LA’s Ontario Airport returns as a privatisation prospect

LAWA, the city department that owns and operates the airport, seeks to increase the competitiveness and efficiency of the airport and is evaluating the feasibility of, and options for, contracting management and operation of the airport through a long-term lease and management agreement. Before beginning any formal solicitation process, LAWA is seeking expressions of interest from parties qualified to manage and operate the airport to gain input that would guide any future selection process and the form of the lease and management agreement.

Specific goals are mentioned such as returning Ontario to pre-2008 passenger levels and to increase its share of traffic in the LA region, with more efficient operations. The request goes to people who are interested in leasing or managing the airport, and anyone interested in the competitiveness of Ontario is invited to respond.

The objectives in full are:
(1) Return LA/Ontario to pre-2008 passenger traffic trends and increase its share of air traffic in the Los Angeles region;
(2) Cost effectively market the airport to airlines, passengers and air cargo companies;
(3) Operate the airport more efficiently; and
(4) Balance the short-term improvement initiatives currently under way at the airport while maintaining its long-term capacity for growth.

Weeding out the asset-strippers

While such a request is hardly unique it may be symptomatic of a growing trend in the US, instigated by the Reason Foundation and its Director of Transportation Policy, Robert J Poole, that emphasises the desirability of issuing a "Request for Strategies" in advance of a Request for Proposals (RFP), in which interested parties lay out their desire and intent to remake and reposition the airport and by which the lessors would indicate that that they were more interested in a partner that would invest in the airport.

According to Mr Poole that would "weed out the asset-flippers and monetisers" - assuming they got responses from more appropriate teams. If they did, they would then be better positioned to create a short-list of qualified teams and develop an appropriate RFP. Moreover there is a hint there of the desirability of Canada's "not for profit" stakeholder approach to airport ownership and management; one that might prove to be a suitable halfway house between municipal ownership and the lease privatisation model that has been the only preferred alternative in the US since the 1996 Pilot Privatisation Programme was introduced.

The REOI process does not trigger a binding competitive process. The City of Los Angeles and LAWA will also retain full ownership interest in the airport.

LA/Ontario International Airport as it is known, is a medium-hub, full-service airport with commercial jet service to many major cities in the US and is also served by airlines providing international service to Mexico. In fiscal year 2010 ending 30-Jun, it served 4.8 million passengers. As of 01-Oct-2010, 18 scheduled and 53 unscheduled passenger and cargo carriers served Ontario Airport.

It is situated in the 'Inland Empire,' or IE as it is known, 35 miles to the east of the LA metropolitan region, and has been a LAWA owned airport since 1967. The Inland Empire is a relatively new LA metropolitan conurbation, now the third largest in California, and 14th largest in the Union, with a population of some four million, centred on San Bernardino, Riverside and Ontario and characterised by an odd juxtaposition of wealthy middle-class gated communities distancing themselves from the downtown mayhem and poorer working-class areas.

Ontario Airport was first proposed as a candidate for privatisation in late 2008/early 2009 subsequent to an examination of saleable assets by the city's then financial controller Laura Chick, but thereafter little was heard about it. Then in Feb-2010 the Mayor of Los Angeles, Antonio Villaraigosa, once again called for the sale of such non-core assets to solve a USD200 million budget gap in 2010. Again nothing was heard for almost a year but during that time California's budget deficit as a whole has gotten worse, and is projected in some estimates to reach USD28 billion in this fiscal year. The City of Los Angeles' own deficit has since grown to almost USD500 million.

The reality of being a non-core asset

Airport Investor Monthly last reported on Ontario Airport and its prospects for privatisation in edition #65, Mar-2010. In it, there was a report from a local LA newspaper, The Press Enterprise, in which, under the slightly exaggerated headline "For Lease: America's airports", Ontario Airport was reported to be included in a memo from the Mayor and five City Council members "urging the city administrative officer (CAO) to solve the gaping budget gap in the current fiscal year". Other privatisation candidates in the memo included such "non-core assets" as the Convention Centre, golf courses, Van Nuys Airport (a general aviation facility popular with Hollywood celebrities), and the city zoo. The CAO's office told the newspaper that it would take several months to research these possibilities.

The Press Enterprise then asked "But will anyone buy?" It concluded the answer was no, pointing to the failure of the lease of Stewart Airport in New York State (1999) to a branch of Britain's National Express plc; an airport which had just been taken back into public management by the Port Authority of New York and New Jersey in late 2008. It might also have mentioned the failed Chicago Midway privatisation project. More to the point, Ontario Airport had 1.35 million fewer passengers use it in 2009, (4.8 million) compared to 2008, a year during which it lost 13.5% of traffic compared to the previous year. In fact 2009 was Ontario's worst year for passenger traffic going all the way back to 1992, the first year reported on the airport's website. Passenger figures for 2010 have not yet been released. It is known there was some growth in the summer, but only in the 1-2% bracket, whereas it really needs 10-12% to get back on track.

