AIRPORT BUSINESS

PRACTICES AND

THEIR IMPACT

ON AIRLINE

COMPETITION

FAA/OST Task Force Study

October 1999
Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

C O N T E N T S

 Page

EXECUTIVE SUMMARY i

Chapter 1: Overview of the Airport System 1

Airport Ownership and Management 2

Airport Funding 3

Airport Leasing Arrangements 7

Scope and Methodology 9

Chapter 2: Airports' Legal Obligation to Provide Reasonable

 Air Carrier Access in Support of Competition 13

Airport Operators Must Provide Reasonable Access and

 Not Engage in Economic Discrimination 15

Terms and Conditions 18

Prohibition Against Exclusive Rights 21

Federal Preemption 23

Airport Proprietary Powers 24

Unfair Airline Competition 26

Chapter 3: Airport Access and Its Effects on Airline Competition 29

Access to Airports Is Critical to Airline Competition 30

Contractual Arrangements Between Airports and Airlines Can

 Influence Competition 33

Contractual Arrangements Do Not Preclude Reasonable Entry 49

Chapter 4: Using Passenger Facility Charges to Enhance Competition 53

PFCs: A Potentially Significant Tool for Increasing Competition 54

PFC Funding Has Contributed to Overall Airport Funding,

 But Its Competitive Impact Is Unclear 58

Steps Needed to Better Understand the Competitive Benefits of

 PFC-Funded Projects 64
CONTENTS...

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page

Chapter 5: Airport Management Practices and Successful Airline Entry 69

Airport Managers Play a Critical Role in the Success or

 Failure of Air Carriers 69

Some Communities Are Reviewing Airport Business Practices to

 Improve Opportunities for New Airline Entry 71

Airports Can Promote Competition by Adopting Practices Already in

 Use at Other Airports 76

APPENDIX A . Gate Usage Practices at Individual Large and Medium

 Hub Airports, 1992, 1998 and 2004 85

APPENDIX B. Type of Financing Arrangements and MII Status at

 Individual Large and Medium Hub Airports, 1998 91
Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

EXECUTIVE SUMMARY

INTRODUCTION

Air Carrier Complaints

Airline deregulation has generated substantial economic

benefits for the vast majority of the traveling public. Lower

average airfares (after adjusting for inflation) and better

service for most consumers have increased the demand for

air travel. Despite deregulation’s overall success, however,

questions continue to be raised as to whether competition

in certain air travel markets is as vigorous as it could be.

Academic and government studies continue to find the

existence of substantial airfare “premiums,” particularly at

concentrated hub airports where new entrant and low-fare

airlines have had problems establishing a strong market

presence. As barriers to entry, the U.S. General Accounting

Office and other observers have pointed to airports’ longterm, exclusive-use gate-lease agreements with tenant

airlines and to majority-in-interest (MII) clauses, which give

signatory airlines special rights to approve airport capital

improvement plans. Recently, the Transportation Research

Board concluded that limited access to airport gates can be

an obstacle to entry that merits close monitoring by airport

operators and the Department of Transportation (DOT).1

Furthermore, at Congressional hearings and in comments

to DOT officials, representatives of new entrant and

incumbent air carriers report that they face the following

conditions in gaining access to critical facilities, particularly

at certain heavily used airports:

4 Lack of assistance from airport management in

obtaining access to gates or in arranging sublease

agreements with primary tenant airlines.

4 Inconvenient and frequent gate reassignments in

circumstances not favorable to the operational needs of

new tenants.

 

1

Entry Conditions in the U.S. Airline Industry: Issues and Opportunities,

Report of the National Research Council’s Transportation Research Board

(August 1999), p. 3-19 (advance copy).
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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Access Is Essential

4 Classification of new entrants as “non-signatory” carriers

despite their willingness to lease gates and become

“signatory” carriers.

4 Fee differentials for gates and other facilities at the same

airport.

4 Lack of access to a gate except at the least desirable

times.

4 Bundling of facilities and ancillary services when a new

entrant subleases a gate (e.g., the subleasing air carrier

must use the ground-handling services of the primary

tenant airline).

4 Inability of new entrants to have new facilities

constructed at airports due to the opposition of signatory

air carriers, as well as their ability to delay or prevent

airport capital-development projects through MII

clauses.

4 Lack of priority for gates and other facilities, since these

are offered first to dominant airlines at airports rather

than to new entrants.

4 Uncertainty regarding what the airport requires to obtain

a gate or to expand operations at the airport.

Airline deregulation can work well only if market forces can

discipline the pricing behavior of all air carriers. As

documented in numerous academic and government

reports, significant new entry in concentrated airline markets results in lower airfares, often dramatically lower. But

if airlines cannot gain access to gates, baggage claim areas,

passenger check-in and hold rooms, and other essential

airport facilities on reasonable terms, they will be unable to

compete successfully against air carriers that do have such

access. Moreover, unless there is a reasonable likelihood

that a new entrant’s short-term and long-term needs for

gates and other facilities will be met, it may simply decide

not to serve a community.
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page iii

Task Force

Established

RESULTS IN BRIEF

Airport Business

Practices

To address the issue of how airport business practices affect

airline competition, Secretary Slater established a Task Force

jointly staffed by the Office of the Secretary (OST) and the

Federal Aviation Administration (FAA). This report

presents the results of the Task Force study, including

actions for immediate implementation by the Department

and issues for further consideration by the Congress,

industry and DOT.

The Task Force focused on two basic questions:

4 Are certain airport business practices discouraging or

preventing entry by new air carriers or hindering

competition among the carriers already operating at an

airport?

4 What has been the impact of Passenger Facility Charges

on airport capacity and airline competition?

Airport business practices play a critical role in shaping

airline competition. Access at many of the Nation’s most

heavily used airports is limited, not only because of airside

constraints, but also because of long-established airport

business practices. The financial viability of an airline,

especially a new entrant airline, may depend on serving a

few key business and leisure markets. But such service

requires access to airport gates and other facilities on

reasonable terms.

Airport managers often cite long-term, exclusive-use gatelease agreements with incumbent airlines as one business

practice that makes it difficult for new entrant air carriers to

begin serving an airport. While airport business practices

can limit the ability of airport managers to assign gates and

other critical facilities to new entrant airlines, airport managers have a legal obligation to accommodate all qualified

airlines that wish to serve their airport. (An airport may

adopt reasonable and nondiscriminatory minimum standards
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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Passenger Facility

Charges

SCOPE AND

METHODOLOGY

Public Comments

to ensure safe and efficient airport operation; such standards

may include creditworthiness, for example). Stated simply,

airport managers cannot allow dominant airlines to become

de facto airport managers. The Department, meanwhile,

must be vigilant in assuring that all airports meet their legal

obligations to accommodate all qualified airlines.

Passenger Facility Charges (PFCs) have played an important

role in financing airport capital development projects.

Between 1992 and 1998, FAA approved 3,900 projects and

authorized collection of PFCs totaling almost $19 billion.

(By January 1999, approved funding reached $23 billion.)

Several projects allowed airport operators to build or

refurbish terminals and gates, and thus accommodate new

entrant air carriers or incumbent carriers that wanted to

expand their operations. However, due to a lack of data

regarding the effects of PFC-financed projects on new

entrant usage, and because many terminal projects have not

yet come on line, the extent to which PFCs have had a direct

effect on enhancing airline competition is not clear. Changes

to the PFC Program are needed before its full competitive

potential is achieved.

To gather information on airport business practices and the

impact of PFCs, the Task Force obtained information from

the public and the airport and airline communities. Task

Force staff also worked closely with the Airports Council

International-North America (ACI-NA), which developed a

questionnaire on airport capacity, operations, and practices.

Finally, Task Force members visited 13 large airports to gain

information about airport practices and airline competition.

The Task Force provided several opportunities for the

public, the aviation industry, and the airport community to

provide input to the study. On April 10, 1998, DOT published

a request for comments in the Federal Register. Comments

were collected and filed in a public docket (Docket No. OST98-4025). Airport and airline representatives have also met
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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Survey Data

Case Studies

AIRPORT

OPERATORS

MUST PROVIDE

ACCESS

Prohibited Practices

with the Task Force to discuss airport business practices and

issues of interest to the study team.

The Task Force also relied upon a survey conducted by the

ACI-NA. The survey was designed to gather information

about the ability of airports to provide air carrier access to

gates and related facilities and how any such limitations in

access to them could constrain airline competition. The survey also asked several questions about PFCs and their effect

on airport capacity and airline competition.

To better understand how airport business practices affect

airline competition, Task Force members visited 13 large

airports to meet with airport and airline officials in order to

understand the economic, financial, legal, and competitive

factors that motivated airport executives to adopt specific

business practices.2 These discussions also provided a way

to gather information about the scope and pace of changes

in business practices and which practices promoted or

discouraged airline competition.

Federal law requires airport operators to provide access to

all qualified air carriers on reasonable terms and without

unjust discrimination, and prohibits them for granting an

exclusive right to operate at their airports. Airport practices

that have the effect of unreasonably denying or hindering

access by air carriers in effect regulate their routes, contrary

to the federal preemption authority over fares, routes, and

services.

To receive federal airport improvement funds, an airport

operator must agree that it will operate the airport in an

economically nondiscriminatory manner. The “economic

non-discrimination” grant assurance implements the

provisions of 49 U.S.C. 47101(a)(1) through (6). In pertinent

part, these provisions require the airport sponsor to make

 

2

The airports are located in the following communities: Atlanta, Baltimore,

Charlotte, Cincinnati, Dallas, Denver, Detroit, Houston, Minneapolis,

Pittsburgh, Phoenix, Salt Lake City, and San Jose.
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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Public Benefit & Use

BENEFITS OF

COMPETITION

DEPEND ON AIR

CARRIER ACCESS

the airport available for public use on reasonable terms and

without unjust discrimination to any aeronautical user.

Airport operators also may not: (1) deny access by

disapproving an otherwise-qualified air carrier’s application

or by unreasonably delaying access; (2) adopt unjustified

standards prohibiting a certain class of carrier from

operating at the airport or containing criteria not relevant to

operations, not reasonably attainable, not uniformly applied,

or intended to protect incumbents; (3) claim lack of gate

availability when, in fact, gates are not fully used; (4) defer

completely to incumbent tenants’ determinations on

whether or not, and how, to accommodate requesting airlines; (5) permit unreasonable sublease fees or conditions to

be imposed on new entrants; or (6) unreasonably deny

signatory status to an authorized air carrier willing to

assume the obligations of a signatory carrier.

Providing access to new entrants comports with the federal

grant assurances’ overriding policy to assure that the airport

is operated for the benefit of the public and is available for

public use. Further, since access must not be unjustly

discriminatory, airports must be sensitive to assuring that a

new entrant is accommodated on terms reasonably similar

to an incumbent’s and that anti-competitive effects do not

result from an airport’s action.

Numerous empirical studies of airline pricing practices since

deregulation have concluded that average airfares in

concentrated markets are higher, often considerably higher,

than they are in competitive markets. High fares can have

adverse consequences for local economic development and

employment, as state and local officials have come to

appreciate. However, when new low-fare entry occurs in a

market, average fares decline, often dramatically. Of course,

high fares are not limited to travelers enplaning only at

large, concentrated hub airports. Travelers based in smaller

cities -- the “spoke” in a large carrier’s route network -- may

also pay high fares.
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page vii

Facilities Usage

Contractual

Arrangements

Types of Agreements

New entrant air carriers often operate in short to mediumhaul markets with significant passenger volumes, the markets where airfares are often high. In order to bring the

benefits of price competition to these markets, new entrants

need reasonable access to airport gates, facilities, and

services.

Airports differ in how fully their facilities are used. Some

difference is appropriate: air carriers differ, both in terms of

the markets they serve and the frequency of the service they

provide, and weather and other factors also affect airport

utilization. It appears, however, that some airports could

make better use of their facilities. Indeed, current

limitations on airport-terminal access at some airports may

be as much a function of airport-airline contractual

arrangements and airport management practices as they are

a function of terminal and other physical constraints.

Airports and airlines have developed complex contractual

arrangements (so-called use and lease agreements) to

govern their ongoing business relationships. These

agreements are legally binding contracts that specify the

terms and conditions of the airlines’ use of and payment for

airfield and terminal facilities. In many cases these

agreements formed the foundation for the original financing

of existing airport facilities. Such agreements are often

grouped into three broad categories: compensatory,

residual, and hybrid.

Generally, under a compensatory agreement, an airport

operator charges its airline tenants fees and rental charges in

an amount necessary to recover the actual cost of operating

the airport for each group’s respective benefit; accordingly,

the airport assumes the financial risk of any overall revenue

shortfall. Under a residual agreement, signatory airlines

generally agree to pay any costs of operating the airport that

are not allocated to other users or covered by non-airline

revenues. Signatory carriers thus assume the risk of overall

revenue shortfall and receive the benefit of any revenue

surpluses. Hybrid agreements combine elements of both the
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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Types of Gate Use

Barriers to Entry

compensatory and residual agreements and have grown in

popularity since airline deregulation.

The nature of the agreement can influence an airport’s ratesetting and investment practices. The MII clauses that often

accompany a residual agreement, for example, grant signatory airlines the right to review and approve airport capital

development projects. Moreover, residual agreements are

often structured to provide investors with added security

for their purchase of airport revenue bonds; accordingly, the

terms of these contracts are frequently longer than is the

case with compensatory agreements. 

Airports lease gates to air carriers under exclusive-use,

preferential-use, and common-use arrangements. Many

airports have entered into all three types of arrangements,

although one type will generally be dominant at an airport.

Based on the results of the ACI-NA survey, many airports

have begun to opt for preferential-use leases, although

exclusive-use leases remain the most popular contractual

arrangement at large hub airports.

Many of the business practices in effect today at airports

were adopted decades ago for specific economic, financial,

and political reasons. Some airport business practices, such

as entering into long-term, exclusive-use gate lease

agreements, were considered to be essential for securing a

long-term financial commitment from tenant air carriers,

thus reducing the perceived investment risk of airport bonds

and the cost of capital for airports.

In this regard, previous academic and government studies

have identified certain contractual arrangements between

airports and airlines, especially long-term, exclusive-use

gate-lease agreements, as a barrier to entry. DOT remains

concerned about the potentially adverse competitive consequences of long-term, exclusive-use gate leases, especially at

concentrated hub airports. However, several factors have

begun to mitigate their anti-competitive effect, including the

growing popularity of preferential-use leases, the role
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page ix

MII Clauses

Subleases

“Bundled” Services

PFCs have played in requiring airports to adopt preferential

or common-use leases, and the somewhat diminished

popularity of exclusive-use agreements within the financial

community.

The traditional MII provisions authorize a prescribed

percentage of airlines that have signed an airport’s use and

lease agreement to review and then approve or disapprove a

proposed capital project that will be financed through the

rates and charges assessed against them. Most large and

medium hub airports have MII clauses in their use and lease

agreements. Because MII clauses could be used to delay or

prevent the construction of terminal and other projects that

would benefit new entrant and smaller air carriers, they

have been identified as a barrier to entry. While there is

little “hard” evidence to demonstrate their anti-competitive

effect, there is anecdotal evidence, based on comments to the

docket and the ACI-NA survey responses, that air carriers

have either invoked or threatened to invoke MIIs to delay or

prevent entry at a few airports.

Generally, a sublease agreement for the use of a gate or

other facility will be negotiated directly by an entrant and an

incumbent airline, with little, if any, involvement by airport

management. Many airports exercise no control over fees

charged for subleased facilities. Subleasing may not be an

optimal solution for accommodating air carriers that want to

establish a significant market presence. By its nature, a

sublease agreement will be based on the operational needs

of the primary tenant airline; indeed, some subleases permit

the primary tenant to regain control over a subleased gate

on short notice or require the subleasing carrier to shift its

operations to different gates when the tenant airline requires

it to do so. In short, subleasing arrangements may make it

difficult for new entrant carriers to schedule flight operations or to offer customers an acceptable level of service.

Smaller air carriers offering only a few flights a day at an

airport may not have the crew on hand and the facilities

available to provide all the support services they need to
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page x

Grant Assurances

And Access

PFCs AND

COMPETITIVE

ACCESS

operate (e.g., baggage handling, fueling, towing, catering,

minor maintenance). When faced with this situation, a new

entrant will contract with an incumbent carrier or, perhaps,

an independent contractor to provide necessary services. By

doing so, a new entrant may be required to purchase a

“bundle” of services rather than the specific services it

needs, or to pay higher than expected fees.

Notwithstanding specific features that have been

incorporated into airport-airline use and lease agreements,

one fact remains unchanged: all federally assisted airports

are bound by federal grant assurances that require the

airport operator to accommodate reasonable requests for

access by a new entrant carrier or by an incumbent carrier

that wants to expand its operations. While an air carrier tenant is not required to cancel flights or to forfeit its use of

airport facilities, an airport operator may not deny access to

its facilities based solely on existing lease arrangements.

Airport operators also have the legal authority to oversee

gate usage for purposes of efficient operation and to accommodate airline requests for access. As a result of the PFC

Program, airport managers have the financial tools to

expand terminals and other facilities to accommodate all

airlines that want to serve their communities.

The governing statute and the implementing regulations

require that PFCs be used to finance eligible airport projects

that preserve or enhance safety, capacity, or security of the

national air transportation system; reduce noise or its

impact; or enhance airline competition. FAA’s primary role

in administering the program is to approve or disapprove

the projects submitted to it, based on the governing statute

and its regulations. Tenant airlines cannot block an airport

from imposing PFCs for approved projects.

By allowing airports to assess a fee of up to $3 per enplaned

passenger, PFCs provide an important and growing source

of funds to improve and expand airport infrastructure.
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page xi

Potentially Significant

Competitive Tool

Competitive Impact

 Uncertain to Date

Moreover, PFCs may be used to fund a broader range of

terminal projects than can be funded under the Federal

Airport Improvement Program (AIP). Unlike AIP grants,

PFCs may also be used to pay a project’s interest costs,

which can be critical to undertaking the project and assuring

investors of its financial viability.

The PFC program embodies provisions that provide airport

managers with potentially powerful tools for ensuring

airline competition. For example, PFCs are an independent

source of funds that can be imposed by airports without the

approval of incumbent air carriers. Baltimore/Washington

International Airport, for example, used this tool to

construct gates for a low-fare carrier over the objection of

incumbent carriers. PFCs cannot be used to build facilities

that are subsequently leased to air carriers on a long-term,

exclusive-use basis. And while PFCs may be used to build

facilities that are subsequently leased to air carriers under

preferential-use terms, leases cannot contain automatic

“carry-over” provisions, whereby a short-term, preferentialuse lease becomes a de facto long-term, exclusive-use lease.

Further, any lease between a public agency and an air

carrier for PFC-financed facility must contain a provision

that allows the agency to terminate the lease if the carrier

also leases facilities at the airport on an exclusive-use basis,

does not fully use the facilities, and does not share them.

This provision enables airport managers who impose PFCs

to finance the construction of terminal facilities to establish

more control over all airport facilities, including those

already leased to air carriers under exclusive-use

agreements. In this regard, Detroit Metropolitan Wayne

County Airport required the dominant carrier with

exclusive-use gates to share two underutilized gates with a

low-fare carrier.

Between 1992 and April 1998, FAA approved 3,900 projects

and authorized the collection of $18.9 billion in PFCs.

Although airside, ground access, and noise-mitigation

projects have all been critical in providing efficient and safe

infrastructure for all users of the airport system, approved
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page xii

AIRPORT

MANAGERS &

BEST PRACTICES

terminal projects (531) are the most likely to have a direct

effect on airline competition. As of April 30, 1998, approved

PFC terminal projects accounted for $6.9 billion in authorized collections. A review of the 531 projects showed that

217 terminal projects, which accounted for slightly more

than $6.0 billion in PFC approvals, were likely to have the

greatest direct impact on airline competition. However, we

were unable to measure the impact of these projects on competition because:

4 FAA databases have not tracked the specific number of

gates, loading bridges, hold rooms, or other terminal

facilities.

4 Discussions of conditions that limit competition and initiatives to foster competition, although required by FAA

regulation, have not been emphasized by most airports

in their PFC applications for new terminal facilities.

4 Interpretation by airport operators as to what constitutes

a competitive enhancement has been subjective.

4 Available data suggest most new terminal facilities built

with PFC funds have gone to incumbent airlines, but it is

unknown whether this resulted in freeing up gates for

new entrants.

4 Many of the approved projects have not yet come on

line.

Airport managers play a critical role in determining whether

a new entrant carrier is given a reasonable opportunity to

compete at an airport. Some airport managers recognize

this fact and are adopting new practices or modifying old

ones to create an “entry-friendly” environment. State and

local public officials are also taking actions to encourage

airline competition and to take steps to ensure competitive
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page xiii

access to their airports. Positive initiatives by state and

community leaders in Baltimore, Minneapolis, Charlotte,

and Atlanta are good examples.

There is a broad range of business practices being used

among the Nation’s airports. Airport managers clearly

exhibit important differences as to how much they seek out

airlines to serve their airports and what actions they are

prepared to take to assist new-entrant airlines. Some airport

officials are quite comfortable adopting a “let-the-carrierswork-it-out approach” to managing their facilities. Other

officials are willing to take bold and innovative actions to

secure the benefits of increased airline competition for their

communities. Such “best practices” by airport managers

and operators include:

4 Promoting new entry by becoming advocates for competition.

4 Continually monitoring gate-utilization practices of airlines.

4 Invoking “use-it-or-lose-it” authority if incumbent

carriers are not using their gates fully.

4 Providing clear guidelines and a timeline to prospective

entrants on what they must do to gain access to an

airport and when they will be able to begin operations,

and clear standards to incumbent carriers that seek

additional space to expand operations.

4 Monitoring all sub-lease agreements to ensure that fees

are reasonable.

4 Creating an environment where third-party contractors

provide competitive ground-handling and support

services.

4 Taking actions to recover gates when they become available and to convert gates and other facilities to commonuse status.
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page xiv

RECOMMENDATIONS

4 Working to ensure that any new MII agreements entered

into do not prevent or delay projects that could be

beneficial to new entrants or smaller airlines serving

their airports.

4 Using the tools provided by the PFC program to finance

terminal expansion projects that provide greater

opportunities for new entrants and increase airline competition.

A commitment on the part of all airport managers to adopt

these “best practices” would go a long way toward ensuring

that all communities receive the fare and service benefits

that have resulted from airline deregulation.

To enhance competitive access to airports, the Task Force

recommends the following actions for immediate implementation by the Department.

· The Secretary should designate the Assistant Secretary

for Aviation and International Affairs as the

Department’s “competition advocate” for promoting

competitive access to airports. Responsibility for

administering the airport access requirement associated

with the AIP and PFC programs, however, should

remain with the FAA Administrator.

· The FAA Administrator should direct the appropriate

FAA offices to:

 ̧ Ensure that airports meet their legal obligation to

provide reasonable access in support of competition

and provide training and guidance to field offices

and airports for assistance in meeting this goal.

 ̧ Ensure that PFC applications for terminal projects

include the required explanation of any competitive

limitation at the airport before approving terminal

development projects.
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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ISSUES FOR FURTHER

CONSIDERATION

 ̧ Provide AIP funding only for master plans that

include a description of competitive effects resulting

from the addition of gates or related facilities, as

shown in the airport master plan filed with FAA.

 ̧ Implement a new database that will provide current

information on various aspects of PFC projects,

including the numbers of terminal gates, ticket

counters and baggage carousels built or renovated,

the net increase in those facilities and their respective

funding source (PFC or non-PFC), and the types of air

carriers to which the facilities are or will be leased

and the specific terms that apply.

 ̧ Conduct a public outreach effort to explain how the

PFC program, including the grant assurance

provisions, can be used to enhance airline

competition.

 ̧ Ensure that airports comply with the regulatory

requirements of 14 CFR Part 158, Assurance 7, by

encouraging airports to establish a “terminal use

monitoring program” before any PFC applications

are approved for terminal projects.

 ̧ Require airport operators to (1) resolve new entrant

access complaints within a reasonable period and (2)

clearly specify and publish what is required for a new

entrant to acquire a gate and for an incumbent carrier

to expand.

During the course of the Task Force study, several issues

were raised in the public docket or during discussions with

airport and airline officials regarding specific ways to ensure

access to airport gates and other facilities and to

institutionalize the “best practices” for promoting

competitive access. The Task Force believes that implementation of its recommendations, coupled with a procompetitive airport management philosophy, will provide
EXECUTIVE SUMMARY

Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

 Page xvi

the tools needed to ensure that airport business practices

enhance airline competition. However, the Task Force also

believes that in the event progress in ensuring competitive

access proves elusive, the issues described below represent

additional steps that are worthy of further discussion and

debate by the Congress, industry, and Department for

possible implementation.

4 Should “ensuring competitive access” be made an

explicit requirement in legislation?

 

A statutory provision requiring an airport operator to assure

“competitive access” could incorporate the provisions of the

report’s “best practices” guidance into legislation. A

“competitive access” provision could be added to the grant

assurances as codified in Title 49, section 47107.

4 Should “reasonable” fees be defined in order to charge

signatory carriers for building a limited number of

gates and related facilities for new and expanded

access?

Many airports construct new facilities on agreement with

the signatory airlines for future use. The issue is whether,

under the statutory requirement that airport-air carrier fees

be “reasonable ” (49 U.S.C. 47129; 47107(a)(1); 40116(e)(2)),

to allow an airport to charge users for gates built on speculation or in anticipation of demand. The traditional view is

that users of public utilities (such as airports) may be

charged when the facility is used and useful, not during

construction.

4 Should DOT prohibit adoption of majority-in-interest

clauses for landside facilities? Allow “consult-only”

MII clauses for landside projects? Allow MII clauses

for airside projects?

Restricting the ability of signatory airlines to use their

majority-in-interest powers may facilitate the ability of an

airport to plan and finance new construction to include
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Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

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common-use gates and facilities for new entrants. Majorityin-interest clauses, under which signatory carriers have the

ability to veto or delay certain capital construction projects,

have been criticized by some airports, GAO, and others as

potentially anti-competitive tools of the incumbent airlines.

The airline industry and some airports have responded that

signatory carriers have a legitimate interest in participating

in financial and other key aspects of future projects, since

they are committed to remain at the airport and to pay the

future rates and charges.

Information from the ACI-NA survey and from the docket

(OST-98-4025) indicates that carriers have used their MII

powers at some airports to delay projects, but these projects

eventually were built with PFC or other financing.

4 Should airport sponsors be required to file competition

plans when undertaking long-term, exclusive-use

leases or special facility bond financing, or when

incorporating MII clauses in their master use and lease

agreements?

Long-term exclusive-use arrangements have been criticized

by GAO and others as anti-competitive. Some airports and

the airline community defend long-term, exclusive-use

leases as necessary to guarantee certain financing arrangements. We have found that exclusive-use arrangements are

subordinate to the airport’s obligation to assure that the

airport is publicly available for reasonable access and to the

statutory prohibition against the grant of an exclusive right

to use the airport. 49 U.S.C. 47107(a)(1) and (a)(4); 40103(e).

Accordingly, we have concluded that an airport generally

has the authority to require an exclusive-use airline tenant to

share or sublet unused gate space, when requested by

another airline, where common-use or other gate space is

not available, and on reasonable terms and conditions.

Although exclusive-use arrangements do not necessarily

shield airport managers from the obligation to assure reasonable access, long-term, exclusive-use arrangements
EXECUTIVE SUMMARY

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October 1999

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are not optimal for facilitating easy access for new entrants.

To both accommodate the perceived need for future

application of exclusive-use leases as well as to enable reasonable access for requesting airlines, it may be necessary

for an airport to develop and file with the Department a

competition plan demonstrating how it will provide for new

entrant access.

Special facility bond financing generally is associated with

long-term, exclusive-use lease arrangements. Accordingly, a

competition plan explaining how the airport will provide for

access by new entrants and for expansion by existing

carriers could also be considered.

Majority-in-interest clauses also have been criticized as anticompetitive, but carriers state that MII clauses protect them

from fee increases attributable to unnecessary improvements. Competition plans could be useful to determine

how an airport proposes to enhance competition given the

planned adoption of an MII clause.

