Docket Management System
U.S. Department of Transportation
Room Plaza 401
400 Seventh St. S.W.
Washington, DC 20590-0001
|Re:||FAA Docket FAA-2003-14246 |
Airport Privatization Pilot Program
Notice of receipt of application—New Orleans Lakefront Airport
New Orleans, Louisiana
To Whom It May Concern:
The Aircraft Owners and Pilots Association (AOPA) represents the general aviation interests of over 398,000 members nationwide with over 11,000 operating in the geographic area around New Orleans Lakefront Airport. AOPA is committed to ensuring the future viability and development of general aviation airports and their facilities on behalf of our membership.
On January 16, 2003, the Federal Aviation Administration (FAA) published in the Federal Register, 1 "Notice of receipt of application of New Orleans Lakefront Airport, New Orleans, Louisiana; commencement of 60-day public review and comment period." The association subsequently requested that the FAA facilitate a public hearing and grant a 60-day extension to the original comment period.
After a careful and detailed review of information available to us surrounding the above action, AOPA has serious concerns. We cannot support approval of the proposal now under review by the agency until and unless the Secretary of Transportation is satisfied all requirements of the federal law 2 have in fact been met and concerns of airport users have been adequately addressed. These include the requirement that the Secretary must be satisfied that the airport will continue to be available for public use on reasonable terms and conditions and without unjust discrimination and that the interests of general aviation users are not adversely affected. 3
The association provides herein our comments and details surrounding our opposition regarding FAA approval of the proposed participation of New Orleans Lakefront Airport in the Airport Privatization Program. 4
AOPA believes the Airport Privatization Pilot Program may provide an opportunity for an influx of new private capital for airport development. However, the program is at the present time a demonstration program with no proven track record for achieving its purposes. The impact of the pilot program on airports, airport tenants, and users has yet to be determined.
Federal budget constraints continue to play a significant role in levels of federal financial aid available to airports through the Airport Improvement Program (AIP). At the same time though, any changes in funding sources and the sponsorship or management of airports must be scrutinized carefully by the federal government and the FAA due to the potential impact on the national system of airports. During the FAA's reauthorization hearings in 1996, members of Congress clearly recognized the challenges associated with maintaining adequate AIP funding levels. In a statement to the subcommittee of aviation of the Committee on Transportation and Infrastructure House of Representatives, Representative Jerry F. Costello stated, "While I believe we should have a flexible system of funding that responds to the various needs of airports across the country, we should be careful that changes in the current system will reflect federal priorities." 5
Identifying alternative methods to ensure that necessary and appropriate airport infrastructure projects are funded is a necessity. The Privatization Pilot Program can provide one alternate source of airport development funds by allowing private ownership, leasing, and capital investment in airports currently held by public sponsors. However, the FAA must continue to play the role of gatekeeper in protecting a valuable transportation asset. The FAA must balance the objectives of a private company to turn a profit, the users and tenants from being victim of significant increases in rates and charges, and to ensure that the airport's role in the national system of airports is not diminished.
New Orleans Lakefront Airport (NEW) is a vital airport in the New Orleans area. With 255 based aircraft and over 123,600 operations per year, 6 the airport serves as the primary reliever airport to Louis Armstrong International Airport (MSY), which by contrast is home base to 32 based general aviation aircraft that account for a mere 21,850 operations per year. 7
There are a total of four (4) airports within 30 miles of NEW including MSY. These four airports have a total of 162 based aircraft with approximately 136,400 operations per year. The importance of NEW becomes clearly evident when compared to the other four airports, as does the impact of any change in the Lakefront's availability as a general aviation reliever airport.
Both the federal government and the state of Louisiana recognize the significant contributions NEW provides to a well-structured system of airports within the region. Both the state and the FAA have invested heavily in airport development at NEW. Since 1990, the state of Louisiana has funded over $2.367 million in airport improvements at NEW while the FAA has, since 1982, provided over $17 million in AIP funding to the airport.
After a thorough and detailed review of the proponent's submission to the FAA, there continue to be numerous unanswered questions surrounding the proposal to convey NEW to private sponsorship, management, and development. Unless and until additional written modifications are made to the proposal to address these questions and associated issues, the association is unable to support the proposal.