Poor stepchild

In Jun-2010, a group of officials in Ontario mounted a campaign to wrest control of Ontario Airport away from the city of Los Angeles. Spearheaded by Alan Wapner, a councilman in the San Bernardino County, the group persuaded the Los Angeles City Council to order a feasibility study on the matter to be completed by 01-Sep-2010. They argued that the airport is the largest economic generator in the area and shouldn't be "left in the hands of someone outside the region". The group added that Ontario is long regarded as LAWA's poor stepchild and is likely to remain that way while Los Angeles International Airport (LAX) embarks on a series of major renovations expected to cost at least USD10 billion over the next 10 years.

At issue was whether Los Angeles was willing to give up such a large portion of its "turf" - 1700 acres - even for some up-front money at a time when the city had a huge budget deficit and was laying off workers. Not all Mr Wapner's colleagues agreed with spinning off Ontario from LAWA but the proposal found favour in some other LA region suburbs close to Ontario. And with the CEO of the Los Angeles Area Chamber of Commerce who argued that Los Angeles may be better off selling its stake. He opined that it is "a beautiful airport facility with a great deal of land but it would seem that it's a rather significant asset which doesn't generate any cash flow".

Financial woes and woeful fees

Ontario operates under LAWA's budget, does not draw on the city's general fund, and until recently was holding its own financially. With traffic booming it was even regarded as being at least part of the "regional" solution to handling growth at LAX, except that it was operating at close to capacity itself. But when the recession hit, the Inland Empire, with its construction-driven economy and new sub-prime loan-dependent areas, was knocked particularly hard. With declining passenger numbers the "bottom line" is an estimated USD10 million drop in revenue to about USD75 million for 2010 and much the same in 2011 despite the transfer of some staff to Los Angeles and the closing or reduction of many airport services.

However, Councilman Wapner believes the real reason for the decline is not the economy but the high cost of doing business at the airport. Airlines pay landing and terminal rental fees amounting to about USD14.50 a passenger while the cost per passenger at LAX is USD9.95, partially caused by a hefty administrative fee imposed by LAWA and partially from salaries that are up to 20% higher than comparable ones in the IE. The fees contributed to a decision taken by JetBlue last year to reduce services in the LA basin.

Two reports in Sep-2010 - one from LAWA and the other from the City of Ontario - have a different spin on the cost issues. The City of Ontario report points out that successful secondary airports (such as Washington -Baltimore's BWI, LA's non-LAWA airport at Burbank, Houston Hobby, Dallas Love Field, and Fort Lauderdale) are characterised by lower costs than the metropolitan area's principal hub. Hence, they are able to attract low-cost carriers, in particular. Ontario once had both JetBlue and Southwest, but now retains only a scaled-back presence of the latter. By contrast, congested LAX serves nine LCCs, including even Allegiant, which otherwise nearly always serves secondary airports.

LAWA's report, prepared by Jacobs Consultancy (now LeighFisher), and which is more in line with Council Wapner's thinking, points to operating and maintenance expenses per passenger that are more than twice as high as the average for medium-hub airports. The city's report explains why those costs are so high: a much larger workforce than comparable airports, much higher compensation levels (averaging more than USD102,000 per employee), and the annual administrative fee of 15% of operating expenses paid to LAWA.

One impediment to a sale or lease, which would require Ontario Airport to take control of its own affairs in the first instance, would be that enhancement work that has been undertaken since 1967 when the city of Ontario entered into a joint powers agreement with Los Angeles, (which finally purchased the site in 1985) has been undertaken with federal money (ie a new terminal complex and runway additions and extensions). As with most potential US airport privatisations some work would be required to untangle the ownership.

Price of LAX renovation could drive airlines to Ontario

In the meantime, there is a growing alternative view of Ontario's potential that is linked to the multi-billion-dollar renovation at LAX that may in fact shift some passenger traffic to the Inland Empire. The steep price of planned improvements at LAX will eventually have to be passed on to airlines in the form of higher user fees. As a result the cost of doing business at LAX will be greater than at Ontario by 2013.

Indeed it could be argued that LAWA has its hands full managing and modernising LAX, as well as a side issue, that of dealing with unhappy tenants at Van Nuys. It is also committed to the "regionalisation" of air service in Greater Los Angeles, since LAX operates under a politically imposed cap on its maximum annual passenger numbers. Even so it is hard to imagine LAWA returning an asset that, even in its current depressed state, has a large asset value and solid long-term growth prospects, if it can cut costs and increase revenues.

Some US analysts remain unconvinced that either objective will work out, arguing that airlines don't go anywhere just because of lower costs; the real issue is whether the passenger base will be able to support it.

