CHICAGO — Chicago Mayor Richard Daley will meet with executives at American Airlines and United Airlines Thursday as a legal standoff over $3.36 billion worth of expansion projects at O’Hare International Airport drags on.
The dispute over whether the city can proceed with its financing plans for the projects without airline approval forced officials to put off a $1.1 billion sale of bonds secured by passenger facility charges and federal grants.
The bonds were scheduled to sell this week but the city last Thursday pulled the deal.
“The timing of the issuance … is yet to be determined, but the sale will not proceed as scheduled,” a statement from the finance office read. “The city is committed to moving ahead as quickly as possible with these bonds.”
The move was expected by investors after United and American — which together handle about 80% of O’Hare’s passenger traffic — sued the city on Jan. 18 seeking to block it from starting construction this spring on projects or issuing $2.5 billion of future general airport revenue bonds.
Chicago wants to complete its $8 billion O’Hare Modernization Program by 2014, but the airlines want the city to adhere to a schedule that is tied to operational triggers based on passenger and flight growth. The price tag on the final phase is $3.36 billion. The city has completed financing for the first $3.3 billion phase that airlines previously approved. Plans for a new $2 billion terminal that is part of the overall program remain on hold.
“When they said 2019, just unbelievable,” Daley said Monday. “Where are we now, today? This is 2011. … 2019? They said then, maybe you can apply for runways — 2019? Then it takes how many years to get the permits — 2023 or 2024? In the meantime, every airport is expanding.”
“I will sit down with them, but they have to put something new on the table,” Daley said.
The city is fighting the lawsuit but recently scored a victory in another. The Illinois Supreme Court last week declined to review an appellate court decision that cleared the way for the city to acquire St. Johannes Cemetery. The cemetery is in the path of a new runway.
Lower courts upheld the city’s right to condemn the cemetery and relocate graves. The cemetery’s owner, St. John’s United Church of Christ, and families of those buried there, had challenged the move based on state and federal religious protection laws.
Daley’s upcoming meeting follows one held last Thursday between airline executives and Illinois’ U.S. senators, Democrat Richard Durbin and Republican Mark Kirk. Both emerged from the meeting to say they urged the airlines to resume talks with the city. Both said they were encouraged that a resolution could be reached.
As talks with the airlines stalled, the city put together a financing plan last summer that officials believed bypassed the need for airline approval. To raise funds for the spring construction season, it intended to sell PFC- and grant-backed bonds that don’t require airline authorization.
Under the existing pact between Chicago and carriers at O’Hare, airlines do have a say in projects funded with GARB borrowing, since it is their rates and charges that repay the debt. The city, however, believed under its financing plan it could begin issuing GARBs later this year because it planned to delay debt-service payments until after the existing airline use agreement expires in May 2018.
As the city moved closer to selling the PFC-grant bonds, the airlines sent the mayor a letter on Jan. 14 warning of possible litigation, as it considered the PFC issue and future GARB issuance “inextricably linked.”
Chicago disclosed the warning in the litigation section of its preliminary offering statements published on Jan. 17. “We are alarmed at the city’s actions to proceed with the issuance of debt for this project without airline approval, which our leases with the city require,” the letter read.
The airlines contend that the city’s attempt to finance the completion phase projects breaches its contractual rights under the use agreement. While the use agreement does not give the carriers a say on projects to be paid for with PFCs or federal grants, the airlines believe those projects should be blocked because GARB proceeds ultimately will be needed to complete them.
“The completion phase deserves the scrutiny of the airlines because it is not justified presently by passenger demand, capacity constraints, or delays at O’Hare,” the lawsuit reads.
In its motion asking the court to dismiss the case filed on Jan. 27, the city says the airlines are overreaching by asserting that the use agreement grants them “broad and sweeping veto” powers over completion projects. It says the use agreement states it can undertake capital projects funded by PFCs and federal grants or other funding sources as long as the airlines “will not be obligated to pay any costs.”
The city said it presented its current plan of finance for the completion phase to the airlines in July. The airlines contend that it lacked complete information and future communications indicated the city was prepared to move forward without airline approval.
“Fundamentally, the city’s actions raise serious concerns as to why the city has insisted on withholding information about the completion phase, including the financing thereof, from the airline parties, the bond investors, and the general public,” the airlines’ complaint reads.
The completion phase of the program includes construction of two new runways and the extension of another, in addition to various support projects.
The city contends that any attempt on the airlines’ part to interfere with its use of PFCs to fund the disputed projects violates federal law. Officials argue that the OMP is made up of many projects and the court should reject the airlines’ claim that those funded by PFC borrowing should be blocked because the GARB issuance may be needed to complete them.
Debt service on the future GARB borrowing would not kick in until a new use agreement is in place, so the city contends there’s no contractual violation of the current agreement.
“Plaintiffs cannot get around this problem by arguing they might eventually have to pay debt service on the post-2018 GARBs,” the city’s filing reads.
A hearing on the city’s motion to dismiss is scheduled before Cook County Circuit Court Judge Richard Billik Jr. on Feb. 8. The city has asked the judge to decide its motion before the next hearings scheduled for Feb. 22 and 23 on the airlines’ request for a preliminary injunction blocking the completion phase projects or GARB issuance.
The city unveiled the OMP in 2001 to expand the airport’s capacity and reduce air traffic delays caused during poor weather by the shutdown of intersecting runways. When the expansion is completed, O’Hare will have six parallel runways and two crosswind ones, compared to its current seven intersecting pattern. The Federal Aviation Administration approved the plan in 2005.
The city faces a precarious road even if it prevails on the litigation and would be better served to reach some compromise with the airlines, according to investors and analysts.
Standard & Poor’s in a special report said the lawsuit won’t affect current ratings, but that could change if the city’s relationship with the airlines worsens.
“What could pressure the ratings … is an escalation in the situation such that O’Hare’s relationship with the airlines deteriorates to the point that they do not abide by the airline agreements or reduce capacity materially, pressuring the airport’s financial margins,” analysts Joseph Pezzimenti and Kurt Forsgren wrote.
Fitch Ratings recently downgraded O’Hare’s PFC and third-lien GARB ratings, and Moody’s Investors Service shifted its outlook on the third-lien GARBs to negative. The actions came before news of the lawsuit. q
Fitch rates O’Hare’s PFCs A-minus. It assigns an A-minus to the third-lien GARBs, a AA on the second-lien GARBs, and a AA-plus on the first-lien GARBs.
Moody’s rates O’Hare’s PFCs A2 and its second- and third-lien GARBs A1. It rates the first-lien GARBs Aa3.
Standard & Poor’s rates Chicago’s PFC bonds A-minus. It rates the third-lien GARBS A-minus, the second-lien GARBs AA-minus, and the first-lien GARBs AA.
The city has $816 million of outstanding PFC-backed bonds, $5.1 billion of third-lien GARBs, $369 million of second-lien bonds, and $73 million of first-lien bonds.
