CHICAGO - Chicago would receive $2.52 billion under a pioneering lease agreement that, if approved by city and federal authorities, would hand over operations of Midway Airport to a private consortium - Midway Investment and Development Co. LLC - for 99 years, Mayor Richard Daley announced yesterday.

Federal Aviation Administration approval is needed for the lease terms and the Transportation Security Administration must sign off on a revised Airport Security Plan for the airport. City Council approval is also required.

The mayor will submit the lease to the council at its meeting next Wednesday. If approved, the transaction would mark the first long-term lease of a major U.S. airport. The city hopes to close on the deal early next year.

"As the first privatization of a major American airport, this transaction will provide unprecedented benefits for the traveling public, the airlines and the taxpayers of Chicago," Daley said at a news conference. More than $1 billion in net proceeds will be used "during this difficult economy to make the infrastructure investments needed to move Chicago forward, as well as protect for Chicago taxpayers," he added.

The first $1.3 billion from the deal would go to repay existing Midway airport debt that financed a massive overhaul of the air field. Chicago committed to spending about 90% of the remainder on infrastructure and to help trim its $9 billion unfunded pension liability under state legislation approved in 2005. That leaves about $100 million from the transaction unrestricted.

Daley said his 2009 budget to be unveiled on Oct. 15 will include details as to how the city will spend the funds. The deal comes as the city is trying to close a $420 million deficit in the next budget with reports circulating that 3,000 open positions may be cut and another 1,000 laid off. Daley said yesterday the use of all of the deal's discretionary funds to close the gap would only put off the city's structural budget struggles until the following year.

Midway Investment and Development Co., or MidCo, is a consortium established by YVR Airport Services Ltd. of Vancouver, Citi Infrastructure Investors of New York, and John Hancock Life Insurance Co. of Boston. The group was among five pre-qualified by the city to bid on the transaction.

Market participants had originally estimated that Midway could fetch more than $3 billion depending on the lease's length and other terms, but those estimates were scaled back in recent months as a result of the credit crunch and turmoil in both the U.S. and foreign markets.

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. In 2007, Midway's five runways and 43 gates handled nearly 304,000 flights and more than 19 million passengers. The airport includes four parking areas with over 13,500 parking spaces.

Daley first floated the idea of leasing the airport to a private operator in late 2004 as the city was preparing to close on the 99-year concession lease of the Chicago Skyway toll bridge for $1.8 billion. That deal launched national interest in public-private partnerships 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 also advanced plans to privatize its parking meter system and three waste-recycling centers.

Airport managers, airlines and other market participants have been tracking the Midway deal which could serve as a model for future airport leases and could set the stage for an expansion of the federal pilot program that permits the privatization of up to five airports.

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. 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 has since assumed control of that facility.

Privatization of domestic airports faces a tough hurdle under the pilot program because it requires that at least 65% of the airlines operating at the airport approve the transaction, as well as airlines with at least 65% of the traffic. Airlines have been resistant to privatization, but the city found a more willing partner, albeit initially a skeptical one, in Southwest Airlines - the airport's largest carrier.

The majority of other airlines have agreed to the lease terms that would cap their fees for six years and then limit increases to a rate tied to inflation over a 25-year term. The city's advisory team includes lead Credit Suisse Securities LLC, Banc of America Securities LLC, and M.R. Beal & Co., lead legal adviser Mayer Brown LLP and also Johnson & Quandt PC, and Sanchez Daniels & Hoffman LLP.

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.

A key legal adviser on the deal, John Schmidt from Mayer Brown, predicted this past spring that the Midway deal would spark national interest among cities that manage airports because of the financial incentives as well as airlines looking to control future airport operating costs.

The need to fund airport improvements and expansions could also drive increased interest in privatization, given the airlines' current fiscal struggles and rising fuel costs. The White House has proposed expanding the pilot program to 15 slots, but whether congressional critics of the growing use of public-private partnerships will agree is uncertain.

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. The state legislation that paved the way for the deal allows the airport's exemption from property taxes to remain in place even with a private owner.

In a statement, MidCo said it "was attracted to this opportunity given the existing world-class airport facilities and the ability to work with the airlines serving the airport, the city of Chicago, and the employees at Midway Airport. We believe together, in this partnership, we can build on the success and reputation of the airport." YVR Airport Services owns and operates 18 airports on three continents.



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.