4 Should DOT require (1) airports to inform tenants

simultaneously when gates are available and (2) large

hub airports to develop and file gate usage policies?

(1) We have found that gate availability may be informally

communicated by airport management to its dominant airline

while the needs of other carriers are overlooked. Requiring an

airport operator to inform all tenants simultaneously of gate

availability could facilitate expansion opportunities by smaller

carriers or by carriers with a limited presence at the airport.

(2) The development of gate usage policies and practices is

not new. These policies are indicated in the PFC competitive access assurance #7 (14 CFR Part 158, Appendix A)

for tenant airlines that also will be tenants at PFC-financed

facilities. Additionally, the Bankruptcy Code provides an

airport with the opportunity to provide gate usage data

when arguing for timely disposition of gate leases. 11 U.S.C.

365(d)(9). Airports with preferential-use leases that include

minimum operations or gate usage requirements currently
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are practicing gate usage management. Development of

gate usage practices and policies can assist in ensuring that

underused facilities are made promptly available for new

entrants.

4 Should DOT permit passenger facility charges to be

imposed only for common-use facilities?

Passenger facility charges may be used for leased facilities

but not for long-term (5 years or over) exclusive-use facilities. 49 U.S.C. 40117(f)(2); 14 CFR 158.3, Appendix Assurance 5. Additionally, a lease for a PFC-financed facility may

not contain a carry-over provision with an automatic

renewal option for the tenant carrier (PFC Assurance 6) and

must provide for competitive access (PFC Assurance 7). In

light of the pro-competitive nature of the statute and the fact

that these facilities are built with federally-authorized fees,

an issue to be addressed is whether the PFC-financed facilities

should be common-use so as to provide a level playing field

for all carriers.

4 Should airport managers be required to (1) oversee

economic terms of sublease arrangements and (2)

ensure that non-tenant fees do not include charges for

unneeded services?

(1) Many airports do not have limits on sublease fees and

do not oversee sublease fees and economic terms. Rather,

they let tenant carriers negotiate these with subtenants. New

entrants have complained about fee differentials and fee

premiums in subleases as well as location and time of day

arrangements. New entrants also may be forced to use the

tenant as ground-handler, when they desire to self-handle or

use another party. While an airport’s statutory responsibility to assure reasonable access extends to sublease

terms, (49 U.S.C. 47107(a)(a)(1) and (a)(2)), most airports

believe that marketplace negotiations between airlines

produce “reasonable” terms and conditions. Accordingly,

specific authority on the part of airports to oversee these

terms may be necessary to ensure accountability and to

facilitate new entrant access on reasonable terms.
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(2) At some airports, carriers are required to purchase a

bundle of services, including some they do not need or can

purchase less expensively elsewhere or provide themselves.

This can raise the price of entry and unduly hinder the

ability of a low-fare carrier to compete. More authority to

ensure that non-tenants are treated reasonably may facilitate

entry and lower costs.
Airport Business Practices and Their Impact

FAA/OST Task Force On Airline Competition

October 1999

CHAPTER 1: OVERVIEW OF THE

 AIRPORT SYSTEM

The competitive landscape of commercial aviation within the United States has undergone a remarkable transformation since Congress passed the Airline Deregulation Act

of 1978. Today, U.S. air carriers transport about 270 million more passengers a year

than they did during the last year of economic regulation. On average, domestic

consumers pay a third less (in constant dollars) than they did 20 years ago. And airline

operating profits are also at record levels, totaling roughly $20 billion over the last three

years. These gains are largely the result of more efficient industry operating practices

and the critical role played by low-fare air carriers in creating a more competitive environment.

In response to deregulation, the major airlines greatly expanded the use of hub-andspoke networks and created connecting hub airports around the country. With a huband-spoke system, an airline, using banks of connecting flights, can serve the maximum

number of city-pair markets with a minimum number of airplanes. Among other

things, this strategy allows air carriers to better match the size and frequency of aircraft

serving spoke routes, while maximizing traffic flow by consolidating connecting

passengers with different destinations on each flight.

Operating at a hub creates service advantages for many travelers, since it gives travelers

at hub cities many more flights and enables airlines to offer more service in markets

without enough traffic to sustain non-stop service. On the other hand, the efficiency

gains of hub operations make it more difficult for other air carriers to challenge the

dominant carrier in local markets, thereby allowing it to charge high average fares in

many local hub markets.

A large number of new airlines attempted to break into the airline industry immediately

following domestic deregulation, but virtually all failed or were acquired by established

airlines. What followed was a period dominated by large, network air carriers until

Southwest Airlines altered the competitive landscape. Today, a number of low-fare

carriers1 provide service, resulting in substantial consumer benefits, and new service by

 

1

 As used in this report, a low-fare carrier is an air carrier whose primary business strategy is to offer fares lower

than those offered by all or most incumbent carriers in any given market.
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low-fare airlines has proven to be an efficient way to inject competition into concentrated markets.2

Numerous studies have suggested, however, that despite the overall benefits of airline

deregulation, there are a number of factors that prevent airline passengers and the airline industry itself from enjoying the full benefits of economic deregulation. In particular, barriers to entry within the industry exist with respect to computer-reservation

systems, frequent-flyer programs, travel agent commission overrides, exclusionary

behavior, economies of scale of operation, and external airport constraints (e.g., the

High Density Rule, airport-specific perimeter rules, and environmental constraints).

These potential barriers to entry have received a significant amount of attention from

public officials. Less attention has been devoted to airport business practices and their

role as a potential barrier to entry.

The remaining sections of this chapter describe the general nature of airport ownership

and management, the source of airport funds, airport-leasing agreements, and the

study’s scope and methodology.

AIRPORT OWNERSHIP AND MANAGEMENT

There are approximately 18,300 airports in the United States, of which 5,300 are for

public use. Of the public use airports, the majority (4,166) are publicly owned, and

approximately one-eighth are commercial-service airports.3 All of the commercialservice airports are included in FAA’s National Plan of Integrated Airport Systems.

While most commercial-service airports are owned by local governments, such as cities

and counties, some state and local governments have established special entities, such

as single-purpose airport authorities or multi-jurisdictional regional authorities, to

manage their airports. Table 1.1 on page 3 describes the ownership of public use airports.

 

2

 For example, the Department’s April 1996 study of low-cost airlines examined the effects of the low-fare service

offered by Morris Air and Southwest, which acquired Morris, in a number of Salt Lake City markets. Average fares

in these markets dropped by about 50 percent and traffic tripled while fares in other Salt Lake City increased. As a

result, by late 1998, the average fares in the market served by Morris and Southwest were only one-third the level of

fares in other Salt Lake City markets.

3

 Commercial service airports are legally defined as airports (1) with scheduled passenger service, (2) that annually

enplane 2,500 or more passengers, and (3) that are publicly controlled, with public ownership of the airfield (49

U.S.C. 47102(7)). Commercial service airports are also categorized by hub size. Large hub airports are airports with

at least 1.0 percent of total national enplanements; medium hub airports are airports with less than 1.0 percent of

total national enplanements, but at least 0.25 percent; small hub airports are airports with less 0.25 percent of total

national enplanements, but at least 0.05 percent; non-hub airports are defined as airports with less than 0.05 percent

of total national enplanements.
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Table 1.1

Ownership of Hub and Non-Hub Airports

Ownership Percent of Total

City 40.2

Single County 14.4

State 9.3

Port Authority 4.1

Regional 22.7

Multi-jurisdictional 6.2

Other (private, etc.) 3.1

 Total 100.0%

Source: Airports Council International-North America, 1997 General Survey.

Private ownership of commercial airports, while gaining in popularity internationally,

remains the exception. In the United States, only one commercial service airport, Stewart Airport, has an application under consideration at FAA under a pilot program that

permits up to five airports to shift from public to private ownership or control. Some

public airports, however, have increased their reliance on commercial management in

response to the changing regulatory and economic environment in which they operate.

Burbank Airport, for example, contracts out its daily management to a private company; Indianapolis, a city-owned airport, operates under contract with BAA, a private

company whose parent corporation is based in England and operates the London airports; and Albany Airport is managed by a private company. In the United States,

increased reliance on companies that provide management services has been most

prevalent at medium hub airports. According to the Airports Council InternationalNorth America (ACI-NA), no member of the organization that is a large hub airport is

privately operated.4

AIRPORT FUNDING

Airports are funded through a variety of means. Factors influencing an airport’s choice

of financing include ownership, airport type, size, and maturity of the airport. All of

these factors are taken into account in the airport’s master plan.5 The primary focus of

airport planning and capital development is to provide safe and efficient air carrier

service and to enhance airport capacity. The promotion of air carrier competition has

not been an integral part of most airports’ planning processes. Funding decisions have

 

4

 According to the “1997 General Survey” conducted by ACI-NA, only five percent of its members have some form

of private operation and management. Three were medium hub airports, one was a small hub airport, and one was a

non-hub airport.

5 An airport master plan is a concept of the ultimate development for a specific airport. Its objective is to provide

guidance for future development which will satisfy aviation demand in a financially feasible manner.
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typically focused on carrying out the objectives of the airport’s master plan. Airport

managers are beginning to recognize that the choice of financing arrangement influences the degree to which they can accommodate new entry and encourage competition

among air carriers.

Major sources of airport funding include airport user charges, airport revenue bonds,

Passenger Facility Charges (PFCs), the Airport Improvement Program (AIP), and state

and local programs. Airport user charges are generally used to recover an airport’s

operating costs and its debt-service costs for bonds; the other sources of funds have

provided the majority of direct capital funding, as summarized in Table 1.2 for the

period 1990 to 1996. Ultimately, airport user charges and other revenue sources (commonly referred to as “concessions” revenue), through payment of debt service costs,

fund the capital projects that are financed by airport revenue bonds.

Table 1.2

Major Sources of Airport Capital Funding (billions $)

Funding Sources 1990 1991 1992 1993 1994 1995 1996

Airport Revenue Bonds 4.6 3.2 4.8 1.6 3.0 3.2 4.0

AIP Grants 1.4 1.8 1.9 1.8 1.7 1.5 1.5

Passenger Facility Charges (PFCs) n/a n/a 0.1 0.5 0.8 1.0 1.1

State/Local Grants 0.5 0.5 0.5 0.5 0.5 0.5 0.5

 Total $ 6.5 $ 5.5 $ 7.3 $ 4.4 $ 6.0 $ 6.2 $ 7.1

n/a = Not Applicable.

Source: The American Association of Airport Executives, “America’s Future in Airport Infrastructure”

Airport User Charges

Aeronautical user charges include aircraft landing fees; apron, gate-use or parking fees;

fuel-flowage fees; and terminal charges for rent or use of passenger hold rooms, ticket

counters, baggage claims, administrative support, hangar space, and cargo buildings.

Non-aeronautical user charges encompass rentals and fees to terminal concessionaires,

automobile parking, rental car fees, rents and utilities for facilities, non-aviation development fees (e.g. airport hotel, gas station, etc.), and communication fees.

Bonds: Revenue, General Obligation, and

Special Facility

The issuance of bonds remains the primary means of financing airport capital-development projects at the Nation’s commercial service airports. Bond debt service for

interest, capital, and other costs is a major component of airport rates and charges.

Most airport bond financing has utilized tax-exempt, general airport revenue bonds
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(GARBs). During the 1990's, GARBs accounted for between 36 percent and 70 percent

annually of capital-development expenditures at airports -- over $3 billion per year on

average. When small, locally owned airports finance capital projects with bonds, they

often pledge the “full faith and credit” of the local government entity.

Some facilities are financed with tax-exempt, special facility bonds secured solely by the

revenues of the facility constructed -- for example, an aircraft maintenance facility --

rather than an airport’s total revenues. Terminal facilities have also been financed with

special facility bonds. The introduction of PFCs as an additional source of funds has led

to the evolution of a version of the GARB that relies partially or totally on PFC revenues

for repayment. Due to the conservative nature of the tax-exempt bond market, these

PFC-backed bonds often require special commitments from FAA to reduce the likelihood of any bond default resulting from some federal actions that could affect future

PFC collections.

Airport Improvement Program (AIP)

Federal AIP grants have played a critical role in the building of the Nation’s airport

infrastructure. AIP funds are distributed by statutory formulas or based on FAA’s discretion. During the 1990s, AIP grants accounted for between 21 percent and 40 percent

annually of the total airport capital-development expenditures. Airport sponsors and

non-federal contributors must provide, at a minimum, a ten percent share of any project

funded by AIP grants.

Table 1.3 below summarizes the grants awarded under AIP for fiscal years 1982-1997.

As of August 1999, the Program was authorized $1.66 billion in obligational authority

for fiscal year 1999.

Table 1.3

Airport Improvement Program

Cumulative Total Grants Awarded, Fiscal Years 1982-1997

Type of Grant Total Grant Funds ($ bil.) Percent of Total

Planning $ 0.400 1.9%

Safety & Security 1.214 5.9

Landing Area Construction 10.863 52.9

Noise Control (exc. Landings Areas) 2.288 11.1

Lighting, Navaids, Weather Equipment 1.146 5.6

Buildings 1.033 5.0

Land (other than Noise) 1.615 7.9

Roadways 0.980 4.8

Miscellaneous 0.497 2.4

State Block Grants 0.503 2.4

 Total $ 20.539 100.0%

Source: FAA
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Passenger Facility Charges (PFCs)

In 1990, Congress reversed a prior federal prohibition and authorized airports to charge

a per-passenger enplanement fee to finance airport capital improvements and the

expansion and repair of airport infrastructure. Once approved, a $1, $2, or $3 fee on

each enplaned passenger can be imposed to fund specified projects. The three objectives for which PFCs can be applied are (1) to preserve or enhance safety, security, or

capacity of the national air transportation system; (2) to reduce noise or mitigate noise

impacts resulting from an airport; and (3) to furnish opportunities for enhanced air carrier competition.

Since the inception of the PFC Program, FAA, as of May 1, 1998, had approved 632

applications at 290 airports (approximately 3,900 individual projects) for the collection

of PFCs. In 1996, PFCs accounted for 15 percent of total airport capital development

expenditures.6

State and Local Programs

State and local governments have contributed to the development and operation of

community airports, offering matching grants to secure federal support, providing

direct grants to fund airport maintenance projects, and financing the installation of

navigation aids. To expand air service and to encourage competition, state and local

governments have also supported airport marketing initiatives. As the availability of

federal funds has declined relative to capital needs, the efforts of state and local governments have become increasingly important, especially as AIP grants have been targeted

on airport projects and facilities of national importance. During the 1990’s, state and

local grants accounted for between 7 percent and 11 percent of annual expenditures for

airport capital-development purposes. States have used a variety of revenue sources to

support their local airports. While aviation fuel taxes are the most significant source of

state funds, aircraft registration fees, airport licensing, pilot registration, and taxes

(income, personal property, and sales/use) are also important revenue sources.

 

6

 Airport revenue streams are not entirely independent. PFCs and AIP can be viewed as complementary programs.

In fact, Section 47114(f) of Title 49 U.S.C. requires that AIP funds apportioned to a large or medium hub airport be

reduced according to a formula if a PFC is imposed at that airport. This reduction takes place in the fiscal year

following the approval of authority for PFC collections at that airport and continues in each succeeding fiscal year in

which a PFC is imposed.
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AIRPORT LEASING ARRANGEMENTS

The financial and operational arrangements at commercial airports are primarily

defined in terms of use and lease agreements. These agreements specify the financial

obligations, terms of use, and other responsibilities that each party assumes with regard

to the use of the airport’s facilities as well as the occupancy of the land and buildings.

Although practices differ greatly among commercial airports, use and lease agreements

have generally been classified into three types: residual, compensatory, and hybrid

agreements.

The structure of an airport’s use and lease agreements can influence the degree to which

it can promote airline competition and new air carrier entry. Table 1.4 illustrates the

distribution of agreement types by hub size for airports that responded to a 1998 ACI-NA

survey.

Table 1.4

Airport Use and Lease Agreements

Distribution by Type and Airport Size (percent)

Use and Lease Large Medium Small

Residual 41% 38% 57%

Compensatory 41 19 14

Hybrid/Other 18 43 29

 Total 100% 100% 100%

 Respondents (number) 22 21 14

Source: Airports Council International–North American (ACI-NA), “1998 Airport Gate Availability/PFC Survey.”

Residual Use and Lease Agreements

Under residual use and lease agreements, signatory airlines agree to assume the financial risk of running the airport. Airlines assure that the airport will break even by paying fees that generate revenues equal to the remaining (“residual”) costs of operations

once all (or a specified percentage of) non-airline sources of revenue have been taken

into account. The average length of a residual agreement at a large hub airport is

approximately 28 years.

The typical trade-off an airport makes in exchange for this transfer of risk is (a) forgoing

the opportunity to realize significant revenue surpluses to apply toward development

projects, since surpluses are credited to the signatories, and (b) forfeiture, to some

extent, of autonomous decisions over capital expenditure programs to the signatories

through a majority-in-interest provision in an airport’s use and lease agreement.
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Based on the 1998 ACI-NA survey, 84 percent of the residual use and lease agreements

have a majority-in-interest (MII) clause. These provisions allow MII airlines to approve

or disapprove (or at least delay) specific capital projects, the costs of which could be

included in the rates and charges of the signatory airlines.7 The potential for disapproving or delaying a project that would benefit new entrants, to the detriment of competition, is obvious. If the project does not receive MII approval, the airport may have

to reframe or abandon its plans. [In such situations, airports could use AIP, PFC, or

special facility bonds to finance contended projects.] Not all airport projects require MII

approval, however. For instance, projects funded by PFCs or special facility bonds do

not generally require airline approval. Airports are legally required to consult with

their major carriers when contemplating a PFC-funded project, but MII carriers are

legally barred from exercising veto rights over PFC-financed projects.

Compensatory Use and Lease Agreements

Under compensatory use and lease agreements, airlines typically pay only for the facilities and services they actually use, leaving the airport to assume the financial risks and

rewards from non-airline facilities. For example, with regard to an airport gate, an airline will pay a rental rate that will recover its allocated cost. The average length of a

compensatory use and lease agreement at large hub airports is approximately 17 years.

By transferring the financial risk of the day-to-day operations to the airport and allowing the airport more latitude in its use of funds, airports have the ability and incentive

to entice additional air service. Of the airports surveyed by ACI-NA that had compensatory use and lease agreements, only 20 percent had an MII provision in their agreements.

Hybrid Use and Lease Agreements

A “hybrid” use and lease agreement (also know as a “cost center” approach) is a variation of the two types of agreements discussed above. Hybrid agreements generally take

the form of excluding selected non-airline activities from the residual cost pool. A typical example of a hybrid use and lease agreement is one in which only the airfield

remains in the residual pool; i.e., through landing fees signatory air carriers cover the

cost of airfield operations that remain after aircraft parking fees and fuel-flowage fees

have been collected.

Although this form of agreement limits an airport’s control of its sources and uses of

funds, it can be used to reduce the financial risk an airport faces. By recovering its airfield operations and development costs, an airport is assured of a significant revenue

 

7

 Some residual agreements provide for agreed-upon capital improvement and other funds from which the airport

may draw without prior airline approval.
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stream regardless of competitive or cyclical trends in the industry or economy. At the

same time, however, the airport has an incentive to increase non-aeronautical sources of

revenue. Diversification or sharing of the financial burden can result in a more stable

revenue stream for these airports.

Approximately 74 percent of those airports that responded to the ACI-NA survey and

reported having hybrid agreements also reported that they have MII clauses associated

with those agreements. The average length of a hybrid use and lease agreement at large

hub airports is approximately 20 years. To the extent that the choice of use and lease

agreements influences airline competition, a hybrid agreement can be considered “middle ground.” It offers an airport more control over its sources and uses of funds than a

residual agreement, but less control than a compensatory agreement. Meanwhile, air

carriers appear to retain a marked degree of influence in the airport planning process

through the presence of MII clauses.

SCOPE AND METHODOLOGY

A key objective of our study was to understand how airport business practices affect

airline competition. We also were interested in knowing how the PFC Program has

affected airport capacity and airline competition. Data collection problems had made it

difficult for academics and others to do the type of study we have undertaken. Moreover, the most comprehensive government reports on airport business practices, airport

capacity, and airline competition were prepared almost a decade ago.8

Our research program had five elements: (1) meetings with airline managers to discuss

the types of problems air carriers have encountered at specific airports; (2) information

gathered from a survey instrument; (3) information developed through DOT databases;

(4) information and comments provided in the public docket (Docket No. OST-98-4025);

and (5) data and information gathered through interviews with airport and airline officials (i.e., case studies).

To ensure broad-based study participation, DOT/FAA provided several opportunities

for the general public, the aviation industry, and the airport community to provide

critical input. On April 10, 1998, DOT published a request for comments in the Federal

Register. Comments were collected and filed in the public docket. Airport and airline

representatives have also met with members of the Task Force to discuss the study’s

 

8

 For example: U.S. Department of Transportation, Secretary’s Task Force on Competition in the U.S. Domestic

Airline Industry: Airports, Air Traffic Control, and Related Concerns (Impact on Entry) (1990); and General

Accounting Office, Airline Competition: Industry Operating and Marketing Practices Limit Market Entry, August

1990. GAO also prepared an October 1996 study, Airline Deregulation: Barriers to Entry Continue to Limit

Competition in Several Key Domestic Markets, but it focused on entry conditions at a limited number of airports.
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scope. Additional opportunities to participate in the study included a survey conducted by ACI-NA and 13 airport case studies conducted by the Task Force. Details

about the survey and case studies are presented below.

ACI-NA Survey

In the fall of 1998, ACI-NA conducted a survey on gate availability and PFCs. The purpose of the survey was to elicit information about the limitations on an airport’s ability

to provide air carriers access to gates and related facilities, and how these limitations

could constrain competitive service at the airport. Issues regarding the use of PFCs

were also examined. The survey results supplemented the Task Force analysis of competitive issues.

The survey questionnaire was sent to all 144 ACI-NA airport members, which included

31 large hub, 47 medium hub, 33 small hub, and 33 non-hub airports.

Survey results were tabulated for the Task Force using the double-blind keypunch

method to ensure data accuracy. Additional quality control was performed on each

completed survey. Inconsistent responses and tabulation errors were identified and

resolved with the assistance of ACI-NA and the responding airports.

Case Studies

To better understand how airport business practices affect airline competition, members

of the Task Force visited 13 airports to meet with airport and airline officials. The principal reason for visiting specific airports was that it offered the best way for the Task

Force to understand the economic, financial, legal, and competitive factors that influenced the decisions made by airport executives to adopt certain business practices. It

also allowed the Task Force to gather information on how airport business practices are

changing, the pace of change, and which practices serve to promote airline competition.

A major strength of the case study method is that it allows analysts to assemble data

from various sources and to gather information and opinions about critical issues, decisions, and relationships.9

 Case study analysis, like any credible research program, relies

upon the judgment of the individuals who undertake the research. When undertaking

a case study, it is necessary to organize the information obtained around a few key

issues. The issues of importance to the Task Force were whether specific airport busi-

 

9

 For a discussion of the merits and limitations of case study research, see, Joseph Feagin, Anthony Orum, and

Giedon Sjoberg, A Case for Case Study, University of North Carolina Press, 1991; also, Robert E. Stake, The Art of

Case Study Research, Sage Publications, 1995.
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ness practices have made it more difficult, and therefore costly, for air carriers to begin

serving an airport.10

The airports chosen for on-site visits were selected for various reasons. Charlotte/Douglas International Airport, Greater Pittsburgh International Airport, Minneapolis/St. Paul International Airport, Detroit Metropolitan Wayne County Airport, and

Greater Cincinnati International Airport have been named in GAO studies as having

adopted business practices that have made it difficult for new entrant air carriers to

serve these airports, especially if they desire to do so with more than a few flights per

day during peak travel hours.

Other airports, such as Atlanta-Hartsfield International Airport, Dallas/Fort Worth

International Airport, Houston Intercontinental Airport, and Denver International Airport, are major traffic hubs for certain large air carriers and, as such, play a critical role

in the Nation’s air transportation system.

Two airports, Baltimore/Washington International Airport and Salt Lake City International Airport, have experienced significant growth in low-fare air service as a result of

new entry and increased competition since the early 1990’s.

One airport, Phoenix’s Sky Harbor International Airport, has adopted new business

practices in the wake of airline deregulation. The Phoenix market also is of interest

because two low-fare air carriers, Southwest Airlines and America West Airlines, have

extensive operations based at Sky Harbor.

At another airport, San Jose International Airport, officials appear to have made a decision not to become overly dependent on any one airline, since the airport’s ability to

expand and thus accommodate new entry is extremely limited.

In sum, each airport selected for in-depth analysis provided the Task Force with an

opportunity to study important aspects of airline operations, airline competition, and

airport business practices.

 

10There is a vast economic literature that discusses the definition, measurement, and importance of entry barriers for

influencing market competition. For a valuable survey of this literature see, Richard J.Gilbert, “Mobility Barriers

and the Value of Incumbency,” Handbook of Industrial Organization, Volume 1, Richard Schmalensee and Robert

Willig, eds., Elsevier Science Publishers, 1989; also the relevant sections in Jean Tirole’s, The Theory of Industrial

Organization, MIT Press, 1988. For a recent discussion of entry barriers and new entrant airlines, see: Sveinn

Vidar Gudmundsson, Flying too Close to the Sun: The Success and Failure of New Entrant Airlines, Ashgate

Publishing, Brookfield, Vermont, 1998, pp. 18-58.
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CHAPTER 2: AIRPORTS’ LEGAL OBLIGATION TO

 PROVIDE REASONABLE AIR CARRIER

 ACCESS IN SUPPORT OF COMPETITION

A key objective of the Department’s airport and airway programs is to promote airline

competition, consistent with the goals of the Airline Deregulation Act of 1978, in addition to assuring a safe national airport system with adequate capacity. This chapter

describes the legal and regulatory standards that govern the actions of airport operators

to provide reasonable access to their facilities.1 The economic nondiscrimination grant

assurance, including the reasonable access provision, and the statutory prohibition on

grant of exclusive rights, require airport operators to ensure that the airport is consistently available for public use and is operated for the benefit of the public.2

 Airport

operators are required to provide access on reasonable terms, without unjust discrimination, and are prohibited from directly or constructively granting an exclusive right to

operate at the airport, in order to provide the public the full benefit of competition in air

services. In addition, an airport may not deny access to its facilities solely based on the

leasing arrangements of the currently existing facilities. While some arrangement for

accommodation of new entrants must be made, an air carrier tenant is not required to

cancel flights or to forfeit its use of airport facilities.

As a general rule, an airport operator may not directly or indirectly ban access to an

airport by an otherwise qualified air carrier operator. To prevent or impede a carrier’s

service at an airport is inconsistent with the airport’s contractual grant assurances to

provide reasonable and not unjustly discriminatory access to the airport and not to

grant an exclusive right at the airport. Moreover, the Airline Deregulation Act of 1978

(Pub. L. No. 95-504, 92 Stat. 1705, 1708 (1978)) prohibits a state or local government’s

regulation of an air carrier’s rates, routes, or services.3 An action by an airport operator

to unreasonably or discriminatorily deny or hinder access to air carriers effectively

 

1

In addition, the United States, under the Chicago Convention and our bilateral air transport agreements, must give

reasonable, non-discriminatory access to foreign air carriers, a number of which are code-share partners with U.S.

carriers.

2

49 U.S.C. 47107(a)(1)-(6); 40103(e). FAA may enforce these obligations, after providing the opportunity for a

hearing, through withholding approval of a project grant application, under 49 U.S.C. 47106(d), or by withholding

payments under project grant agreements, under 49 U.S.C. 47111(d). Additionally, administrative investigations

and hearings may be held under section 47122 and judicial enforcement sought pursuant to section 47111(f).

3

49 U.S.C. 41713(b).
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regulates their routes, contrary to the federal preemption authority over rates, routes,

and services.4

Actions that thwart an air carrier’s access or operations also can be contrary to the procompetitive purposes of the exclusive rights prohibition, have anti-competitive implications inconsistent with the anti-discrimination assurance, and undermine the goals of

the Airline Deregulation Act to foster competition and encourage new entry into air

transportation markets.

