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robertspan@paulhastings.com 

November 11, 2005 

VIA FACSIMILE AND U.S. MAIL 

Carlene V. Mcintyre, Esq. 

Chief, Opinions and Appeals Division 

Paul, Hasllngs, Janolsky & Walker LLP 

515 Soulh Flower Street· 25th Floor· los Angeles, CA 90071·2228 

telephone 213 683 6000 • facsimile ?.13 627 0705 • WIWI.paulhastlngs.com 

19978.00005 

The Port Authority of New York and New J crsey 

225 Park Avenue South, 15th Floor 

NewYork,NY 10003 

Re: m Rates and Changes 

Dear Carlene: 

Thank you for your letter dated October 17, 2005 responding to my letter dated October 

11, 2005 on behalf of Continental Airlines, Inc. ("Continental'') in connection with its 

review of rates and charges at Newark Liberty International Airport ("EWR"). 

As you suggested in your letter, 1 have reviewed the documents and infonnation provided 

by the Port Authority of New York and New Jersey (the "Po1'1: Authority") to the Finance 

Subcommittee of the Aidine Airpo!t Affair.s Committee (the "Subcommittee") on 

October 18, 2005. That information does not contain any of the detail requested in my 

letter, however, nor is it responsive in any way to my requests. 

Continental is entitled to the information that I have requested from the Pott Authority to 

be able to determine whether (1) the flight activity fee at EWR conforms with 

Continental's lease agreement with tl1e Port Authority, and (2) the flight activity fee is fair 

and reasonable and otherwise in accordance with federal law. 

Among other things, the lease agreement establishes a formula for the annual calculation 

of the flight activity fee. This fottnula is supposed to be based on actual costs incutred in 

the operation and maintenance of the Public Aircraft Facilities ("PAF"), and actual costs 

!elated to the Allport Services Factot ("ASF''). The information provided by the Port 

Authority to the Subcommittee contJ>ins only the highest-level summary of these costs. 

TI1ere is no detail concerning any of the individual cost items tl1at make up the totals or 

the method used to amortize each such cost item. Tims, there is no way for Continental 

to determine whether the flight activity fee in fact has been calculated accw:ately at 

represents an approptiate application of the formula. 

LEGAL_US_W# 52925312.5 EXHIBITTT 
Carlene V. Mcintyre, Esq. 

November 11,2005 

Page 2 

I am sure you will agree that a party to a contract under which there is an obligation to pay 

an amount set by a formula is entitled to receive the underlying information necessary to 

determine whether that formula has been calculated correctly. While that principle of 

contract law is one basis for Continental's request for information concerning the details 

of the various cost categories that comprise the flight activity fee calculation, federal law 

imposes the same obligation on the Port Authority. 

Continental has questions and concerns about what we know about the flight activity fcc 

calculation. For example, the lease agreement allows the Port Authority to include in the 

calculation only costs actually incurred or accrued. Yet Continental has been informed 

that the Port Authority applies a 60 percent fixed charge cover f.'tctor as part of the flight 

activity fee calculation, even though such a cover factor is nowhere mentioned in the lease 

agreement. Furthermore, application of such a cover factor appears to be inconsistent 

with the provisions of Schedule A to the lease agreement, which call for liquidated 

overhead charges of only 10 percent. 

Further regarding the computation of any fixed charges, the lease agreement provides that 

tl1e actual average interest rate on outstanding Port Authority bonds is to be used to make 

such computation. Continental has recently become aware of the Port Authority's 

practice of £nancing facilities at EWR with tax-exempt bonds that require interest-only 

payments for many yeats, while at the same time charging the intended airline users of the 

financed facilities mortgage style amortization.(interest plus principal) payments. 

Continental needs and requests all relevant infotmation on this fmancing practice to 

enable Continental to understand and to assess the long-term effects of this practice on 

rates and charges at EWR after the current lease agreement expires. Even if such a 

financing practice were pemritted under the lease agreement and federal law applicable to 

airport rates and charges, Continental is concerned that such a financing practice raises 

significant issues under federal law applicable to tax-exempt bonds. 

Continental also needs information about substantial Port Authority payments to other 

governmental entities to settle litigation, to pay "rent'' or for other purposes. Continental 

needs to assess, among other things, whetl1er these payments affect the flight activity fee, 

directly oJ: indirectly, now or in the future. 

These ate just a few examples of the kinds of questions and concerns that demonstrate the 

need to obtain ftom the Port Authority all necessary information to assess the flight 

activity fee calCulation. For this reason, Continental again requests the information 

requested in my previous letter. 

