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JAA, airlines agreement results in less financial risk

by David Chapman, Staff Writer

The Jacksonville Aviation Authority recently reached a five-year agreement with Delta Air Lines Inc., a deal authority Executive Director and CEO Steve Grossman said will likely be signed by other major airlines and will minimize financial risk for the authority.

The agreement is one that governs the relationship between the airport and airlines, which provide the authority $55 million to $58 million annually and is the authority’s single largest source of revenue.

The remaining portion of the authority’s about $65 million in revenue comes from rents, its other airports and items like fueling charges.  

“It’s the bible that we live by in our industry,” Grossman recently said. “It’s an important, complicated agreement … that goes back in history to the beginning of the airline industry.”

Grossman said the biggest change through the new agreement is the way airlines pay into terminal building, maintenance and rent. Under the old agreement, airlines paid amounts for the portion they used, minus the nonrentable public space.

Risk on the authority’s part was offsetting those costs through concessions, which continued to increase each year because passenger count continued to increase.

Grossman said that model worked until the recession hit, when fewer people began to fly.

It had since stayed that way.

“I think those days are over,” Grossman said of ever-increasing yearly passenger counts.

He said that in response, airlines have done a much better job evaluating new markets, have ceased the rapid expansion that created competition that, in return, caused falling prices.

Fewer people meant less concessions and the authority needed to alter its equation.

Grossman said that now the new agreement benefits the authority by eliminating risk, dividing up costs – minus the concessions – and charging each carrier rates based on their square footage.

“Essentially, no matter what costs are, we are going to break even. There’s no profit, but we are always made whole by the carriers,” he said.

Grossman said the main risk to the authority that still applies comes through parking and parking facilities, where higher passenger counts still correlate into higher parking rates.

The airlines also wanted some built-in concessions Grossman said were not on the bargaining table.

That included revenue sharing at a percentage of what the airport collected – a perk airlines have been used to – which Grossman rejected.

“We said no,” Grossman said. “We’re investing that money, (and) that money should stay with the authority.”

Grossman did say, though, that if airlines wanted to contribute money toward projects such as Cecil Airport, that they could and then receive some type of revenue sharing.

Airlines also wanted veto power over the authority’s capital program, which it pays into. Such a plan can consist of improvements, additions to the airport, more terminals and the like, which can mean increased competition, but Grossman said the authority also declined the veto request.

Instead, airlines are able to delay such plans for a year or two, but not override decisions.

“The only entity that cares about the City of Jacksonville is the authority,” Grossman said. “If we need to build additional facilities for additional airlines, we would not give airlines control of that.”

Grossman said that even with the new agreement with airlines, the authority will always have an obligation to run a successful business.

Typically, coming to terms over governing agreements takes in excess of a year, but the one currently agreed upon by Delta and on the table for other airlines was arranged in about six months. Grossman said that is a testament to the bargaining team and finance unit within the authority.

The agreement is for five years, which is significantly smaller than similar agreements of the 1970s that could stretch to almost 30 years given the life of bonds. Shorter deals are now industry standard.

In addition to Delta agreeing, Grossman said last week that Southwest Airlines Inc. officials had indicated they would also agree to the deal. He expects other airlines will also agree in the near future.

“It’s a matter of who controls the destiny of your air,” Grossman said of the deal.

dchapman@baileypub.com

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