Prohibited airport actions include, for example: denials of access by disapproving an

otherwise qualified air carrier’s application or by unreasonably delaying access; adopting unjustified standards prohibiting a certain class of carrier from operating at the airport or containing criteria not relevant to operations, not reasonably attainable, not uniformly applied, or intended to protect incumbents; claiming lack of gate availability

when, in fact, gates are not fully utilized; relinquishing control of airport facilities to

incumbent carriers for purposes of negotiating access with a new entrant; permitting

unreasonable sublease fees or conditions to be imposed on new entrants; and unreasonably denying signatory status to an authorized carrier that assumes the obligations

established for signatory status. These actions may be considered failing to grant

reasonable access, unjustly discriminating against a class or between classes of carriers,

or granting a prohibited exclusive right. Also, unreasonable denials of access can effectively regulate a carrier’s routes, contrary to the federal preemption provision.

Airport proprietors may exercise their proprietary rights and powers, but these rights

are circumscribed. They must rationally and demonstrably relate to protecting the safe

and efficient operation of the airport or relieving noise or congestion at the airport.

Exercise of proprietary rights must be reasonable, non-arbitrary, nondiscriminatory,

and justified. They may not unduly burden interstate commerce or be used as a proxy

for unjustifiably prohibiting new entry or unreasonably protecting incumbents, or for

regulating an air carrier’s routes inconsistent with federal preemption.

 

4

Federal Aviation Administration v. Arapahoe County Public Airport Authority, FAA Order No. 1999-1, Feb. 18,

1999 (pending appeal, sub nom., Arapahoe County Public Airport Authority v. Federal Aviation Administration,

Case No. 99-9508 (10th Cir.). [But see Arapahoe County Public Airport Authority v. Centennial Express Airlines,

Inc., 956 P.2d 587 (S. Ct. Colo. 1998).] Love Field Service Interpretation Proceeding, Declaratory Order 98-12-27

(December 23, 1998); Order on Reconsideration, 99-4-13 (April 14, 1999) (pending appeal, sub nom., The City of

Fort Worth v. Department of Transportation, Case No. 99-60239); New England Legal Foundation v. U.S.

Department of Transportation, 883 F.2d 157 (1st Cir. 1989).
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AIRPORT OPERATORS MUST PROVIDE

REASONABLE ACCESS AND NOT ENGAGE

IN ECONOMIC DISCRIMINATION

To receive federal airport improvement funds, an airport must agree that it will operate

its airport in an economically nondiscriminatory manner. The “economic nondiscrimination” grant assurance implements the provisions of 49 U.S.C. 47107(a)(1) through (6).

In pertinent part, these require the airport sponsor to make its airport available as an

airport for public use on reasonable terms and without unjust discrimination, to any

person, firm, or corporation, to conduct or to engage in any aeronautical activity for

furnishing services to the public at the airport. 49 U.S.C. 47107(a)(1); Grant assurance

22a, 62 Federal Register 29761, 29766 (June 2, 1997).

This provision is intended to assure that the airport is consistently available for public

use and is operated for the benefit of the public. Airport Compliance Requirements, FAA

Order 5190.6A, ¶4-13a. (1989). The airport operator is obligated to make all airport

facilities and services available on fair and reasonable terms and without unjust

discrimination. Order 5190.6A, ¶3-1. This may be referred to as the “reasonable access”

component of the economic nondiscrimination assurance.

The “reasonable access” provision of the “economic nondiscrimination” assurance

requires an airport to make reasonable efforts to accommodate new entrants by providing the necessary facilities or the opportunity for the new entrant to obtain those facilities. This can be accomplished by having common-use gates available on a per-turn or

other basis, sharing preferential-use gates at underused times, or arranging for use of

exclusive-use gates at unused periods. An airport operator is not required to divest a

tenant carrier of facilities in use; however, the airport operator can work with the carrier

to ensure more effective utilization of scarce facilities to better accommodate requesting

airlines. Providing access to new entrants comports with the grant assurance’s overriding policy to assure that the airport is operated for the benefit of the public and is

available for public use. Further, since access must not be unjustly discriminatory, airports must be sensitive to assuring that a new entrant is accommodated on terms

reasonably similar to an incumbent’s and that anti-competitive effects do not result

from an airport’s actions.

Accommodation is relatively easy if the airport has its own airport-controlled gates and

facilities available for common use. If common-use gates do not exist at the airport, the

airport can offer use of preferential-use facilities. This can be accomplished by reviewing the airline tenants’ schedules and usage of the facilities, and then making necessary

adjustments for the new entrant’s operations. Where an airport has exclusive-use gates
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and facilities, the operator can oversee the new entrant’s sublease attempts and intervene, if necessary, to enable the new entrant to gain access from a tenant carrier.

Access to the full complement of facilities is part of the reasonable access assurance.

This includes parking positions, loading bridges, hold rooms, ticket counters, and baggage make-up areas. FAA Order 5190.6A, ¶4-15d. (1989). In order that access is not

unjustly discriminatory, the time of day appropriate for accommodation may be significant to a new entrant attempting to initiate service into a market. Therefore, the airport,

to the extent reasonably possible, must see that the new entrant’s time-of-day access is

compatible with its operational needs.

FAA has interpreted the reasonable access provision as requiring access for new

entrants. FAA Order 5190.6A (1989) recognized that since the passage of the Airline

Deregulation Act of 1978, there was an influx of air carriers into airports. Many of these

airports were operating at capacity before passage of the act, insofar as counter, gate

and ramp space were concerned. In some instances, space was made available to new

carriers from carriers established on the airport. However, in other cases, no space was

made available and the carrier was denied access to the airport. FAA determined that

some arrangements for accommodation must be made if reasonably possible, and that a

carrier may not be denied access to an airport solely based on the non-availability of

currently existing facilities. In some cases, the airport operator may provide temporary

facilities, such as a mobile ticket office and gate facilities, to relieve the situation. Otherwise, FAA and the airport operator together can develop a solution to the problem.

Order 5190.6A, ¶4-15d.

Timely access is an essential component of reasonable access. In a case involving Westchester County’s temporary hold on Midway Airlines’ application to serve the airport,

the court concluded that the county was entitled to exercise its proprietary rights to

hold Midway’s application for about four months from the date of Midway’s completed

application to serve Westchester, after which it must provide access to Midway or any

other carrier entitled to access.5 The court specifically ordered the county to conclude

its study of airport usage within 30 days of the date of the judicial decision and promulgate rational and nondiscriminatory rules governing the allocation of ground facilities

and flight slots within 20 days thereafter. This reasonable delay in providing access

was justified given the demonstrated congestion at the airport and the fact that the

county was in the process of formulating plans to allocate its scarce resources. The

court acknowledged that entry by Midway Airlines into the Westchester County airport

 

5Midway Airlines, Inc. v. County of Westchester, 584 F. Supp. 436 (S.D.N.Y. 1984).
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“would increase the competition for passenger patronage along certain interstate

routes” in accordance with the competitive policies of the Airline Deregulation Act.

Unreasonable delay of over a year by the Port Authority of New York and New Jersey

in allowing timely access by the Concorde into John F. Kennedy International Airport

was deemed discriminatory by the Second Circuit. The court, in the Concorde II proceeding, enjoined the Port Authority from further prohibition of Concorde operations

(pending formulation of a noise program).6

Providing timely access is important for purposes of complying with the grant assurances and ensuring that the public receives the benefit of competitive service. Generally, access should be provided with dispatch, since the airport operator is presumed to

be familiar with the usage of the airport’s space and facilities and with management of

sublease or sharing arrangements. Delays occasioned by the airport management

investigating “reasonable accommodation” arrangements should not be necessary,

since the airport has undertaken the assurance that, as a public facility, it will be able to

provide reasonable access to the public. Unless the airport is demonstrably congested

or there is a significant safety, noise or environmental concern, access should be provided with reasonable dispatch.

Anti-competitive effects can result when an airport does not provide access. For example, the City of Dallas was held to have acted unreasonably and with unjust discrimination in denying Southwest Airlines access to Love Field airport since carriers of similar

size and function to Southwest were permitted to make similar use of the airport.7 The

court found that the City’s:

“...unsystematic classification discriminates not only between different types

and kinds of aeronautical use, but also between uses within the same general

class as well. Such discrimination is particularly objectionable because of the

anti-competitive effects it has on the airlines and the public they serve.” 371 F.

Supp. 1015, 1030.

In this regard, the court noted that Southwest’s presence in the short-haul market generated “vigorous competition” and “very substantial savings to the traveling public.”

371 F. Supp. 1015, n. 8.

 

6

British Airways Bd. v. Port Authority of N.Y. , 564 F.2d 1002 (2nd Cir. 1977).

7

City of Dallas v. Southwest Airlines Company, 371 F. Supp. 1015 (N.D. Tx. 1973), aff’d on other grounds, 494

F.2d 773 (5th Cir.), cert. denied, 419 U.S. 1079 (1974).
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More recently, FAA has held that a ban on access, as well as unreasonable delays in

adopting minimum standards for access (about two years), was unreasonable and

unjustly discriminatory.8 FAA concluded that Arapahoe County was not justified in

banning from Centennial Airport the operation of a scheduled Part 135 operator while

permitting similar operations by nonscheduled Part 135 operators.

TERMS AND CONDITIONS

The airport operator must assure that terms imposed on those who use the airport and

its services, including rates and charges, are fair, reasonable, and applied without unjust

discrimination, whether by the owner or tenant. 49 U.S.C. 47107(a)(2), Order 5190.6A,

¶4-13b.9

Airports must charge air carriers reasonable fees for aeronautical use. 49 U.S.C. 47107;

47129. An airport may choose either a residual fee methodology, a compensatory fee

methodology, or any combination of the two. Section 47129(a)(2).10

The revenue generated by the airport may be used, in a non-discriminatory manner, to

foster competition at the airport by advertising new air service and by funding cooperative advertising for an airline’s services.11 Airport management can offer air carrier

fee discounts or waivers during promotional periods, also.

Each air carrier using the airport (whether as a tenant, non-tenant or subtenant of an air

carrier tenant) must be subject to substantially similar rules, conditions, and charges as

 

8

 Federal Aviation Administration v. Arapahoe County Public Airport Authority, FAA Order No. 1999-1, Feb. 18,

1999 (pending appeal, sub nom., Arapahoe County Public Airport Authority v. Federal Aviation Administration,

Case No. 99-9508 (10th Cir.) But see Arapahoe County Public Airport Authority v. Centennial Express Airlines,

Inc., 956 P.2d 587 (S. Ct. Colo. 1998).

9

 Legislative history of the provision indicates Congressional intent that “...it cannot take an unreasonable or

inordinate amount of time...” to achieve status as a tenant, if a carrier so desires. 122 Cong. Rec. S4306 (daily ed.,

Mar. 25, 1976), Statement of Sen. Cannon.

10Whether or not fees must be cost-based is an issue currently under our consideration in Docket No. 29303,

Advance Notice of Proposed Policy Regarding Airport Rates and Charges, 63 Federal Register 43228 (August 12,

1998) . Our previously issued Final Policy Regarding Rates and Charges, 61 Federal Register 31994 (June 21,

1996), was substantially vacated by a three-judge panel of the D.C. Circuit Court of Appeals in Air Transport

Association of America v. Department of Transportation, 119 F.3d 38, 43 (D.C. Cir. 1997), as amended on

rehearing, 129 F.3d 625 (D.C. Cir.1997). At the court’s suggestion we are now examining, among other issues, the

extent of an airport’s monopoly power over airline fees.

11Department of Transportation/Federal Aviation Administration Policy and Procedures Concerning the Use of

Airport Revenue, 64 Federal Register 7696 (February 16, 1999), §§ V.A.2. and VI. B. 12, petition for review

pending, sub nom. City of Los Angeles v. FAA, Docket No. 99-70452 (9th Cir. 1999).
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are applicable to similarly situated users. The airport operator may make reasonable

classifications such as tenants or non-tenants and signatory and non-signatory carriers.

The airport may also impose different charges, regulations, and conditions on nontenants, on the one hand, and tenants, on the other hand (or signatory vs. non-signatory

carriers), as long as these charges, regulations, and conditions are reasonable and the

classifications are reasonably applied. 49 U.S.C. 47107(a)(2)(B).

Classification or status as tenant or signatory shall not be unreasonably withheld by the

airport, however, provided an air carrier assumes obligations substantially similar to

those already imposed on air carriers in such classification or status. 49 U.S.C. 47107(a)

(2), (3). Grant assurance 22.e, Order 5190.6A, ¶4-14a(1). An air carrier that is willing to

sign a contract, assume appropriate financial obligations, and become a signatory carrier with the airport should not be subject to unreasonable delays or conditions for classification as a signatory carrier.

It is clear from the statute and grant assurances that an airport operator must provide

reasonable access on reasonable terms and conditions not only to tenants, but to subtenants and non-tenants as well. When a carrier will be operating at the airport as a

subtenant, the airport operator is responsible for assuring that terms and conditions in

the sublease provisions are reasonable and that similar users are subject to substantially

comparable charges.12

Approximately one-third of the large hub airports responding to the ACI-NA survey

question regarding subleasing reported that they have not actively reviewed sublease

fees and terms.13 Some commented that the marketplace adequately disciplines the

fees. It has been asserted by some new entrants that there are sublease fee differentials

at the same airport. Also, some airports do not assist new entrants in gaining access to

sublease facilities. Further, subtenants may be required to undergo inconvenient relocation at the discretion of the incumbent tenant. At other airports, new entrants have

complained that they were subject to unreasonable conditions, such as requirements to

use the leasing airline’s ground personnel or to contract for a bundled package of services. An airport operator has the responsibility to determine whether these terms and

conditions are reasonable and non-discriminatory, including whether they unjustly or

adversely affect a new entrant’s operations and ability to remain competitive.

 

12In addition, under the Chicago Convention, fees must be reasonable, cost-based, and non-discriminatory when

applied to foreign air carriers.

13The 1998 ACI-NA Gate Availablity/PFC survey question on was: “Has your airport invoked this authority

(review/approve sublease)? Yes/No. Describe the airlines involved, when, and the outcome.”
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The grant assurances permit the airport operator to charge non-signatory carriers

higher landing fees than those of signatory carriers due to the relatively uncertain service by the non-signatory carrier, potentially causing fluctuations in the airport’s revenues and requiring higher reserves and more intensive administrative costs. Carriers

also may choose non-signatory status rather than take on the obligation of a long-term

commitment, due to marketing decisions, economic or traffic uncertainties, or otherwise.14 Signatory carriers generally obligate themselves to the unexpired portion of the

master use and lease agreement, agree to service the airport’s general airport revenue

bonds, and/or furnish a deposit or bond. In return, signatories pay lower landing fees,

may receive a credit of concession or other airport revenue, and may have approval

power over future capital construction. Our study identified five large hub airports that

no longer grant signatory status: Phoenix’s leases are on a monthly basis; San Francisco

offers only permits except for its pre-existing 15 signatory carriers; Atlanta’s recently

adopted management policy is not to offer signatory status; Miami has not granted signatory status since 1989; and Boston-Logan does not have a signatory agreement relating to airfield use.

Carriers that intend to establish a permanent market presence, however, generally

prefer signatory status, if available. The grant assurances prohibit an airport from

unreasonably withholding classification or status as a signatory or tenant if an air carrier assumes obligations substantially similar to those of a signatory or a tenant. We

have found that some large hub airports require carriers to commit to certain conditions

such as operating a minimum number of flights and/or leasing certain space, in order

to obtain signatory status. Newark and LaGuardia airports have refused signatory

status to airlines whose operation levels did not meet the minimum standards, and

Baltimore-Washington International refused signatory status to a carrier that did not

meet the airport’s policy of leasing a full complement of space. Additionally, lack of

gate space prevented at least one new entrant from attaining timely signatory status at

Detroit despite its willingness to otherwise assume the obligations of a signatory.

Airports must be careful not to unreasonably withhold signatory status to a new entrant

that is willing and qualified to assume signatory obligations but whose ability to meet

them is hindered by airport policy or facility shortage. For example, an airport may

reconsider its minimum operating standards to see if they are too high and constructively prevent a new entrant from attaining signatory status.15 Additionally, the lack of

 

14See Policy Regarding Airport Rates and Charges, 61 FR 31994, 32015, discussion of Charges to Non-Signatory

Carriers, para. 3.1.1 (June 21, 1996). The United States Court of Appeals for the District of Columbia Circuit did

not vacate this DOT/FAA policy provision in its decision in Air Transport Association, 119 F. 3d 38, supra, n. 10.

15FAA’s Airport Compliance Requirements Order 5190.6A encourages airport owners to develop and publish

minimum standards to be met by commercial operators in advance of negotiations with any prospective tenant or
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a gate -- through no fault of the new entrant’s -- cannot, by itself, be used as an excuse

for refusing signatory-type status to a new entrant willing to assume such obligations.16

In this type of situation, the airport management can impose alternative obligations on

the new entrant.

PROHIBITION AGAINST EXCLUSIVE RIGHTS

An airport operator must treat new entrants in a similar fashion to incumbents and not

impose standards that impede their ability to compete. An airport is prohibited from

granting an “exclusive right” to conduct a particular aeronautical activity. 49 U.S.C.

40103(e) and 47107(a)(4); Grant assurance 23, 62 FR 29761 (1997).

In 1941, then Attorney General Robert H. Jackson explained the purpose of Section 303

of the Civil Aeronautics Act, the predecessor to 49 U.S.C. 40103(e), was to promote and

encourage competition in the provision of air services:

“[L]egislative history ... shows that the purpose of the provision is to prohibit

monopolies and combinations in restraint of trade or commerce and to promote

and encourage competition in civil aeronautics in accordance with the policy of

the act... [but this] does not mean that in administering the provisions of section

303 it is necessary to permit such competition as would endanger the safety of

the public and of persons engaged in air commerce.”17

This covenant enjoins the airport operator from granting any special privilege or

monopoly in the use of public use airport facilities. FAA Order 5190.6A, ¶3-1. The

prohibition against exclusive rights applies whether the grant of an exclusive right

results from an express agreement, from the imposition of unreasonable standards or

requirements, or by any other means. The concern is that an exclusive right limits the

usefulness of the airport and deprives the public of the benefits of a competitive airport.

FAA Advisory Circular 150/5190-2A, ¶ 7. (1972). Exclusive-use, long-term leases do

not contravene the prohibition against grant of an exclusive right when there is no

 

operator. ¶3-17a., Use of Minimum Standards. FAA will make an official determination on proposed minimum

standards “...only when the effect of a standard denies access to a public-use airport, and the determination should

be limited to a judgment as to whether failure to meet the qualifications of the standard is a reasonable basis for such

denial or the standard is an attempt to create an exclusive right.” ¶3-17.b.

1649 U.S.C. 47107(a)(3).

1740 Op. A.G. 71 (1941) ; Niswonger v. American Aviation, Inc., 411 F. Supp. 763, 766 (E.D. Tenn. 1975), aff’d

529 F.2d 526 (6th Cir. 1976); City of Pompano Beach v. Federal Aviation Administration, 774 F.2d 1529 at 1541

(11th Cir. 1985); City of Dallas, supra, n. 7, 371 F. Supp. at 1030; Midway Airlines, supra, n. 5, 584 F. Supp. at 441.
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understanding, commitment, express agreement, or intent to exclude other reasonably

qualified airlines. Order 5190.6A, ¶3-9a. Such leases, however, should be limited to

only such space “as is demonstrably needed”. Order 5190.6A, ¶ 3-9.c(2).18

An airport is permitted to establish minimum standards for engaging in commercial

activity at the airport in order to ensure the safe and efficient operation of the airport.

These conditions, however, must be fair, equal and not unjustly discriminatory. More

specifically, they must be relevant to the proposed activity, reasonably attainable, and

uniformly applied. FAA Order 5190.6A, ¶3-12. If the minimum standards affect access

to an airport, FAA can determine whether failure to meet the qualifications is a reasonable basis or whether the standard results in an attempt to create an exclusive right.

Further, manipulating the standards solely to protect the interest of an existing tenant

or tenants is unacceptable. FAA Order 5190.1A, Exclusive Rights (1985).

It has been held that conduct effectively granting an exclusive right to an incumbent

fixed base operator occurred where the airport did not offer a new enterprise lease

terms (including length of lease, required improvements, sublease requirements, minimum standards, etc.) that enabled the new enterprise to be competitive with incumbents providing similar services.19 For example, the airport had imposed financial obligations on the fixed base operator (FBO) that were not imposed upon or were more

than those imposed by the leases between the airport and the incumbent FBOs (e.g.,

$500,000 investment for new entrant FBO versus $200,000 investment for others for a 30-

year lease; $5,000 versus $0 deposit; higher rental rate for unimproved land; and

requirement to comply with current and future minimum standards versus lock-in

requirements to older minimum standards). The court found these provisions to be

unjustly discriminatory because they were disadvantageous to the new entrant FBO,

would impose an undue hardship upon its proposed business operation, and would

render it non-competitive with the existing FBOs. The court held that there was no reasonable justification for the differences in the airport’s treatment between the new

entrant FBO and the incumbents.

Violations of the exclusive rights prohibition have also been found in Dallas’ ban on

service at Love Field by Southwest, a then-intrastate air service provider, and in Arapahoe County’s ban on scheduled Part 135 service at Centennial Airport by Centennial

Express.20

 

18Niswonger, Id. (finding a violation of exclusive right prohibition because a fixed base operator had acquired

control and exclusive use of more area of the airport than it reasonably needed or could be expected to use in

conducting its business).

19City of Pompano Beach v. Federal Aviation Administration, 774 F.2d 1529 (11th Cir. 1985).

20City of Dallas, supra, n. 7; Federal Aviation Administration v. Arapahoe County Public Airport Authority, supra,

n. 8.
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FEDERAL PREEMPTION

Airport management’s response to requests for access must not be contrary to the

Airline Deregulation Act, which relies on the marketplace, not state and local governments, to regulate airline rates, routes, and services. Denial of access or delay in

approving access can result in the airport operator’s unlawfully affecting a carrier’s

routes by impeding access to an airport market. This can have the anti-competitive

effects of foreclosing entry and impeding the public benefits of a competitive air transportation system.

The Airline Deregulation Act of 1978 placed “maximum reliance on competitive market

forces and on actual and potential competition” consistent with the public safety, for the

provision of the national air transportation system. 49 U.S.C. 40101(a)(6). To prevent

state and local governments from impeding competitive market forces in the airline

industry, the act prohibited a state or political subdivision from enacting or enforcing

any law, rule, regulation, standard, or other provision having the force and effect of law

relating to rates, routes, or services of air carriers providing air transportation. 49 U.S.C.

41713(b)(1); 49 CFR 399.110(a) (1997).21

Additionally, it is the policy of the United States to carry out the airport and airway

program to foster competition, consistent with the Airline Deregulation Act’s reliance

on the marketplace to provide the needed air transportation system and to encourage

new carrier entry into air transportation markets to ensure a more effective and competitive airline industry. 49 U.S.C. 47101(d).

An airport operator’s denial of access to, or untimely grant of access to, a carrier can be

tantamount to a prohibited regulation of an air carrier’s routes. For example, FAA has

found that Arapahoe County’s delay in adopting standards for and eventual ban on

Part 135 scheduled service was an unlawful regulation of air carrier routes because the

ban prohibited regular operations over any route involving Centennial Airport.

Moreover, the ban was found to create an “inherent conflict with federal law, which

permits an air carrier holding authority to provide scheduled passenger service to provide that service to any airport in the United States.”22

 

21Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992).

22Director’s Determination, issued August 21, 1998; affirmed in FAA Order No. 1999-1, supra, n. 8.
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Additionally, the Department held certain locally proposed restrictions at Dallas’ Love

Field are inconsistent with the “Shelby Amendment”23 and constitute an impermissible

regulation of airline routes.24 Further, these restrictions are inconsistent with the purpose of the Airline Deregulation Act, which is intended to benefit the public by

providing airlines with the freedom to choose which markets they will serve in

response to market demands.

An improper regulation of rates, routes, and services was tentatively found in New York

Airlines, Inc. v. Dukes County, 623 F. Supp. 1435 (D. Mass. 1985), in a decision partially

denying the airport’s motion to dismiss the airline’s claims. Martha’s Vineyard Airport

had denied access to New York Airlines on the grounds that the carrier’s proposed

service would be unnecessarily redundant of the service of the incumbent carrier,

Provincetown-Boston Airways. New York Airlines also alleged that the airport commission was concerned about the potential effect of its proposed service on competition

with other carriers. The court determined that considerations of adequacy of existing

service at the airport and the potential competitive effect of the new entrant’s proposed

service on the incumbent were impermissible local concerns since they related to “rates,

routes, and services” -- matters within the federal domain.

AIRPORT PROPRIETARY POWERS

An airport operator does have limited proprietary powers to impose reasonable and

non-discriminatory restrictions on the use of an airport. These powers are exceptions to

its general obligation to allow use by all types, kinds, and classes of aeronautical activity and the general public, and to the general prohibition against grant of exclusive

rights.25 They are recognized in 49 U.S.C. 41713(b)(3) as an exception to the rule generally prohibiting a state or political subdivision from regulating air carrier rates, routes,

or services.

An airport’s exercise of its proprietary powers must be reasonable, nondiscriminatory,

not unduly burdensome to interstate commerce, and designed to accomplish a legitimate state objective in a manner that does not conflict with the Airline Deregulation Act

and related statutes. 14 CFR 399.110 (1997).

 

23The Shelby Amendment is contained in section 337 of the Department of Transportation and Related Agencies

Appropriations Act, 1998, P.L. No. 105-66, 111 Stat. 1425, 1447 (October 27, 1997).

24Love Field Service Interpretation Proceeding, supra, n.4.

25The Attorney General interpreting the legislative history to the 1938 exclusive rights prohibition indicated that an

airport proprietor could exercise its proprietary prerogative to protect safety at the airport. (See n. 17, supra).
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The airport operator may restrict aeronautical use under certain conditions, subject to

FAA review. Grant assurance 22h recognizes the right of the airport operator to establish uniform conditions necessary for the safe and efficient operation of the airport.

Grant assurance 22i allows the sponsor to prohibit or limit any given type, kind, or class

of aeronautical use of the airport if that action is necessary for the safe operation of the

airport or necessary to serve the civil aviation needs of the public. As explained in

Order 5190.6A, an airport operator may control the use of the airport so as to eliminate

hazards to aircraft and to people on the ground. ¶4-7b, 4-8a. Restrictions on access to

promote safe and efficient operations must be well justified and not serve as a proxy for

discriminatory or unreasonable treatment of air carriers.26 Further, potential economic

harm to another airport would not justify an access restriction.27

In accordance with the Airport Noise and Capacity Act of 1990 (49 U.S.C. 47521 et seq.;

14 CFR Part 161), an airport operator may impose restrictions on Stage 3 aircraft to alleviate demonstrated noise and environmental impacts, subject to FAA approval. Any

such restrictions must (1) be reasonably consistent with reducing non-compatibility of

land uses around the airport; (2) not create an undue burden on interstate or foreign

commerce; (3) not be unjustly discriminatory; (4) not derogate safety or adversely affect

the safe and efficient use of airspace; (5) meet both local needs and the needs of the

national air transportation system to the extent practicable; and (6) not adversely affect

other FAA laws or powers. Order 5190.6A, ¶4-8f. While not subject to FAA approval,

restrictions on Stage 2 aircraft must undergo an analysis and public review process that

applies the same criteria. 14 CFR 161.305.

An airport operator may regulate an airport’s noise levels only in a “reasonable, nonarbitrary and non-discriminatory manner” and only when justified.28

An airport operator may also impose certain use restrictions for reasons of congestion.

Where the volume of air traffic is approaching or exceeding the maximum practical

 

26Federal Aviation Administration v. Arapahoe County Public Airport Authority, supra, n. 4.

27Love Field Service Interpretation, supra, n. 4.