On that subject, the view expressed in Airport Investor Monthly #65 still stands. Despite acknowledging that other privatisation candidates such as Chicago's Midway airport (temporarily in abeyance) and New Orleans' Louis Armstrong Airport (since cancelled) either had a clear role in the area (Midway) or a monopoly (New Orleans), neither of which could be offered by Ontario Airport right now. Ontario did have some things going for it. Our opinion was (and is, with some modification) as follows:

No concept of a privately run low-cost airport

"[There is a] total lack of a conceptualisation in the US (outside of Missouri, New York State and possibly Austin, Texas) of a privately-run low cost airport (LCA) or terminal serving a broad metropolitan area, as is often found in Europe and increasingly in Asia. Ontario would have a head start as an LCA rather than the 'full service' airport it sometimes purports to be, on several counts. Firstly, it is already dominated by the US's primary LCC, Southwest (almost 50% of Ontario's passengers); an airline that has already nodded through the concept of privatisation at Midway. Secondly, it is situated in the fastest-growing part of the 14 million population Greater Los Angeles metropolitan area, one where planning permission in the already heavily built up parts nearer the Pacific Ocean is these days more readily given to high rise apartment projects than to villas, to spare precious land. Thirdly, Ontario Airport is handy for important districts to the east of the city proper, like Pasadena, Glendale, even the Disney and other theme parks in Orange County, though they do have their own local airport (John Wayne at Santa Ana).

There may be eight airports serving this LA city-region, but it is the principal region of the state of California, a state that would have the world's eighth highest nation-state GDP in the world if it was a country, with a GDP similar to that of Italy or Brazil. LAWA's airports and the non-LAWA ones span a vast region, for example Palmdale is 60 miles north of the downtown area, but there is no substantial designated low cost facility as such* as there is in the San Francisco Bay Region (Oakland), Greater Miami (Fort Lauderdale) or Dallas (Love Field) and even this huge geographical area is little different from, say, northwest England, where Liverpool Airport was able to grow tenfold in a decade by establishing itself as the budget airport of choice. It is not as if surface transport to and from the airport is lacking - the San Bernardino Freeway, (Interstate 10), which plugs into the entire LA basin freeway system, runs straight past the door on its journey from Santa Monica in the west to Arizona and Texas.

(*Burbank's Bob Hope Airport, roughly the same size as Ontario, which is operated under a management contract by TBI/Abertis and which is the only LA region airport with a direct downtown rail link, is a fringe case in this respect but the majority of its services are legacy/commuter ones and are limited to the western part of the US).

"Moreover, Ontario has few noise restriction rules unlike other southern California airports such as John Wayne (Santa Ana), Burbank and Long Beach. The airport is allowed to operate 24/7.

A challenge worth taking on

"Airport Investor Monthly could propose many non-US airport operators that would regard Ontario as a challenge worth taking on, assuming they were happy to work in the US generally - a country that is sometimes suspicious of the motives of foreign operators - and that they were content with only being able to lease it."

STOP PRESS. In the matter of airport privatisation generally in the US, there is at least one House bill that could derail it. In a 2008 bill there are two provisions intended to make it harder to bring about airport privatisation, and to reduce the incentive of companies to invest in such deals.

The first would increase the airline approval requirement from the present 65% to a more difficult to achieve 75%. Any state or municipal government that seeks to lease an airport under the existing FAA Airport Privatisation Pilot Program may shift the lease proceeds to its general government budget only if it can achieve the required level of airline approval. Doing that involves clearing two barriers. Approval is required from 65% of the number of airlines offering scheduled service at the airport, but also of airlines accounting for 65% of the annual landed weight (on which traditional landing fees are based). Few governments would want to lease an airport if they could not spend the proceeds.

The second provision would exclude privatised airports from receiving Airport Improvement Programme (AIP) grants, even though passengers using such airports would still be paying the ticket tax that provides the majority of the funds used for AIP. That would create an uneven playing field for the companies that lease airports; their competitors would be getting 'free' development money from the government, from which they would be excluded, despite continuing to pay for it.

The fear is that these provisions might yet turn up in the FAA Reauthorisation Bill.

Despite this, the Chief of the airport operators' association in the US, ACI-North America, remains confident that as many as 10 US airports could be privatised during this decade. The trigger factor would be economic pressures on cities and states, leading them to divest their airports via long-term leases, and thereby getting a return on their investment in the form of lease payments. "Once a mayor cashes a USD2 billion check" from such a transaction, he predicts, political attitudes will shift to favour privatisation. He also noted that airport managers are attracted to the prospect of "a little more freedom" under privatisation.

Background information

• ONT is part of Los Angeles World Airports, the City of Los Angeles department that owns and operates ONT, Los Angeles International Airport (LAX), Van Nuys (general aviation) Airport, and aviation property at Palmdale
• The REOI is available at: www.labavn.org/index.cfm?fuseaction=contract.doc_list&contractid=10842&recordid=10842&page=0&CFID=740034&CFTOKEN=32975887