We do not believe the proposal meets the statutory requirements of 49 USC § 47134 and have a number of concerns about this proposal which center on the following areas:
When the concept of privatization of publicly owned airports was introduced during the 104th Congress, there was much discussion, debate, and thought given to the development of innovative funding mechanisms for continued airport improvement. AIP levels had fallen while airport infrastructure demands continued to escalate. In fact, the Honorable John J. Duncan, chairman of the House aviation subcommittee, said in his opening remarks, "...U.S. airports have significant infrastructure needs that will be difficult to meet under current financial and fiscal circumstances. Federal, state, and local governments are all pressed for funds. Innovative ideas must be considered to help address airport infrastructure needs." 8
During hearings held on February 29, 1996, before the subcommittee of aviation of the Committee on Transportation and Infrastructure in the House of Representatives, Rep. Jerry F. Costello noted, "Because available funds are becoming more scarce, I believe we owe it to airport users to explore all options to ensure that airports function in an efficient and user-friendly manner." 9
While AIP funding levels have changed since then, Chairman Duncan and Rep. Costello's remarks give clear indication that Congress intended that the Privatization Pilot Program would bring private capital to airport development. The concept was to change an airport's continuing near total dependence on AIP as the major source of development funds.
When discussion and debate about privatizing airports reached the full House Committee on Transportation and Infrastructure, Committee Chairman Rep. Bud Shuster reported on H.R.3539. Included in the committee report was Section 310 defining private ownership of airports.
The bill reported from the committee on July 26, 1996, included significant "report language" covering certain sections of H.R.3539, including specific discussions regarding "Airport Privatization." The report states, "In the Committee's view, permitting airports to be privatized, either by sale or a long-term lease, could tap into additional sources of capital for infrastructure improvements."
Report language attached to the reported bill after conference with the Senate at Section 27 states in relevant part, "The Managers have agreed to a limited pilot program to determine if new investment and capital from the private sector can be attracted through innovative financial arrangements." When Chairman Shuster presented the conference bill to the full House of Representatives on September 27, 1996, he said to the Speaker of the House, "Mr. Speaker, the conference report for H.R.3539, the Federal Aviation Reauthorization Act of 1996, includes an Airport Privatization Pilot Program. Five airports will be allowed to either be sold or enter into long-term leases. The intent is to allow the private sector to bring more capital, efficiency, and cost-effectiveness to our congested airport system."
It is obvious that Congress intended very specifically to authorize a pilot program that would provide a vehicle for private investment in airport development rather than continued draw against federal financing.
It is our opinion that the proposal submitted by the Orleans Levee District (OLD) and American Airports Corporation (AAC), as joint applicants, fails to meet this congressional intent and spirit of the pilot program.
In reviewing of the Capital Investment Plan submitted by the private operator as part of their application, the applicant clearly plans to acquire significant levels of state and federal funding and use airport generated revenues in order to achieve their development program for the airport.
The Private Operators Proposed Five-Year Capital Improvement Plan 10 indicates a total outlay for airport development of approximately $32 million with a mere $913,745 of "private" capital proposed for the five-year period. That is less than three percent of the total! However, the application suggests that of the $913,745 to be invested by the private operator, $816,995 will be derived from airport operational revenue—not private capital. In reality then, over the five-year time period, the only amounts to be provided as private capital is $96,750, and that amount is likely to be derived from retained earnings from the airport and airport revenue, as well as equity of the private operator. 11 More troubling is that during years two and five, of the private operator's proposed capital plan, absolutely no private capital is proposed for investment in airport development projects that total $6 million for each of those two years. Additionally, in the first two years of operation by the private company, $12 million worth of airport projects are proposed with only $96,750 of "private" capital. The balance of funding during the entire five-year period is expected to come from the FAA and state of Louisiana.
The private operator does, however, offer "private projects based on demand" that would require a significant level of their capital. These include hangar facilities, but again, construction would be based on demand. Entrepreneurial risk then is minimal at best. It should be noted as well that these types of projects are ineligible for federal funding under AIP, so there is no alternative but to use private funds.
It is not until year seven of the proposed Capital Improvement Program that AAC begins to contribute significantly to airport development. However, the development projects are not focused necessarily on current users of the airport but rather on projects designed for ease of access and attraction of charter operators. Projects include site preparation of a new terminal, construction of a new air carrier apron, terminal access road construction, etc.
