A delicate process

Nov. 8, 2000

A delicate process

One authority?s attempt to rewrite the book on its reliever airports

By Gary Schmidt,

November 2000

On the reasons for beginning the process of evaluating the MAC?s reliever airport system ...

?One of the problems that we had was actually the liability of the commercial operators. It isn?t just an illegal operator issue, it?s the problem of someone wants to come in on a shoestring and see if they can make it work. That started us off saying, we need to have some type of minimum standard here or we will continue to have an overabundance of commercial operators, which I think we do on some of our airports.

?People were coming to us and saying, ?I want to start a flight school, but I just want to do it out of a storage hangar, and if it turns out to work well I?ll really invest in the business.? What that did was take students away from commercial operators who had made the investment.

"That in turn led us to start looking at all the policies because, to be quite honest, the pomp and circumstance is really at the International Airport. That is a large focus of the Metropolitan Airports Commission, so for a long time the relievers could be subsidized without a whole lot of money.

?Overall, I think we realized that the rates, which had not changed since the early ?60s, were the problem. Looking at that, we got into the rate structure, and we?re now in the middle of trying to revise the lease policies and rules and regulations.

?We?re trying to progressively bring all of our documents up into the 21st Century. It?s been a battle.?

On reactions of airport tenants to the process ...

?The minimum standards is a real issue with the commercial operators. I think they?re afraid we?re going to try to put people out of business. I think we were very reasonable in what we adopted; in fact, I would call them extremely minimum standards.

?The other side of the coin for us is that most of our airports are fully developed, so these standards were going to apply to existing operators. There weren?t going to be a whole lot of new entrants unless we allowed it, and what we were trying to preclude was somebody coming and saying, ?I want to start in that small hangar over there and you?ve got no rules and regulations to prevent me from doing it without discriminating. It was intended to help existing commercial operators from those shoestring new entrants.

?Then we got into the issue of the rates and charges, and of course everybody was very upset. If we hadn?t raised the rates since the 1960s, why were we doing it now? A lot of the old-timers would say, these airports were never supposed to make money; they?re worth more than that subsidy anyway to the international airport in providing capacity. And they probably are.

?Our goal was we want to cover our operating expenses. The development of the infrastructure will continue to be subsidized by MSP.?

On the difficulty of coming to agreement with commercial operators on rates and charges ...

?The third time is the charm. We tried twice to change the rates and charges. The first time we were into minimum standards and rates and charges at the same time, and there was such a hullabaloo about trying to change the rates that we backed off and said, let?s get the minimum standards done first.

?The second time the commission was not happy with the complaints they were seeing from the tenants, so they directed us to go back. (They said,) ?You need to look at your expenses before you change the rates. The third time we decided this is going to play better if we have somebody from the outside come in that has some experience with other airports. That?s when we hired Airport Business Solutions.

When all was said and done and the minimum standards got adopted and we were able to keep everybody in business or at least attempt to, we got more into a partnership atmosphere. I think that still exists today.

?On the rates and charges, the same kind of thing. We were doing high school auditoriums for our public hearings and we got into some pretty vociferous shouting matches. But when all was said and done, tenants said this was long overdue and they better understood why we were doing it. During the process it was hard and relationships were strained.?

On why it took some ten years to make concrete movement on the process ...

?A big indicator for us really has to do with the dual track process at Minneapolis, because at one point starting in the early ?90s we were trying to make a decision as to whether we should build a new international airport or refurbish and add facilities to the existing airport. By the time the study was through, there was an indication that no matter what you did at some point you were going to run into capacity issues or convenience issues. And that means the reliever airports are going to have to play a more important role going into the future.

?The decision to keep MSP at its current site really had an impact on the reliever airports. Now, if we?re going to help preserve capacity in the future, we have to be able to take some of that traffic away from MSP that?s appropriate for reliever airports. There?s no reason that corporate traffic can?t operate out of the reliever airports. So we?re trying to improve our facilities out there to make them more attractive while at the same time making sure we?re a compatible neighbor.?

On how today?s rates and charges compare with ones that had been in place before the current review ...

?Even today, our rates are well below the market. At (St. Paul) Holman Field, our rates for a storage tenant are going to go up to about 35 cents a square foot in, I believe, 2005, the final year of the implementation of the new rate structure. At Flying Cloud, I think they go up to 25 to 30 cents a square foot. At the other airports it?s a little less; we thought the ones with the most recreational activity could least afford the change.

?What they used to be was two to three cents a square foot at most places. It had been that way since 1963. Fuel flowage, we were at two cents a gallon; ultimately we?re going to go up to eight cents a gallon. We?re at a nickel a gallon right now.

Of course, we?re going to use the consumer price index and increase the costs based on that so we don?t have to go through this process again. At least we?ll have some indicator that tells us when we should be raising the prices.?

On how lease terms will be affected by the new policies ...
?The old policy used to say initial leases were for ten years and all renewals were for five-year terms. Then, over the years based upon the investment, we would make a recommendation to the Commission to maybe go beyond ten years. We have a few that are 30-year leases based upon investment.

?The new policy says all leases will be ten years and renewals will be ten years, and there?s again some lattitude for commercial operators based upon the investment that we can enter into the initial lease term for a longer period of time.?

On how to set policies for reliever airports that are distinctly different; for example, St. Paul Holman Field is a primary corporate facility while Lake Elmo Airport is recreational ...

?We did two things. For minimum standards, we developed two - one for minor use airports and one for intermediates. Holman Field right now is the only intermediate airport, but for those that want to handle corporate aircraft there?s a minimum standard in there for that type of operation.

?As far as the tenants themselves go, we did make some differentiation and we tried to do comparable airports when we did the analysis. So we have in the database a little over 200 airports. We tried to see if they were snowbelt airports; we tried to determine comparative based aircraft, number of operations annually, the fuel flowage; and put that into the mix to decide what the appropriate rate structure should be. And then, compare that to what the regional average was.

?For example, with Holman Field, we probably had about ten airports that were very comparable, that dealt a lot with corporate traffic activity, were in the snowbelt, had activity levels that were comparable. What was that market charging??

On lessons learned - what he would tell others considering minimum standards, rates and charges policy review, lease revisions, etc. ...

?One is we waited too long to react to the changing circumstances of markets. We almost let it get to a point where it was becoming a problem for us. The subsidy that was going off MSP, we weren?t identifying what the subsidy was really for. All we knew was that it was growing.

?An idea we learned was the idea of partnering; we?ve gotten better at it. We can be better.

?We knew it was a problem, and I don?t think the tenants necessarily knew it was a problem. I don?t think that we explained that the reliever airports as part of a system also have to be able to justify themselves.

?One thing we?re recognizing now is - changing the rates, changing the minimum standards - we?ve set the stage now for the Commission to continue to invest in the reliever airports. Now I think everybody realizes how critical this is going to be with the fractional ownership and all the corporate aircraft that are going to come online in the next ten years. If we are going to get our fair share, we need to be prepared for that now. Not look at it in ten years and say, they?re all here, how are we going to handle it?