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"Skepticism meets Burns & McDonnell’s unusual KCI terminal proposal"


 

Sunday, May 14, 2017

 

Skepticism meets Burns & McDonnell’s unusual airport proposal

By Joe Robertson, Mark Davis, and Lynn Horsley

The Kansas City (MO) Star

 

 

Burns & McDonnell’s unusual proposal to build and privately finance a new single terminal at Kansas City International Airport was greeted with skepticism Friday even as the mayor and city manager touted the plan’s benefits.

 

“I have lots of questions,” City Councilwoman Katheryn Shields said, echoing concerns from some of her council colleagues who learned just this week about Burns & McDonnell’s idea to privately finance a major airport improvement in exchange for the exclusive right to do the work.

 

Shields said she had some doubts that a majority of the 13-member council would sign off on an exclusive deal with the engineering firm.

 

“We need an explanation as to why we didn’t want to use the competitive process” for airport improvements, Councilman Quinton Lucas said. “We have exceptional design firms.”

 

Lucas said a competitive bidding process might bring out even better ideas.

 

During a morning news conference at the airport, Mayor Sly James and City Manager Troy Schulte embraced the idea as the best and fastest way to accomplish airport improvements, after five years of intense community debate.

 

“They are the ones who stepped forward,” Schulte said of Burns & McDonnell. He was standing outside KCI’s Terminal A, where the city announced what it thinks would be the first major airport in the nation to be privately financed.

 

Public approval, city leaders agreed, will depend on a design that keeps the airport among the most convenient for passengers, while also allowing the terminal to be built quickly and cheaply enough to ease any increases from the higher interest expenses of private financing.

 

A preliminary memorandum of understanding is expected to go to the City Council on Thursday. There will be opportunities for public input and discussion before a council decision, James said.

 

And even though a private financing arrangement would not require a public vote, the city will send any proposal to voters in November, James said.

 

“We made a promise,” he said. “We plan to keep that promise.”

 

Burns & McDonnell CEO Ray Kowalik said at the news conference that the company is developing a design that would provide 35 gates, two driveway levels for incoming and departing passengers, and a 6,500-space garage next to the terminal, among other ideas that will be “as convenient as we can make it.”

 

Private financing does not mean that Burns & McDonnell would pay for the new airport construction, estimated at about $1 billion. The company would line up private financing from lenders and its own pockets. Those amounts would be paid back with airport revenues, such as airline fees and rents, parking, concessions and other airport money.

 

The city would continue to own and operate the airport.

 

James said there would be “zero money from the city,” “zero tax increase” and it would add “not a penny of debt” on the city.

 

No taxpayer dollars are ever used for airport improvements. Traditionally, in Kansas City and across the country, the city issues airport revenue bonds that are paid back by airport revenues — just as the Burns & McDonnell financing would be paid back. Issuing municipal airport bonds would likely carry a lower interest rate than the private borrowing.

 

Shields said the key benefit of the deal appeared to be that the airport improvements could be completed more quickly. But she wondered whether the city could achieve quick construction, at a lower cost, by doing “design build” and financing the project with traditional airport revenue bonds, which carry a lower interest rate.

 

She said Kansas City voters have had other problems with the idea of a new airport terminal.

 

“I thought the citizens’ concern was convenience, not really financing,” she said.

 

Shields said Burns & McDonnell’s representatives assured her this week that they would design an incredibly convenient terminal, but they haven’t yet created that plan.

 

Schulte acknowledged that a public/private partnership would be rare for an airport but said there would be advantages. Most airport designers, he said, would not be willing to take on a $1 billion project whose design and maintenance would remain under the city’s control, and which would have to meet prestructured expectations on rates of return and impacts on user fees.

 

Under the previous, public-funded financing structure that the city had proposed, a new terminal likely wouldn’t open until 2024, Schulte said. He said Burns & McDonnell, in its discussions with the city, anticipated completing it in 2022.

 

“This is a heck of a lift,” Schulte said, saying the proposal from Burns & McDonnell is the first of its kind to come forward in the 10 years that he said he has been researching and courting airport construction options.

 

Most airport design firms require a 7 percent to 10 percent rate of return on their financial investment. Burns & McDonnell would be working with closer to a 3 percent rate of return, he said.

 

The proposal is “unusual both in scale and scope,” agreed John Strong, a finance professor with a focus on aviation, transportation and finance at the College of William and Mary in Virginia.

 

Strong said each separates the KCI plan from other airport improvement projects in the United States that have involved private participation. Others, he said, generally also have included competitive bids and “a more protracted process” than the one unfolding in Kansas City.

 

All-in-one deals, in which a private entity such as a company would design, build and finance a project, typically have happened in developing countries that lack the capacity to finance the projects publicly, Strong said.

 

The KCI proposal carries some strengths, Strong said, including Burns & McDonnell’s “world-class” engineering, procurement and construction operations, its experience with aviation projects and its local ties.

 

“Personally, I think someone else is going to do something like this,” Strong said in an email, “and that variations on such private participation will increasingly become the norm.”

 

Hitting the target

 

City officials say the new financing plan is designed to be as affordable as a financing plan that the airlines had said they would do a year ago.

 

The memorandum of understanding would require that the project’s annual cost to repay the project financing not exceed $85.2 million.

 

The $85.2 million amount came from the city’s estimate a year ago of what a new publicly financed airport would carry in annual financing costs. If Burns & McDonnell’s proposal can’t stay within that cost, then it won’t get a deal.

 

“If you can replicate what we can do … then we’re still talking,” said John Green, chief financial officer of the city’s Aviation Department.

 

Burns & McDonnell has acknowledged that private financing has a higher interest rate than municipal aviation bonds. The company’s challenge is to make up those cost differences somewhere else.

 

Company officials said Thursday that beginning construction sooner and opening the terminal earlier would shave costs from the project. A new design also would operate more efficiently for airlines, further trimming costs.

 

Airline costs are important because the city’s deal with the airlines would require them to make up any shortfall in meeting the financing payments each year.

 

Currently, the Aviation Department spends about $33 million a year on debt costs. Green said that debt will have been paid off before the new terminal would open and the anticipated $85.2 million costs would begin.

 

Airport revenues last year delivered more than $57.7 million to cover debt costs for the year. While that was substantially more than the $33 million owed for the year, it would have been $28 million below the expected $85.2 million a year total with the new airport starting in 2022.

 

Green said the gap actually would be larger than that because the Aviation Department wants a cushion to ensure the payments can be met each year. He said the gap would have been about $35 million.

 

Green said growth in passenger traffic, new concessions revenues and other income sources by 2022 would help close the gap. Airlines, under the agreement being put to them under the Burns & McDonnell proposal, would make up any shortfall in meeting the annual payments.

 

Some costs would be passed down to passengers. But project supporters insist KCI would still be affordable.

 

The privatized plan still meets the previous agreements made with the consortium of KCI airlines that keeps Kansas City below average nationally in passenger fees. The cost per passenger would be expected to go from about $6.60 now to about $11 per passenger, which would still be well below the national average.

 

“No one is going to design an airport that’s not convenient,” James said. “…(and) ticket prices have to be competitive.”

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