U.S. airports' funding crunch – are P3s the answer?

Summary

• Like everywhere else, U.S. municipalities are struggling to find the cash to run their airports, let alone invest in them.
• This in the land where the first airport privatisation initiative, now almost 25 years old, failed to generate more than one success.
• But a change in regulation in 2018 made private infrastructure financing more attractive, and available to all airports.
• Now public-private partnerships are (comparatively) thriving, and moving into different aspects of the airport estate.
• However, they don't always work out.

US airports caught in a crippling financial squeeze

A recent article published by the Reason Foundation, by way of its 'Airport Policy News' organ, argued that U.S. airports, just like their global counterparts, are caught in a crippling financial squeeze. Their primary revenue sources - airline fees and space rentals, plus revenue from passenger spending - are still greatly depressed by the ongoing decline in air travel compared with pre-pandemic conditions.

This CAPA report takes these concerns, and their potential remedies, further.

Passenger traffic was down by 70-75% across the nation in 3Q2020 (just one major airport lost "only 50%" according to Fitch Ratings, and one third of airports were "performing worse than Fitch's expectations of a 75% decline)".

The worst hit ones were international hubs such as Boston, Washington Dulles, New York JFK, Los Angeles International, Miami, and San Francisco, and with Honolulu being the worst of all - down 89% from 2019 in the third quarter.

For all the attempts to introduce private capital, bonds remain the primary capital investment vehicle

U.S. airports' capital investments are financed almost exclusively by bonds, in contrast to many global airports that have equity investors as well as bondholders.

But debt service must be paid, on pain of ratings downgrades by Fitch and its peers, which leads to higher borrowing costs.

Well-run airports maintain debt service reserve funds, but when revenues are squeezed there may not be much left over for capital investments, such as for new terminals or the modernisation of existing ones, or for other facilities such as people movers, consolidated rental car centres, or new backup power systems.

P3s a popular and growing alternative

This raises, again, the potential for public-private partnerships (PPPs or P3s) for hard-hit U.S. airports to tap into - a popular alternative and one that is growing, globally.

P3s can offer an alternative to putting capital improvement projects on hold until air travel recovers, since they connect with private capital; a mix of equity and debt that in some cases does not require the use of any existing airport revenues or new airport bond issuance.

Consolidated car rental facilities offer a perfect opportunity

Taking consolidated car rental centres (ConRACs) as an example, the centralisation of car rental facilities, ideally adjacent to the terminals themselves (as at Reagan National in Washington and a few other airports), and preferably close to surface transport interchanges within an airport complex. Such facilities also help reclaim the huge acreage occupied by rental car lots, by shifting those operations into multi-storey garages.

Around the US them are being funded by P3s, including one at Los Angeles International (LAX).

Another example can be found at New York Newark Liberty International Airport. Indeed, there are active P3s for various varieties of infrastructure at all the three main New York airports, with two of them responsible for the total rebuild of LaGuardia.

Design-Build P3s are the 'default position' for the New York Port Authority

In the past five years the Port Authority of New York and New Jersey (PANYNJ) has negotiated four P3s, two at LaGuardia and two at Newark, which have collectively totalled USD11.5 billion in investment. Design-Build is now the default position on all PANYNJ projects, and P3s are sought for all major projects.

The company in control of the Newark project is investing equity and bank debt to build the facility, with the promise of a new revenue stream of an inflation-linked rental car customer facility charge in return.

It could reasonably be assumed that as long as the pandemic lasts, and for a long time after that, the use of private vehicles to access, and leave from, the airport will be the preferred option for the general public just about everywhere.

Newark Airport project's revenue stream is from customer facility charges; the first to use a revenue-risk P3 model

The Newark project consists of a six-storey parking and rental car facility plus an adjacent quick turnaround facility for washing and servicing incoming rental cars - and it is accessible from the terminal via an elevated walkway. Best of all, the contract shifts major risks from the airport operator (PANYNJ) to the private developer/operator, ConRAC Solutions, which is financing the USD480 million EWR project.

Newark Airport's revenue stream will be a customer facilities charge (CFC) paid by each rental car customer.

Over the 35-year lease of the long term P3, the CFC will increase by 2% each year. ConRAC Solutions and its equity providers and lenders will depend on this revenue stream for both debt service and their return on equity. They have no recourse to the Port Authority, which means the risks are transferred to the company.

