Los Angeles side-steps Feds in airport privatisation

The City of Los Angeles is asking for market feedback on a unique privatisation proposal: handing over the management and operations of one of its airports to a private partner without going through the Federal Aviation Administration’s pilot privatisation programme.

“Our initial analysis is we don’t need to do it in order to do what we want to do,” Stephen Martin, chief operating officer of Los Angeles World Airports, the city’s airport management arm, said in an interview. But Martin has issued a request for expressions of interest from private investors to see what they think.

Los Angeles wants to improve the operational efficiency of Ontario International Airport, a medium-size commercial airport located about 35 miles east of Los Angeles in Ontario, California. Through 2024, the airport has a type of contract called a “residual agreement,” under which its costs get passed on to the airlines that serve it, which include US Airways, Southwest Airlines and Continental Airlines.

As a result of the residual agreement, if Ontario’s operating expenses rise, it becomes less profitable for the airlines to serve the airport. And that’s exactly what’s happened since the economic downturn began in 2008: the airport’s cost index spiked from about $10 dollars per passenger to $14, Martin said.

“We’re trying to turn over every rock to try to figure out how to make the place run more efficiently,” he said. Los Angeles World Airports hired a consulting firm, Jacobs Consulting, to figure out how the private sector could help lower Ontario’s costs.

Ontario Airport: possible deal in 2011

One alternative was to privatise the airport under the Federal Aviation Administration’s Pilot-Privatisation Programme – a procedure created in 1996 which allows the FAA to privatise up to five airports in the US. Other airports to seek privatisation in the US, including Chicago’s Midway Airport and Puerto Rico’s San Juan Luis Muñoz Marín International Airport, have opted to participate in the privatisation programme.

Participation in the programme allows the airport owner to divert privatisation proceeds to other, non-airport uses – a key reason behind Chicago’s decision to participate in the programme. But Los Angeles World Airports, or LAWA, doesn’t need to redirect privatisation proceeds away from its airports.

“Since the proposition we have for Ontario does not involve redirecting money away from LAWA . . . it’s not obvious to me that … we’ve triggered a need for some sort of FAA approval,” Martin said.

He added that the FAA’s privatisation process could be lengthier than a process managed by LAWA, which would want to get a privatisation deal done in 2011.

The FAA programme would just slow us down and we would not have control over the schedule Stephen Martin

“The FAA programme would just slow us down and we would not have control over the schedule,” he added.

LAWA may reconsider its decision to sidestep the FAA process if investors express a clear preference for the FAA’s programme, Martin said. “We’re not resolved against doing that,” he said.

For now, LAWA is envisioning a 20- to 30-year agreement with a private operator that could take various shapes. For example, a private equity-backed concession company could take over the operations and maintenance of the airport and pay LAWA either a lump-sum or ongoing payment.

Potential investors have until 28 February to submit expressions of interest. Martin expects LAWA to decide in March whether they want to pursue a deal and launch a competitive process for it shortly afterwards.

New Jersey-based Infrastructure Capital Advisors is advising LAWA on the privatisation process. Martin said LAWA has not yet engaged any legal advisors but may do so once it decides to pursue a deal.

“We need to find somebody in the world of this kind of stuff who doesn’t have any conflicts and knows what’s going on in the world of airport privatisation,” Martin said.