City Hopes To Catch Some Breaks To Pay For Revamp

Gov. Rod Blagojevich signed a $6.6-billion bill to expand O'Hare last August, but critics now argue that the total cost is likely to be higher. With the full $15-billion price tag for Chicago's plan to expand O'Hare International Airport coming into focus, questions are emerging about how the city will pay for the costliest public works project in its history.

City airport planners argue that the plan is flexible, and the decision to go ahead with any of the new runways or terminals will depend on step-by-step approval by the airlines and bond markets over time. "If the passenger traffic is there, the costs are what (they need) to be," says Ramon Ricondo, the city's main airport planning consultant. "If not, some of it may not be built. O'Hare will remain competitive." The city's first phase of improvements, particularly a new parallel runway on the north side of the airport, promises to sharply reduce delays at a relatively modest cost of $2.9 billion. But that could be the extent of what's doable for the foreseeable future, at least until airline profits rebound and there's a better fix on future passenger demand.

"I believe it all will happen," says U.S. Rep. William Lipinski, D-Chicago, a close observer of the city's airport plans. But it could take awhile. "I think the airlines will not be as robust economically as the plan in place will need them to be at the appropriate time. It may take longer" than the city's current timetable.
 
Critics argue that the total cost is likely to be higher than the city's estimate and too expensive in relation to the projected benefits. "This would be magic if they put in $15 billion and they doubled capacity," says Jon Ash, managing director of Global Aviation Associates Ltd., an aviation consulting firm retained by the Suburban O'Hare Commission, an anti-expansion group. "The real question is whether you could ever finance this thing." Today, of course, the answer would be no. O'Hare's largest tenant, United Airlines, is in bankruptcy and Texas-based arch rival American Airlines is struggling to stay out.

"Of course we support the master plan, and have worked closely with the city on it," says a spokesman for UAL Corp., United's Elk Grove Township-based parent. "As things move along, we'd expect costs to be reasonable. To get into specifics, it's just too premature." Other airlines are still waiting to get on board. "We do not believe that we have been presented with a comprehensive economic analysis that weighs the cost of the program with the potential increase in flight activity," says a spokesman for Eagan (MN)-based Northwest Airlines in a prepared statement. "Furthermore, we were and continue to be concerned that the program, in its entirety, will create a cost structure for airlines serving O'Hare that will be among the most expensive airports in the world."

Mr. Ricondo, the city's consultant, concedes that "O'Hare will be average to high cost," depending on what happens to anticipated improvement projects at other major airports. In addition, city airport planners are making optimistic long-range assumptions about funding sources and the ability of long-struggling airlines to shoulder more than $1 billion in annual debt service by 2022 to pay for airport operations and improvements. For instance, the $4.50 passenger facility charge that the city gets from every ticket is projected to increase to $6 by 2011, but that will take an act of Congress.

"A lot of folks, including us, would have problems with that," says a spokesman for the Air Transport Assn., the airline industry's trade association in Washington, D.C.

The fee and bonds backed by proceeds from it are expected to cover 22 percent of the $6.6 billion needed for new runways and a western terminal, plus 41 percent of $4.2 billion in routine capital improvement costs over the next 20 years. Overall, annual debt service would soar from $132.7 million in 2003 to more than $1 billion a year by 2022. Much of the debt and interest payments are back loaded to reduce the financial pressure on airlines today. One assumption is that future refinancing of the airport's existing $3.2 billion in debt will put off principal payments until 2019.

The city also assumes that a type of borrowing called special facility debt — usually backed by a single airline — will be used for a substantial part of the new terminals that will be built. The market for special facility bonds has been thrown into doubt by United's attempt to default on that kind of debt in bankruptcy, an issue that is still being litigated. Other kinds of third-party financing, such as privately built terminals, could be used instead. The debate over what's really needed at O'Hare may be just starting, and it promises to play out for the next decade or more. It's a debate the region could have had before now if the city and suburbs hadn't been at odds over whether to expand O'Hare at all over the last 20 years.

"We'd be more than willing to sit down with the city and come up with a low-cost, cost-efficient expansion plan for the airport," says Joseph Karaganis, general counsel for the Suburban O'Hare Commission.

When Mayor Richard Daley forged an airport accord with former Gov. George Ryan in 2001, he went for a much bigger-than-expected expansion plan involving six new and reconfigured runways and the razing of more than 500 suburban homes to expand the airport's footprint. Instead of engaging in the normal political give and take, Gov. Ryan agreed to the city's comprehensive plan. Critics still argue that the plan is too big and too expensive. But only the most die-hard critics would argue that O'Hare doesn't need to expand at all. "O'Hare needs to be modernized; everyone would agree with that," says David Hinson, a former Federal Aviation Administration commissioner working with the Suburban O'Hare Commission on a pro bono basis. "The demand will be there and the existing configuration can't handle it."

FMI: www.ohare.com/ohare