The EWR ConRAC is the first in the U.S. to use a revenue-risk P3 model. The other public-private partnership ConRAC under construction today at LAX is financed-based on annual availability payments made by LAX to the P3 company (Fengate and PCL Investments). Under that structure, key risks (including a future decline in rental car use) remain with the airport.

Other examples will soon follow

This has all the hallmarks of a winning model. A five-year partnership has been announced with iCON Infrastructure to develop other privately financed ConRACs at U.S. and Canadian airports, using the revenue-risk model.

This kind of P3 adds no debt to the airport's balance sheet and relies on no existing airport revenues. It should work for any facility that has a built-in revenue source, such as a new parking structure or an airport hotel.

P3 schemes for airport infrastructure are not new

Airports Council International (ACI) has acknowledged the changing level of demand for private sector co-operation in infrastructure that may have been "off the table" before - such as partial privatisations or creative ways of bringing in revenue in the short term.

In fact, such demand was noticeable long before the pandemic.

In the CAPA Airport Privatisation and Finance Review, published in Sep-2018, it was pointed out that there was already a multitude of P3 projects for a variety of U.S. airport infrastructure and that, as with long-established Build-Operate-Transfer initiatives, various derivatives were starting to emerge, such as design-build-finance-operate-maintain P3 projects.

Examples of US airport P3s from Airport Privatisation and Finance Review, 2018

Airport	State	Procedure
South Suburban Airport, Chicago/Peotone	Illinois	Potential 75-year airport design-build-finance-operate-maintain concession P3 project with an investor-owned company to develop and operate the airport, which may be cargo-oriented.
Gary-Chicago	Indiana	A done P3 deal (Jan-2014) by AFCO to operate and manage development at the airport for 40 years. Initial investment of USD25 million with a further USD75 million to follow.
Austin	Texas	Austin City Council authorised negotiations with Highstar Capital (Oaktree Partners) to lease 30 acres including the South Terminal at Austin-Bergstrom International Airport. The South Terminal was rehabilitated and became commercially operational once again in Apr-2017, under a P3 between the City of Austin - Department of Aviation and LoneStar Airport (funded by Oaktree Capital/Highstar Capital).
Branson	Missouri	Branson Airport, LLC is an example of a commercial passenger airport that was privately developed and which is, now, privately operated. Private developers raised USD155 million in capital and received airspace approval from the FAA. They created a single runway airport with a contractor-operated control tower and a modest terminal building.
Los Angeles (LAX)	California	Los Angeles World Airports announced a USD5 billion Landside Access Modernisation Program for LAX, involving both a consolidated rental car centre and an automated people mover linking it to the central terminal area. Both of those projects are now planned as design-build-finance-operate-maintain P3 projects.
Dallas-Fort Worth	Texas	Dallas/Fort Worth International Airport said that the proposed sixth terminal there (Terminal F) might be constructed as some form of P3 project. However, as American Airlines has 85% of capacity at DFW, a sixth terminal for AA - as it would be - with third party involvement might create too many issues.
Denver	Colorado	At the end of Jun-2016 Denver International Airport selected a consortium led by Ferrovial Airports as the preferred bidder for its main terminal renovation project. The consortium was selected to enter into exclusive negotiations for a public-private partnership (P3) to make improvements to the Jeppesen Terminal. The contract was signed on 25-Aug-2017. The 34-year concession represents an investment of USD650 million.
Des Moines	Iowa	The Des Moines Airport Authority hired a consultant to assist in evaluating alternatives for developing a replacement for its 67-year-old terminal, one of which is a P3 procurement.
San Diego/Tijuana	California/Mexico	The USD120 million Cross Border Xpress provides an easier way for US air travellers to access Tijuana International Airport, checking in on the US side and walking across a bridge to the airport. The private company paid for US customs and immigration facilities on the US side.
Paulding Northwest (Atlanta) and Paine Field (Seattle)	Georgia/Washington State	The New York-based private equity firm Propeller Investments, whose privatisation proposal for Briscoe Field in the Atlanta metro area was defeated in 2012 by local opposition, returned to Georgia in 2013 with a new proposal, to develop passenger service at the relatively new Paulding Northwest Atlanta Airport. The deal is structured as a P3 between Propeller and the county, which does not require a pilot programme slot - only airfield and airspace approval from the FAA, as well as TSA screening facilities. Propeller Investments is pursuing a similar opportunity at Paine Field in Everett, a suburb north of Seattle, Washington State.
Westchester County Airport	New York State	In Aug-2017 Westchester County received three proposals to manage and operate the airport under a USD1.1 billion P3 covering a 40-year lease with no expansion of the airport's footprint. In Nov-2017 Macquarie Infrastructure Corporation was selected as the winning bidder. The Board of Legislators has not given its final approval at the time of writing.
Kansas City Airport	Kansas	In Nov 2017 voters approved a USD1 billion Kansas City airport P3 scheme to build a 750,000-square-foot single-terminal hub. Four bids were proposed for it. The council subsequently voted against it, but negotiations with the private sector developer resumed late in Dec-2017.