28City and County of San Francisco v. Federal Aviation Administration, 942 F.2d 1391 (9th Cir. 1991), finding

discriminatory city exclusion of certain aircraft since the city permitted operation of similarly noisy aircraft; Santa

Monica Airport Ass’n v. City of Santa Monica, 481 F. Supp. 927, 938-39 (D.C. Cal. 1979), aff’d, 659 F.2d 100 (9th

Cir. 1981); United States v. County of Westchester, 571 F. Supp. 786, 797 (S.D.N.Y. 1983), enjoining all-night

curfew imposed regardless of accompanying emitted noise as arbitrary, unreasonable, discriminatory and overbroad;

British Airways Bd. v. Port Authority of N.Y. and N.J., 558 F2d. 75 (2nd Cir.1977); 564 F.2d 1002 (2nd Cir. 1977),

enjoining the proprietor from further delaying access to its airport by a supersonic plane when it was shown that the

plane satisfied the proprietor’s decibel-based noise standard.
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capacity of the airport, an airport owner that owns a multi-airport system may designate a certain airport in a multiple airport system for use by a particular class or classes

of aircraft. The owner of the airport system must be able to assure that all classes of

aeronautical needs can be fully accommodated within the system without unreasonable

penalties to any class and that the restriction is fully supportable as being beneficial to

overall system capacity. Order 5190.6A, ¶4-8d.

The Port Authority of New York and New Jersey justified a perimeter rule at LaGuardia

to force airlines to use John F. Kennedy International Airport, another Port Authority

airport, for all nonstop long-haul flights. It showed that LaGuardia Airport was operating at or near capacity, creating delays and congestion, and that this rule would alleviate the problem.29 A showing of severe congestion justified a reasonable delay (a

matter of several months), but not a ban, on new entrant access.30

UNFAIR AIRLINE COMPETITION

The Department has the authority to prohibit anti-competitive airline practices. 49

U.S.C. 41712.31 This power covers unfair methods of competition by airlines, including

violations of antitrust laws or antitrust principles derived from those laws.32 The antitrust statute applicable to the airport practices discussed here is the Sherman Act of

1890, codified at 15 U.S.C. 1 et. seq. Section 1 of the statute prohibits contracts in

restraint of trade, interpreted as those that have the purpose of restricting competition

or have a significant tendency to reduce competition. Section 2 of the Sherman Act

prohibits monopolization and attempted monopolization, but not if the firm has

obtained monopoly power for legitimate reasons.33 The Department will not apply

 

29Western Air Lines v. Port Authority of N.Y. and N.J., 658 F. Supp. 952 (S.D.N.Y. 1986), aff’d, 817 F.2d 222(2nd

Cir. 1987), cert. denied, 485 U.S. 1006.

30Midway Airlines v. County of Westchester, supra, n. 3.

31

Unfair and deceptive practices and unfair methods of competition. “On the initiative of the Secretary of

Transportation...the Secretary may investigate and decide whether an air carrier...has been or is engaged in an unfair

or deceptive practice or an unfair method of competition in air transportation... If the Secretary, after notice and an

opportunity for a hearing, finds that an air carrier...is engaged in an...unfair method of competition, the Secretary

shall order the air carrier...to stop the practice or method.”

32

See, e.g., United Airlines v. Civil Aeronautics Board, 766 F.2d 1107 (7th Cir. 1985).

33Airport practices, even if they restrain competition, would be immunized from antitrust liability under the “state

action” doctrine, which usually shields state and local governments from antitrust liability. The Supreme Court, in

Parker v. Brown , 317 U.S. 341 (1943), held that federalism and state sovereignty principles immunize anticompetitive restraints imposed by states as an act of government from the Sherman Act, (15 U.S.C. 1 et. seq.).
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antirust principles to airport practices, however, since its authority under 49 U.S.C.

41712 does not extend to potentially anti-competitive airport practices.

The Department can apply these antitrust principles to airline practices at airports

where the airline practice is found to be an unfair method of competition. For example,

the “essential facilities” doctrine of Section 2 of the Sherman Act could be applied to

compel dominant airlines to surrender control of airport gates. The essential facilities

doctrine requires a firm controlling a facility essential for competition to make that facility available to competitors when four tests are met:

(1) control of the essential facility by a monopolist;

(2) a competitor’s inability practically or reasonably to duplicate the

 essential facility;

(3) the denial of use of the facility to a competitor; and

(4) the feasibility of providing the facility.34

Accordingly, the essential facilities doctrine could justify requiring an airline controlling

a monopoly share of gates at an airport to share or sublease its underutilized gates to

competing airlines unable to obtain their own facilities.

Another example of a violation of an antitrust principle could involve sublease tying

practices by airlines. An airline’s insistence on tying a ground handling contract (or a

purchase of other services) with its sublease of gates raises the issue of violation of section 1 of the Sherman Act. Unless there is a legitimate business reason for insisting on

the tie, a tying contract may be considered a violation of section 1 if the contract

involves two separate products or services, the sale of one is conditioned on the purchase of the other, the seller has sufficient economic power in the market for the tying

product or service to enable it to restrain trade in the market for the tied product, and a

 

Antitrust suits against publicly-owned airports have been dismissed under the state action doctrine. See Allright

Colorado v. City and County of Denver , 937 F. 2d 1502 (10th Cir. 1991); Interface Group v. Massachusetts Port

Authority, 816 F.2d 9 (1st Cir. 1987) (Breyer, J.); Independent Taxicab Drivers’ Employees v. Greater Houston

Transportation Co., 760 F.2d 607 (5th Cir. 1987); Commuter Transportation Systems v. Hillsborough County

Aviation Authority, 801 F.2d 1286 (11th Cir. 1986).

34MCI Communications Corp. v. American Telephone & Telegraph Co., 708 F.2d 1081, 1132-33 (7th Cir. 1983)

(upholding a jury verdict finding that AT&T violated section 2 of the Sherman Act when it refused to interconnect

MCI with the local distribution facilities of the Bell operating companies). See also, Delaware & Hudson Ry. v.

Consolidated Rail Corp., 902 F. 2d 174, 179-180 (2d Cir. 1990), cert. denied , 111 S. Ct. 2041 (a long-haul railroad

would violate section 2 if it denied a competing railroad access on reasonable terms to its short-haul tracks).
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not insubstantial amount of commerce in the tied product or service is affected.35 Consequently, the airline tenant’s tying of subleased gates to the use of the tenant’s ground

handling services may violate section 1 if (1) there is no legitimate business reason for

insisting on the tie, (2) the tenant controlled a substantial majority of gates at the airport,

and (3) the tying arrangement affected a significant amount of commerce, such as

ground handling.

The exercise of MII clauses may raise additional antitrust concerns since a veto of proposed construction may prevent the building of additional facilities for potential competitors. An airline with market power at an airport that blocks the construction of

facilities for competitors merely to maintain its own monopoly power (and not justified

for legitimate business reasons) may engage in conduct unlawful under section 2 of the

Sherman Act. Its refusal to allow the construction of facilities for competitors would be

comparable to its refusal to surrender gates unneeded for its own operations.

Additionally, unreasonable exercise of MII power by two or more airlines to block a

capital project for a competitor could be unlawful under section 1 of the Sherman Act.

While competitors are permitted to form joint ventures,36 the members have a limited

ability to block other competitors from joining.37 The veto by two or more airlines

could be unlawful if the MII action meant that the airport would be unable to satisfy the

demand of other airlines for facilities and if the MII carriers had no legitimate justification for their action.

 

35Fortner Enterprises v. U.S. Steel Corp., 394 U.S. 495, 498-499 (1969).

36Northwest Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S. 284, 295 (1985).

37United States v. Terminal Railway Ass’n, 224 U.S. 383 (1912) (competing railroads had to be admitted into a

combination formed by several railroads that had acquired control of all of the passages into and out of St. Louis

where such passages could not be duplicated). Associated Press v. United States, 326 U.S. 1 (1945) (the Associated

Press could not exclude prospective members from its pooled news service merely because they competed with a

member newspaper).
Airport Business Practices and Their Impact

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CHAPTER 3: AIRPORT ACCESS AND ITS EFFECTS

 ON AIRLINE COMPETITION

Providing airport access to new entrants and to carriers expanding their services is of

crucial importance to maintaining airline competition. Yet, gaining access at some

major carrier connecting hubs has been difficult and costly for new entrants. Many airports have adopted lease and management practices that may effectively cede control

over their airport facilities to the dominant carrier. This transfer of authority has been

especially evident in the administration of long-term, exclusive-use lease agreements at

large commercial hub airports. These arrangements give incumbent carriers the right to

the facilities regardless of their gate usage, and to decide on sublease terms and

conditions as well as to whom to sublet, if at all. Thus, limitations on airport terminal

access may be a function of airport lease and management practices, including the

preference of incumbent airlines to have maximum control of their gates.

Results of the ACI-NA survey indicate a decline in the percentage of exclusive-use gate

leases at 15 large hub airports, from 63 percent of gates in the 1992 reporting period to a

projected percentage of just under 40 percent of gates in 2004. Conversely, preferentialuse gates have become more prevalent, from about 28 percent of gates in 1992 to a projected percentage of 45 percent in 2004. Reliance on the PFC program as an accepted

method to finance gates represents a major reason for the increase in preferential-use

gate leases. Airports with preferential or common-use gate arrangements state that it is

easier to facilitate access for new entrants.

Financing arrangements giving signatory airlines the power to veto or delay capital

improvement projects through the exercise of MII clauses have had some direct effects

on airport construction planning. The subject projects eventually were either partially

or totally constructed, however, using PFCs, tenant financing, or eventual signatory

carrier financing. Results of the ACI-NA survey indicate that about two-thirds of the

large and medium hub airports have MII clauses and that the MII clauses are prevalent

at airports with residual or hybrid use and lease agreements.

Use of exclusive or preferential-use lease arrangements does not relieve the airport

operator of the responsibility to make every reasonable effort to accommodate new

entrants and carriers expanding operations. As discussed in Chapter 2, the reasonable

access, economic nondiscrimination, and non-exclusive rights provisions in the federal

statutes and airport grant assurances require the airport operator to assure reasonable

access to the airport regardless of the existence of exclusive lease arrangements.

Airport-air carrier use and lease agreements also recognize the primacy of the federal
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law over rights granted an airline. Accordingly, airport management has various

means by which to provide reasonable access to qualified requesting carriers at

underused facilities, including leased facilities.

Until recently, the Department was not pro-active in facilitating efforts by new entrants

to gain access to airports or in monitoring airports' compliance with the reasonable

access assurance. We will need to be vigilant in assuring that airports meet their legal

obligations to accommodate all qualified airlines.

ACCESS TO AIRPORTS IS CRITICAL TO

AIRLINE COMPETITION

Maintaining a competitive airline industry is essential to preserving the benefits of

deregulation. Competition can take many forms, but it is clear that an airline attempting to enter a market cannot compete successfully if it does not have access to essential

airport facilities and services on competitive terms.

Lack of Competition Can Result

In Fare Premiums

For at least a decade, studies have shown that fares in local markets at connecting hubs,

dominated by one major airline, are substantially higher than comparable markets that

do not involve a dominated hub airport.1 DOT has updated its hub premium calculations several times, most recently for 1997. At certain airports (see Table 3.1, next

page), these updates show that hub premiums are very high, especially at cities where

significant competition from low-fare airlines has not made inroads.

By contrast, at connecting hub airports where Southwest and other low-fare carriers

have been able to gain significant access, fare levels are much more moderate. Delta’s

Atlanta hub, which in 1988 had a hub premium of 47 percent, had a 20 percent premium in 1997 due to low-fare competition primarily by AirTran Airlines in 24 markets.

Average fares at Delta’s Salt Lake City hub were 21 percent higher than comparable

non-hub markets in 1988. In 1997, with Southwest competing in 28 local markets, average fares were actually 15 percent below comparable non-hub markets.

 

1

Borenstein, S., 1989, Hubs and High Fares: Airport Dominance and Market Power in the U.S. Airline Industry.

Rand Journal of Economics, Vol. 20, No. 3, Autumn, pp. 344-365; DOT 1990, Secretary’s Task Force on

Competition in the U.S. Domestic Airline Industry; Transportation Research Board, National Research Council,

Special Report 230, Winds of Change: Domestic Air Transport Since Deregulation, 1991.
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Table 3.1

Hub Premiums and Low-Fare Competition

Hub Airport

1988 Hub

Premium (%)

1997 Hub

Premium (%)

1997 Total

Markets

1997 Low-Fare

Markets (a)

Atlanta 47.1% 20.2% 155 24

Charlotte 33.6 58.9 91 0

Cincinnati 44.9 66.8 68 1

Denver -3.6 10.3 138 17

Detroit 2.2 17.6 123 28

Memphis 32.9 35.7 76 6

Minneapolis 23.0 43.7 123 3

Pittsburgh 12.4 56.6 97 1

Salt Lake City 21.1 -15.1 90 28

St. Louis 23.9 13.8 107 40

(a): A low-fare market is any market in which a low-fare airline carries at least 10% of the market. For purposes of this table,

low-fare carriers include Air South, AirTran, American Trans Air, Carnival, Frontier, Kiwi, Pro Air, Reno, Southwest, Spirit,

Tower, Vanguard, and Western Pacific. Low-fare affiliates of the major carriers are not included in the designation of lowfare markets above because at this time there is no way to differentiate the low-fare affiliate from the mainline carrier

operations in the ticket fare database.

Source: DOT

Irrespective of how overall average fares compare from city to city, new low-fare

competition on spoke routes typically has a major effect on airfares and passenger

volumes. In the absence of a low-fare competitor, the pricing practices of major carriers,

including limited seat availability at low fares, results in a very large, low-fare demand

sector that goes unserved. This is an important public policy consideration for ensuring

that low-fare competitors have access to hub markets.

It is not just the hub cities that suffer from high fares. Travelers pay very high fares at

spoke cities in the East and Midwest that have dominated hubs as their primary destinations, as illustrated in Table 3.2 . In 1997, Rochester, New York, and Richmond, Virginia, had fare premiums of 42 percent and 35 percent, respectively, while the premium

Table 3.2

Some Examples of Fare Premiums at Smaller Spoke Cities

Airport Total Markets Premium (%)

Buffalo, NY 56 18.2%

Burlington, VT 26 11.9

Des Moines, IA 42 21.2

Richmond, VA 56 35.4

Rochester, NY 49 42.2

Source: DOT
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in Des Moines, Iowa, amounted to 21 percent. Such high fares have important negative

economic consequences for these cities in their ability to retain and attract businesses.2

Connecting hub airports provide individual major airlines that dominate such airports

enormous competitive advantages, particularly in markets to and from the hub cities.

Flow traffic allows service-frequency advantages in local markets, frequent-flyer programs help to lock in local passengers to the dominant carrier, commission override

programs provide incentives to travel agents to sell on the dominant carrier, and computer reservation systems provide advantages to the network carrier. All of these

factors raise economic barriers to entry and allow a dominant air carrier to charge

higher fares. But none of these advantages presents an absolute barrier to entry, as is

the case when a new entrant cannot obtain access to gates, ticket counters, and other

airport facilities and services needed to deliver a viable competitive service.

New Entrants Need Access to Major Cities and

The Full Array of Airport Facilities to Mount

Effective Competitive Service

New entrant airlines must have access to major traffic centers in order to fully develop

their operating systems. Their access to major carrier connecting hubs in the interior

United States, such as Atlanta, Charlotte, Denver, Detroit, Pittsburgh, and Minneapolis,

and major coastal destination cities, such as New York, Newark, Boston, and Los Angeles, are necessary to establish viable new airlines. High fares at many of these cities

mean not only that time-sensitive travelers pay high fares, but also that a large number

of price-sensitive passengers are not offered the option of affordable air service. Studies

have shown that local city-pair traffic doubles or triples when new entrant, low-fare

competition enters a market.3 Carriers with low-fare strategies have told DOT staff that

access to major cities is essential if they are to be successful at sustaining operations.

Most of the informal complaints we receive about the difficulty of obtaining competitive

access to airports involve major cities, especially those that serve as primary connecting

hubs for major network carriers. On the one hand, this tendency is understandable.

Connecting hubs do support high-frequency service to scores of cities by the hubbing

carriers. To a significant extent, it is necessary for the hubbing carrier to have substantial facilities at an airport, since it needs to operate a large number of flights during

 

2

See, for example, the discussion of economic impacts of high fares on Rochester, New York summarized in DOT

1999, Aviation in the 21st Century (forthcoming).

3

See The Low Cost Airline Service Revolution, April 1996, http;//OSTPXWEB.DOT.GOV/DomAv/1cs.pdf; and

Competition in the U.S. Domestic Airline Industry: The Need for a Policy to Prevent Unfair Practices, Revised May

1999, http://Ostpxweb.dot.gov/aviation/DomAv/comp.rev.pdf.
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incoming and outgoing banks of flights to optimize convenient connections for

passengers. However, to the extent a hubbing air carrier controls the availability of airport facilities and other services through financing, leasing, or other arrangements, it

has little incentive to share these facilities, especially with airlines that may be aggressive price competitors.

During the course of our study, new entrant carriers repeatedly told us that, in order to

plan and operate new services and to mount a competitive effort, they need timely and

predictable access to a gate or gates on the same concourse with good jetways and

aprons, ticket-counter positions with baggage belts, and the ability to contract for baggage handlers, caterers, maintenance personnel, cleaning services, and office space,

among other things. While some of these facilities and services may be available, they

may only be available at very high rates or may take months to acquire by contract.

Beyond that, the new entrant carriers noted the need for the opportunity to expand

their operations in order to become effective competitors.

New entrant carriers also told us that, in most cases, they achieved access to an airport,

but at a cost that put them at a competitive disadvantage. For example, one carrier

noted that it was unable to become a signatory airline at an airport and was required to

pay high landing fees. To become a signatory carrier, the new entrant was required to

lease a gate. Even though the carrier was prepared to do so, it was told none was available. A second carrier found itself paying 60 percent of the terminal’s payment with 25

percent of its usage because payment was based on a ratio of flights/departures/

enplanements rather than square footage. In this airline’s view, it was being penalized

for making efficient use of its gate space. A third carrier noted the cost and inconvenience of having to engage in separate agreements from different leaseholders for ticket

and gate space while “similarly situated” carriers that were not competing with the carrier leasing the facilities paid roughly one-half that of the new entrant. This same new

entrant also noted that, because its lease was about to expire and it could not find other

facilities, it was forced to use the international terminal to operate some of its flights,

but was subject to a “head” fee for the use of the international terminal even though it

would only be offering domestic services not requiring customs or immigration services.

CONTRACTUAL ARRANGEMENTS

BETWEEN AIRPORTS AND AIRLINES

CAN INFLUENCE COMPETITION

Contractual agreements between airports and airlines specify air carrier usage of an

airport’s facility. Gate leasing arrangements, MII contractual clauses, subleasing

requirements, and ground handling agreements have all been cited by various studies
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as barriers to entry that affect a new entrant’s ability to gain reasonable access to an airport.

Long-term leasing arrangements can influence competition by ensuring continued

access to incumbent carriers but making access for new entrants uncertain. Particularly

at airports with a high percentage of exclusively leased gates, incumbent carriers often

have the practical authority to determine gate usage, subleasing arrangements, and

ground handling. A new entrant negotiating exclusively with the dominant incumbent

carrier tenants can encounter significant difficulties gaining timely access to needed

gates and facilities on reasonable terms and conditions. Preferential-use gates, by

comparison, give the airport operator the power to require the tenant to share the gate

under specified conditions. Airport-controlled common-use gates give the airport

operator more flexibility to assign gates and to facilitate entry.

Gate Availability

Table 3.3 on the next page shows reported peak-period gate use compared to the

reported number of gates for 23 large hub airports that responded to the 1998 ACI-NA

survey. Reported peak-hour gate use is the number of aircraft movements on average

during the busiest consecutive three-hour period in a 24-hour span during the busiest

peak month. Twelve of the large hub airports listed in the table reported that approximately 10 percent or more of their gates were unused during their peak periods. Based

on data from the ACI-NA survey, it appears that gates are available at many of the

Nation’s busiest airports during peak periods. Indeed, limitations on airport access

may be as much a function of the current airport-airline use and lease agreement as it is

a matter of physical constraints, although some airports, such as Phoenix’s Sky Harbor

International, do face physical constraints that limit their ability to accommodate new

airline services. The key to determining the extent gates are available even at reported

gate-constrained airports, particularly those with exclusive-use lease arrangements, is

for airport managers to monitor gate use.
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Table 3.3

Total Available Gate Capacity at Large Hub Airports, 1998 (a)

Airport

Reported

Gates

Reported

Peak Hour

Gate Use

Share of

Peak Hour

Unused

Atlanta 171 171 0%

Baltimore-Washington 75 40 47%

Boston 93 88 5%

Chicago O’Hare 175 175 0%

Cincinnati 120 105 13%

Dallas-Fort Worth 120 115 4%

Houston 89 70 21%

Las Vegas 93 69 26%

Los Angeles 146 90 38%

Miami 121 114 6%

New York Kennedy 113 102 10%

New York LaGuardia 72 65 10%

Newark 94 94 0%

Orlando 79 60 24%

Phoenix 84 84 1%

Pittsburgh 100 85 15%

Reagan Washington National 44 44 0%

Salt Lake City 72 48 33%

San Diego 45 41 9%

San Francisco 75 75 0%

Seattle 76 70 8%

St. Louis 84 76 10%

Tampa 60 37 38%

Total 2,201 1,917 13%

(a): Table excludes six large hub airports that either did not respond to 1998 ACI-NA survey

regarding gate usage or whose responses were not usable.

Source: 1998 AC-NA survey.

Gate Leasing Arrangements

How an airport’s gates and related facilities are to be used depends on whether the

contractual agreement specifies either an exclusive, preferential, or common-use

arrangement. Agreements vary by length of lease and type of control exerted by the

airport. Contractual arrangements may differ by gate elements and also by gate.4 For

 

4

 Gate elements include aircraft parking facilities and passenger loading and unloading facilities, such as loading

bridges, mobile lounges, and so forth. Other gate elements necessary to provide passenger service include

passenger-hold rooms, check-in facilities, baggage claim facilities, aircraft servicing, and aircraft handling.
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example, many airports lease passenger hold rooms, aircraft parking positions, and

loading bridges on an exclusive or preferential-use basis and arrange for baggage claim

activities on a common-use basis. Miami leases ticket counter and airline operational

and administrative space on a monthly basis while it assigns gates on a daily basis.

Gate leasing arrangements at large and medium hub airports are summarized in Table

3.4 below. Appendix A describes gate leasing types for each of the large and medium

hub airports that responded to the ACI-NA survey question.5

Table 3.4

Summary of Gate Usage Practices of Large and Medium Hub Airports

1992

Number of

Airports

Exclusiveuse gatesPreferentialuse gatesAirportcontrolled gates 1992 Total

Large hubs 6 15 778 342 111 1,231

Percentages 63.2% 27.8% 9.0% 100.0%

Medium hubs 7 15 151 213 71 435

Percentages 34.7% 49.0% 16.3% 100.0%

1998

Number of

airports

Exclusiveuse gatesPreferentialuse gatesAirportcontrolled gates 1998 Total

Large hubs 15 787 453 172 1,412

Percentages 55.7% 32.1% 12.2% 100.0%

Medium hubs 15 136 218 110 464

Percentages 29.3% 47.0% 23.7% 100.0%

 

5

 The ACI-NA survey question was: List the Number of Gates According to Type (Exclusive Use/Control; Shared

Use/Control; Airport Use/Control, for the years 1992, 1998, and planned 2004.

6

 Although all of the 24 large hub airports responding to the ACI-NA survey submitted complete data to the

question about distribution of gates by lease types for 1998, a number of airports did not respond uniformly to the

question for the other two years. Detroit did not fully respond to the question about distribution of gates by lease

types for 1992. Pittsburgh did not respond to the 1992 question. Detroit, Los Angeles, Phoenix, San Diego, and

Tampa did not respond to the question about estimated distribution of gates by lease types for 2004, and Dallas/Ft.

Worth, New York-Kennedy, and Miami did not respond fully to the question for 2004. Hence, in order to facilitate

“apples-to-apples” comparisons, totals have been computed without the data for these nine airports.

7All of the 22 medium hub airports responding to the ACI-NA survey submitted complete data to the question about

distribution of gates by lease types for 1998. Portland did not respond to the ACI survey questions about

distribution of gates by lease types for 1992 or 2004. Five other medium hub airports, Kansas City, Nashville,

Memphis, Omaha, and Ontario, did not respond to the question for 2004, and Oakland did not respond fully to the

questions for 1992 and 2004. As with the large hub airports data, totals have been computed without the data for

these seven airports.
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Table 3.4, Cont...

2004 (Planned)

Number of

airports

Exclusiveuse gatesPreferentialuse gatesAirportcontrolled gates 2004 Total

Large hubs 15 608 711 208 1,527

Percentages 39.8% 46.6% 13.6% 100.0%

Medium hubs 15 164 238 142 544

Percentages 30.1% 43.8% 26.1% 100.0%

Source: 1998 ACI-NA survey.

The ACI-NA survey results show that exclusively leased gates were the predominant

gate arrangement at 15 large commercial hub airports in 1992 and 1998, as depicted in

Table 3.4. Preferential-use leases, however, are projected to become more prevalent by

the year 2004 at large hub airports, as noted in the table. The number and percentages

of airport-controlled gates have been increasing at large hub airports that responded to

the ACI-NA survey question.

At those medium hub airports responding to the ACI-NA survey question, exclusively

leased gates have amounted to and are projected to amount to approximately 30 percent of total gates. The percentage of preferential-leased gates has declined and is

projected to decline somewhat, while the number and percentage of airport-controlled

gates have markedly increased, a trend that is projected to continue in 2004.

For 1998, most of the 24 large hub airports responding to the ACI-NA survey have their

gates mixed among exclusive use, preferential use, and airport controlled, with varying

percentages of each type among airports.8 (See Appendix A, Tables A-3 and A-4.)

While 21 large hub airports use more than one gate leasing arrangement, only Reagan

Washington National reported all preferential-use gates, and only Miami and Phoenix

 

8

 The airports responded to the following question in the ACI-NA survey device: “List the Number of Gates

According to Type- Exclusive Use/ Shared Use/ Airport Use." The survey defined “Exclusive Use” as “Gates that

typically are assigned exclusively to one airline for the duration of the lease with no provisions for shared use or

airport control, except that the airport may still retain sublease review/approval.” “Shared Use” was defined as:

“Recognizing that there are numerous variations on shared use and/or control of gates, commonly referred to as

“preferential use” and “common use”, this category includes those types and variations of shared use and controlled

gates. Shared use and control may be between one or more airlines and the airport or between two or more airlines.

Also include gates [leased] on a preferential basis where the lease requires the [lessee] to allow another to use the

facility to the extent such use does not interfere with the [lessee’s] actual use of the facility. Also include gates

where the preferential [lessee] has the ‘right to bump’ another carrier from the gates as the [lessee’s] operational

needs expand.” “Airport Use/Control” is defined as “Gates that are totally under the control of the airport. These

could be assigned on a temporary, per use basis or short term (e.g., 30 day) arrangement.”
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reported all airport-controlled gates.9 There were a total of five large hub airports

reporting a complete absence of exclusive-use gates: Baltimore-Washington

International, Reagan Washington National, Miami, Phoenix; and Seattle). Of the 22

medium hub airports responding to the ACI-NA survey, 17 have their gates under at

least two types of leasing agreements. Half of the medium hub airports (eleven)

reported no exclusive-use arrangements, three airports have all preferential-use gates,

and one has all airport-controlled gates. Milwaukee is the only airport with all exclusive-use gate leases. Tables B-1 and B-2, Appendix B, list the expiry date of each large

and medium hub airport’s use and lease agreement.

Exclusive-Use Contractual Agreements

Exclusive-use gate arrangements remain the predominant type of airport-air carrier

rental agreement among large commercial hub airports. An exclusive-use lease typically assigns to one airline the right to use and occupy gates and facilities for a specified

duration and the right to sublet or assign the facilities, conditioned on the prior written

approval of the airport management.

