When Mayor James Hahn offered up his $9 billion, “Alternative D” plan for the overhaul of Los Angeles International Airport in 2002, little was made of how the ambitious project would be paid for.
Three years later, the commitment to the project has been scaled back to $3 billion and it has cleared its initial hurdles in the City Council. As yet, little has been made about how the revised project would be paid for.
“Obviously, I have not spent a great deal of time on the financing side because we’re trying to get the plan approved,” said City Councilwoman Cindy Miscikowski, who led efforts to split Hahn’s original plan into two phases earlier this year.
There are five basic revenue sources from which to draw: bonds, landing fees charged to airlines, surcharges on passenger tickets, grants from the federal government, and surcharges on car rentals.
But just as the LAX Master Plan has a number of components that can be and have been shifted around, so too do the financing options.
Two of the sources, landing and ticket fees, would affect the airlines most directly, and given the fiscal crisis besieging carriers, there is resistance to picking up added costs or seeing any action taken that might send passengers to lower-cost alternatives.
“The entire health of the industry will be a major component of this project and every other project in the country,” said Robert Dibblee, managing director of state and local government affairs at the Air Transport Association. “That’s why we’re working hard at just doing everything we possibly can to revive the industry and not spend a single dollar where it’s not necessary.”
United Airlines, the largest carrier at LAX, has been operating under bankruptcy protection since December 2002 and recently announced it would be slashing its fleet, cutting domestic flights and considering withholding its employee pension obligations.
The airlines’ financial situation is “a critical concern,” Miscikowski said.
“That’s why the plan has been phased and couched partly in the way it was,” she said. “From the very first, we’ve heard that an $11 billion project they can’t finance. A $3 billion one maybe they could.”
The most concrete breakdown of the financing plan for the airport expansion came last week when airport officials submitted a general outline to the City Council’s Commerce, Energy and Natural Resources committee, which approved the proposal. That meeting came a day after the Council’s Planning and Land Use Management Committee endorsed the proposed LAX Master Plan by a 2-1 vote.
The Board of Airport Commissioners is expected to provide a financial analysis of the costs associated with each of the plan’s components 60 to 120 days after the plan gets approved, said Miscikowski. The City Council has scheduled a hearing on Oct. 19.
In an e-mail last week, Nancy Castles, spokeswoman for Los Angeles World Airports, said the preliminary funding scenario had airline leases and landing fees contributing 25 percent to 50 percent of the project costs. Revenues from concessionaires and other vendors would make up 30 percent to 40 percent. Passenger facility charges, which are a Federal Aviation Administration-approved tax assessed on airline tickets of travelers departing from LAX, would make up 14 percent to 28 percent.
Federal grants would contribute 5 percent to 12 percent, and rental car customer charges, assessed by the rental car companies, would make up 2 percent to 5 percent.
Dennis Olson, director of properties at Alaska Airlines and chairman of the LAX Airline Airport Affairs Committee, a local affiliate of the ATA, said the financial options outlined by the airport are typical of most expansion projects. But, he added, airlines are concerned about how to absorb some of the costs given the industry’s economic situation.
“They’re not comfortable,” he said. “But they realize there are projects they want to see done.”
Coming up with cash
Despite the airline industry’s woes, LAWA has been a moneymaker for the city, something that could help buoy its financing options.
For the fiscal year ended June 30, 2003, the most recent data available, LAWA had operations income of $18.9 million, up 36.2 percent from the prior fiscal year. Operating revenue rose 5.8 percent, to $499.3 million, largely from concessions, building rentals and landing fees. The gains came even as passenger volume fell 1 percent to 55.3 million year-over-year.
LAWA’s fiscal health could prove an advantage given the opportunities to shift the dollars drawn from each of the funding sources:
– Revenue bonds. Standard & Poor’s has rated Los Angeles World Airports’ existing bonds AA-, which could bode well. But City Councilman Tony Cardenas, who heads the Commerce, Energy and Natural Resources committee, has his concerns about their real cost.
“Every time you bond, you could be paying double or triple the cost,” he said. “You’re saving money if you have cash on hand when you start to expand. If you have a large amount of cash on hand, the end result is you bond less of the capacity. That means 20 years out you look back, and since you didn’t have to bond 100 percent of the project, you saved 30 to 40 percent of the overall cost.”
– Landing fees. The fees charged to the airlines leasing its gates are typically used to fund airfield projects. At LAX, landing fees are typically lower than at other major airports, which Stephen Erie, political science professor at the University of California at San Diego, said helped it stay competitive with other regional airports.
Raising the fees, he said, would have to be done “slowly and with extreme difficulty.”
– Passenger facility charges. The federal government levies a $4.50 charge on all tickets for passengers flying out of LAX. Initially instituted in 1997 to fund the soundproofing of area residences, the money collected may only be designated for airport infrastructure projects and not for improvements benefiting an airline or other tenants.
– Federal grants. Olson said first-phase projects have a higher likelihood of receiving federal grants, which would eliminate the need to bond airfield projects, such as the planned relocation of LAX’s southern runway. The most common type of federal funding is the Federal Aviation Administration’s Airport Improvement Program grants, which offer billions of dollars for up to 85 percent of the cost for capital improvements, he said.
Many of the grants, however, are limited to airfield improvements. Discretionary grants and those related to homeland security may also be available.
– Rental charges. Car rental companies would likely assess a surcharge on the cost to rent a car in order to pay for the consolidated rental car facility. Whether the surcharge would pay for all or part of the facility remains unclear, Miscikowski said.
“The rental car facility is one where we could see stand-alone financing,” she said.
