ORD's sometimes-bumpy upgrade project had been going smoothly lately, with the facility's seventh runway becoming operational in November 2008 and plans underway to add four more runways (while decommissioning two older ones) and extending two existing runways by the middle of this decade. CDA, which manages ORD, also wants to add a fifth terminal by 2014.
UA and AA, which combined operate around 90% of the facility's flights (including regional operations), are needed to finance a large amount of the remaining expansion, estimated to cost $6-$8 billion. In order for the main portion of the modernization to be finished by 2014 as planned, the airlines and CDA need to reach an accord this year. The two agreed on the general outline of the modernization and Phase 1 funding in 2003, though funding for Phase 2 of the program--the four runways to come and the new terminal--was not established at that time.
While negotiations have been contentious at times, UA/AA and CDA appeared to be nearing a funding arrangement at the end of last year. But when CDA informed airlines operating at ORD in January that landing fees would increase by 38% and rental rates by 15%-17% in the first half of this year, UA and AA hit the ceiling. In a blistering letter hand-delivered to CDA Commissioner Rosemarie Andolino earlier this month, UA VP-Corporate Real Estate Kate Gebo and AA VP-Corporate Real Estate Laura Einspanier jointly wrote that the increases "are steep, unnecessary and threaten the competitiveness of O'Hare, the City of Chicago and our companies."
They said the decision to up the fees so sharply "in the current economic environment. . .is incredibly disappointing." The real estate VPs added that CDA staff had informed them that the rationale for the fee increase was the "prepayment of debt that is not scheduled to mature until after 2030" and called the "unheard-of" action of prepaying debt so early, particularly at a 4% interest rate, "a fiscally irresponsible action."
They noted that "before the holidays [in December] we were optimistic that we were nearing completion on agreement" for funding the remainder of the modernization program. But until CDA "agrees to reverse course on the prepayment of debt, we will not continue to discuss funding approval of the. . .runways even on the terms we had been discussing at the end of the year." Gebo and Einspanier wrote, "If [CDA] is going to intentionally and unnecessarily increase the airlines' costs, we cannot consider any projects that will only exacerbate the situation." They offered to return to the negotiating table "if [CDA] reverses course on the debt repayment and issues new rates for 2010."
IATA Regional VP-North America Doug Lavin also wrote a letter to Andolino expressing "great concern" about the rate increases. "Airports across the United States have been working closely with their airline customers to control their costs and to ensure that their rates are reflective of the difficult economic times," he explained. "Given [the economy], Chicago O'Hare could not have chosen a worse moment to burden its carriers with increases of 17% in rental rates and 38% in landing fees. The accelerated payment of debt not maturing until 2030 artificially raises the cost basis used to set rates for the airlines by $63 million this year alone."
In a statement, Andolino said, "It is unfortunate that the 2010 O'Hare debt service increases have occurred during difficult economic times. These debt service increases were anticipated as part of the [modernization program] agreement reached with the airlines in 2003." She added that she preferred not to "conduct these negotiations in the press."
At a Feb. 10 news conference, she said the higher landing fees were necessary in part to help pay for the runway that came online in November 2008. She explained that CDA should have raised fees last year but refrained from doing so in deference to the recession's effect on carriers. "That's why it went up even more this year, because [the new rates] should have actually started. . .last year," she told reporters, adding that she remained open to reaching an accord with the airlines that could provide "short-term rate relief."
UA and AA say they did expect a rate increase this year to help finance bonds that paid for the November 2008 runway but allege that 75% of the fee hike being imposed by CDA relates to the prepayment of the debt that matures in 2030. "We understood there would be some increase and we accepted that," AA spokesperson Mary Frances Fagan told ATWOnline. "It was the additional increase to pay for debt that doesn't mature for 20 years at a 4% interest rate that was unacceptable."
She said negotiations between the airlines and CDA over funding the remainder of ORD modernization are on hold indefinitely, adding, "We thought we had a deal we were working on" late last year.