Source: CAPA Airport Investors Database.

(In fact, not all of these projects were seen through to the end, and reference to those that did not is made at the end of this report).

The amount of cash available to municipalities to support their airports will continue to decline

ACI also noted that airports owned by municipalities must anticipate that those owners will have limited financial capacity to help them.

Indeed, that has been the case for the past two decades or so, and numerous privatisation projects for airports during that time have been conceived for reasons as varied as financially supporting flagging municipal waste removal from the accrued lease funds, plugging holes in pension funds, and even plugging holes in the sewerage system. Cities involved included Los Angeles, Chicago, Atlanta and St Louis, although none were ever approved. In part, that was because it was not strictly legal to do that (asset recycling) under the existing legislation.

That "limited financial capacity" is potentially going to gain more momentum while cities remain locked down and jobs are lost, and if immigration increases.

The 2018 FAA Reauthorisation Act was a game changer

Weighed against this negativity is the fact that U.S. cities and counties that own and operate airports now have an alternative option, thanks to the 2018 FAA Reauthorisation Act, which, unlike many of its annual predecessors, actually did something novel.

They can now tap the asset value of their airports via the relatively new Airport Investment Partnership Program (AIPP), which replaced the original and ailing Airport Pilot Privatisation Programme brought in during the Clinton administration in 1996.

That programme was one that had overseen only one successful privatisation, in Puerto Rico in 2017, and another which lasted for just seven years before it reverted to public ownership (New York Stewart International). (Not counting Branson Airport in Missouri, which was a private venture outside the FAA mandate).

The financial world is now every U.S. airport's oyster

Under the AIPP, any government airport owner can enter into a long term P3 structured as a lease, competitively selecting from amongst the world's leading airport companies, with financing provided by public pension funds, venture capital funds, hedge funds or the growing ranks of infrastructure investment funds.

What's more: unlike what was the case with the former federal pilot programme, there are no restrictions on how many, or what size of, airports can choose to do this. That Xanadu of opportunity was one the U.S. airports industry had never previously experienced, even in the heyday of privatisation in the 1960s, when firms like Lockheed and Pan Am owned airports.

The lease payments can be made annually, over a 40-to-50-year lease term, or the net present value can be paid up front, as was done in the case of the successful San Juan International airport in Puerto Rico in 2013, and was being seriously considered in 2018 for the St Louis Lambert Field airport (which would have been by far the biggest to date) until that went down following a political 'reappraisal' by the city's Mayor.

However structured, the lease revenue can be used by the airport owner for general government purposes, including other infrastructure investment, which was not the case before.

Investors less risk-averse when they call the shots

The Reason Foundation article considered why financially strapped cities, counties, and states (such as Hawaii and Maryland, and potentially a lot more of them) might be interested in doing this.

One reason is that owing to the long term nature of these P3 leases, the investors might be less risk-averse to financing major improvements (such as new or modernised terminals), since they do not rely on investors as conservative as municipal bond buyers often are. And the risks attendant to premature investing would be borne by the P3 investors, not by the airport owner.

The 'calibre' of investors that have already run the rule over U.S. airports may surprise some

At an Airport Consultants Council meeting in Nov-2020 delegates appeared to be surprised by the calibre of those who wanted to lease St Louis Lambert Field.

