Chicago Issues RFQ for Midway Airport

CHICAGO - Chicago took a major leap forward in advancing its groundbreaking plan to privatize Midway Airport, launching a search for potential bidders interested in a long-term lease to operate the airport in exchange for an upfront cash payment.

With a Midway deal in the works for at least three years, a preliminary agreement on the terms of a potential deal with a majority of airlines that operate at Midway paved the way for the city to move forward with the request for qualifications.

Potential bidders face a deadline for submitting their qualifications by 4 p.m. Chicago time on March 31, according to the 45-page document. Market participants have said the deal could fetch $2 billion to $3 billion, garnering strong interest because of its unique status as the first major airport privatized in the U.S. even as the credit markets have tightened significantly in recent months.

The city would use proceeds of the proposed transaction first to retire about $1.25 billion of outstanding first and second lien Midway Airport revenue bonds rated in the single A category. State legislation paving the way for the transaction commits the city to using additional funds to shore up the city's $9 billion unfunded pension liability and to finance infrastructure work.

"Just as with the long-term lease of the Chicago Skyway, if we successfully conclude this transaction, the taxpayers of Chicago will benefit through a substantial payment to the city that we can use to enhance quality of life for our residents," the city's chief financial officer Paul Volpe said in a statement.

Mayor Richard Daley first floated the idea of entering into a lease of Midway Airport with a private operator as Chicago prepared to close on the 99-year concession/lease of the Chicago Skyway tollbridge to a foreign consortium of Cintra Concesiones de Infraestructuras de Transporte SA andMacquarie Infrastructure Group.

The city collected $1.82 billion from the Skyway transaction that closed in early 2005, a deal considered the first long-term, major public-private partnership involving an existing asset. 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.

Navigating a Midway transaction, however, has proven more tricky given the complexities involved in operating an airport and the multiple parties whose approval is needed including the Federal Aviation Administration and Midway's airlines.

The FAA accepted the city's application in the fall 2006 to reserve one of five spots under a 1996 federal pilot program that allows airports to enter into long-term operating leases or pursue the sale of a facility to a private firm. Midway would take the one slot allowed for a hub airport.

The program exempts the airports from laws that require that airport revenues be spent on airports. To date, only Stewart International Airport in New Windsor, N.Y., had been privatized, but the Port Authority of New York and New Jersey assumed control of that facility last year.

The federal program requires that at least 65% of the airlines operating at Midway approve the transaction, as well as airlines with at least 65% of Midway traffic. The city announced a preliminary understanding with the airport's largest carrier - Southwest Airlines - last year. The city announced yesterday that Delta Air Lines, AirTran Airways, ATA Airlines, and Frontier Airlines had also recently signed on to the preliminary understanding. The five represent about 95% of Midway traffic and more than 70% of total number of airlines. Northwest Airlines Corp. and Continental Airlines Inc. also operate at the airport.

The RFQ includes a preliminary timeline that anticipates qualified bidders would be announced in the second quarter following a review by both city advisers and the airlines, a due diligence process completed in the second and third quarter, a final bidding process conducted in the third quarter and closing on a transaction - if the bids are acceptable to the city - by the end of the year. In addition to FAA approval needed for the lease structure and airline use agreement, any deal would need the approval of federal Transportation Security Administration and the Chicago City Council.

The lease - anticipated to run at least 50 years - anticipates a 100% ownership stake. It would require that a private operator assume a 25-year use agreement with Midway's airlines.

The plan won airline support in large part because it would generate millions of dollars in net present-value savings for airlines by capping fees for six years and then tying increases to inflation. It also transfers the risk of operations and maintenance costs from the airlines to the private operator. The airlines would also retain control over capital projects.

Midway generated in 2006 operating revenue of $105.6 million from landing fees, terminal area use charges, rents, concession, and parking revenues and another $24.4 million in passenger facility charges and $22.2 million of federal grants.

Midway is located about 10 miles southwest of the downtown. It handled nearly 304,000 flights on its five runways carrying more than 19 million passengers with an average rate of growth over the last 10 years of 5%. The airline has five runways and 43 gates. The airport includes four parking areas with over 13,500 parking spaces.

The city's financial advisers include lead Credit Suisse SecuritiesLLC, Banc of American Securities LLC, M.R. Beal & Co., and Popular SecuritiesInc. Its legal advisers include lead Mayer, Brown, Rowe & Maw LLP,Pugh, Jones, Johnson & QuandtPC, and Sanchez Daniels & Hoffman LLP. q

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