Public-Private Partnership Policy Casebook/JFK Airport PPP

Summary

• In 2017, Governor Cuomo announced a JFK Vision Plan.
• JFK vision plan would reviatlize the airport on multiple fronts:
  • Connect 8 terminals.
  • Redesign international roadways to remove congestion
  • Centralize the parking lots
  • Revamp amenities
• Plans were approved again May 2021 by the Port Authority of New York and New Jersey, along with JFK International Air Terminal (JKFIAT), which operates the terminal, and Delta Air Lines.
• About the JFK Airport as a whole
  • JFK covers 4,930 acres, including 880 acres in the Central Terminal Area.
  • The land is owned by the City of New York, the airport built on it is operated by The Port Authority of New York and New Jersey, under a lease with the City of New York.
  • It is a major hub for Jetblue, Delta, and American airlines. It has four runways, eight terminals with 117 gates.
  • JFK Airport can operate a maximum of 81 flights per hour.
  • JFK has been recognized as the leading U.S. gateway for passengers and cargo. The airport is among the busiest in North America and the world.
• This case study synthesis is to focus on the P3 agreement of Terminal 4.
  • JFK Terminal 4 was the first major terminal in the United States to be administered by a foreign airport operator (Schiphol Group).
  • It is also the only non-airline privately-operated terminal at the JFK Airport.

Maps of Locations

• Location of JFK Airport

• Location of JFK Terminal 4

Risk Matrix

Risk Matrix

Risk Type	Public	Shared	Private
Land Availability, Access and Site Risk	X
Political Risk	X
Environmental Risk	X
Design Risk			X
Construction Risk			X
Infrastructure Condition Risk			X
Operating Risk			X
Demand Risk		X
Financing Risk		X
Strategic or Partnering Risk		X
Force Majeure Risk	X
Quality Assurance/Control Risk			X
Change in Laws Risk			X
Early Termination Risk		X
Labor Dispute Risk			X
Condition at Handback Risk			X

Location of JFK Terminal 4

Timeline of the JFK Terminal 4 PPP Project

• 1993 Port Authority began planning and design studies for Terminal 4 redevelopment
• July 1995 Request for qualifications issued for parties interested in operating the existing IAB and to construct and operate the new Terminal 4
• December 1995 Request for proposals (RFP) issued March 1996 RFP responses due
• April 1996 JFKIAT selected as winning proponent
• May 1996 Memorandum of understanding signed between Port Authority and JFKIAT and JFKIAT assumes operational responsibility
• April 25, 1997 Closing of $934.1 million in Series 6 Special Project Bonds to finance Terminal 4 redevelopment
• May 13, 1997 Execution of JFKIAT lease, JFKIAT assumes operation of IAB
• May 8, 2001 Opening of the Terminal 4 central terminal building (“head house”) with the principal facilities for processing arriving and departing passengers
• August 10, 2001 Port Authority and JFKIAT agree to terms of lease amendment; Port Authority provides $172 million in subordinate completion financing
• September 11, 2001 Terrorist attacks depress international airline travel demand; most U.S. airports, including JFK, closed for 2 days
• November 2004 City of New York and Port Authority execute extension to Port Authority’s lease of JFK and LaGuardia airports through 2050
• 2007 Delta Air Lines begins negotiations with Port Authority and JFKIAT over Terminal 4 expansion
• April 2010 Schiphol USA acquires JFKIAT ownership stakes of LCOR and Lehman
• August 11, 2010 Port Authority, JFKIAT, and Delta announce $660 million expansion of Terminal 4
• May 2013 Delta to relocate fully Terminal 3 operations to Terminal 4
• May 2015 Terminal 3 demolished; site redeveloped to accommodate remote aircraft parking

Annotated List of Actors

• Port Authority: a bi-state port district established through an intergovernmental contract between the states of New York and New Jersey. The governor of each state appoints 6 members to the Board of Commissioners, which oversees the Port Authority.
• JFK International Air Terminal LLC (“JFKIAT”): the winning bidder of this project, with a joint venture structure of
  • LCOR JFK Airport LLC (“LCOR”) with a 40% stake
  • Schiphol USA LLC with a 40% stake
  • Lehman JFK LLC (“Lehman”) with a 20% stake

Contract Type

In May 1997, the Port Authority of New York and New Jersey awarded a concession contract to JFK International Air Terminal LLC (JFKIAT), a subsidiary of the Schiphol Group, to operate, manage and maintain Terminal 4 until 2043. According to the concession, JFKIAT was in charge of expanding the Terminal 4 and upgrading the airport infrastructure, which includes nine new international gates, customs and border security facilities and additional baggage space.

JFKIAT signed a lease with the Port Authority on May 13, 1997, just a few days after the special project bonds' financial close on April 25, 1997. The lease period was set to terminate on the sooner of (1) 25 years after the date of beneficial possession of the new facility, or (2) the day before the expiration of the Port Authority's lease with the City of New York for JFK ("City Lease"). The lease obliged JFKIAT to finish construction of the terminal by May 12, 2002; but, if it was not completed by May 2001, hefty financial penalties applied. The City Lease was set to expire in 2015 at the time of its signing; however, in 2004, it was extended until 2050. If the City Lease was not extended, the JFKIAT lease provided for accelerated amortization of principal. The JFKIAT lease for Terminal 4 was amended to expire on May 8, 2026, as a result of the City Lease extension.