But analysis of whether EWR rates and charges confo.rm with the lease agreement does 

not end the inquiry. Continental needs all the information requested in my letter to assess 

the fahness and reasonableness of the flight activity fee \lllder federal law. Your letteJ: 

LEGAL_US_W # 52925312.5 
Carlene V. Mcintyre, Esq. 

November 11, 2005 

Page3 

implies that Continental is not entitled to this information because it has an agreement 

with the Port Authority conceJ.ning the calculation of rates and charges. 

While it is true, as you point out, that the U.S. Department ofTranspormtion Rates and 

Charges Policy (the "Policy") expresses a preference for negotiated rates, such rates must 

still be fait and reasonable. As the Policy states: 'We do not interpret section 47129 [of 

Title 49, U.S. Code] to preclude an investigation of fees set by agreement or the 

application of the policy in such an investigation." 

Additionally, the Port Authority has given assurances to the federal government and the 

public that it will charge reasonable rates for the use of its aeronautical facilities. Federal 

hw requires aeronautical rates to be reasonable. See, e.g. 49 U.S.C. § 40116. These 

requirements of federal hw cannot be waived or abrogated by contract: ("the 

requirements of any hw, including the requirements for use of cirport revenue, may not 

be waived, even by agreement with the aeronautical users." Policy, section 1.3.) 

There are three simple facts that would give any neutral obsru:ver concern about the 

reasonableness of the rates ~nd charges at EWR: 

• EWR's flight activity fee is the highest flight activity fee in the country and is 

approximately 60% higher than the flight activity fee at John F. Kennedy 

Intemational Airport. 

• Each year, EWR generates a substantial revenue siu:plus. The 2005 budget 

foxecasts a surplus of $141 million. 

e The POJ:t Authority uses the sutplus revenue generated from EWR to subsidize 

other, non-aru:onautical operations, such as the P.A TH train, and may be used for 

other non-aeronautical purposes currently unknown to Continental. 

Let's put aside for the moment the question of whether the Port .Authority's 

"grandfather" exception to the revenue diversion J:estrictions allows the Port .Authority to 

make payments of such substantial sums of money for non-aeronautical purposes. That is 

a legal question that cannot be resolved by us. But, even if the grandfather exception were 

to allow such payments, the generation of substantial sutplus revenue still raises the 

question of whether the aeronautical rates and charges are reasonable. The grandfather 

exception is not a license to generate a surplus, nor a basis to deny necessaty information 

to Continental. The Policy states, for example, that the existence of a net surplus of 

revenue over expenses could indicate unreasonably high charges. It is interesting that the 

Policy notes that, normally, an aitport proprietor will have no incentive to generate 

surplus revenue because all revenue must be used for aitpoxt purposes. Section 4.2.1. 

The Port .Authority, on the other hand, because it depends on EWR and the otl1er New 

LEGAL_ US_ W # 52925312.5 
Carlene V. Mcintyre, Esq. 

Novetnbet 11,2005 

Page4 

York area aitports to subsidize its money-losing non-aeronautical operations, has a great 

deal of incentive to generate surplus revenue from the airports. Although the Port 

Authority's 1952 Consolidated Bond Resolution requites the Port Authority to operate all 

its facilities, the net proceeds of whi!:h are payable into the general reserve fund, in an 

efficient and economical manner, it appears that the failure to do has resulted in a greater 

subsidy from (and hence diversion of) aitport revenue than would have been requited 

otherwise. 

In your letter, you refer to the recent Terminal B proceeding at the U.S. Department of 

Transportation (D01). Continental and I believe the final decision in that proceeding, 

which found unreasonable an annual surplus of $5 million created by the Terminal B 

charges, should raise serious concerns for the Port Authority in light of the $140 million 

annual surplus generated by EWR. If the DOT decision has not prompted a Port 

Authority review of the lawfulness of the $140 million annual smplus, Continental 

strongly urges the Port Authority to undertake such a review without further delay in 

connection with providing Continental with the necessary information to assess EWR 

rates and charges. Clearly, the Terminal B final decision and other DOT decisions 

underscore the need for ahport operators, including the Port Authority, to avoid charges 

that result in a surplus regardless of the intended or aetna! use of the surplus. 

In sum, the information requested by Continental is necessary so that we may make an 

initial determination of the reasonableness of the flight activity fee at EWR and whether 

that fee confo1ms with the lease agreement. Such an initial determination is necessary so 

that Continental can decide whether additional steps, including a Part 16 complaint to the 

Federal Aviation Administration, are warranted. 

I look forward to heating from you as to when we may expect to receive the information 

requested in my October 11 letter. 

RobertS. Span 

of PAUL, HASTINGS,JANOFSKY & WALKERLLP 

RSS:mc 

LEGAL_US_W # 52925312.5