# Continental Airlines

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**Pre~idcnt** Contini?(Jio! Airlines. Inc. 1600 Smilh Street HQSEO Hovskm TX 77002 Tel 713 324 5140 Fox 713 324 6329 Stole and Civic Affair.$

March 16, 2004

Mr.Robert F. Lurie SeniorPolicyAdvisor Office ofthe Chaim1an ThePortAuthority ofNY & NJ 225 ParkAvenue South l5 1 hFloor NewYork, New York 10003

DearBob,

Thankyou for your time last week. We appreciate your and the Chairman's attention to our concerns about escalating landing fees at Newark Liberty International Airport (EWR). We know Tony has spentmuchtime on those concerns. We came backto him through you as a result oftheGovernor's inquiry on where we stood on these issues after ·manyinonths and your inquiry about the impact ofthe Dewey lease negotiations on the NewJersey airport's interests. ·


### In summmy, the Dewey lease extension terms will result in a substantial advantagefor the New York carriers, whose landing fees will be $2 lower (on a base of approximately $7per 1,000pounds ofaircraft weight at EWR) than those paid by the New Jersey carriers. This is occurring as Passenger Facility Charges (PFCs) generated at EWR havepaid for all the approvedPFCprojectsfor EWR, and the PortAuthority is 

### now using EWR PFCs topay for the $1.9 billion JFKAirTrain. Compounding the situation, thePortAuthority is_p.[qnning to subsidize a significantportion of the JFKtrain costs as part ofthe Dewey lease extension, a subsidy that was not accorded for the EWR train costs. The most immediate way to relieve this inequity isfor thePortAuthorityto apply EWR PFCs to reduce current EWR rates and charges, which was the recommended solution that the Chairmanpresented to us last May in response to our concerns about landing fees.

In reply to your specific questions, weprovide information on the topics of 1) potential PFC-eligible projects that would lower the EWR rates and charges, 2) the impact of recent escalations in Port Authority costs on EWR rates and charges and 3) gross ticket revenue derived from the Port Authority airports. The Port Authority staffhas seen this infonnation before.



### PFC Correspondence. Attaclunent A is a compilation of letters to and from the Port Authority aviation staff concerning potential PFC projects at EWR. The August 27111 letter to Frank Dimola was in response to an informal PFC meeting,at which the Port

EXHIBITQQ

## 41 Authority provided a list ofpotential PFCprojects. The staffasked the carriers from each 

### \,i, airport to prioritize these projects. Frankindicated that this surveywas in preparation of the formal PFC application and consultation process. As you see, Continental clearly expressed its desire to primarily use the PFC revenue generated at Newark Liberty to reduce rents and charges. The November ?'h letter from Ed Harrison is a response to several questions posed by the carriers after the Poli Authority staff presentation of estimated 2004 rates and charges. At that meeting, the staffadvised the carriers ofboth
an increase in the anticipated 2003 rate reconciliation and continued high rates for2004. The carriers identified ways to reduceboth. Themostcritical items the carriers identified for reduction were capital projects being transferred to fixed charges in 2003 and 2004. Theseprojects represent meaningful targets for PFC funding. By removing these eligible projects from the rate calculation, and providing credit for the Type A Monorail Amendment and 9/11 Security Reimbursement, significant reductions in the Newark Liberty rates can be achieved with no risk to the Poli Authority. As we said in our meeting, the PoliAuthority has the ability to reconcile these credits ifany portionofthe PFC application is ultimatelyrejected. 

# j We believe the Port Authority should assume that PFC-eligible projects will ultimately

- receive approval, allowing the application ofthese offsets to the full-year 2004 rate base calculations. Moreover, given the significant disparity 

### in flight fee rates across the Hudson, we believe that currentPFC collections shouldbe applied to thebenefit ofEWR rate reductions. This includes revenues derivedfrom the current $3.00 perpassengerrate t!f as well as the plarmed $1.50 increase. As demonstrated by the Port Authority's

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### quarterly PFC report, PFC collections and approved uses atNewark are already at equilibrium. The Port Authority should not create a short-term imbalance by shirting 

### EWR collections to support JFK AlrTrain to the extent this action fuels a 30-35% activity fee premium atNewarkover

### JFK.

PortAuthoritycosts. Attachment B contains a compilation ofthe historic PortAuthority flight fee and monorail cost components versus Pmt Authority revenue derived from airline rates and charges. This spreadsheet demonstrates what wehave learned since our discussions on rate relief began: the 60 percent revenue in excess of cost that Port Authority derives from EWR. The staffrepresents that this "coverage" was originally designed to fund P01t Authority costs not directly allocable through the rate formula. You can see, however, how escalations in the base costs in recent years have resulted in significant increases inairlinerates and charges in the areas of:

• Fixed charges. The second spreadsheet in Attaclunent B shows that one of the main drivers oftherecent increase in cost is Fixed Charges. We question the impact fixed charges have on both thePort Authority's indirect costs and the airline rates. There appears to be an exponential increase in revenue generated byfixed investment, while thereis notthecorresponding increase in similarlygenerated indirectcost. Since thePortAuthoritycharges the carriers for the operations and repair offixed assets as a direct cost, we believe the coverage associated with Fixed Charges provides an example of how the

# • coverage factor has become a source for extra revenue, ratherthan a means to recover unallocated, indirect costs.



### Securitv. In addition to Fixed Charges, the costs associated with Emergency Services and Policing 

### & Traffic have substantially increased, and caused a corresponding 160percentincrease in the related airlinerates overthe last few years. The industry understands the reasons for increases in security-related costs since 9/11. What the carriers do notunderstand is whether this increase in direct security cost has resulted in a corresponding increase in nonallocated security cost. Ifnot, the fommla is generating excess revenue for the Port Authority.

To resolve these questions, it would be helpful for the Port Authority to provide an itemized description ofnon-allocated costs that are not otherwiserecoverable through the existingrates andcharges.



### Yield tor carriers at EWR. To your question about the carriers' ability to pass along costs, Attachment C contains three slides demonstrating the ranking of the Port Authority's airports relative to the top 25 domestic Metropolitan Statistical Areas in regard to both ticket price and flight fee. As you can see, the average yield driven by EWR is solidly in the middle ofthe pack, while the landing fee is the highest in the group. As we discussed in our meeting, ticket prices and landing fees are not directly related and the extremely competitive market forces prohibit airlines from passingalong increases in airport costs.

We hope this is helpful. As we said, given the industry environment, we do not have months more to wait for help on mitigating the spiraliug costs at EWR. We obviously remain committed to serving ourhub. As you know, we have invested approximately$1 billion at EWR inthe past ftve years. We want to continue to grow when the economy improves. Wejust need help in the meantime to ensure thatcan happen. Please contact mewithconcerns orquestions. Thankyou again. Sincerely,



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Cc: MikeDeCotiis