# Paul

# Hastings
ATTORNEYS

Atlanta BeljJno Brussels Hong Kong London los Angeles Milan New York Oranae County Palo Alta Paris San Diego San Francisco Shanghai Stamford Tokyo Washington, DC (213) 683-6253 robertspan@paulhastings.com
November 11, 2005

VIA FACSIMILEAND 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 PortAuthority ofNew York and New

## J crsey 225 ParkAvenue South, 15thFloor NewYork,NY 10003
Re: 

# m Rates and Changes
Dear Carlene:
Thank you for yourletter dated October 17, 2005 responding to my letter dated October 11, 2005 on behalfofContinentalAirlines, Inc. ("Continental'') in connection with its review ofrates and charges at Newark Liberty InternationalAirport ("EWR").
As you suggested in your letter, 

### 1have reviewed the documents and infonnation provided by the PortAuthority ofNew York and NewJersey (the "Po1'1: Authority") to the Finance Subcommittee ofthe Aidine Airpo!tAffair.s Committee (the "Subcommittee") on October 18, 2005. That information does not contain any ofthe detail requested in my letter, however, nor is itresponsive in any way to myrequests. Continental is entitled to the information that I have requested from the PottAuthority 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 ofthe flight activity fee. This fottnula is supposed to bebased on actual costs incutred in the operation and maintenance ofthe Public Aircraft Facilities ("PAF"), and actual costs !elated to theAllport Services Factot ("ASF''). The information provided by the Port Authority to the Subcommittee contJ>ins only the highest-level summary ofthese costs. TI1ere is no detail concerning any ofthe individual costitems tl1at make up the totals or the method used to amortize each such costitem. 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 ofthe formula.

LEGAL_US_W# 52925312.5 EXHIBITTTCarlene 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 thatprinciple of contractlaw is one basis for Continental's request for information concerning the details ofthevarious cost categories that comprise the flight activity fee calculation, federal law imposes the same obligation on the PortAuthority. Continentalhas questions and concerns about whatwe know about the flight activity fcc calculation. For example, the lease agreement allows the PortAuthority to include in the calculation only costs 

### actually incurred or accrued. Yet Continentalhas beeninformed that the PortAuthority applies a 

### 60 percent fixed charge cover f.'tctor as part ofthe flight activity fee calculation, even though such a cover factor is nowhere mentioned inthe lease agreement. Furthermore, application ofsuch a cover factor appears to beinconsistent with the provisions ofSchedule A to the lease agreement, which call for liquidated overhead charges ofonly 

### 10 percent. Further regarding the computation ofany fixed charges, the lease agreement provides that tl1e actual average interestrate on outstanding Port Authority bonds is to be used to make such computation. Continentalhas recently become aware ofthe PortAuthority's practice of£nancing facilities at EWR with tax-exempt bonds thatrequire interest-only payments for many yeats, while at the same time charging the intended airline users ofthe 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 ofthis practice on rates and charges at EWR after the currentlease agreement expires. Even ifsuch a financing practice were pemritted under the lease agreement and federal law applicable to airportrates and charges, Continentalis concerned that such a financing practice raises significant issues under federal law applicable to tax-exempt bonds. Continental also needs information about substantial PortAuthority payments to other governmental entities to settle litigation, to pay "rent'' or for otherpurposes. Continental needs to assess, among other things, whetl1er these payments affectthe flight activity fee, directly oJ: indirectly, now or in the future. These ate justa few examples ofthe kinds ofquestions and concerns that demonstrate the need to obtain ftom thePortAuthority 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 ofwhether EWRrates and charges confo.rm with the lease agreement does not end the inquiry. Continental needs all the information requestedin my letter to assess the fahness and reasonableness ofthe flight activity fee \lllder federal law. Your letteJ:

LEGAL_US_W # 52925312.5Carlene V. Mcintyre, Esq. November 

### 11, 2005 Page3
implies that Continental is not entitled to this information because 

### ithas an agreement with the Port Authority conceJ.ning the calculation ofrates 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 offees set by agreement or the application ofthe policy in such aninvestigation." Additionally, thePortAuthorityhas given assurances to the federal government and the public thatitwill charge reasonable rates for the use ofits aeronautical facilities. Federal hwrequires aeronautical rates to bereasonable. See, e.g. 49 U.S.C. 

### §40116. These requirements offederal hw cannotbe waived or abrogated by contract: ("the requirements ofany hw, including the requirements for use ofcirport revenue, may not bewaived, even by agreement with the aeronautical users." Policy, section 

### 1.3.)
There are three simple facts thatwould give any neutralobsru:ver concern about the reasonableness ofthe 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 atJohn F. Kennedy IntemationalAirport.

• Each year, EWRgenerates a substantialrevenue 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.ATH train, andmay be used for other non-aeronautical purposes currently unknown to Continental.
Let's put aside for the moment the question ofwhether the Port .Authority's "grandfather" exception to the revenue diversion J:estrictions allows the Port .Authority to make payments ofsuch substantial sums ofmoney for non-aeronautical purposes. That is a legal question that cannotbe resolved by us. But, even 

### ifthe grandfather exception were to allow such payments, the generation ofsubstantial sutplus revenue still raises the question ofwhether the aeronautical rates and charges are reasonable. The grandfather exception is not a license to generate a surplus, nor a basis to deny necessatyinformation to Continental. The Policy states, for example, that the existence ofa net surplus of revenue over expenses could indicate unreasonably high charges. It is interesting thatthe Policy notes that, normally, an aitportproprietor will have no incentive to generate surplus revenuebecause all revenue must beused for 

### aitpoxt purposes. Section 

### 4.2.1. The Port.Authority, on the other hand, becauseit depends onEWR and the otl1er New

LEGAL_ US_ W # 52925312.5Carlene V. Mcintyre, Esq. Novetnbet 11,2005 Page4

York area aitports to subsidize its money-losing non-aeronautical operations, has a great deal ofincentive 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 netproceeds ofwhi!: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 beenrequited otherwise. 

### In your letter, you refer to the recent TerminalB 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 PortAuthorityin light ofthe $140 million annual surplus generated by EWR. Ifthe DOT decision has notprompted a Port Authority review ofthe lawfulness ofthe $140 million annual smplus, Continental strongly urges the Port Authority to undertake such a review without further delay in connection with providing Continentalwith the necessary information to assess EWR rates and charges. Clearly, the TerminalB final decision and otherDOT decisions underscore the need for ahport operators, including the PortAuthority, to avoid charges that result in a surplus regardless oftheintended or aetna! use ofthe surplus.
In sum, the information requested by Continental is necessary so thatwe 

### may make an initial determination ofthe reasonableness ofthe flight activity fee at EWR and whether that fee confo1ms with thelease agreement. Such an initial determination is necessary so that Continental can decide whether additional steps, including a Part 16 complaint to the FederalAviation Administration, are warranted.
I look forward toheating from you as to when we may expect to receive theinformation requested in my October 11 letter.

RobertS. Span ofPAUL, HASTINGS,JANOFSKY & WALKERLLP
RSS:mc

LEGAL_US_W # 52925312.5