A case study of LAX reveals a set of complex airport relationships that make growth challenging. To say the least.

If business ever takes you to Hong Kong or Honolulu, chances are you’ve spent some down time at Los Angeles International Airport (LAX). As the number one international gateway to Asia and the Pacific—with traffic from both commerce and the film and fashion industries—the Southern California hub sees more than 61 million passengers annually, contributing to its status as the world’s fifth busiest passenger airport.

A recent layover in LAX’s Tom Bradley International Terminal (TBIT) may have afforded you the opportunity to enjoy the new amenities and furnishings of its four new “mega” airline lounges. TBIT’s overall lounge space has increased by 72 percent, with 47,000 square feet of consolidated lounge space replacing 16 former individual lounges. In addition to an unaffiliated carriers’ lounge, these premier alliance lounges, operated by OneWorld, SkyTeam and Star Alliance, respectively, provide frequent fliers with a welcome reprieve from surroundings that tend to prompt the apology, “Pardon our dust.”

LAX’s impressive passenger base is expected to expand to the estimated limits of the airport at 78.9 million annually, and a modernization program has been set in motion to prepare for this anticipated growth. A $723.5 million project that launched in February 2007 involves major interior renovations to TBIT, installation of an in-line checked-baggage security system, and a second boarding gate for new large aircraft.

In addition to the first large aircraft gate, which was completed in June 2006 and put to the test when the behemoth Airbus 380 touched down on U.S. soil for the first time in March 2007, an anticipated $1.2 billion investment is earmarked in part to accommodate LAX’s “Cadillacs of the Sky” with the addition of an 11-gate midfield satellite concourse and an above-ground people mover.

Delayed delivery of the A380 and Boeing 787 enables LAX to handle sporadic next-generation aircraft operations now, but forecasts suggest that the airport will offer 11 daily round-trips in the A380 alone by 2012. Other modernizations at LAX include a consolidated rental-car facility with an as-yet-unknown price tag, although an architectural and engineering request for proposal (RFP) is underway.

Funding airport construction zones

Major ongoing construction is not unique to LAX. Airports Council International-North America (ACINA), a trade association representing air carrier airports in the United States and Canada, estimates capital development costs for airports that comprise the national airport system of the U.S. to be $87.4 billion for the period of 2007 through 2011. These local airport projects are intended to benefit passengers directly and strengthen the country’s aviation infrastructure, with more than 73 percent of airport capital development projects planned to increase capacity through terminal and airside improvements such as new gates, taxiways and runways.

With price tags in the multimillion and billion-plus range, airports must make adequate arrangements for these capital improvement programs. As a member of Los Angeles World Airports (LAWA), LAX has earned one of the healthiest credit rankings of any airport in the States. Its latest Standard & Poor’s “AA” general airport revenue bond rating has ensured the organization ample access to debt and capital markets, which allows the combination of bond financing with federal grants and reserves needed to pay for projects like the midfield satellite concourse.

Yet in the case of TBIT, a majority of renovation funding will be supplied by LAXTEC, a consortium of 33 airlines operating within the terminal. The new airline lounges, for example, will be completely paid for by TBIT airlines, while the engineering work, hiring and construction were completed under LAWA’s control. Further enhancements specified in the TBIT renovation program will follow suit with LAWA project management and LAXTEC reimbursement.

“The way airport finance works in the U.S. is to essentially function as public utility,” says Mark Thorpe, LAWA’s director of air service marketing. “In general, airports in the U.S. are federally regulated, and the cost of renting terminal space [depends on] the cost related to the construction, the bond financing and all other incurred costs.”

In short, airport rent is based not necessarily on fair market value, but instead on the amortized cost of debt to build and maintain the facility decades into the life of the airport.

ACI-NA senior advisor Dick Marchi notes that the relationship between airports and airlines is basically that of landlord and tenant. “There is a spectrum of relationships embodied in different kinds of agreements,” he says. “Some agreements give airlines review and approval authority over airport capital spending expenditures, while others have far less [or] none.”

Differences in the system

As capacity constraints exacerbate the need for capital improvements throughout the airport system, you may wonder why your hometown terminal is aging without adequate attention, while facilities such as LAX get all the latest bells and whistles in the marketplace.

A number of factors are involved, but at the end of the day, the airlines wind up paying for everything. Just about any airport has a say in which projects go forward. While LAX maintains one of the best bond ratings of any airport in the U.S., many others do not share the same good fortune. Particularly since September 11, the volatile airline industry hasn’t been seen as the best place to issue debt.

“When your local airport wants to modernize facilities, and they go to the debt market to try to issue revenue bonds, they aren’t going to get the most favorable interest rates, so it is a very expensive proposition to build those facilities,” LAWA’s Thorpe explains. Whether a bond rating is perfect or paltry, the bottom line of project costs may quash a proposal before it leaves the drawing board.

“If you are going to modernize your facility and double your operating costs, the airlines are going to look at that and say, ‘Are we going to double traffic to pay for that?’” says Thorpe. “In a lot of cases, the answer is no, so it is not something that is [economically] justifiable.”

