Chicago Proposes Major Hike In Airline Rents And Landing Fees

It seemed like a long-sought deal to fund new runways at Chicago's O'Hare International Airport (KORD) was about to be inked, until United and American Airlines balked at a proposal for major hikes in the rents and landing fees airlines pay.

The city of Chicago proposed to ask the airlines for millions of additional dollars to help repay bonds issued to build the new runways. The Chicago Tribune reports that the bonds carry a 4 percent interest rate, and won't come due for 20 years.

In a scathing letter to Chicago Aviation Commissioner Rosemarie Andolino, United and American said they would not return to the negotiations until the city reconsiders its position on the fees. "We think that it's fiscally irresponsible to prepay debt that already has a coupon of 4 percent, especially when that debt is not due until 2030," said Michael Trevino, a spokesman for United Airlines. "Obviously, the airline industry continues to have its financial challenges."

The Chicago Tribune reports that the overall airport expansion will cost $15 billion. One of the sticking points is a new $3 billion western terminal that the airport wants but the airlines don't. The two sides had agreed about the terminal in late December, but the city said last week that the terminal had to be part of the discussions. The city also announced that rents would be raised 15-17 percent, and that landing fees would jump a whopping 38 percent. About $63 million of the money raised by fee hikes would be used to prepay bonds issued 5 years ago.

The airlines thought they had made an agreement with the Daley administration to keep costs down until the project was completed. In 2003, the airlines contended they could not afford to pay for the runway construction up front, so the city borrowed heavily for the project. Airlines were supposed to pay the money back after the project was complete, the runways were operational, and airline industry was again profitable. "We are uncertain what has triggered this change in direction, but find it quite troubling and inconsistent with our past dealings," wrote United and American officials. "If [city aviation] is going to intentionally and unnecessarily increase the airlines' costs, we cannot consider any projects that will only exacerbate the situation."

Now, some critics say without the support of the airlines or private investors, the construction will stop midstream when the project runs out of money.

First Deputy Aviation Commissioner Michael Boland told the Tribune that the airlines should have known that the city would ask them to share more of the cost burden. "It is unfortunate that the 2010 O'Hare debt-service increases have occurred during difficult economic times. However, they were anticipated as part of the (O'Hare modernization) funding agreement reached with the airlines in 2003," he said.

FMI: www.ohare.com