United, American threaten to call off O'Hare expansion talks

United, American threaten to call off O'Hare expansion talks
By Julie Johnsson and John Hilkevitch
Copyright © 2010, Chicago Tribune
10:22 a.m. CST, February 10, 2010
http://www.chicagotribune.com/business/chi-biz-ohare-feb09,0,780656.story


An elusive deal on funding the final new runways at O'Hare International Airport finally appeared to be close at hand after years of negotiations, until city officials undermined the agreement, airline officials said Tuesday.

Representatives of United and American airlines said city aviation officials caught the carriers off-guard with demands that they consider unreasonable: They planned to hike O'Hare rents and landing fees by millions of dollars, despite the recession and a struggling airline industry.

In addition, the city intends to use the money to repay bonds, which carry a 4 percent variable interest rate and aren't due for another 20 years.‬

The carriers balked, and in a scorching Feb. 3 letter to City Aviation Commissioner Rosemarie Andolino, they said that all talks are off until the city rethinks its financing strategy.

"We think that it's fiscally irresponsible to prepay debt that already has a coupon of 4 percent, especially when that debt is not due until 2030," said Michael Trevino, a spokesman for United Airlines. "Obviously, the airline industry continues to have its financial challenges."

The city should tap other funding sources, including fees charged passengers, said the International Air Transport Association in a Feb. 9 letter to Andolino. The trade group said it stepped into the dispute on behalf of foreign and domestic carriers at O'Hare because of the "unprecedented increase" in airport fees.

"Chicago O'Hare could have not chosen a worse moment to burden its carriers," said Douglas Lavin, IATA regional vice-president, given the $11-billion loss and $80 billion year-over-year drop in revenues that airlines saw in 2009.

It's a rare public dispute between the parties and comes at a time when the city scored a crucial legal victory that would have paved the way for the second phase of the $15 billion O'Hare expansion. A DuPage County judge Monday awarded the city possession of St. Johannes Cemetery, which lies in the path of a proposed runway.

The city and airlines were close to an agreement in late December to move ahead with the last runways on the south end of O'Hare, which the city contends would deliver the greatest results of any of the runways planned. They would substantially boost capacity for additional flights, while slashing the airport's legendary delays.

The two sides also agreed, sources said, to table the most contentious issue: the city's insistence on building a $3 billion western terminal that the airlines say they can't afford and don't need.

But the city backtracked last week and insisted that the terminal be part of any discussion. City officials also said they planned to retroactively raise the airlines' 2010 airport usage fees, as of Jan. 1. Rents would rise 15 percent to 17 percent, while landing fees would jump 38 percent.

About three-fourths of the landing-fee hike, or $63 million, would go to prepay bonds issued in 2005.

"We are uncertain what has triggered this change in direction, but find it quite troubling and inconsistent with our past dealings," wrote United and American officials. "If [city aviation] is going to intentionally and unnecessarily increase the airlines' costs, we cannot consider any projects that will only exacerbate the situation."

Andolino wasn't available for comment. In a statement, first deputy commissioner Michael Boland said the city wouldn't negotiate through the press but that it "remains willing to reach an agreement with its airline partners."

The airlines are furious because they thought they had a solid agreement with the Daley administration to keep down the costs of operating at O'Hare until the $15 billion airfield expansion project is completed. Andolino has said the project still can be done by 2014, which was the deadline Mayor Richard Daley set when Chicago was vying to host the 2016 Olympics.

But without airline support, or private investors, O'Hare expansion critics say the project will run out of money and stop midstream.

From the airlines' perspective, the centerpiece of financing the project was a concept called "pavement before payment."

Conceived in 2003, the idea went as follows: Since the financially struggling carriers could not provide significant upfront money for runway construction, the city borrowed heavily to raise funds. Then, the airlines were supposed to pay back their share years later, through increased landing fees and other charges, when a wealth of flights were operating on the new runways and the industry was again profitable.

But the airlines should have known that the city expected them to shoulder more of the costs, Boland said.

"It is unfortunate that the 2010 O'Hare debt service increases have occurred during difficult economic times; however, they were anticipated as part of the (O'Hare modernization) funding agreement reached with the airlines in 2003."

Chicago's intention to pay off long-term debt now, as referred to in the letter, suggests that the city may seek to dramatically increase future borrowing to finance the rest of the expansion project, experts said.

"Money is cheap right now and the city thinks it can do better" than the current interest rate it is paying on bonds, said an aviation consultant who has done work at O'Hare.

jjohnsson@tribune.com jhilkevitch@tribune.com