In comparing the private operator's proposed five-year capital plan to investment made solely by the public sponsor (Orleans Levee District), one finds that in FY02-03, the Levee District invested over $280,000 of their funding (with no state/federal match) in improvements at the airport. OLD has invested in a single year nearly three times the amount the private operator is proposing during five years.
In the FAA's Airport Privatization Program Notice of Final Application Procedures 12, the FAA notes, "the final procedures do not identify a predetermined level of investment. Rather, the private operator is required to provide sufficient resources of its own funds in conjunction with other financial resources for carrying out the maintenance, improvements, and modernization of the facility as required by the statute. This should be accomplished on an annual basis with documentation provided showing the source of all funds." [Emphasis added]
Yet the Joint Applicants proposal very clearly states, "Private Capital Operator's completion of its proposed CIP is premised on the availability of federal grant funds, PFC revenues, and market demand." 13
These points alone should be adequate reason for rejecting approval of the application.
One exemption that is allowed under the statute would permit a sponsor to "recover from the sale or lease of the airport, such amounts as may be approved," 14 limited only by the approval of the air carrier users of the airport. 15 The obvious intent is to protect the air carrier users of the airport but offers no similar protection for general aviation. Except for this exemption, 49 USC Section 47133 would prohibit the expenditure of revenues generated by a federally funded airport for any purpose other than airport purposes. This "revenue diversion" prohibition, from which an exemption is sought in this application at all other (non-privatized) airports, serves to help ensure that charges to general aviation are reasonable. The OLD application frankly states that all rental payments to OLD under the privatized lease will be used for OLD general fund purposes. There are no plans to earmark any of the proceeds for specific airport purposes. The rent paid to OLD will be a guaranteed $300,000 per year with an escalating percentage of the gross income from the airport. Therefore, in addition to not being used for airport purposes, the rent necessarily will be passed on to the users of the airport in the form of fees and other payments. OLD will also receive use of airport facilities and two parking lots rent free, which we believe is not appropriate since OLD collects lease payments from the private operator.
Related to this statutory provision requiring air carrier approval of a profit to the public sponsor of a privatized airport, is the statutory provision that the lease agreement with the private entity include a requirement that every airport fee imposed on an air carrier will not increase faster than the rate of inflation 16 unless a higher amount is approved by the air carrier users of the airport, using the same formula as described above. The existing proposal contains no language that would provide the same protections from rate increases afforded to airlines. There appears to be no identifiable significant air carrier group to control fees as contemplated in the statute. We believe the nature of minimal and different air carrier operations at NEW are not the kind of air carrier operators Congress expected to be operating at an airport in order to provide general aviation rate protections. Therefore, we believe the "approval of 65 percent" of air carrier operators becomes a moot point. In order to afford these same rate increase protections, we believe the proponents should make an effort to protect general aviation tenants and airport users. As such, the agreement must also say specifically that the percentage increase in fees imposed on general aviation will not exceed the percentage increase in fees based on the consumer price index (CPI).
The application states that the private operator will not seek any charge in excess of the statutory limit. However, increases in charges would be limited only by air carrier approval. General aviation would have no say in the matter. Clearly, the intent of Congress was to protect the airport users who were expected to be air carriers with a vested interest in keeping fees reasonable and thereby protecting general aviation as well. But where air carrier operators are minimal and as outlined above different than Congress envisioned, or nonexistent such as at an airport serving strictly general aviation, these protections do not exist.
Another of the exemptions allowed under the statute, and sought in this application, allows a private purchaser or lessee to earn compensation from the operation of an airport. 17 In this application, the private operator seeks this exemption to the extent necessary to earn compensation from its investment and risk undertaken in operating the airport. The private operator estimates that its return on investment will range between a minimum of 13 percent and a maximum of 30 percent. It expects its profits from the operation of the airport to rise from a negative $82,000 in the first year to $1.5 million in year five. We believe the proposal and application do not provide any cost containment assurances that the private operator's profit will not be driven solely through increased charges to airport tenants and users. Again, the application lacks adequate controls to afford protection to general aviation operators.