As indicated in Table 3.4, the percentage of exclusive-use gates has been declining and

will continue to decline. Over 55 percent of the gates (787 gates out of a calendar year

1998 reported total of 1,412 gates) are leased on an exclusive-use basis at the large hub

airports responding to the ACI-NA survey question. In 1992, by contrast, exclusive-use

gate arrangements had amounted to 63 percent (778 of a total of 1,231) of total gates.

The projected percentage of exclusive-use gates for 2004 will be just under 40 percent

(608 gates out of a forecast total of 1,527 gates).

Long-term, exclusive-use leases for gates and ancillary facilities have been criticized by

the Department, GAO, and others as potential barriers to entry.10 The concerns have

rested on complaints by new entrant carriers that the incumbent airlines hoard gates,

require substantial sublease premiums, offer access at less preferable times, force the

 

9

Forty-seven of Miami’s reported airport-controlled gates are under a use arrangement to American Airlines that is,

in effect, an exclusive-use agreement.

10Airline Deregulation, GAO/RCED-99-92 (March 1999); Airline Competition: Options for Addressing Financial

and Competition Problems, GAO/T-RCED-93-52, Statement of Kenneth M. Mead, at 16, encouraging the use of

preferential-use, as opposed to exclusive-use, leases; Airline Competition: Industry Operating and Marketing

Practices Limit Market Entry, GAO/RCED-90-147 (August 1990), at 40 concluding that “exclusively leased airport

facilities, including gates, may represent a substantial barrier to entry at some airports;” Secretary’s Task Force on

Competition in the U.S. Domestic Airline Industry, February, 1990; Winds of Change, Transportation Research

Board (1991); Hardaway, Robert, Economics of Airport Regulation, 20 Transp. L.J. 47, 54 (1991); Hardaway,

Robert and Dempsey, Paul, Airlines, Airports and Antitrust: A Proposed Strategy for Enhanced Competition, 58 J.

Air L. and Comm. 455, 480 et. seq. (1992).
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new entrant to use the incumbent’s ground personnel, or refuse to sublease altogether.11

In other words, new entrants assert that these leases prevent the airport operator from

providing cost-competitive access to unused or underused facilities.

Critics have referred to long-term, exclusive-use leases as "a willful anti-competitive

practice because [particularly with MII clauses] they allow the incumbent airlines to

maintain dominance by barring both access to existing gate space and construction of

new airport facilities."12 Also, if all airport gates are leased, new entrant carriers seeking

signatory status can be frustrated.13 The Minnesota State Planning Department recently

issued a report concluding that long-term leases to Northwest did not promote competition at Minneapolis, and suggested, among other courses of action, prohibiting any

airline from holding long-term leases on a specified percentage of gates.14

Some large hub airports commented that long-term leases “are not in the best interest of

the airport or new entrants."15 Chicago’s comments recognized that the exclusive-use

nature of the gates can "tie up underutilized gate capacity in the hands of the incumbent

airline."16

Several airports have complained that long-term, exclusive-use leases prevented them

from promptly recovering gates from bankrupt carriers. Additionally, financial

analysts have expressed concern that long-term, exclusive-use leases to a dominant

airline may be riskier to holders of airport debt than a long-term, preferential-use lease

with the same carrier.17

 

11Id., See also, GAO/T-RCED-89-66, Statement of Kenneth M. Mead, Barriers to Competition in the Airline

Industry; GAO/RCED-97-4, Barriers to Entry in the Airline Industry.

12Note, The Antitrust Implications of Airport Lease Restrictions, 104 Harv. L. Rev. 548, 557 (1990).

13The Department/FAA’s case study at Detroit revealed that new entrants were frustrated due to the lack of

available gates at the airport.

14Minnesota Planning, Flight Plan: Airline Competition in Minnesota, St. Paul, Minnesota, March 1999, p. 19.

15Comments of Jerald K. Lee, Deputy Executive Director, Los Angeles World Airports, U.S. Department of

Transportation Docket OST-98-4025, August 24, 1998.

16Comments of Mary Rose Loney, A.A.E., Commissioner, City of Chicago, Department of Aviation, U.S.

Department of Transportation Docket OST-98-4025, December 30, 1998.

17Detroit’s comments to the docket noted that “the County received favorable comments from the rating agencies on

its new preferential use lease with Northwest;” our case study revealed that the bond rating agencies had expressed

concern to Wayne County because so many of the airport’s gates were tied up in exclusive leases to Northwest.
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Some large airports visited by Task Force members explained that they were transitioning from long-term, exclusive-use leases as a means to gain control over gates. For

example, Atlanta airport management requires average minimum utilization at some

exclusive-use, long-term gates, allows only short-term ticket counter leases. Similarly,

San Jose is transitioning to month-to-month agreements for carriers as its current longterm leases expire.

Some airports support long-term, exclusive-use lease arrangements, since they historically relied on the backing of a specific airline tenant to finance the construction of new

and improved facilities.18 The Air Transport Association defends long-term leasing

practices as providing assurance to carriers who make substantial financial commitments that they will be able to use specific facilities over the long term.19 Similarly, the

Maryland Aviation Administration believes that long-term leases offer the security of

knowing that construction costs will be repaid.20

Preferential-Use Contractual Arrangements

Preferential or shared-use contractual arrangements generally give the tenant airline the

primary right to use the facility when it has operations scheduled. These arrangements

represent a shared control between the airport and the airline tenant; the airline tenant

acknowledges the airport’s authority, under specified circumstances, to allow use of the

leased facility by other airlines. Unlike traditional exclusive-use lease arrangements,

preferential-use contracts afford the airport explicit contractual authority to use a tenant’s gates for new entrants or carriers wanting to expand service.

Preferential-use leases differ in the amount of “preference” or “priority” the airport

gives to the tenant. For example, some arrangements give absolute preference to the

tenant airline if it meets the minimum utilization threshold.21 If minimum utilization

criteria are not met, the leases may subject the tenant to “use-it-or-share-it” requirements or to the “use-it-or-lose-it” rule. Some preferential-use leases give the primary

 

18US Airways’ entered into its long-term, exclusive-use arrangements at Pittsburgh in the 1980’s to secure the

airport’s debt for its new terminal.

19Comments of the Air Transport Association of America, Docket OST-98-4025.

20Comments of Maryland Aviation Administration, Docket OST-98-4025.

21Gate utilization may be based on number of daily operations (generally requiring at least a minimum of three

flights/weekday) or may be calculated based on a percentage of the historical average utilization of similar airline

tenants. These provisions may give the airline tenant the right to “cure” within a certain period after its utilization

has dropped below the minimum.
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tenant the right to charge the secondary tenant for facility usage. (Some leases allow

"bumping" rights by the primary tenant in the event it increases its operations). Some

airports retain the right to recapture the facilities and reallocate excess capacity, under

"use-it-or-lose-it" provisions that are not triggered by a specific minimum usage threshold.22 Some airports use short-term, preferential-use leases for more control. Others

have the right to periodically reallocate preferential-use gates based on utilization and

other factors.23 Minimum usage thresholds can range from three flights per day to over

seven flights per day, or be based on average utilization of similar signatory carriers

over a historical period.

Preferential-use lease terms often have provisions, such as minimum use, that enable

the tenant airline to avoid sharing facilities. Some long-term, preferential-use gate contracts are similar to exclusive-use leases with “reasonable accommodation” clauses. In

its administration of the PFC program, FAA has treated any lease that accords absolute

preference to an air carrier based on flight threshold as a de facto exclusive-use lease.

As shown in Table 3.4, preferential-use leases have become more prevalent at the large

hub airports responding to the ACI-NA survey, increasing from about 28 percent of

gates in 1992 (342 of 1,231 total gates) to 32 percent in 1998 (453 of 1,412 total gates), and

are projected to increase to over 46 percent in 2004 (711 of 1,527 total gates). One large

hub airport, Reagan Washington National, has reported a gate composition of all preferential-use gates. Boston Logan commented that, upon the 2001 expiration of its exclusive-use leases, its gate composition will include only preferential and common-use

gates. Detroit Metropolitan Airport also is transitioning to all preferential and common-use gates as it builds and renovates terminal facilities with PFC funds.

Airport-Controlled Gates

Airport-controlled or common-use arrangements describe gates totally under the control of the airport. The airport may assign gates on a temporary, per-turn basis or on a

short-term (e.g., 30-day) arrangement. This facilitates the airport's assignment of gates

to new airlines initiating service or to established carriers expanding service.

 

22Kent County, for example, “reserves the right at all times, however, to determine when any Airline is utilizing

excess space beyond its reasonably foreseeable needs and to take such space back with a corresponding reduction in

Airline’s rentable space.” (Response to September 1998 ACI-NA Gate Availability/ PFC Survey).

23The Metropolitan Washington Airports Authority, for example, has a list of factors used to determine continued

need by the incumbent airline at Washington Reagan and Washington Dulles—including past, current, and projected

utilization; amount of air traffic; number of gates and leased space; practicality of constructing new space; and

imbalanced usage.
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Although the number of airport-controlled gates at the respondent large hub airports is

projected to jump considerably, from 111 gates in 1992 to 208 gates in 2004, this growth

is overshadowed by the growth in the number of preferential-use gates, as discussed

above. As shown in Table 3.4, in 1992, nine percent of the 15 large hub gates consisted of

airport-controlled gates, increasing to a projection of nearly 14 percent in 2004. The

number of airport-controlled gates is expected to double, from 71 gates in 1992 to 142

gates in 2004, at the medium hub airports responding to the ACI-NA survey question.

However, this number represents a greater percentage increase of airport-controlled

gates compared to total medium-hub gates, from 16 percent in 1992 to 26 percent

projected for 2004.

Two airports reported in the ACI-NA survey that they have all airport-controlled gates:

Miami, with 121, and Phoenix, with 84. Seattle expects to have all of its 82 gates under

airport control by 2004. Miami indicated that its control of gates and terminal facilities

has helped new entrants gain access, allowed code-sharing partners to achieve proximity of space, and enabled more efficient use of its Federal Inspection Services facilities.

Miami explained that it has the right to assign gates daily based on its gate utilization

policy; as a practical matter, most carriers operating at gates are able to remain there.24

Phoenix stated that it uses a month-to-month system and controls the loading bridges

and baggage systems to better facilitate and manage entry. Seattle asserted that

available operating space constrains expansion and that the airport is gaining more

control over its facilities to better manage its operations.

Majority-In-Interest Clauses

A traditional MII clause is a contractual provision in the master airport-air carrier use

and lease agreement requiring the airport operator to consult with and seek approval of

a prescribed percentage of signatory carriers for a proposed capital project to be

financed by the carriers. The MII carriers generally have assumed the financial risks of

long-term leasing commitments and/or guarantees for debt financing, generally under

residual financing arrangements. For example, Orlando, which has an MII, uses a residual agreement under which all airport revenue is credited to reduce signatory airline

rates and charges, and the signatory airlines agree, jointly and severally, to pay the airport authority rates and charges in a sufficient amount for the authority to satisfy its

obligations under its bond resolution.

 

24American Airlines' month-to-month agreement for 47 gates at its new international concourse guarantees the

carrier the right to use the terminal assuming it meets minimum usage conditions that American fully expects to

meet. Therefore this agreement, unlike Miami's other month-to-month arrangements, is considered by DOT to be a

long-term, exclusive-use agreement.
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Studies have indicated that a problem exists when incumbents can control airport

development, since MII carriers may use their powers to forestall capacity improvements that would facilitate entry by providing additional capacity.25 Others

acknowledged that an MII clause may have been justifiable before airline deregulation

to balance the power of the airport/airline potential monopolists, but that giving

incumbent airlines power to potentially block entry could hamper the pro-competitive

goals of deregulation.26 GAO has indicated that MII powers could limit an airport's

ability to expand and increase its capacity to raise revenue.27 Others claimed that MII

clauses are anti-competitive because they allow incumbent carriers to bar market

entry.28

The American Association of Airport Executives expressed the views of a number of

airports by asserting that the desire of the signatory airlines to maintain the status quo

at the airport runs counter to the needs of communities to invest in airport facilities and

to attract new businesses or to provide new fare offerings. It suggests "consult-only"

MII clauses.

The Port Authority of New York and New Jersey commented that MII provisions allow

"dominant carriers to control capital development at the airport." It uses special facility

financing for privately owned gates at several of its airports or relies on its ability to

issue consolidated financing, which does not require airline approval. Similarly, the

Massachusetts Port Authority commented that MIIs can hamper competition. Boston

Logan relies on special facility financing or on general revenue bonds backed by consolidated port revenues. Miami commented that MII agreements allow a few large carriers to have veto power over airport development and can seriously limit the airport's

attempts to make the environment more competitive.

MII carrier opposition to projects was described by several airports in comments to the

docket or in the ACI-NA survey responses.29 At each of these airports, however, the

 

25Secretary's Task Force on Competition in the U.S. Domestic Airline Industry (February, 1990) at v. and ch. 3.

26Winds of Change, Domestic Air Transportation Since Deregulation. Transportation Research Board, National

Research Council (Washington, D.C. 1991).

27Barriers to Competition in the Airline Industry, Testimony of Kenneth M. Mead, GAO/T-RCED-89-66

(September 21, 1989); Airline Competition, GAO/RCED-90-147 (August 1990).

28Notes, The Antitrust Implications of Airport Lease Restrictions, 104 Harv. L. Rev. 548 (1990).

29

Large and medium hub airports that responded affirmatively to the ACI-NA survey question: "Have the carriers

exercised MII powers in order to prevent the airport from expanding gates or other essential facilities to

accommodate other carriers/competition?" were Miami, Detroit, Colorado Springs and Fort Myers. Miami indicated
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projects were either partially or totally constructed, and the airport used PFCs, tenant

financing, or eventual signatory carrier financing.

A traditional MII provision authorizes a prescribed percentage of carriers that are signatory to the airport’s use and lease agreement to approve or disapprove a proposed

capital project to be financed through their rates and charges. These carriers are generally defined in terms of "weighted votes," comprising at least half of the signatories who

together have landed at least half of the total landed weight or operations of all the signatories during the preceding year. (Therefore, a signatory carrier that no longer serves

the airport would be excluded from MII participation). A weighted vote may also be

defined as half of all signatories that pay more than half of the terminal rentals, landing

fees, and preferential apron area fees. Seattle, for example, considers MII approval to

occur when the airport management has received a favorable response from 55 percent

of the responding airlines, providing that the approving airlines collectively paid at

least 55 percent of the landing fees.

The MII may constitute a specific number of airlines paying a supra-majority of fees or a

numerical majority of airlines paying half the fees, such as at Chicago O'Hare. At some

airports, the MII clause is drafted to require the vote of the dominant carrier for project

approval.

Terms of the agreement generally obligate the airport operator to allow the signatory

airlines a period of time within which to review the proposed project and to respond by

approving or disapproving the proposal. At some airports, an absence of response by

the MII carriers within a specified amount of time is deemed to be an approval of the

project. At BWI, for example, the MII clause provides:

 

that the MII carriers filed suit to block a current massive capital expansion project largely for American Airlines, the

largest carrier at Miami International. The court found, however, that the MII clause was not applicable to this

project. Air Canada et al. v. Dade County et al, (S.D. FL 1998), No. 95-2037-Civ; Miami-Dade County ACI-NA

Survey Response. Miami has since not renewed the MII clause. The airport project is being constructed and

financed by both PFCs and carrier rates and charges (according to the equalization methodology). Colorado Springs

indicated that its signatories approved only a portion of the permanent facilities needed for a new entrant; the new

entrant constructed and financed its own interim facility. The Lee County Port Authority commented that certain

signatories with sufficient operational space at Southwest Florida successfully delayed both the addition of new

gates for other carriers that had requested more space as well as construction of a new Federal Inspection Services

facility and runway extension, to be used by the new carriers. The latter projects eventually were financed by PFCs.

In its comments, the Los Angeles World Airports said that one carrier was able to block proposed improvements at

the city's Ontario airport; the airport has let the MII clause lapse at LAX and has improved Ontario, largely with

PFCs. Also, the Metropolitan Washington Airports Authority commented that the signatory carriers at Reagan

Washington National airport were resistant when informally approached about a proposed gate addition to

Washington Dulles to accommodate anticipated growth and demand. The project eventually was financed with

PFCs.
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“It is agreed that during the basic term of this Agreement no Airfield Capital

Expenditure shall be made by Lessor, nor shall an expenditure in excess of

$25,000 be made by Lessor for an Airport development study or Airport master

plan, without Majority-in-Interest approval, provided that failure either by 50%

or more of the Airlines in number, or by Airlines together landing 50% or more

of the total weight landed by all Airlines at the Airport during the immediately

preceding calendar year to specify disapproval in writing within thirty (30) days

of written notice...to each Airline by Lessor seeking approval shall constitute

Majority-in-Interest approval of such expenditure.” (Baltimore/Washington

International Airport response to ACI-NA Gate Availability/PFC Survey, September 1998).

Some agreements require the airport to provide the signatories with detailed descriptions of the project, construction schedules, justifications, cost-benefit analysis, cost allocation, and proposed financing arrangements.

At several airports, there is no minimum capital expenditure triggering the MII process

and signatory carriers can have a veto power over most projects. Some airports have

relatively low expenditure thresholds for MII approvals, such as a $50,000 capital

replacement threshold at Cincinnati and a $25,000 capital improvement threshold at

Dallas/Fort Worth (except that no MII approval at DFW is needed if a signatory has

agreed to fund its own facility).

At other airports, MII approval is limited to projects with relatively high costs, such as a

$100 million threshold at Reagan Washington National Airport (the MII ceases to exist

in the year 2000); $500,000 at St. Louis; $553,925 at San Francisco (the MII refers only to

signatory carriers from the 1980’s agreement); and a $10 million airfield project at

Tampa (terminal renovation financing is permitted if approved by just one signatory).

Many MII clauses pertain to both landside (such as terminal construction and improvements) as well as airside projects, and to other types of expenditures. Additionally,

some clauses, such as those of Denver and Seattle, require MII approval for changes in

rate methodology.

Generally excluded from the MII approval process are the following project types:

required for public safety; undertaken to comply with pertinent laws or to maintain

FAA certification of the airport; constructed with an airport’s capital; or below a predetermined dollar amount.

Some airports have significant restrictions on MII powers. There is at least one airport

(Seattle) that requires carriers not to withhold MII approval due to competitive impacts.
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Some MII clauses specifically provide that new facilities can be constructed without MII

approval and that airport revenue bonds can be used for funding such a facility provided the proposed lessee executes a lease agreement obligating itself to the monetary

obligation imposed on the airport as a result of the new facility.

Other MIIs do not give a veto power to the airlines but provide that they may delay a

project (for periods of from six months to two years) after which the airport may construct the project and charge the signatories. For example, Las Vegas' MII clause

permits carriers to delay for up to two years an airport-proposed project; after that,

however, the project could go forward.

At least two airports, however (Salt Lake City and Tampa, for terminal projects), have

provisions allowing the airport to charge all signatories for improvements proposed in

writing by just one signatory and agreed to by the airport.

Table 3.5 summarizes the types of use and lease agreements and status of MII clauses at

the large and medium hub airports responding to the ACI-NA survey questions.30 As

shown in the table, most of the responding large and medium hub airports have MII

clauses.

Table 3.5

Summary of Type of Gate Control and Financing Arrangements

At Large and Medium Hub Airports (1998)

Large Hub Airports:

Where MII

Clauses have Type of Use &

With MII Clauses # % been invoked # % Lease Agreement # %

Yes 15 65.2% Yes 2 10.0% Compensatory 9 40.9%

No 8 34.8% No 18 90.0% Residual 9 40.9%

Total airports 23 100.0% Total airports 20 100.0% Hybrid 4 18.2%

Total airports 22 100.0%

Medium Hub Airports:

Where MII

Clauses have Type of Use &

With MII Clauses # % been invoked # % Lease Agreement # %

Yes 15 68.2% Yes 2 12.5% Compensatory 4 19.0%

No 7 31.8% No 14 87.5% Residual 8 38.1%

Total airports 22 100.0% Total airports 16 100.0% Hybrid 9 42.9%

Total airports 21 100.0%

Source: 1998 ACI-NA survey.

 

30These questions included: (a) Do you have “Majority-In-Interest” or “No Additional Rates, Fees, Charges”

provisions in your airline use and lease agreement(s)? Yes/No. (b) Have the carriers exercised MII powers in order

to prevent the airport from expanding gates or other essential facilities to accommodate other carriers/competition?

Yes/No. What type of use and lease agreement do you have in effect? Compensatory/Residual/Hybrid/Other.
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Specifically, about two-thirds (15) of the 23 large hub airports responding to the ACINA survey question reported having MII clauses. Similarly, among the medium hub

airports responding to the ACI-NA survey question, about two-thirds had MIIs.

Appendix B lists the airport-by-airport financing arrangements and MII clause status

for the large and medium hub airports responding to the ACI-NA survey. MII clauses

are common at large and medium hub airports with residual or hybrid use and lease

agreements, and infrequent at airports with compensatory use and lease agreements.

The survey data also indicate comparatively infrequent use of MII powers to delay or

veto projects. The docket comments, however, reflect additional concerns by airports

that carriers can exercise MII clauses to stall projects that can enhance competition.

Subleasing

A sublease is a contractual arrangement between an airline tenant of an exclusively or

preferentially leased airport facility and an airline subtenant. Typically, a sublease

arrangement must receive airport approval; some airport leases will say that the

“approval shall not be unreasonably withheld.” Generally, subleases will be negotiated

by the tenant carrier and requesting airline, without airport management involvement.

Subleasing, when used and managed effectively, can be a significant tool for the

accommodation of new entrant airlines.

Some commenters criticized the nature of the airport sublease market as enabling

incumbent carriers to wield too much power over sublease terms and conditions so as

to artificially raise the price of entry and thwart the aims of airline deregulation.

Some new entrants have complained of a lack of assistance from airport management in

arranging competitive sublease terms and conditions; inconvenient, forced gate reassignments for subtenants; unfair sublease fee differentials at the same airport; and difficulty in negotiating with dominant incumbent airlines for subleased gates at desirable

times and at reasonable costs.

Many airports do not review sublease fees and conditions.31 Numerous large hub airports have no fixed limits on sublease fees, including:

• Cincinnati • John F. Kennedy • Orlando

• Charlotte • LaGuardia • St. Louis

• Chicago O'Hare • Las Vegas • San Diego

• Dallas/Ft. Worth • Los Angeles • Tampa

• Detroit • Newark

 

31As discussed in Chapter 2, results of the ACI-NA survey indicate that approximately one-third of the large hub

airports responding reported that they have not actively reviewed sublease fees and terms.
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Several airports (including Boston-Logan, Chicago, Dallas, Detroit, John F. Kennedy,

LaGuardia, Los Angeles, Newark, and San Diego) indicated, either in the ACI-NA survey or in comments to the docket, that although they have no set limit on sublease fees,

they nevertheless oversee terms to ensure that they are fair and reasonable.

Two large hub airports (Atlanta and Salt Lake City) reported that they limit sublease

fees to the rate charged the primary airline tenant. Five other large hub airports (Baltimore-Washington International, Reagan Washington National, San Francisco, Seattle,

and Washington Dulles) reported that their master use and lease agreements contained

specific limits on sublease fees, ranging from markups or administrative fees of 10 percent to 50 percent. At least three large hub airports (Boston-Logan, Miami, and Phoenix) reported that they do not currently allow sublease arrangements for gates.

Ground Handling

Ground handling includes the array of services necessary to maintain and operate the

airline, such as fueling, air conditioning, ground power, baggage handling, communications access, towing, catering, minor maintenance, and similar services. A typical

signatory airline handles itself, generally at a lower cost than it would pay to a fixed

base operator or a third-party contractor. A new entrant, however, may not have the

crew and facilities available at an airport to begin self-handling. If a new entrant

subleases gates from a signatory, the signatory may require the new entrant to use the

signatory for ground handling.

The ACI-NA survey responses indicate that aircraft handling and service for a new

entrant typically is provided by a fixed base operator, another airline, or the new

entrant itself (subject to the airport’s rules). The ACI-NA survey did not provide comparative information on ground handling service fees, terms, and conditions between

prime tenants/subtenants, fixed base operators, or others.

Some new entrants complain of requirements to use the prime airline tenant for ground

handling, rather than a more competitive option. The State of Minnesota Planning

Commission, in response to the 1998 pilots’ strike that idled Northwest Airlines, found

that sublessees are often required to use the leasing airline’s ground personnel and

suggested limiting this practice because it restricts competition.32

Some new entrants also claim that airport management does not oversee ground handling arrangements, leading to higher fees. Additionally, our case study at Denver

International Airport found that some new entrants complain about the airport’s prac-

 

32 Minnesota Planning, op. cit., p. 19.
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tice of requiring all carriers to purchase the “bundled” package of services. Some air

carriers claim that they are required to pay for services they do not use and to pay third

parties for services they can perform themselves.

CONTRACTUAL ARRANGEMENTS DO NOT

PRECLUDE REASONABLE ENTRY

Contractual arrangements between an airline and airport do not relieve the airport

operator of the responsibility to make reasonable efforts to accommodate new entrants

and carriers expanding their operations. The reasonable access, economic nondiscrimination, and non-exclusive provisions in the federal statutes and airport grant assurances

require the airport operator to assure reasonable access to the airport, regardless of the

existence of exclusive lease arrangements.

Statutory and grant assurance obligations typically are incorporated in the airport-air

carrier agreement. These agreements recognize the paramount nature of the federal law

over rights granted an airline. An airport-air carrier contractual arrangement, accordingly, may contain the following non-exclusivity condition:

“It is hereby specifically understood and agreed that nothing herein contained

shall be construed to grant or authorize the granting of an exclusive right to provide aeronautical services to the public as prohibited by Section 308(a) of the

Federal Aviation Act of 1958, as amended, [now 49 U.S.C. 40103(e)], and City

reserves the right to grant to others the privileges and right of conducting any

one or all activities of an aeronautical nature.” (Chicago-O’Hare lease agreement.)

A use and lease agreement alternatively may contain the following clause that acknowledges the paramount nature of the federal grant assurances:

“This agreement shall be subordinate to the provisions of any existing or future

agreement between Lessor and the United States relative to the operation or

maintenance of the Airport, the execution of which has been or may be required

as a condition precedent to the expenditure of Federal funds for the development

of the Airport.” (Detroit Metropolitan Wayne County Airport agreement.)

The statutory provisions and grant assurances obligate the airport manager to oversee

access to assure that the airport is operated for the benefit of the public and is available

for public use. While such contractual arrangements can clearly be factors influencing

air carrier access to an airport, airports cannot use them to cede control over the airport

facilities to tenant airlines. An operator of a federally assisted airport is bound by the
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grant assurances to reasonably accommodate qualified new entrants and carriers

expanding their operations, regardless of the airport’s contractual arrangements with

signatory carriers. When exclusive-use gates are the only option for a requesting airline, airport management is not required to divest the tenant carrier of the facilities in

use, or to void a flight. Rather, it is reasonable for airport management to determine the

gate usage of the tenant carrier and to try to fit the requesting airline in at times the tenant is not fully using a gate.

For a period following airline deregulation, the Department was in the forefront of

attempts to assure that airport operators provide access to new entrants, thereby widening the competitive benefits of deregulation. For example, in 1984, the Department

and FAA supported the efforts of Midway Airlines for immediate entry into

Westchester airport and were parties to Midway’s litigation against the County of

Westchester.33 FAA determined that some arrangements for accommodation of new

carriers generated by the advent of airline deregulation must be made if reasonably

possible, and that an airport may not deny access to a carrier solely based on the nonavailability of currently existing facilities. In 1989, FAA issued its Airport Compliance

Requirements, Order 5190.6A, interpreting the economic nondiscrimination assurance

as requiring reasonable access for new entrants. Until recently, however, the Department has not been pro-active in facilitating efforts by new entrants or in monitoring airports’ compliance with the reasonable access assurance.

