CHICAGO -- O'Hare International Airport's two major airlines are now on board with Chicago Mayor Rahm Emanuel's new lease and use agreement that paves the way for funding an $8.5 billion terminal makeover.
The Emanuel administration unveiled its plans -- which include an initial $4 billion borrowing authorization -- last month despite opposition from Fort Worth-based American Airlines. It accused the city of favoring Chicago-based United Airlines with gate allocations. The two are competitors who both operate hubs at the airport and account for a majority of its flights.
American had warned all options were on the table, including litigation or reducing its O'Hare presence. All parties appeared ready to put the acrimony of the dispute behind them Thursday after the city agreed to speed up construction of several gates that would benefit American.
"We are strongly supportive of this agreement because it is what is best for the city of Chicago, our 9,300 Chicago team members and our customers," American chief executive officer Doug Parker said in a news release from the mayor's office distributed early Thursday. "The mayor and his team worked tirelessly and creatively to structure an agreement that keeps competition thriving at O'Hare. We look forward to growing at O'Hare in the years to come."
The new lease and use agreement would replace the existing one that expires in May. The City Council's Aviation Committee Thursday approved sending the package to the full council, which is expected to consider it March 28. An initial $4 billion of borrowing authorization to begin funding the overhaul will be debated by the Finance Committee March 26 ahead of an expected vote at the council's March 28 meeting.
The administration said the number of gates assigned to each airline remains the same as the proposal introduced to last month but the city has agreed to speed up the construction of three common use gates that could benefit American. The city had initially said it couldn't move up construction due to the location of utilities.
"This agreement is a watershed moment for Chicago, and it means we will create tens of thousands of jobs for Chicagoans from every part of the city, generate billions of dollars in economic development and strengthen our city's economy for generations," Emanuel said in the statement.
Few transportation industry officials had believed American would actually walk away, that Chicago would not take additional steps to prevent a departure, or that American would shift to a non-signatory status giving up preferred treatment, but nothing was certain.
Market participants had said American's refusal to sign the new lease couldn't halt the eight-year project but it could have complicated the timing and added to borrowing cost. American accounts for 36% of passengers at O'Hare and United 44%. The new lease sheds provisions that gave the airlines exclusive rights to some gates and allowed the two hub carriers to hold sway over projects.
Other risks could impact the airport's ratings and borrowing costs.
A recent court ruling in Puerto Rico's Title III bankruptcy on its highway and transportation debt, if upheld, could pose a threat to special revenue credits rated above a municipality's issuer default rating, Fitch Ratings has warned. Fitch rates O'Hare airport's general airport revenue bonds at A while it rates Chicago's general obligation debt at BBB-minus.
Fitch said in a report Friday it would include the following disclosure in credits that could be impacted: “A Jan. 30, 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 to bonds secured by pledged special revenues. Fitch's rating criteria treat special revenue obligations as independent from the related municipality's general credit quality. The outcome of the litigation could result in modifications to Fitch's approach.”
The first deal tapping the $4 billion authorization isn't likely to sell until late this year. Additional general airport revenue and passenger facility charge borrowing could be sought and other financing alternatives such as public-private partnerships and special facilities revenue bond structure could also play a role.
Proposed borrowing will drive up O'Hare's debt levels and cost-per-passenger levels - estimated at nearly $19 last year -- but that doesn't necessarily translate into a rating hit, because the agencies have anticipated additional O'Hare borrowing.
"This is a long-term vision and it's expensive but when they get to the debt levels they need to be at, they won't be far off where Los Angeles International Airport and San Francisco International Airport will be," Lehman said in a recent interview.
S&P Global Ratings in June affirmed its A rating on O'Hare's $7.28 billion of GARBs and $560 million of PFC debt. 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 affirmed their ratings last year.
The expansive O'Hare makeover plan calls for the redevelopment of existing terminals, the expansion of the existing international terminal, and demolition of one domestic terminal that would be replaced with another global terminal to smooth international and domestic connections.
The capital program built into the lease agreement would almost double the airport terminal space, adding 22% more gates to improve efficiency and reduce delays and allow it to meet future demand that is expected to reach 100 million passengers annually by 2026.
Funding necessary to repay borrowing for the program is built into the new landing fees and rental payments paid by the signatory airlines that participate in the lease deal.
The city claims the eight-year capital program will create 60,000 construction-related jobs, add $50 billion to the regional economy, and generate 460,000 future jobs.
“We need to create the capacity to not just retain that competitive edge, but expand it. This ordinance positions Chicago as a national and global leader in travel, tourism and trade,” deputy mayor Robert Rivkin told the committee. Rivkin is a lawyer and a former federal transportation official tapped by Emanuel to lead negotiations.
The package won committee approval despite the concerns of some members of the Latino, African American, and Progressive caucuses who are pressing for greater assurances and oversight so that minority and women owned business participation targets on contracts are met and priority given to Chicago firms. Several said they would push for an amendment imposing greater oversight on contracts. Some also raised concerns over increased jet noise in northwest side neighborhoods.
The plan is being pursued as the city is far along with a roughly $10 billion O'Hare Modernization Program dating back to 2001 to reconfigure runways. The airport has recently ranked third nationally in passenger count and serves about 80 million passengers annually.