The statute requires that the percentage increase in fees imposed on general aviation aircraft at the airport will not exceed the percentage increase in fees imposed on air carriers at the airport. 18 However, since NEW does not have air carrier operations, these protections would be lost entirely. Therefore, there is a significant likelihood of increased fees in the form of rates and charges being imposed on general aviation operators to meet lease payments and profitability by the private operator.
Currently, NEW is a publicly owned, public-use airport. As such, financial reports for OLD are open to public review and scrutiny. However, AAC, the majority shareholder at 80 percent, and United Professionals Company, minority shareholder at 20 percent, have asked that the FAA extend confidentiality status to financial information about both companies. 19
While the association can understand the desire of companies to protect items that may be deemed as confidential trade secrets, we find it disconcerting that the public is not afforded an opportunity to review all aspects of this important transaction involving literally millions of dollars. The Privatization Pilot Program is rightfully a public process yet key information has been treated as confidential. While this key information has been provided to the FAA, it is not within that federal agencies mission or expertise to conduct the detailed financial analysis required to reach a conclusion that the financial plan is a sound one. We believe the financial arrangements of this proposal and the companies involved should be reviewed by an organization skilled in analyzing complex transactions such as this one.
Additionally, there is a general lack of detail associated with the private operator's "affiliates." What business segments do the affiliates serve? What role will the affiliates have in the operation and development of Lakefront Airport? Questions surrounding affiliate participation in the private operator's management and development of the airport should be answered and clearly specified in writing.
The proposal states that the applicants do not see any fee impact on existing users, assume leases as is, and foresee no change in fuel flowage fees, and there will be no impact of the fee structure for charges to airport users. 20 Yet there are no timelines defined—does this mean over the full term of the lease? This would appear to be a promise that cannot be deemed reasonable and that when all else is forgotten, will not be honored. With the exception of one lease pertaining to the Millionaire fixed-base operator (FBO), it is our understanding that all other leases have not been renewed and are being held as 30-day tenancies until the FAA approves this proposal. Thus, leases are not "assumed" but will be renegotiated at a later time. There clearly WILL be a fiscal impact on operators based at the airport.
This same section of the final application claims, "Since current Airport rents and fees are established in relation to fair market value, no major adjustment is necessary or anticipated." Additionally, AAC states (in relevant part), "AAC's methodology to rentals is to obtain fair market value for rental of facilities and/or property." 21 However, the joint applicants have requested an exemption from the FAA requirement that an appraisal must be performed to determine the amount of "fair market rent" abatement. 22 The arguments provided speak to the "unique" nature of office space at airports. It is claimed that obtaining such an appraisal would be costly, unduly burdensome, and difficult with inaccurate results. If that is the case, we question claims that the airport charges "fair market value" for leases.
We believe an appraisal is in order and necessary to establish the appropriate fair market values on airport properties. The Appraisal Institute in Chicago, Illinois, grants the MAI designation to senior and master real estate appraisers who would have no difficulty in establishing fair market values appropriate to the uniqueness of NEW. Just because a party is willing to pay a certain amount of rent does not by itself meet the requirements imposed by the FAA.
The existing structure of oversight and management of NEW is well defined with little doubt as to airport sponsorship and responsibility to the FAA as it relates to airport development and federal grant obligations. The joint application appears to interject significant confusion, complexities, and inefficiencies to the current structure.
The proposal indicates that the public sponsor prior to adoption or implementation must approve capital improvement plans by the private operator in writing. 23 Also, the public sponsor retains final approval of assurance of FAA/AIP regulatory and grant assurance compliance and all terms required for the airport's participation in the Privatization Pilot Program. 24 Yet the proposal also claims that AAC will have responsibility for operation of the airport and among other duties, "guaranteeing conformity with grant assurances." 25 Adding further confusion and complexities is the requirement in the proposal that the private operator will comply with all reasonable requirements imposed by the public sponsor relating to airport noise mitigation. 26
It seems that this added level of oversight did not go unnoticed by the FAA. The agency posed several questions that sought to better clarify the relationship between the public sponsor and private operator. The questions posed by the FAA (questions number 11 and 20) were answered by the applicants. 27 However, we do not believe the answers adequately addressed the questions posed by the FAA, but rather sought to minimize the relationship between NEW and AAC.
The Privatization Pilot Program, as one of its goals, seeks to bring efficiencies to the operation and management of airports. This proposal, though, contains terms that only serve to add additional levels of bureaucracy to the operation and management of Lakefront Airport.