Due to a number of factors, the pervasiveness of exclusive-use leases is declining in any

event. First, the bond market no longer requires long-term, exclusive-use leases as a

general matter for many commercial airports. In recent years, the bond market has

relied more on the strength of the underlying passenger base at the airport and local

economic conditions, partially due to reluctance by the rating agencies to depend too

heavily on guarantees by one dominant carrier. Second, some airport managers are

negotiating lease arrangements so as to avoid the potentially lengthy proceedings associated with the disposition of an unexpired exclusive-use gate leasehold of a bankrupt

carrier.34 Third, the utilization of the PFC program at many large and medium commercial hub airports has effectively facilitated the conversion of exclusive-use into preferential-use leases, potentially subject to greater airport control. Pending the outcome

of these factors, however, long-term, exclusive-use leases will represent a significant

presence at airports, requiring active management to ensure reasonable access.

 

33Midway Airlines, Inc. v. County of Westchester, 584 F. Supp. 436 (S.D.N.Y. 1984).

34The unexpired leasehold of an exclusive-use, long-term gate lease is subject to the Bankruptcy Code processes,

including the assumption or assignment of a bankrupt carrier’s airport gates and the timing of those activities. 11

U.S.C. 365.
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The airport operator also may not unreasonably withhold tenant status from an air

carrier that assumes obligations substantially similar to those already imposed on

tenant airlines.35 With regard to subleasing arrangements, airport management is

obligated to assure nondiscriminatory and reasonable access. It may do so by

overseeing fees, locations, and time-of-day arrangements. For a new entrant to be

treated reasonably and fairly, airport management may intercede or monitor subleasing

arrangements and take a more pro-active role to encouraging new entrant access.

Moreover, airport management is required to see that ground-handling arrangements

do not hinder the ability of a new entrant, non-signatory carrier to be competitive. Fees,

terms, and conditions for ground-handling should be reasonable and non-discriminatory. Reasonable safety standards may be imposed on ground-handling arrangements.36

With regard to MIIs, there is some evidence to suggest that such clauses can give signatory carriers the ability to block capacity expansion, force a delay in capital improvements, or demand design changes, with the goal of impeding entry and expanding their

own facilities. Information from the docket and the ACI-NA survey suggest that, at

some airports, incumbent carriers have threatened to invoke or have exercised MII provisions to block entry.

On the other hand, airports often agree to MII clauses in connection with commitments

from airlines to long-term leases on a residual financing arrangement. These clauses

protect airline signatories from incurring significant rate increases the airlines had not

anticipated when they agreed to guarantee certain of the airport's financing and costs.

The Air Transport Association commented that MII clauses give the carriers that "must

fund projects an important check on extravagant or unnecessary spending." A number

of airports, including Tucson and Nashville, believe the cooperative relationship fostered by the MII facilitates airport improvements.37 Orlando commented that the MII

provision has required it to "present a persuasive financial case" to the signatory airlines

and to obtain commitments to lease a substantial portion of the space to be constructed.

 

3549 U.S.C. 47107(a).

36FAA Order 5190.6A, ¶3-9e(3).

37Airports without MII clauses also describe how they negotiate expansion of the facilities with signatory carriers.

Phoenix, for example, stated that it negotiates rate adjustments with the airlines "to promote good business

relationships." Boston-Logan reported that it is cognizant of the effects of airport fees on airline costs and tries to

keep costs within a certain range. While dialogues with major carriers may be beneficial to avoid rates and charges

disputes, these consultations should not be used as methods to constrain an airport’s ability to facilitate entry by

potential competitors.
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CHAPTER 4: USING PASSENGER FACILITY CHARGES

 TO ENHANCE COMPETITION

Collectively, the statutory and regulatory provisions embodied in the Passenger Facility

Charge (PFC) Program empower public agencies to use PFCs to enhance competition.

The PFC Program, which is codified in Title 49 United States Code, section 40117, supplements the Airport Improvement Program (AIP) by providing an additional source of

financing for the needs of commercial service airports through an airport charge per

passenger of $1, $2, or $3 per trip segment, up to a maximum of two segments per oneway trip and four segments per round trip. Air carriers collect and remit the fees

directly to an eligible public agency authorized by FAA in accordance with statutory

and regulatory requirements.

The PFC statute and implementing regulations (14 CFR Part 158) require that PFC

revenues be used to finance eligible airport-related projects that accomplish one or more

of the following objectives: preserve or enhance safety, capacity, or security of the

national air transportation system; reduce noise or mitigate noise impacts resulting

from an airport that is part of such system; or furnish opportunities for enhanced

competition between or among air carriers (Part 158, section15(a)). FAA must also find

that the projects are adequately justified.

The PFC statute and regulations provide that a "public agency" that controls a commercial service airport may submit an application to fund a specific project with PFC revenues. A public agency may be a state or any agency of one or more states, a municipality or other political subdivision of a state, an authority created by federal, state, or local

law, a tax supported organization, or an Indian tribe or pueblo. The sponsor of an

airport participating in the Pilot Program for Private Ownership of Airports (49 U.S.C

47134) may also submit a PFC application.

FAA’s role in the project selection process is to approve or disapprove the projects

submitted. FAA may only deny a public agency the authority to impose and use a PFC

for a project if one or more of the following conditions apply to the project: it is not

eligible for PFC funding as set forth in statutory and regulatory eligibility criteria; it

does not meet at least one of the PFC objectives (of which enhancing competition is

one); it is not justified adequately; or it does not conform to other applicable regulatory

requirements as referenced in Part 158 (e.g., environmental requirements, specified

implementation schedules). Unless FAA can demonstrate that one of the above conditions
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for denial exists, it is compelled by statute to approve the particular project for PFC

funding within 120 days of receipt of the PFC application.

Our review of the PFC Program found that: (1) it can be a useful tool for increasing airline competition; (2) existing data, while supporting the valuable contribution PFCs

have made to funding critical airport infrastructure and capacity projects, provide only

limited information regarding how PFC-financed projects have enhanced competition;

and (3) additional actions are needed to better understand how the Program enhances

competition.

PFCs: A POTENTIALLY SIGNIFICANT

TOOL FOR INCREASING COMPETITION

Airports can use PFCs to enhance safety, security, capacity, noise, and competition.

Congress clearly understood that PFCs could be important for enhancing competition at

airports. During congressional hearings leading to passage of the PFC statute, statements by the Secretary of Transportation and others frequently referred to the competitive benefits of PFCs. For instance, GAO testified that PFCs would shift more control

over airport expansion decisions from airlines back to airports by reducing airports'

need for airline approval of capital projects. Further, a PFC would be especially useful

at airports where one or two airlines control most of the traffic or most of the gates and

other essential facilities through restrictive leases.

1

In addition to specifying the enhancement of airline competition as one of the principal

qualifying PFC objectives, Congress incorporated into the PFC legislation a number of

provisions that were intended to make the PFC Program effective for funding procompetitive projects. The PFC regulations also emphasized the intended role of PFCs to

promote competition.

Statutory Provision

By permitting up to a $3 per enplanement charge, the statute enables public agencies to

receive large annual revenue streams sufficient to undertake major infrastructure projects (§40117(b)(1)). This is particularly true for large and medium hub airports where

access to airport facilities is most often a problem for new entrant air carriers. Ninetyone percent of the $1.44 billion in PFC revenues collected nationally in 1998 accrued to

large and medium hub airports.

 

1

Airline Competition: Passenger Facility Charges Represent a New Financing Source for Airports, (GAO/RCED91-39), Dec. 13, 1990, p. 2.
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The PFC statute clearly establishes that no contractual relationship between an airport

and its airlines may be used to block an airport from pursuing a PFC project. In particular, the statute prohibits the following practices that might restrict the use of PFCs to

enhance competition:

• Airport-air carrier contracts that would impair the authority of the public agency

to impose a PFC or to use PFC revenues for a project permitted by the statute

(§40117(f)(1));

• An exclusive long-term lease or use agreement for any PFC-financed project

(§40117(f)(2));

• Any lease or use agreements for a PFC-financed project that would restrict the

public agency’s ability to finance, develop, or assign new capacity at the airport

with PFC revenue (§40117(f)(3)).

Consequently, no air carrier can block a PFC-financed project that will result in adverse

competitive effects to it, even if an MII agreement applies to the use of other airport

revenues.

In establishing the PFC Program, Congress expanded PFC project eligibility beyond the

statutory limits of eligibility for AIP grants to facilitate the funding of infrastructure

projects essential to enhancing airline competition at airports.

• PFCs may be used to fund a broader range of terminal projects than can AIP,

including leased gates and other areas related to passenger movements (49 USC

§40117(a) (3)(E)). Federal assistance, in the form of AIP entitlement grants, may

be used to build some common-use terminal facilities (public-use areas associated with baggage claim delivery; automated baggage handling equipment;

holding areas; and loading bridges) at large and medium hub airports, but airline

ticketing areas and gates, including passenger check-in, are not eligible for AIP

funding at these airports because they are considered revenue generating facilities (Airport Improvement Program Handbook, Order 5100.38A, para. 551 (1989)).

An important source of funding for large capital projects -- AIP discretionary

grants -- may not be awarded for terminal improvements at large and medium

hub airports.

• PFCs may be used to pay the debt-service costs of airport projects, thus permitting major infrastructure projects to be built more expeditiously (§40117(b)(1)).

Except in a limited number of projects under a trial innovative finance program,

AIP grants may not be used to pay the interest costs of airport projects.
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• PFCs are permanently authorized and are not subject to congressional re-appropriation. Moreover, because PFCs are earned from passenger enplanements, the

revenues generated are generally subject to predictable and rising levels from

year to year.

Regulatory Provisions

Use of PFC revenue obligates an airport to conform to the various regulatory assurances

of the PFC Program, which are intended to implement the statute's prohibition on longterm, exclusive-use lease agreements (§40117(f)(2)). These assurances are listed in

appendix A of Part 158.

• Assurance 5: Non-exclusivity of contractual agreements. The public agency will

not enter into an exclusive long-term lease or use agreement with an air carrier

for projects funded by PFC revenue. “Long-term” is defined by the regulation to

be five years or more (Part 158.3). Long-term, preferential-use leases are permitted, provided that the terms of such leases truly are preferential and not de facto

exclusive.

• Assurance 6: No carryover provisions. The public agency will not enter into any

lease or use agreement with an air carrier for a PFC-funded facility if the agreement contains a carryover provision. A carryover provision is a renewal option

which, upon expiration of the original lease, would operate to automatically

extend the term of the agreement with the carrier in preference to any potentially

competing air carrier seeking to negotiate a lease or use agreement for such facility. This assurance guarantees that a “short-term,” exclusive-use lease does not

become a de facto long-term, exclusive-use lease.

• Assurance 7: Sharing of underused/exclusive-use facilities. Any lease or use

agreements between the public agency and an air carrier for a PFC-funded facility will contain a provision that permits the public agency to terminate the lease

or use agreement if (1) the air carrier has an exclusive lease or use agreement for

existing facilities at the airport, and (2) any portion of its existing exclusive-use

facilities is not fully utilized and is not made available for use by potentially

competing air carriers. In effect, this assurance gives airport managers substantially greater control over any exclusive-use facilities at their airports.

In addition, Part 158, section 25(b)(7) requires a public agency, in its justification for a

terminal development project, to discuss any existing conditions that limit competition

between or among air carriers at the airport, any initiative it proposes to foster opportunities for enhanced competition, and the expected results of such initiatives.
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Case Studies and ACI Survey Illustrate

Statutory and Regulatory Tools in Use

Our case studies at Denver, Baltimore, and Detroit airports illustrate how these statutory and regulatory provisions have been used to support competition. At Denver

International Airport, we found that because PFCs helped to finance the airport, no

gates or other facilities have been leased to air carriers for exclusive use. Baltimore/Washington International Airport used PFCs to build or refurbish 22 gates, several of which have been leased to Southwest Airlines, a low-fare carrier.

Detroit Metropolitan Wayne County Airport (DTW) is a large hub airport serving the

Detroit-Ann Arbor metropolitan area. In 1997, the largest carrier at DTW, Northwest

Airlines and its partner Mesaba, had a market share of 80 percent, up from 76 percent in

1992. Six domestic gates were recently built and funded with PFCs and are leased on a

preferential-use basis to Northwest. Because Northwest has leased the six gates built

with PFCs at DTW, the County has been able to take advantage of the provisions in PFC

Assurance 7 that require the leasing air carrier to share its underused exclusive-use

space. Backed by the requirements of Assurance 7, the County successfully encouraged

Northwest to share two underutilized exclusive-use gates with a low-fare carrier. In

addition, the County has undertaken a major PFC-financed terminal building construction and rehabilitation program that will facilitate the elimination of exclusive-use

leases at DTW.

The ACI-NA survey responses showed that airport managers’ control of terminal or

other facilities has increased, in part because the PFC funding option allowed them to

increase airport capacity, especially gates and terminal facilities. PFCs have also

allowed them to overcome the resistance of incumbent carriers and the MII provisions

in their airport/airline agreements. Airport officials also noted the competitive benefits

of the PFC Program:

• Dulles International: A major terminal-expansion project was facilitated by PFC

funding. “Without the PFC option, incumbents would have blocked expansion.”

• Dallas/Forth Worth International: The Airport pointed to the need for a stable

and adequate funding source to ensure it could build needed infrastructure.

“Undoubtedly, the Passenger Facility Charge represents the most viable funding

mechanism to meet its needs.”

• Los Angeles and Ontario International Airports: These airports specifically

pointed to PFC funding as greatly aiding in the development of reliever capacity.
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• Baltimore/Washington International and Colorado Springs Municipal: Both airports credited the PFC Program for allowing the airport to respond to terminal

needs. In both cases, the expansions accommodated low-fare market entrants.

PFC FUNDING HAS CONTRIBUTED TO

OVERALL AIRPORT FUNDING, BUT ITS

COMPETITIVE IMPACT IS UNCLEAR

Existing data support the valuable contribution the PFC Program has made to overall

funding for airport improvement, but provide only limited information on how PFCfunded projects have furnished opportunities for enhanced competition. It has been

approximately seven years since the first PFC application was approved in 1992. Since

1992, when $85 million in PFCs were collected, annual PFC collections at the Nation's

airports grew rapidly to $1 billion in 1995 and to $1.44 billion by 1998. As of April 30,

1998, FAA had approved a total of approximately 3,900 PFC projects with a total value

of $18.9 billion. By January 1999, approved funding had reached $23 billion. Actual

PFC collections realized by airports during the period 1992-1998 were $6.2 billion.

Table 4.1 shows how projects approved through April 30, 1998, were distributed among

major project categories.

Table 4.1

PFC Projects by Major Category (as of April 30, 1998)

CATEGORY $ Billions

Terminal Projects*

Airside Projects

Access Road/Rail

New Denver Airport

Project Financing Costs**

Noise Mitigation

Land for Development

Security

$ 6.9

 3.3

 2.5

 2.3

 2.3

 1.2

 0.4

 0.1

 Total $18.9

*Includes $2.2 billion in PFC funds used for interest.

**Excludes terminal project financing.

Note: Total does not add due to rounding.

Source: FAA data.

• Airside projects typically involve capacity and safety-related facilities that have a

positive effect on all carriers because they permit improved aircraft movements.

Among many important airfield projects funded in part under the PFC Program

are new airports at Denver and Austin and new runways at Seattle-Tacoma

International, Phoenix Sky Harbor, Indianapolis International, Philadelphia

International, Dallas/Ft. Worth International, and Kent County International.
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• Access road and rail projects involve general access by passengers and employees to airports, and, as such, benefit patrons of all airlines serving an airport.

Important airport access projects being funded with PFCs include the Light Rail

System to John F. Kennedy International Airport, the monorail system at Newark

International, the Airport MAX light rail connection to Portland International

Airport, and numerous airport access road projects.

• Project financing costs associated with non-terminal projects. The financing costs

of terminal projects are included directly in that category of Table 4.1.

• Noise mitigation projects typically make airports more compatible with surrounding communities. At Los Angeles International, Chicago O’Hare International, Lambert-St. Louis International, Louisville International, Boston-Logan,

Cleveland-Hopkins International, Milwaukee-General Mitchell International,

Cincinnati-North Kentucky, and other airports, PFCs are funding important

noise mitigation programs.

• Land for development projects typically involving land acquisition for airside

development. Among numerous land acquisitions funded with PFCs are those

at Tampa International, Ft. Lauderdale, Southwest Florida International, and

Memphis International Airports.

• Security projects address issues with few direct competitive impacts. In some

instances, however, inadequate security systems can impede the ability of an airport to accommodate new air carriers or expanded operations by existing air carriers. A good example of the flexibility of PFC funding for security projects is the

recent PFC decision for Chicago O’Hare International. PFC funding was

approved for explosive blast mitigation, airside fencing, acquisition of security

and fire equipment, security checkpoint equipment, portions of a police facility,

and a perimeter intrusion-detection system.

Although all of the project categories listed in Table 4.1 could have some effect on competition, terminal projects are most likely to provide facilities needed for competitive

entry or expansion. In contrast to airfield or access roads, terminal facilities are often

leased to particular carriers and are not available as common-use facilities. In drafting

the PFC statute, Congress acknowledged the role of terminal facilities in promoting

competition by expanding PFC eligibility to gates and related areas and by precluding

the leasing of PFC-funded facilities to air carriers on a long-term, exclusive-use basis.

To determine whether PFC-funded terminal projects have had a positive competitive

impact, Task Force members reviewed all 531 terminal projects, totaling $6.9 billion
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(including $2.3 billion of interest). Of these 531 terminal projects, 314 ($800 million)

were excluded from further analysis because they focused on: (1) compliance with the

Americans with Disabilities Act or other federal mandates, and thus were intended to

achieve other important public policy objectives; (2) renovations to utilities or common

structures such as roofs and restrooms; and (3) improvements to common systems (e.g.,

public address systems) that did not have a direct link to enhanced competitive

opportunities for air carriers.

The remaining 217 terminal projects have a total PFC-financed value of $3.8 billion in

direct project costs, and $2.2 billion of interest, for a total of $6.0 billion. These projects,

summarized in Table 4.2, comprised approximately 32 percent of PFC approvals

through April 1998 (in terms of dollars of PFC commitments).

Table 4.2

PFC Projects at Terminals ($ Mil.)

Airport Hub

Classification

(airports represented)

Number of PFC

Approved

Projects

Capital

Value Interest Total

Large Hubs (18) 47 $2,356.7 $1,600.2 $3,956.9

Medium Hubs (22) 53 $982.1 $466.3 $1,448.4

Small Hubs (26) 35 $364.1 $127.1 $491.2

Non-Hubs and

Commercial Service (70) 82 $116.6 $27.8 $144.3

Grand Total (136) 217 $3,819.4 $2,221.4 $6,040.8

Source: Review of FAA PFC database—projects through 4/30/98.

Having developed a subset of 217 projects that potentially could have a direct impact on

airline competition, we were unable to determine from our review of the applications

submitted or the existing PFC database whether there were any direct competitive

effects. We were unable to quantify the number of gates, loading bridges, ticket counters, or other facilities that were constructed. We were also unable to determine whether

facilities that were constructed supported incumbent carrier growth, new entrants, or

competitive access. The reasons for this are:

• FAA’s current databases do not track the specific numbers of gates, loading

bridges, hold rooms, baggage carousels, and other terminal facilities that have

been constructed to date and financed in whole or in part with PFCs. Moreover,

these databases have no current capability to track the effect of PFC funding on
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net gates available (PFC and non-PFC) at an airport, or the effect of PFCs on

exclusive-use gate lease arrangements.

• Comments submitted by airports to the docket for this study, as well as comments formerly submitted to GAO during studies it has undertaken on airline

competitive issues, reveal that only a few airport managers view inadequate

facilities at their airports as imposing a barrier to air carrier competition. Accordingly, the role of new terminal facilities in enhancing airline competition has not

been emphasized by most airports in their PFC applications.

• To some extent, interpretations by airport managers as to what constitutes

“competitive enhancements” are subjective. Thirty-two of the airports that participated in the ACI-NA survey responded that PFCs helped to fund projects that

enhanced airline competition. While terminal projects were frequently identified, some parties expressed the view that airfield and airport-access projects

were beneficial to competition, too. Unfortunately, the range of opinions offered

by respondents -- everything from adding gates to the expansion of taxiways and

ramps -- made it impossible to quantify, or even accurately represent, the full

effect of PFC-financed projects on airline competition.

• Gates and terminal facilities typically take several years to plan and construct.

The competitive impacts of some large scale terminal projects, such as at Detroit

Metropolitan or Phoenix, will not be known until the facilities are operational.

• Data are not available to gauge the competitive effects of PFC terminal projects

intended for incumbent carriers. Based on data from the ACI-NA survey

(despite some limitations), it is clear that most new terminal facilities financed

with PFCs have been allocated to incumbent airlines. However, what the

available data do not show is whether some pro-competitive benefits, such as

freeing up non-PFC gates for new entrants or allowing airports to eliminate some

of their exclusive-use gate lease agreements with incumbent airlines, may have

occurred.

PFC Funding at Key Gate Constrained Airports

In March 1999, GAO issued a report, Airline Deregulation: Changes in Airfares, Service

Quality, and Barriers to Entry. GAO noted that it had previously identified six important

Airports -- Charlotte, Cincinnati, Detroit, Minneapolis, Newark, and Pittsburgh -- where

new entrant (post-deregulation) airlines reported problems in gaining access to gates.

As of 1999, GAO found little change in competitive conditions at these airports.
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GAO noted in particular that most gates at these airports are leased to airlines on a

long-term, exclusive-use basis, usually to one dominant airline. Table 4.3 shows that

the majority of gates at most of these airports are leased to one established airline.

According to GAO, even when gates were available, few non-incumbent airlines

expressed interest in serving these airports because access remains difficult, and other

factors, generally relating to the size of the incumbent carrier and its associated market

strength, have discouraged them from entering these markets.

Table 4.3

Airports Where Post-Deregulation Airlines Reported Difficulty Gaining Competitive

Access to Gates and the Leasing Arrangements at those Airports

Airport

Total

Number of

Jet Gates

Gates under

Exclusive-Use

Leases

Major Lease Holders, Number of

Gates Operated, and

Date Lease Expires

Charlotte 46 44 37 gates leased to US Airways until 2016.

Cincinnati 68 68 50 gates leased to Delta; 8 of the leases expire

in 2015 and 42 expire in 2023.

Detroit 87 75 56 gates leased to Northwest until 2001.

Minneapolis 70 70 54 gates leased to Northwest; 22 of the leases

expire in 2015 and 32 convert to preferential use

leases beginning in 1999.

Newark 94 79 42 gates leased to Continental until 2008.

Pittsburgh 75 65 50 gates leased to US Airways until 2015.

Source: GAO's presentation of the airports' data. Gate data for DTW has been updated based on interviews with the airport

manager.

Two of the six gate-constrained airports -- Pittsburgh and Charlotte -- identified by

GAO have never imposed a PFC. In the course of our case study interviews, we were

told by airport officials at these airports that they have not imposed PFCs because other

funding sources have been available. Other concerns, such as competition from other

airports and a perception that PFCs are a “tax,” were also cited as reasons why PFCs

have not been imposed.

The Port Authority of New York and New Jersey has committed all of its PFC funding

at Newark International Airport (estimated at $631million through the year 2008) to

projects to provide rail-ground access to Newark and John F. Kennedy International

Airports. In its comments, the Port Authority stated that “ground-access projects are

critical to both the capacity and competitiveness of the New York region’s airports.”

Cincinnati-Northern Kentucky International Airport (CVG) is the most concentrated

hub airport in the United States, with Delta and Delta Connection-Comair accounting

for 94 percent of enplanements. The Airport has been approved for $177 million in PFC
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collection authority, extending through May 2000. Most of the funds will be allocated

to airfield projects and noise-mitigation projects; none of the money has been allocated

to terminal-enhancement projects.

Minneapolis-St. Paul International Airport (MSP) has used PFC funds for two major

terminal projects: $36 million in PFC revenues to fund a Federal Inspection Services

facility and $43 million in PFCs to build a Ground Transportation Center. Neither

project resulted in a greater number of gates at the airport. MSP recently submitted a

PFC application to help finance a replacement terminal from which the scheduled

operations of Sun Country Airlines will be accommodated.

Detroit Metropolitan Wayne County Airport (DTW) has initiated the most aggressive

terminal building project of the six gate-constrained airports identified by GAO. Six

domestic gates were recently built and funded with PFCs; they have been leased on a

preferential-use basis. The County is also funding a major $2 billion terminal expansion

and modernization program. The great majority of this funding is from PFC collections.

Construction has begun on a new Midfield Terminal passenger complex, and existing

terminal space will be renovated and improved. Northwest Airlines and its code-share

partners will be the occupants and principal beneficiaries of the Midfield Terminal,

although the County is committed to meeting the terminal space requirements of all

airport tenants through renovations and modifications to the three existing terminals.

Once the initial phase of the planned new terminal construction plan is completed

(2001), DTW will have a complement of at least 106 jet gates, for a net gain of 19 jet

gates. Moreover, unlike the current situation at DTW, airport officials will then be able

to add new gates to accommodate future demand.

County officials emphasize that their use of PFC financing has facilitated the objective

of acquiring greater management control over terminal facilities. The use of PFC funding to build and renovate terminal facilities precludes any exclusive-use leases for these

facilities, strongly supporting the County’s goal of converting existing exclusive-use

leases to preferential-use agreements. Once the building program is completed, the

County expects that there will be no exclusive-use leases for terminal facilities at DTW.

PFC Decisions Marked by Controversy

Over Competitive Effects

The PFC statute and regulatory program require that all air carriers serving an airport

be given the opportunity to comment on -- but not veto -- proposed PFC projects prior

to the submission of the application to FAA. Moreover, a public comment period, during which any interested party can submit comments to the docket, is required after an

application is submitted to FAA. The forums provided by these processes are invaluable for the identification of either the possible failure of a project to address competi-
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tive problems at an airport, or, in some cases, the possible anti-competitive effects of a

proposed project. When anti-competitive effects have been suggested by opponents of

certain terminal projects, FAA has investigated such charges prior to approving PFC

application for all or part of the project.

Our review of the 217 PFC terminal projects cited in Table 4.2 that potentially could

have a direct impact on competition revealed only 12 projects with a value of over $5

million each in which competitive issues were raised by air carriers or others during the

PFC approval process. These 12 projects are summarized in Table 4.4 on the next page.

FAA was able to resolve the issues identified in Table 4.4. The agency investigated all

assertions pertaining to exclusive-use leases and, when they did not conform to the PFC

assurances, required them to be modified. In one instance a lease could not be modified, and FAA subsequently approached the airport operator to amend its proposed

PFC funding for certain terminal facilities.

In a few instances, FAA did not agree with the assertions made against the projects. In

other cases, certain parties objected to funding air cargo, general aviation, or international projects. The use of PFC funds for cargo or international facilities is permitted by

statute and regulation, even if the use of PFC funds for projects that benefit certain parties is disproportionate to the PFC funds paid by those parties (cargo and general aviation operators do not collect PFCs). Application of PFC funds by a public agency to

noise or capacity projects, in preference to other PFC objectives, such as enhancing airline competition, is also permitted by statute and regulation. However, FAA has not

permitted a project to proceed by satisfying one PFC objective if that project would

obstruct any other PFC objective, including enhancing airline competition.

STEPS NEEDED TO BETTER UNDERSTAND

THE COMPETITIVE BENEFITS OF

PFC-FUNDED PROJECTS

Our review of the PFC Program and its application shows that PFC statutory and regulatory requirements are largely in place to enhance air carrier competition. However, it

is also clear that additional steps are needed to fully realize the competitive benefits of

PFC-funded projects.
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Table 4.4

Summary of Comments on Competitive Effects -- PFC Dockets

City and State Summary of Comments on Competitive Effects

Boston Logan

($434.1 million)

Carriers certified disagreement with the project because they believed that the

project, which serves 15% of BOS passengers, received a disproportionate

allocation of PFC funding.

Chicago O’Hare

 ($546.5 million)

The Suburban O’Hare Commission suggested that the PFC application failed to

discuss or disclose the impact of the ORD PFC Program on the existing

“Fortress Hub” problem at ORD.

