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Airlines Balk at Hub Bill

September 29, 2008

By O’Malley, Chris

Five airlines at Indianapolis International Airport-all of them paying higher fees and rents to help pay for the $1.1 billion midfield terminal-complain they may be stuck footing the bill for part of the $214 million FedEx cargo-hub expansion.

The dispute is detailed in a recent Federal Aviation Administration decision on a complaint filed in April 2007 by Northwest Airlines, Delta Air Lines, AirTran Airways, Continental Airlines and Southwest Airlines.

It provides a rare look into the sometimes fractious relationship between an airport and airlines struggling with high fuel costs and other economic pressures.

The airlines allege the FedEx expansion could cost them an additional $23 million in landing fees at Indianapolis International through 2028. They say that’s because the Indianapolis Airport Authority promised to reduce landing fees for FedEx at the same time it committed to spending $49 million for a new aircraft parking apron at the expanded cargo hub.

The amount of landing fee reductions the Memphis-based company can enjoy will be based on its success meeting certain targets set by the airport.

The FAA dismissed the airlines’ complaint Aug. 18. But the agency did so in part because it said the issue wasn’t yet ripe for FAA review, noting the authority has yet to impose on airlines the costs related to the FedEx expansion. According to FAA documents, the airport has frozen the complaining airlines’ landing fee rates at 2008 levels through 2010 the duration of their current lease agreement with the airport.

Airlines can now file their complaint in court, or appeal the decision to the FAA’s associate administrator for airports.

“While we are pleased with the determination, it may not be the final FAA decision,” said John J. Kish, executive director of the Indianapolis Airport Authority.

Kish declined to elaborate, citing the possibility of more litigation.

Northwest Airlines, which initiated the complaint against the authority, wouldn’t indicate what its next move might be.

But airlines increasingly have been balking at higher airport costs, having worked hard to reduce their own costs, said Robert Mann, of Port Washington, N.Y-based airline industry consultancy R.W. Mann & Co.

One of the most notable reactions was Southwest Airlines’ threat to move out of Seattle-Tacoma International Airport for nearby Boeing Field, in 2005.

A $4.2 billion capital project at Sea-Tac was projected to raise Southwest’s average cost per passenger there to $15 from $7.

Although local leaders put the kibosh on Southwest’s move to Boeing Field, Sea-Tac officials quickly shaved costs off their capital projects.

“These airport costs have become a big issue,” Mann said. Airlines “have become quite aggressive.”

‘Sweetheart’ deal?

FedEx drew celebratory headlines in May 2006 about the expansion and word that it could generate an additional 800 jobs at the airport.

The day after then-Mayor Bart Peterson announced the expansion, the airlines sent the authority a letter objecting to the landing fee credit offered to FedEx, according to FAA records. For 11 months, both sides tried but failed to resolve the dispute; the airlines ultimately filed their complaint with the FAA in April 2007.

The airlines wanted the FAA to stop the airport authority from including the cost of the FedEx cargo apron in the computation of landing fees at the airport.

Currently, FedEx alone pays nearly 50 percent of total landing fees at Indianapolis.

The FAA has a say in certain aspects of airport finances, in part because the airport has received more than $355 million in federal airport development grants since 1982.

Legal counsel for the airlines alleged IAA violated several grant assurance provisions, along with the FAA’s policy on rates and charges and its policy and procedures on the use of airport revenue.

The airport authority countered that the FedEx expansion will generate additional income for the airport because FedEx will land more planes and pay additional rent. The authority argued that the landing fee credit to FedEx ultimately would not harm the passenger carriers but rather have a net benefit of $10 million because FedEx will generate more revenue for the airport.

“The complaining airlines’ story is simple, and might even be compelling, if it were true. They claim that the authority made a sweetheart deal with FedEx, and now is sticking the complaining airlines with the bill,” the authority’s lawyers wrote in a rebuttal.

But the authority argued it cannot be “unjustly discriminatory” to include the cost of the FedEx credit in residual landing fee rates because “the same landing fee rates also include net costs of the passenger terminal … comprised of facilities that FedEx does not use.”

More wrangling on radar

But the airport authority could be on thin ice if it passes on costs related to the FedEx apron expansion and doesn’t get the OK from carriers.

“The FAA finds that the [airlines'] argument that they will incur additional costs … could be valid if the authority imposes this arrangement on airlines without their concurrence,” the Aug. 18 determination states.

The authority “cannot impose the cost of the FedEx rent credit on other carriers even if the other carriers benefit from the additional operations by FedEx, as a result of having the airfield costs spread over more operations, and even if the other carriers actually pay less as a result of the overall deal.”

Barring any further legal action, the FedEx issue may wind up being resolved during negotiations for a new airline lease agreement.

The expansion could bring FedEx’s total airport employment to nearly 5,000.

FedEx plans to add more than 600,000 square feet of buildings to its 1.9-million-square-foot hub, which is its largest operation behind its primary hub in Memphis.

Airlines vs. airport

Allegations by the major players in a complaint filed by airlines with the Federal Aviation Administration

Airlines say:

* Authority in 2006 struck a sweetheart deal with FedEx to ensure a $214 million expansion of its local cargo hub by giving FedEx a break on landing fees through 2028 and building a $49 million cargo apron.

* Northwest Airlines, Delta Air Lines, AirTran Airways, Continental Airlines and Southwest Airlines will wind up bearing the cost of the FedEx breaks: $23 million in higher landing fees through 2028.

Airport says:

* Additional FedEx aircraft activity from the hub expansion will generate higher overall landing fee income at the airport that not only exceeds amount of breaks FedEx will get on landing fees but also will net a $10 million benefit to passenger airlines.

* Apron built for FedEx could be used by passenger carriers during heavy congestion.

FAA says:

* Aug. 18 determination found the Indianapolis Airport Authority violated no federal rules as presented, but noted the authority hasn’t yet imposed cost of FedEx landing-fee breaks on passenger airlines; airlines could have standing when and if the authority imposes the breaks after 2010.

* Airlines could contest now in state courts.

Source: Federal Aviation Administration documents

Copyright IBJ Corporation Sep 1, 2008

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