MAC: Redefining Rates & Charges: Northwest suit has Minneapolis-St. Paul seeking self-sufficiency for its reliever system

Sept. 8, 2004

Special Report

MAC: Redefining Rates & Charges

Northwest suit has Minneapolis-St. Paul seeking self-sufficiency for its reliever system

By John F. Infanger

September 2004

On September 27, Gary Schmidt, director of general aviation airports forthe Metropolitan Airports Commission of Minneapolis-St. Paul, gets back on the hot seat. The MAC will make the initial public unveiling of itsproposed new rates and charges policy, seeking public, and particularlyuser, feedback on the program which is intended to ultimately make the system of six reliever airports as self-sufficient as possible. The intent is to also reduce the amount of monies that come from the International Airport (MSP) coffers to help subsidize the six. A Northwest Airlines lawsuit has made the process more urgent and more high-profile nationwide.

Gary Schmidt, MAC

Admits Schmidt, "I think what they're afraid of is that we're starting a trend that airports have to be wholly self-sufficient, and that is not necessarily a good thing for small communities.

"The fear right now is, our commission is taking the approach that maybe there should be no subsidy to these airports. That almost says there's no recognition that there's a benefit to the International Airport, and that runs contrary for small communities which see a huge benefit, saying air service is important enough to subsidize.

"What they're concerned about is if we become the benchmark for those who say there should be no subsidy whatsoever. Some of these airports could not survive."

Schmidt says that among the groups he has heard from on this process prior to the September hearing is the Aircraft Owners & Pilots Association, which again is most concerned with setting a precedent, he says.

"There are circumstances in our system that are somewhat unique," explains Schmidt. "We have a major hub airport that we are affiliated with; we're in a major metropolitan area; we have probably more sources of revenue than other airports in the country; and, we think this is really a product that will be giving fair value." That product, the new rates and charges policy, will ultimately cost the average hangar tenant at the six relievers about what a cable TV bill costs, according to Schmidt.

Recent History; The Northwest Lawsuit
The irony may be that at the end of the day it seems that Northwest Airlines lost the battle but is winning the war, although the battle is not quite over. It has also become clear, if it was not already to MAC officials, that a two-year rates and charges update/review process that ended in 2000 fell short of the mark.

Explains Schmidt, "Northwest sued, taking the position that there's a state statute that says we're required to recover the cost of operation and the value of the land, which in particular was the point they were trying to make. In their terms, the value of the land included whatever surrounded the airport. We prevailed, up to the [Minnesota] Supreme Court, which really ruled that they had exhausted all of their administrative remedies and therefore they dismissed it without prejudice, meaning they could reinstate their lawsuit if the commission did not move forward."

The commission has made the decision to move forward, and has directed Schmidt and his staff to revisit the rates and charges policies at the six relievers, with significantly different direction than was given in the 1998 review. Then, the goal was to update rates and charges that had been held constant since the 1960s, with an across the board fuel flowage fee of two cents and square footage rent at two to three cents a square foot.

As Schmidt recalls, "When we completed the process in earlier years, our goal was to at least recover the O&M (operations and maintenance) expenses. We were falling a little bit short of the O&M. There were a few reasons for it, one being that we actually implemented [the review process] about a year and a half after we had done a forecast of what would be needed. So we started a bit behind schedule, even for the increases that should have been implemented.

"We are still $1 million short of recovering our O&M expenses."

The earlier review and rates and charges implementation proved quite contentious with aircraft owners, hangar renters, and commercial tenants. It could become again, Schmidt recognizes, particularly because this time around the commission wants his staff to come up with an option to raise enough revenues to throw into the capital development fund pool — not an objective in 1998.

Says Schmidt, "It was our historical position that we thought there was enough benefit to MSP that the capital fund could come out of revenues from the main airport. Again, it's concessions and parking revenue where we sometimes have excess capital that can be spent on reliever airports.

"If nothing else, from a safety standpoint, we're dispersing traffic that probably should not be commingled and is not complementary. So, we get the slower traffic away from the air carrier traffic at MSP. That's a benefit right off the top that I think everybody will acknowledge from a safety standpoint, even Northwest Airlines. From a financial aspect, we're taking operations out of [MSP], particularly during peak times of day when we do come close to capacity of the runways. The minimum you can say is we're probably in the millions of dollars annually that we save the air carriers by being able to divert some of the traffic to the reliever airports."

This time, he says, the specific direction from the MAC is to come forward with a rate proposal that would cover O&M expenses plus give some contribution toward capital expenditures, according to Schmidt.

Finding Revenues For The Capital Fund
According to Schmidt, on September 27 his staff will bring forward three scenarios to the commission:

  • what it would take to cover O&M expenses plus depreciation, which was not incorporated the first time around
  • O&M expenses plus maintenance projects; and
  • O&M expenses plus maintenance projects plus a contribution to the capital budget.

Explains Schmidt, "Further, we decided as a staff that we were going to break down the capital expenses in two ways: one is what we call maintenance projects — rehabilitating an existing runway or whatever; and then infrastructure development, which we're calling the enhancement projects. We're saying that they're going to enhance the entire system. So, the pitch we've used so far is that maybe they should not just be funded by the tenants on the reliever airports because there are other benefits from those projects."

Yet, Schmidt agrees, it would seem the final goal of the commission is to cover O&M expenses plus provide an annual contribution to the capital budget, the final number for which has not been determined. "They will expect us to cover the maintenance projects because those are the ones that directly benefit tenants at the airport," he says.

Proposed Rate Changes
According to Kelly Gerads, manager of administration for the MAC reliever airports and someone charged with doing much of the legwork on this initiative, "Commercial tenants are not going to be hit that bad, I don't think."

She relates that the new rates that the staff is considering are consistent with the recommendations of Airport Business Solutions, a consulting firm which specializes in rate review and airport property valuation and which performed the key study in the 1998-2000 review. "Four years ago, we went with lower rates because it was difficult to have such dramatic rate increases. MAC is saying now that it's more important to be economically viable as a commission as a whole, including reliever airports."

Gerads shares some examples of the proposed rate increases, which she says will primarily affect non-commercial tenants:

  • At St. Paul's downtown airport, rents per square foot would rise from the scheduled 35 cents in 2005 to 42 cents.
  • Anoka Airport is slated to go to 20 cents per square foot in '05, but would rise to 40 cents.

"The significance of this, in round numbers, is that some are paying just under $500 annually for a typical hangar. After this, they will pay not quite $1,200."

Fuel flowage fees range from six to eight cents per gallon; they would increase to six cents at three airports, to ten cents at the other three.