Dallas/Ft. Worth

($84.3 million)

Most carriers certified disagreement with the TRAAM rail station construction.

They claimed that the new station is essentially a long-term, exclusive-use

capital improvement for one carrier, in violation of Part 158 assurances.

Detroit Metro

($1,576.3 million)

Carriers certified disagreement with the Midfield Terminal. They asserted that

while the County’s use agreement for the new terminal is described as

“preferential,” the terminal, in reality, will be a long-term, exclusive-use facility, in

violation of the Part 158 assurances.

Ft. Lauderdale

($2 million)

An airline certified disagreement with the West Side Apron project. It argued that

PFCs should not be used to fund improvements for the cargo carriers or other

tenants that do not participate in the PFC Program, which is based on fees paid

by passengers.

Miami

($42 million)

Numerous airlines certified disagreement with Concourse A expansion phase II

and Concourse A phase II aprons and utilities. These carriers argued that these

projects will create a competitive advantage to one carrier at Miami, violating the

PFC requirement that it furnish opportunities for enhanced competition.

Miami

($232.1 million)

One carrier certified disagreement with all projects, concluding that they are all

associated with or as a result of the “Super A” terminal (see above).

New Orleans

($19.5 million)

Carriers certified disagreement primarily because a number of the specific

improvements provided benefits to general aviation and cargo airlines, which do

not contribute to the PFC funding base.

Orlando

($156.3 million)

Carriers disagreed with the International Terminal and Airside 1 projects. They

disapproved of the projects’ scope and the fact that the projects, which benefit

international passengers, account for use of over 70% of PFC revenue

generated while international traffic accounts for 10% of PFC revenue collected.

Carriers disagreed with the West Ramp Rehabilitation project, because it

benefits cargo and non-passenger carriers.

Philadelphia

($666.1 million)

While there were no Federal Register comments on this PFC application, FAA,

on its own initiative, requested and obtained modifications to the terminal lease

agreements, based on the “competitive access” PFC assurances (5, 6, and 7).

Lambert-St .Louis

($43.7 million)

Most carriers disagreed with the East Terminal Expansion project. Several

carriers questioned the use of PFC revenue in lieu of “traditional or conventional”

funding methods for this project. Others disagreed with the project because they

believe that the expanded terminal will be leased exclusively to one carrier in

violation of the PFC regulations.

Lambert-St.

Louis

($14.6 million)

One carrier questioned whether a supposed exclusive-use lease to one air

carrier is in violation of the PFC regulation. Additionally, airlines certified

disagreement with the Terminal B and C Connector and a Federal Inspection

Service Vertical Transportation project because they believed the projects to be

for the exclusive use of one air carrier.

Source: Review of FAA Records of Decision.
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Improved Public Information on Competition Initiative

FAA’s PFC database contains a comprehensive listing of every project evaluated by the

agency for PFC funding, including approved PFC amounts, project type and objectives,

and authorized collection periods. This database has been evaluated by GAO, and was

found to have a high degree of reliability (Passenger Facility Charges: Program Implementation and the Potential Effects of Proposed Changes, GAO/RCED-00-138, May 1999). However, the database does not contain sufficiently detailed information to answer certain

fundamental questions about the role of PFCs in enhancing airline competition. For

example, it does not contain information on the specific number of terminal gates, ticket

counters, and baggage carousels being built or renovated with PFC revenues at each

airport or the net increase in such facilities (PFC and non-PFC) that will result at the

airport. In addition, FAA’s database lacks detailed information on the specific carriers

or types of carriers to which these facilities are or will be leased and the specific terms

that apply (except, of course, to preclude long-term, exclusive-use leases).

Even though benefits to competition cannot be measured simply by a count of PFC

gates, or even net gate increases, the availability of such data can serve to illustrate

where particular needs of new entrants are, or are not, being addressed with PFCs.

Increased Attention to Existing Conditions

That Limit Competition

As justification for a terminal development project, regulations require that a public

agency discuss any conditions that limit competition between or among air carriers at

the airport, any initiatives it proposes to foster opportunities for enhanced competition,

and the expected results of such initiatives. FAA has consistently required that public

agencies respond fully to any air carrier or public assertions that a project -- terminal or

otherwise -- is anti-competitive. However, public agencies have submitted only minimal information in their PFC applications for terminal-development projects concerning

conditions that limit competition among air carriers, except insofar as the proposed PFC

project affects or is intended to correct such limitations. One reason for this lack of

affirmative response to Part 158, section 25(b)(7), appears to be that few public agencies

believe there are conditions under their control that limit airline competition at their

airports. The lack of barriers to competition attributable to airport infrastructure was

commonly expressed by public agencies in their comments to the public docket for this

study.

FAA has not challenged the lack of descriptive material on conditions that limit competition, in part because the regulation does not require PFCs be used to address such

conditions on a priority basis. However, by not emphasizing this requirement, an
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opportunity to focus public agency attention on competition-enhancing projects is not

being utilized.

FAA has been reviewing PFC applications submitted by public agencies since 1992.

Prior to 1996, when applications for several large PFC terminal projects were submitted,

the agency relied on comments from the public and affected air carriers to reveal any

adverse competitive consequences of terminal projects submitted for PFC funding.

Since 1996, FAA has increasingly queried public agencies for information on terminal

lease arrangements to verify that particular assurances are being met prior to granting

approval for PFC funding of terminal facilities. But FAA has not required public agencies to review their lease arrangements for PFC-funded facilities to ensure that all relevant provisions are consistent with existing regulatory requirements, particularly

Assurance 7. Improved oversight by FAA of all relevant information about actual and

proposed lease arrangements would promote the use of these assurances for pro-competitive purposes.

Education on the Pro-Competitive

Role of PFC Assurances

Interviews with airport managers at the case study airports, as well as the operational

experience of FAA-PFC program office, revealed that some public agencies are unaware

of all the ways PFCs may enhance competition. Most, if not all, airport managers

understand that PFCs constitute a substantial, independent, and flexible source of funds

for capital projects. Moreover, virtually all are aware that PFC-funded facilities cannot

be leased to an air carrier on a long-term, exclusive-use basis. However, in some cases,

it did not appear that airport managers were aware of the full range of competitive

benefits associated with Assurances 5, 6, and 7. Assurance 7, in particular, requires that

an air carrier that leases PFC-funded terminal space must either fully use its own, nonPFC-funded exclusive-use terminal space, or make that space available to other air carriers if they require it. As such, even where PFCs are used to meet the terminal space

needs of incumbent carriers, the ability of the airport to accommodate entry is

enhanced. Greater education about PFC assurances may encourage public agencies to

make greater use of PFCs to fund terminal projects. In addition, more aggressive implementation of the PFC assurances would give airport managers an improved ability to

accommodate new airline entry with existing terminal facilities.

Promote PFCs as an Independent

Source of Revenue

The airport case studies, comments to the public docket, ACI-NA airport survey, and

project-level information available to DOT confirm that the ability to impose PFCs has
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augmented the “leverage” of public agencies in their discussions with airlines regarding

proposed projects. Under the PFC statute and regulation, air carriers may comment on,

but not veto, the use of PFCs for airport development purposes, unlike the use of airport revenue under an MII agreement.

Nevertheless, our case studies at Pittsburgh, Charlotte, and Houston suggest that air

carriers may still be able to influence how public agencies use PFCs to promote airport

access. One of these public agencies stated that the opposition of its dominant air carriers influences its decision not to seek PFC authority. Another public agency cited concern that imposing a PFC would hurt its standing relative to other traffic hubs, suggesting that it is concerned about the potential response of its dominant air carrier if it

imposed a PFC. Each public agency also cited other reasons, including local opposition

to new taxes, as to why it had not imposed a PFC.

It also appears that at some large hub airports, air carriers may be able to influence the

use of PFCs for some projects by conditioning their MII approval of other projects that

are not PFC funded. An official interviewed stated that the airport’s MII carriers

asserted their airfield MII rights to direct PFC funds to where they want them. Finally,

the need to debt finance certain large projects may require that a public agency obtain

air carrier approval to pledge other airport revenues as a backup to a potential shortfall

in PFC revenues. FAA has already taken steps to enhance the viability of PFC standalone debt financing so as to minimize the need for air carrier approval.
Airport Business Practices and Their Impact

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October 1999

CHAPTER 5: AIRPORT MANAGEMENT PRACTICES

 AND SUCCESSFUL AIRLINE ENTRY

This chapter draws upon the results of the case study interviews conducted by the Task

Force and the comments filed by airport officials in the public docket that was opened

by the Department to gather information for this study. As discussed in Chapter 1, 13

airports were selected for in-depth study. The principal reason for undertaking our

case studies was to gain a better understanding of how current airport business practices affect airline competition and whether different practices would promote airline

competition.

Airport business practices do affect airline competition, and some airport officials are

adopting new business practices to promote airline competition in their communities.

Indeed, a pro-competitive management philosophy, an interest by community leaders

in promoting airline competition, and a commitment by airport officials to use the tools

available to assist new entrant and smaller air carriers can result in a more competitive

airline marketplace and generate substantial benefits for the public.

AIRPORT MANAGERS PLAY A CRITICAL

ROLE IN THE SUCCESS OR FAILURE

OF AIR CARRIERS

In the course of our case study interviews, it became clear that many airport managers

desire greater control over gates and other facilities at their airports. As explained in

Chapter 3, however, at some airports tenant air carriers and airport officials have

entered into long-term contractual relationships that in the view of airport officials

restrict their ability to reallocate gates or to adopt other policies that would make it

easier for air carriers to begin operating at their airports. Even when such agreements

are in effect, however, some airport officials have established new business practices

and have adopted innovative policies to encourage entry.

Every airport official interviewed for this study stated that no air carrier that wished to

serve his or her airport had been denied access. But during the interviews it also

became apparent that some airport officials are more comfortable adopting a “let-thecarriers-work-it-out” approach to new entry than they would be serving as “ombudsmen for competition.” There is, in short, a significant difference in management philosophy among airport officials as to how actively they should encourage air carriers to

operate at their airports and what actions they are prepared to take to make entry a reality.
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The commitment of airport managers to promoting competition at their airports can be

critical to the success or failure of new entrant air carriers.

To ensure that all air carriers that want to serve an airport have reasonable access to

gates, facilities, and ancillary services on reasonable terms, airport officials must use all

the policy tools at their disposal. Airport officials at Salt Lake City, for example, have

been willing to establish business practices that have increased airline competition in

their community:

“The [Salt Lake City International] Airport has followed a general policy of

encouraging strong competition and open access for many years. The Airport’s

current use agreement has been a primary tool for promoting that policy... The

Airport has retained control over several gates and a limited amount of counter

space. This gives the Airport the ability to provide space to new entrants on reasonable terms, and helps regulate subleasing prices. The Airport has also

retained the right to reject subleases, and on a few occasions in the past, has

rejected a sublease due to unreasonable pricing.”1

A more competitive airline marketplace can generate enormous benefits for a community. During the 1990's, airline passengers using Baltimore/Washington International

Airport (BWI) have reaped the benefits of lower airfares and more service. Officials at

BWI never made a strategic decision to “market” the airport as a regional center for

low-fare air service. Like other airports, BWI has a marketing program in place that

seeks to entice airlines to serve the airport. For a period of approximately ten years,

BWI officials worked to entice Southwest Airlines to serve the airport. In the words of a

senior BWI executive, “The inauguration of air service by Southwest Airlines to the

greater Washington/Baltimore region in 1994 was the most significant event in BWI’s

history concerning enhancing competition among air carriers.”2

Many economic, financial, and competitive factors influenced Southwest’s decision to

serve BWI. But the business practices in place at BWI, including a willingness to

impose PFCs to construct and refurbish gates over the opposition of some incumbent

air carriers, were important factors in Southwest’s decision. Moreover, because BWI

officials monitor gate-utilization practices, have adopted preferential-use lease agreements, and have chosen to retain control over several gates, the requests of other new

 

1

 Comments of Russell C. Widmar, Executive Director, Salt Lake City Airport Authority, Docket No. OST-98-

4025, August 28, 1998.

2

 Nicholas J. Schaus, Airports Council International – North America, Airport Gate Availability/PFC Survey,

September 1998.
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entrant carriers, including US Airways’ Metrojet, Pro Air, America West, and Frontier,

to serve the Airport have also been met.

These policies have resulted in significant benefits for airline passengers. According to

GAO, between 1990 and 1998 average airfares adjusted for inflation declined significantly in markets served from BWI. Specifically, average airfares declined 49 percent,

35 percent, and 38 percent in short-haul, medium-haul, and long-haul markets, respectively.3

 Because air carriers operating from Dulles International and Reagan National

had to lower their fares in certain markets in response to the fares set by air carriers at

BWI, these figures actually understate the full effect of lower airfares at BWI on air

travel in the Washington-Baltimore metropolitan region.

Market concentration is also relatively low at BWI. For the first six months of 1999, the

combined market shares of the four largest air carriers was 71 percent. (Market shares

of 30 percent, 27 percent, 8 percent, and 6 percent, respectively, for Southwest Airlines,

US Airways, United, and Delta.) This level of market concentration is considerably

lower than level at other large hub airports. For example, during the same period one

air carrier enplaned more than 50 percent of passengers at 15 large hub airports.4

The experience of BWI in attracting new airline service demonstrates how a commitment on the part of airport management to work with air carriers, combined with a set

of “entry friendly” business practices, can produce substantial economic benefits for an

airport, air travelers, and an entire region. Airline competition at BWI is vigorous and,

given the airport’s business practices and policies now in effect, is likely to remain so.

SOME COMMUNITIES ARE REVIEWING

AIRPORT BUSINESS PRACTICES TO IMPROVE

OPPORTUNITIES FOR NEW AIRLINE ENTRY

Many of the business practices in effect today at airports were adopted decades ago in

response to specific economic, financial, and political conditions. Some airport business

practices, such as entering into long-term, exclusive-use gate lease agreements, were

considered to be essential to securing long-term financial commitments from tenant air

carriers, thus reducing perceived risk for investors in airport bonds and lowering the

cost of capital for airports.

 

3

 U.S. General Accounting Office, Airline Deregulation: Changes in Airfares, Service Quality, and Barriers to

Entry, RCED-99-92 (Mar. 4, 1999).

4

Aviation Daily, September 24, 1999.
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Following the bankruptcies of several large air carriers in the 1980’s and early 1990’s,

however, airport managers now recognize that long-term contractual relationships with

air carriers are no assurance that their airports will not suffer financially if their tenants

do. Many airport managers now believe the financial community places relatively more

weight on the economic fundamentals of a capital-development project -- the strength

of the local economy and traffic base -- and relatively less weight on whether an airport

has a long-term contractual agreement with tenant airlines.

Some state and local officials are questioning whether the airport business practices in

effect in their communities reinforce the market power of incumbent airlines. Two

communities, Charlotte and Minneapolis, are studying the competitive situations at

their airports.

Airline Competitive Issues at Charlotte

Charlotte/Douglas International Airport serves as a major connecting hub for US

Airways, which enplanes approximately 93 percent of scheduled passengers at the

airport. As a long-term business strategy, airport officials have sought to position Charlotte/Douglas to be a connecting hub for a major carrier. Airport officials regard US

Airways as a “partner,” and contend that the Charlotte metropolitan region receives

more air service and enjoys important economic benefits because of US Airways’ hub

operations.

While Charlotte/Douglas has the capacity to accommodate some new service, and

some gates are under city control, airport officials appear to have adopted a neutral

approach to encouraging new airline entry. Airport officials, moreover, do not generally review sublease agreements, maintaining that there is enough unused space at the

airport to ensure that fees charged for subleased gates are reasonable. In the view of

airport officials, Charlotte enjoys the benefits of a large, single-carrier connecting hub

operation at what would otherwise be a medium hub airport. This strategy, according

to airport officials, has provided Charlotte with additional air service and other economic benefits.

But Charlotte/Douglas does not have to choose between the economic benefits of a

network hub, on one hand, and price competition, on the other: pro-competitive airport

practices could enable it to reap both. Low-fare airlines have successfully entered markets dominated by one large, network carrier. At these airports, airfare premiums

declined, often significantly; moreover, consumers continued to enjoy the service benefits that are available as a result of hub operations. Studies have found that average

fares in nonstop city-pair markets served from Charlotte are among the highest in the

nation. A recent DOT study, for example, estimated that the average fare premium at
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Charlotte was 47 percent. And, according to GAO, airfares from Charlotte for short,

medium, and long-distance trips were 58 percent, 63 percent, and 42 percent higher,

respectively, than average fares from other airports of comparable community size.5

There is simply no reason for many Charlotte markets not to benefit from more price

competition.

Moreover, according to airport officials, some critics of current airport policy claim that

US Airways does not pay an appropriate share of the airport’s costs, and that it has no

incentive to lower fares at Charlotte -- or to offer air travelers the option of flying on

Metrojet, its low-fare subsidiary -- because of its market power. Other critics argue that

the City of Charlotte should assume more control over airport practices, and that the

airport’s discretionary funds should be spent to build gates and other facilities to attract

low-fare carriers. These parties, according to airport officials, also maintain that new

facilities at Charlotte/Douglas should be financed with general obligation bonds, rather

than through general airport revenue bonds, which traditionally have been accompanied with long-term, exclusive-use gate lease agreements and majority-in-interest provisions.

The Mayor of Charlotte appointed a task force to address the issues of airline competition at Charlotte. Additionally, the Aviation Department, pursuant to a directive from

the City’s Advisory Committee, hired a consultant to evaluate the competitive situation

at Charlotte and to develop strategies to improve it. The Mayor’s task force is to use the

information gathered by the consultant to recommend to the City Council an appropriate course of action.

Airline Competitive Issues at Minneapolis

Following the strike at Northwest Airlines in September 1998, public officials in Minnesota began to focus on what they need to do to increase airline competition in their

communities. To get the views of the public, Congressional representatives, airport

officials, DOT staff, and local officials participated in a meeting to discuss airline competition at Minneapolis-St. Paul International Airport (MSP). At that time, airport officials were quick to point out that limited access to gates and other facilities at MSP was

not affecting the ability of new entrant air carriers to serve Minneapolis. Since then,

airport and state and local officials have begun to address what they can do to promote

 

5

 U.S. Department of Transportation, Domestic Airline Fares Consumer Report, Third Quarter 1998 Passenger and

Fare Information, April 1999; and U.S. General Accounting Office, Changes in Airfares, Service Quality, and

Barriers to Entry, RCED-99-92 (Mar. 4, 1999).
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airline competition, including the critically important role of ensuring reasonable access

for air carriers that want to serve Minneapolis.6

In certain ways, the competitive situation at Minneapolis is similar to that in Charlotte.

One carrier, in this case Northwest Airlines, enjoys a dominant position, controlling 53

of 70 airport gates and carrying 81 percent of all passengers passing through the airport.7

 In September 1998, Northwest had no nonstop competition on 12 of its busiest

routes.8 Moreover, several academic and government studies have concluded that local

passengers at Minneapolis pay substantially higher airfares than do passengers flying in

comparable city-pair markets from other airports. For example, a March 1999 GAO

report concluded that average airfares at Minneapolis in 1998 were 49 percent higher

than average fares at other airports that serve communities of similar size.9

When interviewed by members of the Task Force, airport officials at MSP were not clear

about the criteria an air carrier must meet to be assigned a gate, and stated only that

they expect a carrier to disclose its reasons for requesting a gate, including the type and

frequency of the service it intends to provide. Airport officials also stated that when

they were presented with a request by an air carrier that would not require the use of a

dedicated gate, they refer it to incumbent air carriers and leave it up to the parties to

complete a subleasing agreement. Airport officials do not intervene unless the airline

attempting to gain access complains of unfair or unreasonable treatment.

Although airport officials have the authority to force incumbent carriers to share gates,

they acknowledge that they need better information on gate-utilization practices. Airport officials were also uncertain as to how far they should go to ensure that new

entrant airlines receive access to gates and other facilities -- that is, how far they should

go to promote new airline entry, as opposed to attempting to guarantee nondiscriminatory treatment of all air carriers.

When interviewed by DOT staff, representatives from smaller air carriers that serve

MSP stated that gaining access to gates, as well as related support services, was difficult

 

6

 For a discussion of these issues, see, Minnesota Planning, Flight Plan: Airline Competition in Minnesota, St. Paul,

Minnesota, March 1999.

7

 Minnesota Planning, op. cit., p. 4.

8

 Minnesota Planning, op. cit., p. 10. The markets included: Los Angeles (three airports), San Francisco,

Washington, DC (three airports), Boston, Orlando, Detroit, Seattle, San Diego, Miami, Milwaukee, Indianapolis,

and New York (LaGuardia).

9

 GAO, Changes in Airfares, Service Quality, and Barriers to Entry, op. cit., Table 4.
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and costly. In particular, they explained the problems they encountered when they

undertook to enter into sublease agreements with incumbent air carriers. These smaller

airlines also alleged that they have been forced to pay extremely high fees for subleased

gates and facilities.

In 1996, the State of Minnesota decided to expand MSP rather than build a new airport.

As a result of that decision, MSP is implementing a $2.3 billion capital development

plan, which is intended to meet the region’s long-term air transport needs. Long-term,

exclusive-use gate leases with air carriers operating from the Blue, Green, and Red concourses expired in 1996. Airport and airline officials are renegotiating these agreements; gates on these concourses are now being leased on a month-to-month basis.

Airport officials also intend to adopt several new business practices, including a greater

reliance on shorter-term, preferential-use gate leases. (Many gates on the Gold Concourse will continue to be leased to Northwest under a long-term, exclusive-use

arrangement that will not expire until 2015.) In addition, airport officials propose to

modify the existing MII agreement to give them more discretion to undertake capital

projects without first having to gain the approval of incumbent airlines.

But as useful as these proposals may be for improving airline competition at MSP over a

period of several years, some parties support the adoption of new business practices at

MSP now because, “...[t]he airport is a public facility, and public officials have a duty to

promote free and fair commerce.”10 Strategies to achieve this end include (1) ensuring

open access to new and existing airport gates for air carriers that want to serve or are

serving MSP; (2) devising incentives and recruiting air carriers to serve MSP; and (3)

monitoring airfares at MSP to detect unfair or predatory practices against new entrants

and smaller carriers.

Among the policies being advanced to ensure competitive access for new entrants at

MSP: (1) reserving a major share of any new gates built (12 are scheduled to be built)

for carriers other than Northwest; (2) limiting the number of long-term, gate-lease

agreements at MSP; (3) restricting the number of gates an incumbent carrier could control under long-term lease; and (4) reviewing all sublease agreements to ensure that

new entrant and smaller air carriers are not unfairly disadvantaged.11

Furthermore, airport management has expressed its support and commitment to implement the “best practices” described in this report. Management believes this action will

help to assure that no barriers to entry are created, either to new entrants or to expand-

 

10Minnesota Planning, op. cit., p. 19.

11Minnesota Planning, op. cit., pp. 19-20.
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ing incumbent carriers, as the result of poor communications on MSP’s part or because

of the absence of useful information on the part of interested airlines.

Meanwhile, the competitive environment is changing at MSP. An established charter

operator, Sun Country, has begun providing low-fare, scheduled passenger service

from MSP to many of the markets previously served only by Northwest. Sun Country’s

operations, if successful, could generate substantial consumer benefits for air travelers

in the Minneapolis region. Sun Country and the Metropolitan Airports Commission

recently reached an agreement that provides the carrier with the gates and other

facilities it needs at MSP.12

AIRPORTS CAN PROMOTE COMPETITION

BY ADOPTING PRACTICES ALREADY

IN USE AT OTHER AIRPORTS

In our discussions with airport, airline, and local public officials, numerous ideas were

proffered regarding which airport business practices best furthered the goal of ensuring

a competitive environment. While no one airport can be identified as offering the “perfect” environment for new entrant air carriers, some airports combine elements -- often

several elements -- of the following “best practices.”

Airport Managers Promote New Entry and

Become Advocates for Competition

Some large airports have staff whose primary job is to market the airport’s facilities,

services, and commercial potential to domestic and international air carriers. In some

cases, however, an airport’s marketing effort is narrowly focused toward “achieving a

full service pattern”-- that is, more service to markets or regions airport officials believe

to be “under served” -- or obtaining more international service. Some airport officials

even express the view that anything they can do to promote entry at their airports is, at

best, secondary in terms of importance to the other economic and financial factors that

influence whether an airline begins serving an airport.

New entrant and smaller air carriers at heavily used airports are often in a weak position when they negotiate with incumbent carriers for the use of gates and other facilities. For this reason, some airports have adopted business practices that reduce the

likelihood that new entrants will be treated unfairly. Some airports, for example, have

common-use gate arrangements that forbid airline tenants from subleasing gates or

 

12“Sun Country Airlines to Sign Landmark Agreement to be Anchor Tenant at New Terminal, After Months of

Intense Negotiations,” Minneapolis Star-Tribune, April 6, 1999.
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other facilities.13 Other airports closely monitor subleases to ensure that one carrier is

not placed at a competitive disadvantage.14 Still other airports give tenant and new

entrant carriers a short period of time to reach an agreement, but then intercede if the

parties have been unable to do so.15

Even when such pro-competitive business practices are in place, airport officials that are

advocates for competition continue to work closely with new entrant and smaller airlines during the startup period at their airports. Their efforts center on ensuring that

entrants have timely access on reasonable terms to necessary gates, facilities, and services.

For example, even when a new entrant gains access to a gate through a sublease agreement at a heavily used airport, the lessor airline may require the lessee to adjust its

operations and use a different gate depending upon the lessor’s schedule. Such actions

can be costly and disruptive to the lessee; however, a new entrant or smaller airline may

be reluctant to complain because it is concerned that the lessor may cancel the sublease

or choose not to renew it. In such situations, some airport officials have assisted new

entrants. To ensure that new entrants are not unfairly treated or placed at a significant

competitive disadvantage, such efforts have included negotiating with incumbent air

carriers on behalf of new entrants.

Airport Managers Closely Monitor

Gate-Utilization Practices

Many airport officials interviewed by the Task Force had a detailed knowledge of gate

use at their airports; others had, at best, an imperfect understanding of how gates and

other facilities were being used. Managing an airport’s facilities to ensure that all gates

are fully used is critical to being able to make gates available to new entrants and

incumbent carriers that want to expand service. The initiatives underway at Hartsfield

Atlanta International Airport illustrate how one airport is attempting to maximize the

use of its gates and thereby increase capacity.

 

13“Airlines are not permitted to sublease terminal facilities ... .” Comments of Gail P. Fels, Aviation Department,

Metropolitan Dade County, Florida, Docket No. OST-98-4025. December 29, 1998, page 7.

14“The Lee County Port Authority monitors the prices charged [for subleased facilities or ancillary services] and

attempts to resolve disputes between carriers.” Comments of Debra M. Lemke, Lee County Port Authority, Fort

Meyers, Florida, Docket No. OST-98-4025, August 19, 1998, page 3.

15“Under our current airline agreement if there is no vacant space, a new entrant airline must work with existing

airlines for 30 days. If they are unsuccessful the Airline Authority will step in and work out a joint use.” Comments

of Tom Medland, Airport Authority of Washoe County, Reno/Tahoe International Airport, Docket No. OST-98-

4025, August 10, 1998, page 1.
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The business practices in place at Hartsfield have been influenced by a number of factors: the steady expansion of Delta Air Lines, the demise of Eastern Airlines, the periodic establishment of mini-hub operations by other carriers (e.g., ValuJet), the dramatic

increase in international service, and the emergence of significant airspace, airfield, and

terminal congestion. Major capacity expansion projects are still in the planning stage,

and thus will not significantly alleviate congestion at Hartsfield for several years.

Although some gates at Hartsfield are operated under 30-day leases, and some are

leased on a “per-turn” basis, the majority are leased under long-term, exclusive-use

agreements.16 There is, according to airport officials, concern in the business community about high airfares and the lack of competition at Atlanta.