It is logical to believe that this added oversight by OLD would not come without costs to the airport. Clearly, there will be staffing involved in the duties OLD holds as theirs. It is reasonable to believe those overhead charges will continue to be allocated against airport revenues.
AOPA holds that there should be a single sponsor for the airport and that the defined sponsor should hold all responsibilities for application of federal and state funding grants as well as grant compliance. In this regard, the proposal as submitted to the FAA is contradictory on the subject of responsibilities of grant obligations.
The FAA and Congress have regularly expressed their concerns and worked diligently to develop policies, procedures, and regulations to ensure that airport generated revenue at federally assisted airports is used appropriately for airport development or other approved purposes rather than being "diverted" by the sponsor to non-aviation purposes. Statutory guidance on restrictions on use of revenues is found in Title 49 USC § 47133.
We have reason to believe that the public sponsor of the airport may have been aware of revenue diversion issues at the airport. In an August 12, 1999, letter to airport administration, Mr. Wade P. Webster, 28 who had apparently been working with the airport on enhancing airport revenue and reducing expenses, wrote "...enclosed is a GAO report outlining the rules against diversion of airport revenues to unauthorized non-airport uses. There are some excellent examples of unauthorized uses set forth in this report, which appear to be present at the Lakefront Airport...."
The NEW application, if approved, represents a transfer of a significant public asset to a private operator with significant payments by the operator to the previous public sponsor. Since the airport has been the recipient of significant amounts of federal airport assistance under the Airport Improvement Program, we believe it is reasonable and prudent to request that the FAA conduct a full compliance audit with special attention to airport finances covering periods up to the current stage of the application process. The FAA has statutory responsibility to conduct such an audit and to ensure that any revenue to be paid to the sponsor by the private operator is an appropriate level of compensation. If the public sponsor has over the years diverted airport revenue to non-approved purposes, those funds must be returned to the airport prior to approval of any application under the Privatization Pilot Program. The public sponsor should not be allowed to benefit financially in this transaction from airport funds that may have been used inappropriately prior to this application process. Indeed, it appears that an accounting of equipment acquired with airport revenue may not be complete or exist. 29
AOPA supports the improvement and development of airports to support aviation needs but not to such an extent that it changes the core role of an airport or excludes either subtly or overtly the current users of the airport. The exact role of NEW is yet to be determined since the private operator will create the airport master plan only after approval of this privatization application by the FAA.
NEW serves as the primary and largest general aviation reliever airport in the areas surrounding New Orleans. The proponents clearly recognized this value and use when developing their application to the FAA. In their application, proponents state, "Under Private Operator's management, NEW stands to improve its position as a useful and lucrative general aviation airport serving downtown New Orleans and the greater metropolitan area." 30 Additionally, the applicants state, " Public Sponsor has staunchly defended that the only way for this privatization effort to be successful for Public Sponsor and Private Operator is through the provision of first-class services and the development of general aviation." 31 Along these lines, the proposal states that the first steps of the private operator will be to develop general aviation facilities. 32
However, significant discussion within the proposal centers on attraction and promotion of charter operations using commercial aircraft, terminal building replacement, and runway and taxiway improvement to support these activities. 33
The joint application indicates that the private operator has "no intentions to compete with MSY as New Orleans' airport of choice for scheduled commercial operations." 34 There is no indication, though, in the proposal that NEW will not compete for scheduled commercial operations or non-scheduled commercial operations. Moving airline traffic from one airport to another does not add economic stimulus to the region.
The April 2003 edition of Airport Business included a special report article on American Airports Corporation titled "Bullish on Airports" as well as a sidebar story on the privatization of NEW. The article makes clear the intent of the private operator to market the airport to airline-class charter operators. Such a move in overall airport use will clearly have economic impacts on existing users of the airport. For example, new airport security requirements will need to be implemented under Transportation Security Administration Rule 1542. Such requirements are extremely costly to implement.
Such a shift in airport use leaves a number of unanswered questions that must be answered, including who will pay for these upgrades, what is the cost to current airport tenants and users, and how will this shift in airport use affect land available for development of general aviation facilities. In order to ensure that airport development is carried out on all airport land rather than allowing non-compatible land uses for these parcels, we believe the FAA should require guarantees that airport property will indeed be developed for airport uses and facilities.
