CHICAGO — The combined needs of struggling municipalities, financially strapped airlines, and labor could spark a national wave of interest in airport privatization if Chicago pulls off its plan to lease Midway Airport as expected, a key legal adviser on the proposal predicts.

The greatest impact outside of Chicago will be "in opening U.S. airports to the kind of privatization we've seen around the world," attorney John Schmidt, a partner at Mayer Brown, the chief legal adviser on the transaction, said recently.

Chicago currently is reviewing the qualifications submitted by six groups interested in competitively bidding to enter into a long-term lease of the city-owned airport, a transaction permitted under a federal pilot program that permits five airports to shift to private hands.

Sources have estimated that the first-of-its-kind lease could raise $3 billion, depending on factors like the terms and market demand.

The first $1.2 billion will go to repay existing Midway airport debt that financed a massive overhaul of the air field. Chicago committed to spending much of the remainder on infrastructure and to help trim its $9 billion unfunded pension liability both investments that carry long-term benefits for the city in state legislation approved in 2005. That legislation paved the way for the deal by allowing the airport's exemption from property taxes to remain in place even with a private owner.

Mayor Richard Daley first floated the idea of privatizing Midway in 2004 as the city neared its groundbreaking lease of the Chicago Skyway toll bridge for 99 years to a foreign consortium of Cintra Concesiones de Infraestructuras de Transporte SAandMacquarie Infrastructure Group for $1.8 billion. But the process proved to be complex as officials addressed significant local hurdles.


It was not until late last year that chief financial officer Paul Volpe announced that the city had cleared its most daunting hurdle by reaching an agreement with Midway's main carrier Southwest Airlines. Though Southwest initially resisted privatization as did all other major carriers it was the promise of stable operating rates over the long-term that swayed officials.

The city cleared another potential roadblock in winning the support of unions by ensuring in any lease that current employees be offered jobs with similar pay and benefits. The commitment to fund pensions and infrastructure also helped.

Schmidt, speaking at a panel on the Midway deal at a public finance conference hosted by Information Management Network, predicted that the financial incentives for municipal managers, labor leaders, and airlines could prompt "a strong and quick move to change the federal law to allow for more widespread privatization of large airports."

How quickly Congress would act, however, given the concerns raised over public-private partnerships by key congressman like U.S. Rep. James L. Oberstar, D-Minn., clouds that prediction.

The Federal Aviation Administration accepted the city's application in September 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.

Chicago also in 2006 named its financial team, including lead adviser Credit Suisse SecuritiesLLC, Banc of American Securities LLC,and M.R. Beal & Co. Its legal advisers includelead Mayer Brownand Pugh, Jones, Johnson & Quandt PC,andSanchez Daniels & Hoffman LLP.

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 last year reached an agreement with Southwest, which manages more than 65% of traffic, and it served as a model for negotiations with other airlines the majority of which signed off on the deal allowing the city to meet the federal threshold.

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 agreement 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. The airlines also hold some power in the leasing process and have recently signed off on the bidders' qualifications.

The bidders deemed qualified will be invited to participate in a final bidding process expected later this year. If the bids are acceptable, the city hopes to close on the transaction by the end of the year or early next 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.

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

Midway is located about 10 miles southwest of 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 six teams are:

* Abertis Infraestructuras SA of Barcelona, Spain, Babcock & Brown Group of Sydney, Australia, and GE Commercial Aviation Services of Stamford, Conn.

* AirportsAmerica Group, consisting of Carlyle Infrastructure Partners LP of Washington, D.C.

* Chicago Crossroads Consortium, consisting of Macquarie Capital Group Ltd. and Macquarie Airports of Sydney, and Macquarie Infrastructure Partners and Macquarie Infrastructure Partners II of New York.

* Chicago First Consortium, consisting of HOCHTIEF AirPort GmbH and HOCHTIEF AirPort Capital GmbH & Co. of Essen, Germany, and GS Global Infrastructure Partners I LP of New York.

* Midway Investment and Development Corp., consisting of YVR Airport Services Ltd. of Vancouver, Citi Infrastructure Investors of New York, and John Hancock Life Insurance Co. of Boston.

* Morgan Stanley Infrastructure Partners of New York, Aeroports de Paris Management of Paris, and HMSHost Corp. of Bethesda, Md.

The private operator stands to benefit by improving the efficiency of operations, establishing new retail and restaurant operations, collecting passenger facility charges to finance capital projects, and enjoying lowered construction costs. The operator also can apply for discretionary FAA grant funds.

A source that works on the financing side of such transactions predicted strong investor interest for future transactions with growing foreign interest and domestic interest from private equity firms, even amid the current credit crunch. "There is a strong enough rate of return that there will be solid interest in this market," he said.