A 1996 study found that Delta’s average gate use at Hartsfield was 6.4 departures per

gate per day -- approximately the industry average. (Delta managers interviewed by

members of the Task Force stated that average gate use is now between seven and eight

operations per day.) In addition to a large block of gates operated under exclusive-use

leases, Delta also operates five gates under 30-day leases. Delta is required to use these

gates an average of at least 7.3 operations per day. Hartsfield’s management also was

able to secure a commitment from Delta to increase its gate-utilization practices when it

acquired non-terminal assets from the bankruptcy estate of Eastern Airlines. To explore

additional ways to increase “effective” capacity, Hartsfield’s management hired a consultant to conduct a study of gate and ticket counter utilization, focusing on the facilities

that have been leased until 2010 under an exclusive-use agreement.

Airport officials are also taking actions to expand existing facilities. In January 1999,

representatives from AirTran Airways approached airport officials with a request for

four new gates. The airport has tentatively committed to adding four gates, which will

be accomplished by adding new loading bridges and re-spacing certain gates that were

designed to accommodate Eastern’s wide-body aircraft. Hartsfield will pay for these

facilities out of discretionary funds. The Airport will recover its costs through 30-day

lease agreements or a fixed fee per operation, not a long-term lease, which was

AirTran’s preferred financing arrangement.

Over the longer term, Hartsfield officials will decide whether to impose a moratorium

on long-term, exclusive-use gate and ticket counter leases, will convert certain facilities

to common-use status, and will seek improved utilization of all facilities from tenant

carriers. In sum, airport managers that analyze how gates and other facilities are being

used at their airports and identify ways to increase their use are in a better position to

 

16By one recent count, Hartsfield had a complement of 171 gates, of which 147 were used for domestic flights and

24 were used for international flights (common use gates). Of the 147 domestic gates, 125 were leased on an

exclusive-use basis, 14 were leased on a 30-day basis, and eight were operated on a per-turn basis.
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accommodate new entrant airlines or to assist incumbent air carriers that want to

expand.

Monitoring gate use is also a practical way for an airport to protect itself against disruptions in operations in the event of a bankruptcy of an air carrier tenant. An airport

that has continually monitored gate use will be in a better position to argue for a timely

resolution of a gate lease disposition under the Bankruptcy Code provisions. In considering the timing of the disposition of an unexpired gate lease of a carrier in default, a

bankruptcy court is required to consider, among other factors:

“...the level of actual use of the terminals or gates which are the subject of the

lease, the public interest in actual use of such terminals or gates, the existence of

competing demands for the use of such terminals or gates....“ 11 U.S.C. 365

(d)(9).

Demonstrating to the court that it has attempted to fully utilize the gate lease -- and to

assure competitive entry when the gate was not fully used by the tenant air carrier --

can help the airport operator in arguing that the public interest warrants a speedy disposition of the gate lease to enable the airport to receive the benefits of airline competition.

Airport Managers Invoke ‘Use-It-Or-Lose-It’

Authority if Incumbent Carriers Are Not

Using Their Gates Fully

The ability to reallocate underutilized gates is a potentially important tool for promoting entry. Some airports recognize the importance of reallocating gates:

“[T]he City [Chicago] has the ability at Midway to recapture gates from a carrier

that does not meet certain specified utilization requirements at its gates for a

specified period of time. In at least one incident in the last several years, the City

indicated to one major incumbent carrier that was not meeting the utilization

standard that the City intended to enforce those lease provisions and to reclaim

gates. That carrier quickly increased its service at its gates. In addition, these ‘use

it or lose it’ provisions enabled the City to reallocate the gates of MarkAir and

Kiwi Airlines when those carriers were in bankruptcy proceedings. When

Valujet suspended service at Midway in 1996, the City also used the lease provisions to reallocate Valujet’s facilities to other airlines seeking to enter the market.”17

 

17Comments of Mary Rose Loney, Commissioner, Department of Aviation, City of Chicago, in Docket No. OST98-4025, December 30, 1998, page 16.
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However, some airport managers appear to be reluctant to invoke their authority to

recapture gates from air carriers if they are not being used fully. This is unfortunate,

especially if it precludes access by another willing user. As airports renegotiate their

existing preferential-use gate lease agreements with tenant air carriers -- or adopt preferential-use agreements with minimum-use provisions -- airport officials have the

opportunity to assign gates to air carriers in ways that maximize the use of their facilities.

Airport Managers Provide Prospective Entrants

With Clear Guidelines and a Time Line on

What They Must Do to Gain Access

Some airport officials also appear to be reluctant to challenge the views of incumbent air

carriers as to whether new entry can be accommodated. Not surprisingly, incumbent

carriers may determine that new entry -- and the increased competition that accompanies it -- is not feasible. Incumbent airlines at heavily used airports may be able to make

it difficult for new entrant airlines to begin operating, even if partially used gates are

available.

At some heavily used airports, airport officials compel new entrants to negotiate for the

joint use of gates and other facilities with incumbent carriers. This negotiating process

may not have a time limit, and could be used by incumbents to delay entry for months

or, conceivably, block it entirely. The longer it takes to begin operating, the greater the

costs incurred by prospective entrants, both in terms of direct outlays and forgone

revenues. Moreover, because they are uncertain as to when they will begin operating,

air carriers placed in this position will find it difficult to market their services to travel

agents and potential customers.

AirTran Airways, for example, sought to offer limited service from Newark to Atlanta.

Over a period of several months, AirTran attempted to reach an agreement with incumbent air carriers to share a gate at Newark International Airport. No incumbent airline

would sublease a gate to AirTran, despite the fact that some gates were not, according

to data gathered by AirTran, being used fully. Officials from AirTran discussed the

situation with officials from the Port Authority of New York and New Jersey; nevertheless, it was still denied access to a gate. Officials at AirTran requested DOT’s assistance, and the carrier did, eventually, gain access to Newark International Airport.

Airport officials, not incumbent airlines, should decide when new entrants and smaller

air carriers should begin operating at an airport. Adopting clear guidelines and a time

line as to what air carriers must do to gain access to an airport and expand their operations could prevent incumbent carriers from delaying or preventing airline entry.
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Airport Managers Monitor All Sublease

Agreements to Ensure That Fees Are Reasonable

Officials at many of the Nation’s airports monitor sublease agreements between air carriers to ensure they are not structured in a way that would unfairly disadvantage a new

entrant or a smaller airline. For example:

“Massport monitors the cost of subhandling and sublease agreements at Logan

Airport pursuant to the terms of Massport’s standard terminal lease. Prime tenant air carriers are not permitted to charge excessive handling charges or rents

under such subhandling or sublease agreements, and, in general, Massport

retains the right to approve these arrangements on a case by case basis.”18

Airports have adopted various business practices to prevent new entrants from being

placed at a competitive disadvantage. For example, air carriers are not permitted to

enter into sublease agreements at Miami International Airport.19 Other airports do not

permit subleasing if the airport authority has space available (e.g., gates or ticket counters).20

Of course, if an airport has a substantial amount of underused capacity, an air carrier

would be able to sublease a gate from either an incumbent carrier or from the airport

authority. Officials at three of our case study airports -- New Denver International,

Pittsburgh International, and Cincinnati-Northern Kentucky International -- stated that

their airports had “excess” capacity. At these airports, and others, competition among

incumbent carriers to sublease their underused gates, as well as gates that could be

leased directly from the airport authority, presumably ensures that fees charged for the

use of these facilities are reasonable. However, at those airports where capacity is limited, airport officials can monitor sublease agreements and, if necessary, disapprove any

agreement that results in a serious competitive disadvantage for a subleasing carrier.

 

18Comments of David Y. Bannard, Massachusetts Port Authority, in Docket No. OST-98-4025, December 23, 1998,

page 14.

19Comments of Gail P. Fels, Assistant County Attorney, Metropolitan Dade County, in Docket No. OST-98-4025,

December 29, 1998, page 7.

20Comments of Efren T. Gonzalez, Department of Aviation, City of San Antonio, in Docket No. OST-98-4025,

August 3, 1998, page 2.
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Airport Managers Create an Environment

Where Third-Party Contractors Provide

Competitive Ground-Handling and Support Services

To be competitive, new entrant and smaller airlines require access on reasonable terms

to all airport facilities and support services. Many airports, such as Miami International,

Atlanta’s Hartsfield, and Orlando International, have adopted business practices to

ensure that competition exists for ground-handling and other essential services. At

Orlando International, for example, the airport:

“...will not consent to a sublease that requires the sublessee to obtain ground

handling or other services on an exclusive basis from the Signatory Airline that is

subleasing the space. This assures that the Fixed Based Operators at OIA are not

precluded from competing for these services ... Competition between the Signatory Airlines and the Fixed Based Operators has assured that ancillary services

are available to all airlines at reasonable prices at OIA.”21

Airport officials interested in promoting airline competition can establish business

practices that allow third-party contractors to provide competitive ground-handling

and other support services.

Airport Managers Take Action to Recover Gates

When They Become Available and to Convert Gates

And Other Facilities to Common-Use Status

To promote airline competition, some airports have replaced their exclusive-use gate

lease agreements with preferential-use or common-use agreements:

“Since 1990 the Lee County Port Authority has actively pursued the purchase of

the jet bridges on the gates, as well as repurchasing the preferential rights, in

order to maximize gate utilization at RSW [Southwest Florida International Airport]. The Authority has seen gate utilization of up to ten turns per day on the

gates which it controls since the policy has been enacted. Currently the Authority controls eight of the fourteen existing gates and jet bridges at RSW.”22

 

21Comments of Egerton K. van den Berg, Greater Orlando Aviation Authority, in Docket No. OST-98-4025.

December 18, 1998, pages 6-7.

22Comments of Debra A. Lemke, Lee County Port Authority, in Public Docket No. OST-98-4025, August 19, 1998,

page 2.
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By gaining greater control over their facilities, airport managers may be able to improve

gate utilization and ensure that new entrant and smaller air carriers are able to compete

with incumbent air carriers.

Airport Managers Are Working to Ensure That

Any New Majority-In-Interest Agreements Do Not

Prevent or Delay Projects Beneficial to New Entrants

It is not hard to understand the logic behind MIIs: airlines that are assessed rates and

charges to pay for capital development projects believe they should be able to review

and approve or disapprove such projects before they are undertaken. But, for competitive reasons, some airports have chosen not to enter into MIIs:

“Massport has no MII agreements. Massport believes that such agreements can

hamper competition by, for example, granting air carriers, which have an incentive to reduce competition, the ability to block capital improvements which could

provide facilities which would enhance competition.”23

Other airports contend that MIIs “significantly stifle the growth, flexibility, and competitiveness of an airport.”24 Airport officials who want to foster airline competition can

make sure that any newly negotiated MIIs cannot be used by incumbent air carriers to

block or delay capital development projects that would encourage new entry and foster

airline competition.

Airport Managers Are Using the Tools Provided in the

PFC Program to Finance Terminal Expansion Projects

That Provide Greater Opportunities for New Entrants

As discussed in Chapter 4, PFCs have not only become a major source of funds for airport capital development projects, they are an independent source since they can be

imposed by airports without the approval of incumbent airlines. Also, of course, a PFCfinanced project may not result in an airline obtaining a long-term “lock” on the facility.

Consequently, airport managers are adopting business practices that promote entry and

competition (e.g., use-it-or-lose-it provisions, non-exclusive use of facilities, subleasing

approval and standards).

 

23Comments of David Y. Bannard, Massachusetts Port Authority, in Public Docket No. OST-98-4025, December

23, 1998, page 13.

24Comments of Donald L. Smithey, Airport Authority of the City of Omaha, in Public Docket No. OST-98-4025,

August 26, 1998, page 21.
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Officials at most of the case study airports that have chosen to impose PFCs could identify capital development projects that improved competitive opportunities for new

entrants and incumbent carriers. These airport managers also recognized that PFCs

could, under appropriate conditions, be “leveraged” as a revenue stream to support

bond issues.

As additional demands are placed upon it, the Nation’s airport system will need additional funds for expansion and modernization. The Administration’s FAA reauthorization

legislation proposed raising the current $3 PFC cap to $5. However, to receive the fifth

dollar, large airports served by a “dominant” carrier would have to submit to DOT a

plan on how they intend to promote airport access, entry, and competition. The ability

to impose PFCs is a powerful tool for those airport managers who are interested in

promoting airline competition.
APPENDIX A Page 85

Table A-1.

Gate Usage Practices of Individual Large Hub1 Airports2

1992 1992 1992

Exclusive- Shared- Airport- 1992

use use controlled total Summary

Airport Rank3 gates gates gates gates characterization

ATL Atlanta 1 102 0 0 102 All exclusive-use

BOS Boston 17 26 52 14 92 Mixed

BWI Baltimore-

 Washington

28 0 55 10 65 Mixed

CVG Covington, KY/

 Cincinnati, OH

25 43 38 0 81 Mixed

DCA Washington, DC

 Reagan National

26 0 44 0 44 All shared-use

DFW Dallas-Fort

Worth

4 103 0 9 112 Mixed

DTW Detroit 9 - 0 6 - Undetermined

EWR Newark 8 86 8 0 94 Mixed

IAH Houston 15 66 6 11 83 Mixed

JFK New York 10 99 14 0 113 Mixed

LAS Las Vegas 12 47 0 20 67 Mixed

LAX Los Angeles 3 0 94 25 119 Mixed

LGA New York

 LaGuardia

21 63 1 10 74 Mixed

MCO Orlando 16 60 6 13 79 Mixed

MIA Miami 7 0 0 141 141 All apt-controlled

ORD Chicago O’Hare 2 149 10 0 159 Mixed

PHX Phoenix 11 0 0 76 76 All apt-controlled

PIT Pittsburgh 23 - - - - Undetermined

SAN San Diego 27 27 4 0 31 Mixed

SEA Seattle 18 0 50 25 75 Mixed

SFO San Francisco 5 78 0 3 81 Mixed

SLC Salt Lake City 24 46 3 5 54 Mixed

STL St. Louis 14 12 69 0 81 Mixed

TPA Tampa 29 37 12 3 52 Mixed

Large hub totals4 778 342 111 1,231

Percentages 63.2% 27.8% 9.0% 100.0%

1

 The hub status of all airports in these tables is determined according to criteria applicable to 1998.

2

 Source: 1998 ACI-NA survey, except as noted.

3

 Source: FAA Report VP, “Primary Airport Enplanement Activity Summary for CY1997”.

4

 These subtotals have been computed without the data for the nine large hub airports -- DFW, DTW, JFK, LAX,

MIA, PHX, PIT, SAN, and TPA -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX A Page 86

Table A-2.

Gate Usage Practices of Individual Medium Hub Airports

1992 1992 1992

Exclusive- Shared- Airport- 1992

Use use controlled total Summary

Airport Rank Gates gates gates gates characterization

AUS Austin 53 0 19 0 19 All shared-use

BNA Nashville 42 82 0 2 84 Mixed

COS Colorado Springs 62 6 0 0 6 All exclusive-use

FLL Fort Lauderdale 32 0 26 13 39 Mixed

GEG Spokane 72 19 1 0 20 Mixed

IAD Washington, DC

(Dulles)

30 0 55 16 71 Mixed

JAX Jacksonville 61 20 0 11 31 Mixed

MCI Kansas City 34 57 1 0 58 Mixed

MEM Memphis 37 70 0 2 72 Mixed

MKE Milwaukee 55 42 0 0 42 All exclusive-use

MSY New Orleans 40 37 4 8 49 Mixed

OAK Oakland 38 - 20 1 - Undetermined

OMA Omaha 67 12 0 9 21 Mixed

ONT Ontario, CA 52 0 0 25 25 All apt-controlled

PBI West Palm Beach 54 0 29 0 29 All shared-use

PDX Portland, OR 31 - - - - Undetermined

RSW Fort Myers 60 0 14 0 14 All shared-use

SAT San Antonio 47 0 29 0 29 All shared-use

SJC San Jose 35 12 19 0 31 Mixed

SNA Orange County, CA 42 0 0 14 14 All apt-controlled

TUL Tulsa 69 15 0 3 18 Mixed

TUS Tucson 66 0 17 6 23 Mixed

Medium hub totals1 151 213 71 435

Percentages 34.7% 49.0% 16.3% 100.0%

1

 These subtotals have been computed without the data for the seven medium hub airports -- BNA, MCI, MEM,

OAK, OMA, ONT, and PDX -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX A Page 87

Table A-3.

Gate Usage Practices of Individual Large Hub1 Airports2

1998 1998 1998

Exclusive- Shared- Airport- 1998

use use controlled total Summary

Airport Rank3 gates gates gates gates characterization

ATL Atlanta 1 125 0 46 171 Mixed

BOS Boston 17 26 49 18 93 Mixed

BWI Baltimore-

 Washington

28 0 66 9 75 Mixed

CVG Covington, KY/

 Cincinnati, OH

25 67 53 0 120 Mixed

DCA Washington, DC

 Reagan National

26 0 44 0 44 All shared-use

DFW Dallas-Fort Worth 4 112 0 8 120 Mixed

DTW Detroit 9 56 26 6 88 Mixed

EWR Newark 8 79 15 0 94 Mixed

IAH Houston 15 75 0 14 89 Mixed

JFK New York 10 99 14 0 113 Mixed

LAS Las Vegas 12 16 38 39 93 Mixed

LAX Los Angeles 3 12 96 38 146 Mixed

LGA New York

 LaGuardia

21 60 5 7 72 Mixed

MCO Orlando 16 57 16 6 79 Mixed

MIA Miami 7 0 0 121 121 All apt-controlled

ORD Chicago O’Hare 2 149 26 0 175 Mixed

PHX Phoenix 11 0 0 84 84 All apt-controlled

PIT Pittsburgh 23 89 1 10 100 Mixed

SAN San Diego 27 42 3 0 45 Mixed

SEA Seattle 18 0 49 27 76 Mixed

SFO San Francisco 5 72 0 3 75 Mixed

SLC Salt Lake City 24 49 20 3 72 Mixed

STL St. Louis 14 12 72 0 84 Mixed

TPA Tampa 29 18 23 19 60 Mixed

Large hub totals 4 787 453 172 1,412

Percentages 55.7% 32.1% 12.2% 100.0%

1

 The hub status of all airports in these tables is determined according to criteria applicable to 1998.

2

 Source: 1998 ACI-NA survey, except as noted.

3

 Source: FAA Report VP, “Primary Airport Enplanement Activity Summary for CY1997”.

4

 These subtotals have been computed without the data for the nine large hub airports -- DFW, DTW, JFK, LAX,

MIA, PHX, PIT, SAN, and TPA -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX A Page 88

Table A-4.

Gate Usage Practices of Individual Medium Hub Airports

1998 1998 1998

Exclusive- Shared- Airport- 1998

use use controlled total Summary

Airport Rank gates gates gates gates Characterization

AUS Austin 53 0 18 0 18 All shared-use

BNA Nashville 42 81 0 4 85 Mixed

COS Colorado Springs 62 0 18 2 20 Mixed

FLL Fort Lauderdale 32 0 20 19 39 Mixed

GEG Spokane 72 19 1 0 20 Mixed

IAD Washington, DC

(Dulles)

30 0 52 39 91 Mixed

JAX Jacksonville 61 22 0 9 31 Mixed

MCI Kansas City 34 46 0 11 57 Mixed

MEM Memphis 37 70 0 2 72 Mixed

MKE Milwaukee 55 42 0 0 42 All exclusive-use

MSY New Orleans 40 26 3 13 42 Mixed

OAK Oakland 38 0 19 5 24 Mixed

OMA Omaha 67 13 0 8 21 Mixed

ONT Ontario, CA 52 20 0 7 27 Mixed

PBI West Palm Beach 54 0 29 0 29 All shared-use

PDX Portland, OR 31 0 39 14 53 Mixed

RSW Fort Myers 60 0 12 5 17 Mixed

SAT San Antonio 47 0 29 0 29 All shared-use

SJC San Jose 35 12 19 0 31 Mixed

SNA Orange County, CA 42 0 0 14 14 All apt-controlled

TUL Tulsa 69 15 0 3 18 Mixed

TUS Tucson 66 0 17 6 23 Mixed

Medium hub totals1 136 218 110 464

Percentages 29.3% 47.0% 23.7% 100.0%

1

 These subtotals have been computed without the data for the seven medium hub airports -- BNA, MCI, MEM,

OAK, OMA, ONT, and PDX -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX A Page 89

Table A-5.

Gate Usage Practices of Individual Large Hub1 Airports2

2004 2004 2004

Exclusive- Shared- Airport- 2004

use use controlled Total Summary

Airport Rank3 gates gates gates Gates characterization

ATL Atlanta 1 143 0 0 143 All exclusive-use

BOS Boston 17 26 49 21 96 Mixed

BWI Baltimore-Washington 28 0 77 13 90 Mixed

CVG Covington, KY/

 Cincinnati, OH

25 67 53 0 120 Mixed

DCA Washington, DC

 Reagan National

26 0 44 0 44 All shared-use

DFW Dallas-Fort Worth 4 142 - 14 - Undetermined

DTW Detroit 9 - - - - Undetermined

EWR Newark 8 109 18 0 127 Mixed

IAH Houston 15 64 33 14 111 Mixed

JFK New York 10 99 16 - - Undetermined

LAS Las Vegas 12 0 64 29 93 Mixed

LAX Los Angeles 3 - - - - Undetermined

LGA New York LaGuardia 21 60 5 7 72 Mixed

MCO Orlando 16 57 39 12 108 Mixed

MIA Miami 7 - - 69 - Undetermined

ORD Chicago O’Hare 2 0 179 - 179 All shared-use

PHX Phoenix 11 - - - - Undetermined

PIT Pittsburgh 23 125 0 0 125 All exclusive-use

SAN San Diego 27 - - 0 - Undetermined

SEA Seattle 18 0 0 82 82 All apt-controlled

SFO San Francisco 5 70 0 27 97 Mixed

SLC Salt Lake City 24 0 75 3 78 Mixed

STL St. Louis 14 12 75 0 87 Mixed

TPA Tampa 29 - - - - Undetermined

Large hub totals4608 711 208 1,527

Percentages 39.8% 46.6% 13.6% 100.0%

1

 The hub status of all airports in these tables is determined according to criteria applicable to 1998.

2

 Source: 1998 ACI-NA survey, except as noted.

3

 Source: FAA Report VP, “Primary Airport Enplanement Activity Summary for CY1997”.

4

 These subtotals have been computed without the data for the nine large hub airports -- DFW, DTW, JFK, LAX,

MIA, PHX, PIT, SAN, and TPA -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX A Page 90

Table A-6.

Gate Usage Practices of Individual Medium Hub Airports

2004 2004 2004

Exclusive- Shared- Airport- 2004

use use controlled total Summary

Airport Rank gates gates gates gates characterization

AUS Austin 53 0 25 0 25 All shared-use

BNA Nashville 42 - - - - Undetermined

COS Colorado Springs 62 0 16 0 16 All shared-use

FLL Fort Lauderdale 32 0 20 28 48 Mixed

GEG Spokane 72 19 4 0 23 Mixed

IAD Washington, DC

(Dulles)

30 0 79 52 131 Mixed

JAX Jacksonville 61 30 0 9 39 Mixed

MCI Kansas City 34 - - - - Undetermined

MEM Memphis 37 - - - - Undetermined

MKE Milwaukee 55 46 0 0 46 All exclusive-use

MSY New Orleans 40 40 0 2 42 Mixed

OAK Oakland 38 - - 30 - Undetermined

OMA Omaha 67 - - - - Undetermined

ONT Ontario, CA 52 - - - - Undetermined

PBI West Palm Beach 54 0 29 0 29 All shared-use

PDX Portland, OR 31 - - - - Undetermined

RSW Fort Myers 60 0 0 28 28 All apt-controlled

SAT San Antonio 47 0 29 0 29 All shared-use

SJC San Jose 35 12 19 0 31 Mixed

SNA Orange County, CA 42 0 0 14 14 All apt-controlled

TUL Tulsa 69 17 0 3 20 Mixed

TUS Tucson 66 0 17 6 23 Mixed

Medium hub totals1 164 238 142 544

Percentages 30.1% 43.8% 26.1% 100.0%

1

 These subtotals have been computed without the data for the seven medium hub airports -- BNA, MCI, MEM,

OAK, OMA, ONT, and PDX -- that did not respond uniformly to the ACI survey question about distribution of

gates by lease type for 1992, 1998, and 2004 (planned).
APPENDIX B Page 91

Table B-1.

Type of Financing Arrangements and MII Status

At Individual Large Hub Airports, 1998

Length of

Type of Use/Lease Expiry date of

Use & Lease Agreement Use/Lease

Large Hub Airports Rank MII Clause? MII Invoked? Agreement (Years) Agreement

ATL Atlanta 1 Yes No Compensatory 30 09/20/2012

BOS Boston 17 No No Compensatory - -

BWI Baltimore-Washington 28 Yes No Hybrid 10 02/28/2003

CVG Covington, KY/ Cincinnati, OH 25 Yes No Residual 45 12/01/2015

DCA Washington, DC National 26 Yes No Hybrid 25 01/01/2004

DFW Dallas-Fort Worth 4 Yes No N-R 35 12/01/2009

DTW Detroit 9 Yes Yes Residual 16 01/01/2009

EWR Newark 8 No N-R Compensatory 20 01/01/2018

IAH Houston 15 No N-R Compensatory - -

JFK New York 10 No N-R Compensatory 17 12/30/2015

LAS Las Vegas 12 Yes No Hybrid 5 06/30/2002

LAX Los Angeles 3 No No Compensatory - -

LGA New York LaGuardia 21 No N-R Compensatory 1 12/31/1998

MCO Orlando 16 Yes No Residual 30 09/30/2008

MIA Miami 7 Yes Yes Residual - 01/01/2020

ORD Chicago O’Hare 2 Yes No Residual 33 05/18/1999

PHX Phoenix 11 No No N-R - -

PIT Pittsburgh 23 Yes No Residual 30 01/01/2018

SAN San Diego 27 N-R No Residual 5 -

SEA Seattle 18 Yes No Residual 32 01/01/2001

SFO San Francisco 5 Yes No Residual 30 06/01/2011

SLC Salt Lake City 24 No No Compensatory 25 06/01/2003

STL St. Louis 14 Yes No Hybrid 40 12/31/2005

TPA Tampa 29 Yes No Compensatory 7 09/30/2006

Source: 1998 ACI-NA Survey.
APPENDIX B Page 92

Table B-2.

Type of Financing Arrangements and MII Status

At Individual Medium Hub Airports, 1998

Type of

Length of

Use/Lease Expiry date of

Use & Lease Agreement Use/Lease

Medium Hub Airports Rank MII Clause? MII Invoked? Agreement (Years) Agreement

AUS Austin 53 No N-R Hybrid 10 04/30/1999

BNA Nashville 42 Yes No Residual 30 09/01/2017

COS Colorado Springs 62 Yes Yes Residual 5 12/01/1999

FLL Fort Lauderdale 32 Yes No Hybrid 30 09/01/2011

GEG Spokane 72 No No Compensatory 5 -

IAD Washington, DC Dulles 30 Yes No Hybrid 25 01/01/2004

JAX Jacksonville 61 Yes No Compensatory 20 01/01/2007

MCI Kansas City 34 Yes No Hybrid 5 05/01/2003

MEM Memphis 37 Yes No Residual 28 02/01/1999

MKE Milwaukee 55 Yes No Residual 25 01/01/2010

MSY New Orleans 40 Yes No Hybrid 5 01/01/1997

OAK Oakland 38 No No Hybrid 0.083 -

OMA Omaha 67 No N-R Compensatory 1 01/01/1998

ONT Ontario, CA 52 Yes N-R Residual 20 -

PBI West Palm Beach 54 No N-R Hybrid 12 09/01/2000

PDX Portland, OR 31 Yes N-R N-R 10 06/01/2001

RSW Fort Myers 60 Yes Yes Residual 25 12/01/2008

SAT San Antonio 47 Yes No Hybrid 10 09/01/1999

SJC San Jose 35 No No Residual 29 01/01/2007

SNA Orange County, CA 42 No N-R Compensatory - 12/31/2005

TUL Tulsa 69 Yes No Hybrid 30 06/01/2008

TUS Tucson 66 Yes No Residual 30 09/01/2006

Source: 1998 ACI-NA Survey.
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