Continental 

Airlines 

"'il 

ql;!;, .• ene foxhall 

Vice Pre~idcnt 

Contini?(Jio! Airlines. Inc. 

1600 Smilh Street HQSEO 

Hovskm TX 77002 

Tel 713 324 5140 

Stole and Civic Affair.$ Fox 713 324 6329 

March 16, 2004 

Mr. Robert F. Lurie 

Senior Policy Advisor 

Office of the Chaim1an 

The Port Authority of NY & NJ 

225 Park Avenue South 

l51

h Floor 

New York, New York 10003 

Dear Bob, 

Thank you 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 spent much time on those concerns. We came back to him 

through you as a result ofthe Governor's inquiry on where we stood on these issues after 

·many inonths and your inquiry about the impact of the Dewey lease negotiations on the 

New Jersey airport's interests. · 

In summmy, the Dewey lease extension terms will result in a substantial advantage for 

the New York carriers, whose landing fees will be $2 lower (on a base of approximately 

$7 per 1,000 pounds of aircraft weight at EWR) than those paid by the New Jersey 

carriers. This is occurring as Passenger Facility Charges (PFCs) generated at EWR 

have paid for all the approved PFC projects for EWR, and the Port Authority is now 

using EWR PFCs to pay for the $1.9 billion JFK AirTrain. Compounding the situation, 

the Port Authority is_p.[qnning to subsidize a significant portion of the JFK train costs as 

part of the Dewey lease extension, a subsidy that was not accorded for the EWR train 

costs. The most immediate way to relieve this inequity is for the Port Authority to apply 

EWR PFCs to reduce current EWR rates and charges, which was the recommended 

solution that the Chairman presented to us last May in response to our concerns about 

landing fees. 

In reply to your specific questions, we provide 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 staff has 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 of potential PFC projects. The staff asked the carriers from each 

\,i, airport to prioritize these projects. Frank indicated that this survey was 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 staff advised the carriers of both 

an increase in the anticipated 2003 rate reconciliation and continued high rates for 2004. 

The carriers identified ways to reduce both. The most critical items the carriers identified 

for reduction were capital projects being transferred to fixed charges in 2003 and 2004. 

These projects 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 Poli Authority has the ability to reconcile these credits if any portion of the 

PFC application is ultimately rejected. 

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

- receive approval, allowing the application of these offsets to the full-year 2004 rate base 

calculations. Moreover, given the significant disparity in flight fee rates across the 

Hudson, we believe that current PFC collections should be applied to the benefit ofEWR 

rate reductions. This includes revenues derived from the current $3.00 per passenger rate 

t!f as well as the plarmed $1.50 increase. As demonstrated by the Port Authority's 

{~J-~ quarterly PFC report, PFC collections and approved uses at Newark 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 at Newark over JFK. 

Port Authority costs. Attachment B contains a compilation of the historic Port Authority 

flight fee and monorail cost components versus Pmt Authority revenue derived from 

airline rates and charges. This spreadsheet demonstrates what we have learned since our 

discussions on rate relief began: the 60 percent revenue in excess of cost that Port 

Authority derives from EWR. The staff represents 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 in airline rates and charges in the areas of: 

• Fixed charges. The second spreadsheet in Attaclunent B shows that one of 

the main drivers of the recent increase in cost is Fixed Charges. We question 

the impact fixed charges have on both the Port Authority's indirect costs and 

the airline rates. There appears to be an exponential increase in revenue 

generated by fixed investment, while there is not the corresponding increase in 

similarly generated indirect cost. Since the Port Authority charges the carriers 

for the operations and repair of fixed 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, rather than 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 160 percent increase in the related airline rates over the last few 

years. The industry understands the reasons for increases in security-related 

costs since 9/11. What the carriers do not understand is whether this increase 

in direct security cost has resulted in a corresponding increase in nonallocated security cost. If not, 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 of non-allocated costs that are not otherwise recoverable through the 

existing rates and charges. 

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 of the 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 passing along 

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 our hub. As you know, we have invested approximately $1 

billion at EWR in the past ftve years. We want to continue to grow when the economy 

improves. We just need help in the meantime to ensure that can happen. Please contact 

me with concerns or questions. Thank you again. 

Sincerely, 

~ito;e~-

Cc: Mike DeCotiis