A displeased American Airlines may complicate Chicago's $8.5 billion O'Hare plan

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CHICAGO -- Chicago plans to press ahead with an $8.5 billion makeover of O’Hare International Airport’s terminals under a new airline lease and use agreement opposed by one of the airport’s major carriers.

Mayor Rahm Emanuel introduced the lease package as well as $4 billion of initial bonding authority to the City Council Wednesday.

The first deal – which would be led by JPMorgan with Swap Financial Group and Frasca & Associates LLC advising the city -- isn’t likely to sell until late this year, Chicago’s chief financial official, Carole Brown, said in an interview.

That gives the city time to possibly resolve the gate dispute with United Airlines that is behind American Airlines’ refusal to sign the pact that would replace the existing 35-year-old airline deal ahead of its May expiration. In the absence of a deal, Brown suggested the city could still market its bonds.

“We respect both American and United and we are optimistic we will continue to be a dual hub airport,” Brown said, adding that when the city is ready to go to market she must demonstrate the airport has sufficient traffic levels, a fee structure and operations in place to support the debt.

“What I have to show is there’s sufficient demand” at the airport to generate that support and “I will be able to show that,” Brown said.

The city began its pitch for the major revamp early this week saying it was nearing a final lease and use pact with the airlines. The project’s costs would be built into the new agreement’s terms.

American, which accounts for about 36% of O’Hare’s annual passengers compared to United at 44% -- said it opposes the lease as proposed due to the dispute over gates.

“After 18 months of multi-lateral, transparent negotiations, we were looking forward to supporting the new lease. But American cannot sign the lease in its current form because of a secret provision, inserted at the last minute, awarding additional gates to United,” spokeswoman Leslie Scott said in a statement.

“Since learning of the United gate deal less than two weeks ago, American has sought to re-level the playing field by urging the city to accelerate the construction of three additional gates, and award those to American. To date, the City has dismissed that approach without explanation,” Scott added.

Emanuel dismissed American’s assertions as a competitive dispute between the two airlines that shouldn’t impede a new agreement he said is designed to create a level playing field and free the city of old terms that put the airlines in the driver’s seat. Under the existing agreements, the two carriers had veto power over projects.

“This [new] agreement breaks out of that and allows us to actually be in control of our own destiny and design it,” Emanuel said. “This is an agreement that’s best for Chicago’s future.”

When questioned over whether American’s stance could stall the project, he said the city “will move forward” but did not elaborate on the impact on planning should American not come around. He acknowledged the potential for litigation, but did not elaborate.

American Airlines said in a statement when asked about the potential for litigation: “We’re exploring all of our options.”

The city could face a rockier path with the rating agencies and investors without American on board and it’s unclear if the situation leads to some form of litigation how that would impact the city’s plans, several market participants said.

For the time being, Brown is stressing that American will still continue to pay fees regardless of whether it signs the proposed lease. “If you use the airport as a signatory airline or a non-signatory you still pay,” she said. Final agreements have yet to be signed by some other airlines.

The city has not finalized an overall financing plan for the $8.5 billion. It won’t rely directly on federal funds, which aided the ongoing configuration and expansion of O’Hare’s runways.

Passenger facility charges would be applied to the program and the city “will look at other financing opportunities on a case by case” basis that includes the possible use of public-private partnerships, Brown said. The city might also consider a special facilities revenue bond structure for some projects.

The city will probably spread the $4 billion of borrowing authority over two to four deals, Brown said. The city may return in the future for additional general airport borrowing authorization. The city has both general airport revenue bond and passenger facility charge credits in place.

Emanuel bills the Terminal Area Plan as “historic.” It would redevelop existing terminals and concourses, expand the existing international terminal, and demolish one domestic terminal to replace it with another international terminal. New baggage and screening facilities are included.

The plan is being pursued as the city nears completion on athe roughly $10 billion O’Hare Modernization Program, launched by Emanuel’s predecessor Richard M. Daley in 2001, to reconfigure its runways .

"We reached an agreement with the city for five additional gates in 2016. Furthermore, this agreement is no different than the one reached by American Airlines and the city in early 2016 for five additional gates. American Airlines has been aware of our agreement for over a year and has worked to block the implementation at every opportunity,” United said in a statement referencing the American dispute.

The city said the airport is now ready for its first major terminal in more than 25 years with its runways reconfigured to a parallel structure from an intersecting layout, reducing weather delays. The additional gate and concourse capacity should ease remaining delays, the city says.

The city has hit O’Hare development roadblocks in the past. American and United sued Chicago to block its financing of remaining projects under runway project ahead of the city’s sale of $1.1 billion of passenger facility charge-backed bonds in 2011, citing their lease powers.

The dispute was resolved in a deal brokered by federal authorities with the help of additional federal funding that persuaded the airlines to sign off on a portion of remaining projects.

The Emanuel administration has dubbed the combined OMP, terminal program, and proposed hotel projects its O’Hare 21 vision. The airport serves about 80 million passengers annually and has 21 domestic carriers and 38 international carriers.

Chicago sold $812 million of GARBs last June. Ahead of the sale, Fitch Ratings and S&P Global Ratings affirmed O’Hare’s single-A level ratings on both its $7.28 billion of general airport revenue bonds and $560 million of passenger facility charge debt.

The airport has a $2.3 multi-year CIP program and about $1.6 billion in remaining runway costs, Fitch said. Moody’s Investors Service and Kroll Bond Rating Agency – which rate the airport’s GARBs at A2 and A-plus, respectively -- were not asked to rate the June issue but both affirmed their ratings late last year.

The airport has recently ranked third nationally in passenger count, behind Atlanta and Los Angeles.

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