[LoneStarMike]

Fast forward to December 19, 2007 and this News 8 Austin Story.

Major Airlines Upset Over New Terminal Deal

A planned low-cost terminal at Austin-Bergstrom International Airport is hitting some turbulence.

Three airlines are not happy with an agreement made by the City Council earlier this month that allows a private company to build a new low-cost terminal at Austin's airport.

"I think there is a potential that they could sue the city and they could demand equal treatment," city council member Lee Leffingwell said.

At least three council members say they were under the impression that only one airline, Viva Aerobus, a Mexico-based low-cost carrier, would use the new terminal.

"We became aware that there was going to be a plan to expand the ultra low-cost terminal from three to eight gates and also include domestic low-cost carriers," Leffingwell said.

And that, according to a memo sent to the City Council from the airlines, is the problem.

The fact that GECAS and the City would be recruiting other airlines besides Viva Aerobus and the fact that the low cost terminal would initially start with 3-4 gates, but was modular and easily exandable was discussed at this presentation back in June. Why is Councilmember Leffingwell saying he and other Councilmembers were unaware of this some six months later?

And finally, from Evan Spark's Aviation Policy Blog, an entry on this issue.

Airports in the United States are almost always owned and operated by municipal or county authorities. (In a few cases, like Indianapolis and Chicago Midway, private companies have managed airports for the authorities.) These airports lease gates to airports in long-term leases, and then that airline has exclusive use of those gates. Most big-city airports have extra space to accommodate new entrants or airlines wishing expand service, as airlines rarely wish to lease more gates than they need. In some cases, however, gate unavailability has limited the entrance of new carriers. (Issues like this have threatened US Airways international expansion in Philadelphia.)

Airlines who lease gates at airports usually offer the same amenities to all airlines/tenants: baggage facilities, concessions, and the like, which means that gate-lease fees vary little. If there is competition for amenities and fees, it is among airports. For example, Providence and Manchester offered lower fees and attracted discounters like Southwest unwilling to pay the higher fees of Boston’s center-city Logan Airport. The same applies for Miami versus Fort Lauderdale, Orlando International versus Orlando Sanford, and several others. There has been until now little competition within U.S. airports for fees and amenities.

Austin-Bergstrom International Airport in Texas is now attempting to pull this off. Its only passenger terminal, the Barbara Jordan Terminal, is fully occupied and leased. So, to add significant service, it will need to build more space. But this new space is intended to serve the super-discount airlines like Skybus and Mexico’s vivaAeroBus that Austin wants to attract. Back in June, it began negotiations with GE Commercial Airline Services (GECAS) to build and operate a no-frills terminal at Bergstrom. GECAS would operate the terminal for thirty years, and it would be expressly designed for super-cheap airlines, with neither luggage facilities nor assigned gates. Gate fees at the GECAS terminal would presumably be much less than those at the Jordan terminal.

Southwest, one of two dominant airlines at Bergstrom, is not happy with this and fired off a letter to Bergstrom to complain that

“[e]ssentially, this new terminal will allow carriers to ompete against existing carriers at a substantial cost advantage. . . . While it may be argued that GECAS or some other third party is sponsoring the terminal development and not the City, this argument is splitting hairs. The end result allows the City to take actions which provide facilities to some carriers at a substantially reduced cost compared to those bound by agreement to more expensive facilities.

The airport replied that the move simply makes more low-fare competition possible, adding that Southwest would not want to use the GECAS terminal anyway, so why not let an airline that does want to offer true no-frills service use it?

Such an arrangement is hardly unusual. At New York’s JFK airport, the terminals are mostly built and run the airlines that use them. Pan Am’s Worldport (now used exclusively by Delta and its partners) and TWA’s Saarinen-designed Flight Center (now the under-construction JetBlue terminal) are both iconic examples of privately built terminals at public airports. American Airlines built its own new terminal there (T9), and Terminal 4, the main international gateway, is operated and part-owned by the same Dutch government company that owns and operates Amsterdam’s Schiphol Airport. There should be no problem with an airport leasing space to private operators.

In fact, Southwest tried this very thing in Seattle. Stung by high fees at the region’s main airport, SeaTac, Southwest proposed that it would build a terminal at Boeing Field in south Seattle, which has only nominal passenger service. Southwest would enjoy exclusive use of the close-to-downtown airport for fifty years. Other airlines’ complaints sounded a lot like Southwest’s now. (In the end, King County, where Seattle is located, rejected Southwest’s proposal, for several reasons.)

So then, what’s wrong with airport entrepreneurship? It’s complicated because airports are almost always publicly owned and operated. Airports must operate as public accommodations, open to all entrants. And is it fair for an city and airport authority to operate its own terminal (Jordan) and lease space for a private terminal operator (GECAS)? I don’t see why not. It happens all the time with leases to fixed-base operators and general aviation services.

If Southwest is concerned that the GECAS terminal airlines at Bergstrom will enjoy an unfair advantage, it should seek to build its own terminal at the airport–or simply leave the market altogether, as their letter subtly hints at. Southwest signed the long-term gate lease freely, so it should not complain when another airline gets a different (better) deal under different circumstances. Southwest has brilliantly hedged its fuel costs, taking risks that that price of fuel might drop but betting that it wouldn’t. Its lease at Bergstrom should be considered in the same light. And if Southwest were to, against all odds, desire to build a terminal of its own at Bergstrom, the airport should negotiate with Southwest on the same terms as any other potential tenant.

Overall, I think it’s good that airports seek ways to generate revenue, attract more flights, and cut costs–all of which can be done by privatizing various components of the airport’s business. More power to Bergstrom and GECAS.

In his presentation to Council, Jim Smith also flat out said that the FAA required the City to charge the same rental rates to all the airlines. I e-mailed a couple of questions about gate rental fees to the airport and their response was that for the gate rental fees in the main terminal, the city does charge the same amount per square foot to all the airlines regardless of whether it's a ground level gate (Gate 1) or an upper level gate (Gates 2-25). Some gates are smaller and have less floor space for seating, etc. (like the ones at the very end of the East & West Concourses) so they're cheaper than the bigger gates towards the center of the terminal, but per square foot the rent is the same for everyone. Jet loading bridge fees are separate. Gate 1 is currently the only gate without a jetway.

Whether or not it would stand up in court remains to be seen, but I think the City's position is that they're only leasing the land. The City won't play a part in the construction or operation of the facility. GECAS is building the terminal. GECAS is recruiting the airlines with some assistance from AUS. GECAS will own the terminal for the next 25-30 years until it reverts to city ownership. GECAS is setting the gate rental rates and collecting the money, not the city. The city will just get a percentage of GECAS' overall profits and income from the leasing of the land, if I'm understanding things correctly.

The things that the city does charge for (like landing fees) will still be the same for every airline.

Southwest, in their letter to ABIA mentioned that whether the city was charging lower rates itself or having a third party do it, it was splitting hairs. I don't know if there's some sort of legal loophole if there's a third party involved, but if there is, I hope the City of Austin crawls through it. It wouldn't be the first time an airline or airport used a legal loophole to achieve a desired result.