Schmidt praised Southwest for its willingness to consider the city's privatization proposal. It was not an easy shift in position.

Bob Montgomery, vice president of properties at the Dallas-based airline, said he had a "healthy skepticism" of any privatization, concerned that the true goal was to simply hock the airport with little concern for the interests of airlines or passengers.

"We were concerned. We investigated the European model and its problems because it doesn't result in lower costs and developed a laundry list we thought we needed to resolve," Montgomery recalled in a recent interview. "We also felt that Midway was already so well-run by the city and we had just successfully finished expansion projects. We didn't want to mess it up."

The city had been a "good partner," though, and so Southwest agreed to talks, with the goal of reaching an agreement that ensured a private operator couldn't take over and raise costs. Long-term safeguards were also a primary goal. "The city did great work in listening to us and coming up with creative solutions," Montgomery said.

"The benefits for us are, we have certainty in our rights and charges structure. We've locked in rates for a period of time and then have digestible increases," unlike the wild swings in rates at some other airports, he added. Private-sector efficiency in managing construction projects down the line is also considered a plus.

Airport operating costs are the second-fastest growing expense for airlines, behind skyrocketing fuel costs, so the deal could serve as a model at other airports, though Montgomery said the airline will wait out the completion of the Midway deal before entertaining similar proposals elsewhere. The industry also generally remains opposed to the prospect of privatization.

"We are very interested in finding solutions to the airport cost problem, and to the extent that privatization is a workable tool, we will be interested," he said.

Schmidt predicts that other municipal managers of airports struggling with aging infrastructure, a sluggish economy, and unfunded pension liabilities will look at the Midway deal. They will wonder why "Richie Daley" is the only mayor to capitalize on such an asset and are likely to ask, "Why can't I do that?"

Fitch Ratingsanalyst Peter Stettler, who follows the city's airport credits, agreed. "I think we will see more airport operators interested in privatization but whether Congress will agree is the question," he said.

A Fitch report in 2006 predicted that airport operators would increasingly explore privatization as a means to finance $70 billion in needed improvements. "There is concern that the federal role in financing airports may be reduced," the report said. "Thus, the nation's airports may seek to increase the use of alternative financing sources to augment the historical reliance on general airport revenue bonds."

Labor support is a key to winning local governmental support. Milwaukee County Executive Scott Walker is promoting the idea of privatizing Mitchell International Airport in Milwaukee to raise as much as $1.5 billion for transit, but labor is opposed over the possible loss of jobs. If a proposed lease protects jobs, Schmidt said labor could act as an active participant in the process helping overcome local legislative hurdles.


The pilot program was established as part of the 1996 Reauthorization Act. The program removed some obstacles to privatization by exempting the private owner from repaying federal grants and by allowing the airport owner to use sale or lease proceeds for something other than airport-related expenses.

To date, only Stewart International Airport in New Windsor, N.Y., had been privatized, but the Port Authority of New York and New Jerseyhas since resumed control of that facility. The White House has proposed expanding the program to 15 slots in the proposed reauthorization of FAA funding, but its fate is uncertain as a new administration takes office in January. Supporters of expanding the program believe the restrictions on airline approval must be eased.

Once the FAA receives the city's lease agreement, the agency will conduct its review. A minimum of 60 days for public commentary based on the FAA's report are required, according to Kevin Willis, airport compliance officer with the FAA.

"The agency will work as expeditiously as possible to complete our review. We are aware of the city's timeline," Willis said of the FAA's efforts to help the city close on a deal soon after the bidding process is completed.

The FAA has received other inquiries about the program, but most are waiting to see how the Chicago Midway deal pans out. Willis said the key roadblock in other cities has been lack of airline support.

Whether the Democratic Congress and the next president will embrace an expanded program remains unclear, especially given the heightened scrutiny Oberstar and other skeptics of asset privatization have raised over the growing interest in toll road and bridge privatizations.

Schmidt, a former chief of staff to Daley and a former associate attorney general in the Justice Department, worked on the Skyway deal from its inception. His team at Mayer Brown that works on private infrastructure lease transactions includes fellow partners David Narefskyand Joseph Seliga.

The team has worked as counsel on the Skyway deal and the $3.8 billion lease of the Indiana toll in 2006, and with the Northwest Parkway Public Highway Authority in Colorado in its Northwest Parkway lease. It is also counsel to Pennsylvaniaon its proposed privatization of the Pennsylvania Turnpike and to Chicago on other proposed lease transactions.

Since the Skyway deal, 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.




Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.