In large markets like Los Angeles, major capital improvement projects tend to be economically viable, but the challenge remains: how to get the job done. Key factors in this equation are the governance and political will of each individual airport to push projects forward.

While part of a federally regulated industry, most U.S. airports are operated as independent, not-for profit entities with oversight by a politically appointed authority; or as self-sustaining enterprise funds of a governmental entity, such as a county, city or state government. The LAWA airports—LAX, L.A./Ontario International, Van Nuys and L.A./Palmdale Regional—fall under the direction of the mayor of Los Angeles. Leadership with foresight, as well as the energy and fortitude to push programs forward, has made a significant difference in Los Angeles.

That’s not to say LAX is a stranger to political indifference. Elements of the airport’s master plan process started in 1994 by then Mayor Richard Riordan—and modernized by subsequent Mayor James K. Hahn—are just beginning to come to fruition under current Mayor Antonio Villaraigosa.

After Mayor Hahn’s version of the master plan was approved by the city council, seven lawsuits were filed against it within the 60-day filing period. When Mayor Villaraigosa took office in early 2005, none of the master-plan projects had begun, although engineering and architectural drawings had long been completed. Bids for the contracts were collected, but not awarded due to lawsuit lockups. In September 2005, Mayor Villaraigosa personally called all of the litigating parties into a room together; and by December 2005, they had negotiated a letter of intent. By February 2006, they reached a settlement that allowed the airport to go forward with construction on the LAX South Airfield Improvement Project, as well as develop new plans for LAX that stayed consistent with the mayor’s vision for regional redistribution of aviation demand.

Appointed by Mayor Villaraigosa in May 2007, LAWA Executive Director Gina Marie Lindsey says LAX has not fully turned a corner, but has gotten partway there by permitting the master plan to proceed on a piecemeal basis. An airport industry veteran with leadership stints at Anchorage International Airport and Seattle-Tacoma International Airport on her résumé, Lindsey has overcome a number of challenges that, she comments, reflect a “great deal of commonality.”

“Every airport has its own set of political issues locally,” says Lindsey. “They are all the same in nature. It is just the complexity proportionate to their own operation.”

Compared to the other airports where Lindsey served, she notes, one complication with Los Angeles procedure is the city’s tightly prescribed process for approval. “There is a board process that is not new to me, but the city council and mayor’s office process adds a great deal of front time to how we get things approved.”

Beyond that challenge, the biggest challenge that differs from her past airport experiences is the lack of a consolidated capital improvement plan.

“We are essentially doing things out of sequence,” Lindsey explains, noting that LAX is starting to deliver projects within a program that has not yet been fully defined. “We are programming and scoping for the midfield satellite when we are also on a different, but clearly related, track trying to assemble the rest of the capital projects that are necessary to keep the rest of the terminals running, and also to enable the functionality of the midfield satellite. Typically, you would have all of that done and you would have a methodically and systematically planned and identified and articulated capital improvement plan, with all of the projects sequenced and defined before you started to deliver it. Here, we are doing it all at once.”

Over the next year, Lindsey plans to aggregate the airport’s capital plan, determine priorities and put cost estimates together. “We will be negotiating a finance plan for that set of projects with our air carriers, and we will simultaneously [launch] full speed on design of the midfield satellite while we complete] the projects that were already started: the South Airfield Improvement Project and the TBIT Improvement Project,” she describes. “It will be a very busy year.”

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Unique challenges

There’s a saying among industry veterans that if you’ve seen one airport, you’ve seen one airport. This certainly holds true for LAX. Although comparable to New York’s John F. Kennedy International Airport (JFK) in terms of era representation, other hub airports face their own particular challenges in modernization.

“LAX and JFK were the first of the jet-age airports in the United States, and [they] followed a developmental pattern that has led to challenges to modernize that don’t exist at other airports,” LAWA’s Thorpe says, noting that more recent airport hubs, including Denver and Dallas/Fort Worth, are situated on tens of thousands of open and available acres. “Here at LAX, this airport has been around since 1928, and it started development decades ago that we now have to work with to modernize the facility.”

LAX comprises eight terminals, three of which are controlled by LAWA. Three individual airlines— United, Delta, American—and two consortia control the remaining five terminals, all of which are space-constrained, with tens of millions of passengers filtering through the facility every year.

“These conditions make any type of project extremely difficult to do, because you have to keep passenger and cargo traffic coming in and out, so I think it is a really big deal to have this project going forward as it is,” says Thorpe. “Are we going to redo the entire airport? No. When you have gone down a road for 75-plus years, you can’t just go and [build] a new airport. You have to find an optimal, rather than perfect, solution, and that is what has happened here.”

Even if your hometown airport faces financial or political opposition, rest assured that improvements at pillars of the aviation system, such as LAX, will make a big difference not only locally, but throughout the country’s airports. As Thorpe puts it, “Major improvements to LAX help travelers everywhere.”
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NICOLE NELSON is a freelance writer and former editor of Centerlines, the magazine of the Airports Council International-North America.