"FAA Wants Airports' Advice On Handling Sick Airlines"

Tuesday, July 22, 2003

FAA Wants Airports' Advice On Handling Sick Airlines
Airline Financial News


Caught between bondholders and the "check-won't-be-in-the-mail" attitude of
failing airlines, U.S. airports are seeking greater flexibility in meeting
their financial obligations. As America's airlines continue to restructure
their finances, the Federal Aviation Administration has launched a study as
to how to minimize the impact of the airlines' financial free fall on hub
airports. 

Congress requested the study in order to determine if laws or regulations
need to be changed to minimize the impacts of bankrupt airlines on airport
operations. In seeking public input, the FAA is asking point blank: "What
actions could the federal government take now to help airports adjust to
their current financial environment?" Interested parties have until July 28
to file a response. 

As the study gets underway, US Airways [OTC BB: USALA.OB] is negotiating to
reduce its payments to Pittsburgh International Airport and to scale back
its hub operations. While operating in bankruptcy, United Airlines [OTC BB:
UALAQ.OB] has defaulted on interest payments of $16 million due to airport
authorities in Denver, Los Angeles, Chicago and San Francisco for terminal
facilities and in Indianapolis for a maintenance hanger. And most recently,
American Airlines [NYSE: AMR] has said it is evaluating its hub facilities
in Chicago, Dallas/Fort Worth and St. Louis with an eye towards
consolidating its route structure. American has a $2.2 billion operating
lease in St. Louis that it inherited from TWA. 

"We are in an industry in which airport capacity has been funded by airport
revenue," said Stephen Van Beek, senior vice president of policy and
strategic development at Airports Council International-North America. "It
is kind of an issue everyone is keeping an eye on; it is an immediate
management issue for some airports out there. The airports need a soft
landing if airlines do reduce hubs."

Basically, the rates and charges against the airlines and the non-
aeronautical revenues support an airport, Van Beek explained. An airline's
lease payments support the general operations of an airport, including
interest payments on its general revenue bonds. In addition, specific
improvements for an airline, counters and gates, for an example, may be
financed by special facilities revenue bonds for which an airline is
assessed a special levy. 

"We have made suggestions to the FAA on reauthorization and other vehicles
for financial flexibility," Van Beek said. He added, "All money is green and
let's reduce the ties we have on airport revenues, understanding that
airports' can not divert revenue. It is a closed financial system. Any
dollar that goes to paying down past debt is a dollar that reduces the
charges on the users of the airport."

The flexibility the airport council is seeking involves rewriting FAA's
regulations and the tax code. 

One suggestion Van Beek put forward involves granting airports the ability
to apply the current income from the passenger facility charge (PFC) toward
the debt of older projects. Some of the projects may pre-date the PFC and
others may not have been eligible projects when constructed. The language in
the House version of the FAA reauthorization bill, which is going to a
conference committee with the Senate version, includes provisions giving 12
airports this flexibility. 

"One irony of the situation is that Pittsburgh suggested funding some of the
general airport improvement projects with PFCs," Van Beek said. "US Airways
did not want the airport authority to do this so it could keep ticket prices
low. It said, 'Use your general obligation bonding authority.' That is the
very complaint that US Airways has now that the Pittsburgh's debt load is
too high to use the airport."

"There is a little flexibility right now," said Jeffrey Letwin, managing
partner of the Pittsburgh office of Harrison, Segal & Lewis and the attorney
for the Allegheny County Airport Authority. "To the extent you can use PFCs
for operating issues and debt service reduction for a whole litany of costs
that face airports on a daily basis over and above capital improvements,
that would help airports significantly with issues that arise when a hub
airport suddenly finds itself with a troubled airline as its main carrier."
Letwin added: "The FAA has been very flexible. There are things that are
being considered with respect to PFCs that will help us address some of the
issues in Pittsburgh. The specifics of those I am not at liberty to talk
about."

Pittsburgh has a residual lease with its airlines. Letwin said everything is
a pass through. "If we generate positive cash flow - as we did prior to
Sept. 11 - then we are in a position to give money back to the airlines."
The Sept. 11 watershed impacted a major source of airport revenue for
Pittsburgh and many airports - retail sales. At the Pittsburgh airport, a
very popular mall suddenly was on the "air side" of security and only
ticketed passengers could shop there. "We can definitely use help to open
those gates. We would like some help in getting non-ticketed passengers back
there and get some activity again," Letwin said. 

The airports council is also suggesting changes in the tax code which would
classify all airport debt as public debt. Van Beek said this change would
change the classification of the special facilities bonds. The change would
mean the bondholders would not have to pay the alternative minimum tax and
make the general obligation bonds more attractive to investors." 

[To file a comment or view comments on Case FAA-2003-14581 can be done at
www.dms.dot.gov or at DOT, Room Plaza 401, 400 Seventh St., SW, Washington,
D.C. 20590-0001.] 


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dc/dcboard.php

*****************************************