CHICAGO - With a new runway set to open as planned this fall at O'Hare International Airport under the $3.3 billion first phase of a major expansion plan, Chicago officials are struggling to keep construction of a second runway on track amid ongoing negotiations with airlines on future funding and as a public-private partnership is sought for a new terminal.
The city is on schedule to open in November the first new runway under the O'Hare Modernization Program, which calls for the reconfiguration of the airport's runways from an intersecting design to a parallel configuration and the addition of new runways. Once completed, the airport will have eight runways compared to seven now.
Officials say they want to complete the three phases of the overall $8 billion program by 2014. The runway expansion is part of a larger $15 billion expansion and improvement program planned that also includes new terminals and general capital improvement projects.
The runway plan is designed to expand the airport's capacity to 1.2 million flights from one million and relieve delays that occur in poor weather conditions when runways are closed down, impacting the national air traffic grid. The opening of the new runway will provide some relief by adding capacity for an additional 50 flights.
However, it is the opening of a second runway scheduled for 2011 that is expected to have a more significant impact on delays, reducing them by 36%. However, officials in charge of the expansion said various issues - such as delays in acquiring land due to ongoing litigation - have put a strain on that timetable, although officials remain hopeful.
"We're still holding onto the 2011 schedule, but I have to tell you we're feeling the pressures," OMP executive director Rosemarie Andolino said in a radio interview this past weekend when asked about the timing of the projects and delays in acquiring a cemetery due to litigation. "We still have to work with next of kin and the families. That's a sensitive process and I don't know now what the timing will be."
Earlier this month the U.S. Supreme Court said it would not consider an appeal filed by a group of suburban opponents challenging a lower court ruling that had cleared the path for Chicago to acquire and relocate the cemetery. Because the court denied the petition to hear the case, a decision by the U.S. Seventh Circuit Court of Appeals allowing the city to acquire St. Johannes Cemetery and demolish it stands.
The owners of the cemetery, St. John's United Church, and several suburbs adjacent to the airport on the northwestern edge of Chicago have waged a legal battle on several fronts against the expansion, arguing that the acquisition of the cemetery violated First Amendment freedom of religion protections. A separate case challenging the viability of the financing scheme for the project is pending before the District of Columbia appellate court. The opponents contend that the Federal Aviation Administration should not have approved federal grants for the project.
The first phase - which originally had a price tag of $2.9 billion but has grown by $400 million due to construction delays - relies on $1.6 billion of general airport revenue bonds, $659 million of bonds backed by passenger facility charges and general airport revenue revenues, the use of PFCs on a pay-as-you-go basis, and $330 million in federal grants. Overall, the total runway plan loosely relies on $4.43 billion of GARB borrowing, $1.6 billion of PFC-backed debt, $752 million of third-party financing, and $677 million of federal aid and other pay-as-you-go funds.
Chicago earlier this year sold nearly $800 million of new-money and refunding O'Hare-related debt that provided some funding for the ongoing runway projects. The city has refunded hundreds of millions of dollars of outstanding O'Hare debt, pushing out repayment to shed about $100 million in interest rate costs in the near term for the fiscally struggling airlines.
While negotiations between the city and O'Hare's airlines are continuing on the second phase of the runway project, approval has so far eluded city officials as airlines struggle to keep afloat amid skyrocketing fuel costs. Airlines are bearing much of the expansion costs through higher landing and other fees paid to operate at the airport.
To compensate for lackluster financial support from carriers, the city is looking at a public-private partnership as a funding source. A local publication reported that city officials wrote in a letter to American Airlines and United Airlines - both of which operate hubs at O'Hare - that a practical funding plan could be developed for the second phase that does not rely on the airlines.
Andolino elaborated on the report, saying that private investment was being considered on a proposed new terminal on the western edge of the airport that is part of the second phase. The city hopes if it turns to a public-private partnership to raise about $800 million to finance construction of the terminal. In exchange, private investors could benefit from the sales revenues that could be generated within the terminal.
"I think it makes sense. It shows the city is willing to be creative in financing a new terminal, and as negotiations continue on the second phase, the airlines continue to face a very challenging environment because of fuel costs," said Peter Stettler, a Fitch Ratings analyst who follows O'Hare's credit.
Chicago has entered into several privatization-lease deals of existing assets, but any such deal on the O'Hare expansion would mark the city's first use to help finance the construction of a new asset. Officials are currently reviewing proposals from six teams interested in bidding on the rights to operate Midway Airport under a long-term lease for an upfront payment that some have said could fetch around $3 billion.
Chicago launched the national wave of interest in privatizing assets with its 99-year concession lease of the Chicago Skyway tollroad in early 2005 to a private consortium for $1.8 billion. The city has since entered into a long-term lease on its downtown parking garages in a $563 million deal and has advanced plans to privatize its parking meter system and three waste-recycling centers.
O'Hare has about $4 billion of general airport revenue bonds outstanding in three liens that are rated from the mid- to high-single A range on the third lien to the high double-A category on the first senior lien.