Cost

The Port Authority issued $934.1 million in special project bonds in April 1997 to finance JFKIAT's construction of the new Terminal 4, which included dismantling the IAB and creating a terminal building, terminal frontage highway, and aircraft parking ramp. The bonds are not a general obligation of the Port Authority and are secured by rental payments (i.e., amounts necessary to pay debt service on the bonds), the pledge of a leasehold mortgage, and certain other pledged assets of JFKIAT. JFKIAT pays for facility rentals using its net earnings (revenues less operating and maintenance expenses and ground rental to the Port Authority). Standard & Poor's gave the 1997 bonds a BBB+ rating, Fitch gave them an A, and Moody's gave them a BAA2 rating. MBIA guaranteed the bonds, which were three times oversubscribed.

In August 2001, a lease amendment was signed in line with the Port Authority's $172 million completion financing for JFKIAT. Although JFKIAT initially requested that the Port Authority issue extra bonds to cover cost overruns, the Port Authority instead offered to give a subordinate loan to speed up the process and reduce the complications of dealing with numerous financial parties. The Port Authority also wanted to safeguard its landlord position in the "waterfall" from another creditor while also improving the deal's overall profitability. The Port Authority, in particular, retained a significant amount of land as a result of this funding and the subsequent lease amendment. JFKIAT obtained a greater terminal management fee as well as a larger retail management fee in exchange. The terms of the completion finance were amended by subsequent lease amendments. As a result, after paying operational expenses, ground rent, debt payments, reserve deposits, and terminal and retail management fees, JFKIAT's financial returns are essentially made up of its portion of ACRP 01-14 Considering and Evaluating Airport Privatization Appendix H H-29 distributions.

The project was completed in May 2001 at a construction cost approximately 20% over the budgeted amount. .The final cost of construction was approximately $1,069 million, compared to an original estimate in 1997 of $876 million.

JFKIAT uses differential pricing to account for the value of access to the facilities during peak hours to airlines and the value of longer-term, fixed lease agreements to JFKIAT. These rent and fee prices are normally established to match market-based competitive rates. Airlines can sign into agreements with JFKIAT for a variety of terms (from 30 days to 10 years), with airlines that guarantee a minimum passenger volume for a longer period of time often being charged cheaper prices. According to the lease, JFKIAT is required to present an annual strategic plan to the Port Authority, which includes a collaborative evaluation of the proposed price structure. Any agreement between JFKIAT and an airline with a term of more than 7 years requires written consent from the Port Authority.

Financial Structure

JFKIAT is required to make rental payments sufficient to pay debt service on the special (tax-exempt) facility bonds, pay certain operation and maintenance expenses and ground rent to the Port Authority, and make certain other payments and distributions from revenues available after the debt service is paid under the terms of the lease with the Port Authority. Airline payments (passenger terminal costs, utility recovery charges, exclusive airline space leases, aircraft parking fees, and ground handling concession prices), terminal concession privilege fees, and tenant parking fee payments account for the majority of revenue.

Terminal 4's airline revenues account for around 85-90 percent of total Terminal 4 revenue.

Identification of Policy Issues

• Order Limiting Operations at John F. Kennedy International Airport (JFK).
• Originally published on January 18, 2008, and most recently extended on September 17, 2018.
• The Order remains effective until October 29, 2022.

Key Takeaways

Terminal 4 is generally recognized in the industry as a successful example of nonairline, private sector participation in terminal development and operation. The project did not necessitate the implementation of any federal or state legislation, such as the Airport Privatization Pilot Program. Since the opening of Terminal 4 in 2001, no project of equal magnitude has been completed in the United States. The Port Authority is considering using certain aspects of the Terminal 4 model in connection with a terminal expansion at Newark and the planned redevelopment of the central terminal building at LaGuardia Airport, among other options, as a reflection of its general satisfaction with the conceptual model.

Key lessons learned from this P3 project are as follows:

• The redevelopment of Terminal 4 was made possible by the availability of tax-exempt financing. According to LCOR, tax-exempt borrowing provides a 30% reduction over private financing.
• Despite the Port Authority's efforts to attract private equity to the project, its access to the tax-exempt bond market on behalf of the developers and the resulting cheaper cost of capital dissuaded a significant equity investment that would have demanded higher returns. The Port Authority wanted the consortium to have "skin in the game," so JFKIAT made a $15 million commitment.
• JFKIAT was able to effectively test market-based pricing, which is used by just a few public airports. In example, during the traffic dip caused by September 11 and SARS, JFKIAT was able to negotiate special pricing with airlines that would not have been possible under traditional public procurement regulations.
• The fact that there was no "anchor tenant" whose needs were driving facility design and development at the expense of other tenants was crucial to the Terminal 4 project's success. Any organized opposition to the project was difficult due to the fact that no airline had a significant percentage of traffic at the terminal. As a result of the Terminal 4 expansion project and Delta's preferential-lease status, these dynamics have shifted to some extent.
• This project has also been a success because it is one of numerous terminals at JFK that compete for traffic with other terminals. This competition aims to keep costs cheap while also encouraging JFKIAT to run a well-managed facility with strong customer service standards. Because JFKIAT competes for airline consumers, there is less need for more stringent regulation.

Questions for Discussion

1. Due to lower traveler numbers, do you think expanding the terminal is still a good idea?
2. Do you think the P3 model in this JFK Terminal 4 project, which is quite unique in a number of factors, e.g. a lease contract, leveraged on special (tax-exempt) bonds, and short-term concessions (initially 15 years), can be transferrable to other P3 projects?