NEW is a critical general airport within the region. It is a tremendous financial asset that has received significant levels of state and federal funding over its lifetime. As such, AOPA believes it is vitally important that whoever assumes management duties for the operation and improvement of this prime property have extensive experience and expertise in the aviation industry. The airport is too important and valuable to simply convey without such in-depth knowledge of aviation and airports.
It is important to note that the private operator has been in existence since 1997 but with no "significant activity" until year 2000. 35 It is also important to note that AAC became active in the airport management business when it assumed COMARCO and assumed the contract to operate a number of those airports listed in this proposal for which COMARCO had management contracts.
The majority and most significant experiences of individuals involved in AAC as officers and executives center around management of golf course properties and real estate development rather than airport management and operation. Few of these individuals have substantial aviation industry experience. Therefore, we believe this limited experience in aviation may stretch the company too thin as it relates to appropriate and adequate operation of those airports currently under management or lease contracts and have direct impacts at NEW.
Further, the proposal indicates that AAC has "considerable buying power" through its affiliates as well as marketing resources. 36 While the proposal was developed prior to the sale of American Golf Corporation, an AAC affiliate company, we feel that the sale may reduce the level of corporate affiliate support that would have been available to the private operator. This reduction in available support and marketing services could severely hamper implementation of the proposed business plan and have cost impacts on existing airport users.
AOPA believes the FAA should explore these areas of concern further with special attention to the company's claim of securing private capital for development opportunities at airports. 37
We are aware that OLD charged their Senior Counsel Gary G. Benoit with conducting a due diligence study of candidates for the Privatization Pilot Project for NEW and that said report was provided to the district on April 17, 2001. It is our belief that this study raises a number of questions regarding the private operator's qualifications and ability to manage existing airports already under contract. These deficiencies would obviously fall to NEW as well. The Department of Transportation Document Management System (DMS) indicates the above referenced document had been posted as a comment to the docket but removed by the FAA at the request of OLD as being confidential client work that is privileged. While this may be an appropriate action by the FAA, we also believe the item in question contains important firsthand information relevant to qualifications of the private operator to fulfill its obligations under the proposal at hand. Therefore, we strongly encourage the FAA to obtain copies of the report and review and verify the findings. The FAA, in determining the proponent's qualifications to manage the airport, must weigh these findings in order to ensure that all available information related to the private operator has been investigated.
AOPA strongly opposes the approval of the referenced application in its current form as submitted to the FAA. We believe the application fails to adequately protect the interests of general aviation users of the airport, changes the core use of the airport, complicates the oversight structure, and would have a detrimental impact on not only NEW, but surrounding general aviation airports.
We also believe that the proposed and committed investment by AAC does not warrant a 50-year lease of the airport to the private operator. More often than not, the terms of a lease correlate directly to the level of investment in the facility to be leased. This has long been an industry standard and one that was applied to the private operator upon construction of their fixed-base operation (Super Marine) at Santa Monica Airport in California.
We are particularly concerned that there are not adequate safeguards against unreasonable fees that could be imposed on general aviation users of the airport, and because there are no assurances that the airport will continue to accommodate light general aviation at the airport.
The authority provided to the FAA in granting exemptions under Title 49 U.S.C § 47134 from certain statutory and regulatory requirements for the Airport Privatization Pilot Program, especially as these relate to the use of airport revenue and allowing the private operator to enjoy profitable status, have far-reaching implications for not only the airport, but its users also. We find that forecast profits by the private operator in a range of 13-30 percent is bothersome since there appears to be minimal investment and risk on the part of the private operator.
As noted earlier, development is suggested as being funded by airport revenues as well as federal and state grants. The private operator says very clearly in the proposal that undertaking capital improvements is precedent on receiving PFC revenues and federal grants coupled with market demand. 38
This issue is of vital importance to our members and may well set the stage for application for participation in the program by additional public-use airport sponsors. AOPA appreciates the FAA's consideration of our comments in this vitally important issue. The impact of the FAA's decision in this matter will have far-reaching consequences and establish the model for future privatization proposals.
Therefore, we respectfully request the Secretary deny approval of the proposal in its current form.
Government and Technical Affairs
|cc:||Mr. David Bennett |
Mr. Kevin Willis
May 23, 2003