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Chicago Treads Cautiously as It Reconsiders a Midway Airport Lease

CHICAGO — Chicago Mayor Rahm Emanuel's announcement Friday that the city would explore leasing Midway International Airport to private operators came with a full-court press to portray any eventual deal as a good one for taxpayers.

Terms would differ significantly from former Mayor Richard Daley's proposed $2.5 billion, 99-year Midway concession to Midway Investment and Development Co. that fell apart in 2009 due to the international credit crunch, and from Daley's unpopular 2009 $1.15 billion parking meter lease.

Any new deal would be limited to 40 years and be structured as a management and land lease with ongoing revenue sharing benefits for the city.

The initial upfront payment would go to retire Midway's $1.4 billion to $1.5 billion of debt with future payments being invested in city infrastructure.

More favorable terms and limiting the deal to 40 years will cut into the deal's value but the city still stands to collect a sizeable financial payment, market participants said.

"I am exploring all options on behalf of taxpayers, and I have made it clear I will only consider moving forward if certain conditions and criteria are met, including ownership remaining with taxpayers and a travelers' Bill of Rights," Emanuel said in a statement. "We all know the parking meter deal was bad for taxpayers and the city, and I have instructed my staff to ensure we mandate significant changes that protect us from the mistakes made with the parking meter deal."

Market participants had anticipated the Friday announcement for some time given the city's fiscal crunch, growing international investor interest in such deals, and the strong interest in Puerto Rico's proposal to lease San Juan's Luis Munoz Marin International Airport.

Aerostar Airport Holdings LLC will make significant investments to the San Juan airport over a 40-year period under the deal, which is nearing completion. The company will pay a total of $2.6 billion under the deal between its upfront payments and then continual annual payments.

Daley's $2.5 billion concession was announced in 2008 but later cancelled when the investors couldn't finance the deal.

The city continued to reserve its right to resurrect a deal under the Federal Aviation Administration's Privatization Pilot Program. The city faced an end-of-year deadline to decide whether to explore a new deal or relinquish its slot.

On Friday, the city said chief financial officer Lois Scott would submit a preliminary application, timetable, and draft request for qualifications to the FAA by Dec. 31.

An RFQ likely will go out next month with a due date in the first quarter. The city will use it to gauge market conditions and revenue generation possibilities for a potential lease before deciding whether to actually undertake a bidding process, according to a city statement. Credit Suisse Group, which worked on the 2008 lease, continues to advise the city.

"No final decisions have been made, but we can't make a decision until we evaluate fully if this could be a win for Chicagoans," Emanuel said in a statement.

Proceeds of a lease, should the city pursue one, would first retire Midway's outstanding bond debt, which is rated in the single-A category.

The airport serves 8.7 million passengers annually and it experienced 3% growth in both 2009 and 2010 with passenger numbers up 6% for the first half of last year. Midway bounced back after an 11.4% decline in 2008. The airport is located about 10 miles southwest of downtown. It has five runways and 43 gates and more than 13,000 parking spaces.

The airport benefits from the strong presence of Southwest Airlines and its recently acquired subsidiary Air Tran, which account for more than 90% of traffic.

Throughout Emanuel's 2010-2011 campaign and during his first year in office he treaded cautiously on the subject of asset leases, initially saying he had little interest in resurrecting a Midway deal, but he never ruled them out under the right conditions and terms.

The 2009 parking lease deal soured the public and elected officials on asset leases after the more successful $1.8 billion 2005 Skyway toll bridge and downtown parking garage concessions.

The city's transfer of operations was fraught with operational problems, rates have skyrocketed, and most of the upfront proceeds are long gone after Daley used most of them to balance his last few budgets. The City Council came under criticism for its rushed vote.

On the other hand, the city faces crushing unfunded pension obligations and Emanuel is pushing to rebuild the city's infrastructure with little debt capacity available.

Under the state law that paved the way for the previous Midway deal, Chicago must use most of the proceeds after retiring Midway debt either to finance infrastructure or to shore up its employee pension funding.

Under parameters required by the city, any agreement would include labor protections and follow a revenue-share model that provides an ongoing source of funds that would grow over time, along with an upfront payment. The lease would be limited to 40 years and any use of proceed on city operations would be barred.

The operators would take responsibility for funding police and fire services at the airport. In the previous deal, the city continued to fund those operations.

The city would create a special committee of City Council members, labor, and civic leaders and it would select an independent adviser to assess the value and other aspects of any transaction which would be available for review by the City Council for at least 30 days before any vote on a deal.

After the 2009 parking lease closed the city's former inspector general, David Hoffman, released a report saying the city didn't get a good financial deal.

While more favorable terms may help make any deal more palatable to the public and council members, they will cut deeply into the lease's market value, market participants said. Still, Emanuel needs the more favorable terms to win over public and council skepticism, several council aides said.

The majority airlines at Midway need to sign off under the rules of the federal program under a requirement that at least 65% of airlines operating there as well as airlines with at least 65% of traffic approve.

While Chicago struggled to win over Southwest Airlines back in 2008 when airport privatization was more novel, the airline is more accommodating now with the promise of lower operating costs.

"Like the city, we want to better understand the market opportunity and the impact on our business and passengers. We look forward to exploring this opportunity with the city," Southwest president Gary Kelly said in the city-issued statement.

Chicago earlier this year released a new use agreement with Midway airlines that calls for more than $1 billion in capital and maintenance spending over its 15-year term. The current agreement expires at the end of the year.

The Midway consortium on the 2008 lease had included YVR Airport Services Ltd. of Vancouver, Citi Infrastructure Investors of New York, and John Hancock Life Insurance Co. of Boston. The city collected $126 million in earnest funds posted by the consortium.

The 1996 federal pilot program allows airports to enter into long-term operating leases or pursue the sale of a facility to a private firm. The program exempts the airports from laws that require that airport revenues be spent on airports.

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