The interested parties included four of the world's five largest airport companies (AENA, Groupe ADP, Fraport, and VINCI Airports), major infrastructure investment funds (including AMP Capital, Blackstone, Global Infrastructure Partners, and Partners Group), major public pension funds (such as the Ontario Municipal Employees Retirement System, the Ontario Teachers' Pension Plan, and Public Sector Pension), and two firms that invest in infrastructure on behalf of pension funds (IFM Investors and Ullico).

Indeed, a year ago a CAPA report highlighted the "impressive list of firms" in the queue for that St Louis lease.

See: St Louis airport lease is off: the end for U.S. lease deals?).

And they have been around for a while

Why are investors interested in these airports all of a sudden?

Well, they already were, albeit to a lesser degree. The twice-attempted Chicago Midway lease, almost a decade ago now, attracted some of the biggest firms in the sector.

Airports still have longevity, even if they are on life support right now, and that is what infrastructure investors habitually seek. Moreover, they have large tracts of land, some of which may not be built on. Under existing zoning homes cannot be built there, but commercial facilities, leisure facilities, business parks, 'airport cities' even, or arrays of solar panels are possible.

Many large and medium U.S. hub airports have a net asset value (after paying off existing tax-exempt bonds) of between USD1 billion and USD10 billion, based on pre-pandemic airport transactions worldwide.

How much those valuations would be discounted as of 2021 is uncertain, but in the context of, say, a 50-year P3 lease, the valuations would not be substantially lower.

So, although the proposed St. Louis lease fell through, despite strong investor interest and airline support, due to divided opinions among the metropolitan area's business and government leaders, there will assuredly be other interested governments, as well as investors, when air travel begins a serious recovery.

Not all schemes work out…

On the other hand, not all of the previously mentioned P3s went according to plan.

Denver downsized

A year after terminating a long term P3 to renovate and expand facilities in its landside Great Hall terminal (see table above), Denver International Airport (DEN) has unveiled a scaled-down USD770 million renovation plan. It calls for a less ambitious relocation and makeover of its checkpoint areas, and there will be fewer new retail establishments than in the original plan, which depended on concession revenue to provide debt service on the project's revenue bonds. The renovation is to be completed by the end of 2021, which is two years later than originally planned.

It was in Aug-2019 that DEN announced that it was terminating, for convenience, the 34-year design-build-finance-operate-maintain P3 concession, under which a consortium headed by Ferrovial Airports was to revamp the landside terminal into a planned Great Hall.

After construction was held up due to a finding that the terminal's concrete flooring could not sustain the weight involved in the planned construction, negotiations on how to resolve the delays and costs involved were unsuccessful. The problems must have been serious, given that under the terms of the agreement, DEN must pay various reimbursements to the consortium as a condition of ending the concession far earlier than its agreed 34-year duration. The project is now a public one.

Hendry County Airport in limbo

At the same time, in Florida the planned conversion of the Hendry County (Florida) Airport to a cargo-reliever airport for Miami International, the only active lease filed with the FAA presently, will require significant upgrades for the surface transportation infrastructure adjacent to the airport. Hendry County received only one proposal for the needed Transportation Infrastructure Analysis around what will be the Airglades International Airport.

This is the second privatisation setback in Florida in recent months: there was a tentative lease proposal for the Punta Gorda Charlotte County Airport on Florida's west coast, but in Nov-2020 Charlotte County Airport Authority commissioners voted 3-2 to oppose the proposal, which included approximately USD200 million up front, with an additional USD125 million to USD300 million in revenue share over a 40-year lease.

…but the P3 is moving into other areas of airport operation

But on the other hand again, just up the road in Georgia, the Atlanta Department of Aviation issued a request for proposals (RFP) on 07-Jan-2021 for a company or consortium to design, build, finance, operate, and maintain (DBFOM) a new cargo facility at Hartsfield-Jackson Atlanta International Airport.

Responses to the RFP are due on 04-Mar-2021.

Six teams responded last year to a request for information (RfI): AFCO, Aeroterm, Balfour Beatty, Ventus, Engineering Design Technologies, and Holder Construction.

Recent long term airport P3s in the cargo segment have included an air cargo facility at Laredo International Airport in Texas. Which just goes to show how the P3 momentum is moving into different areas of the airport industry.

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Acknowledgment is made to the Reason Foundation, Airport Policy News and Bob Poole for the original article around which this report is based.