(September 28) LOS ANGELES—The findings in a long-awaited report from the Los Angeles city administrative officer further the possibility that the City of Angels will relinquish ownership and control of Ontario International Airport, though the report indicates the aerodrome’s selling price will be far higher than Ontario officials were hoping. And while Los Angeles City Manager Miguel Santana’s report recommends that his city begin a dialogue on negotiations for the possible transfer of the airport back to Ontario, he has also called for exploring the possibility of selling the airport to the highest bidder, which might prove to be any of ten private sector domestic and international companies that last year expressed an interest in owning and running the facility.
This week, four days after the report was released, the Los Angeles City Council’s Trade Commerce and Tourism Subcommittee endorsed Santana’s report and recommended to the full city council that it direct Santana to begin discussions for transferring control of the airport.
Los Angeles took over management of the airport in 1967 as part of a strategy to increase flights out of the aerodrome. That ploy worked, as Los Angeles was able to use its control of gate positions and other considerations at Los Angeles International Airport to induce airlines to fly into and out of Ontario. Just under 200,000 passengers enplaned at Ontario Airport in 1966. Under Los Angeles’s management, over $550 million in improvements were made to the facility. In 1985, Ontario deeded the airport to Los Angeles for no consideration. In 2007, usage of the airport peaked, with 7.2 million passengers moving through the airport’s gates.
Since that time, passenger traffic through Ontario International has dropped dramatically, with 4.2 million passengers using the airport in 2011, and further declines registering this year.
Ontario city officials have repeatedly asserted that Los Angeles World Airports, the non-profit entity Los Angeles created to manage the four airports it owns, is purposefully mismanaging Ontario Airport’s operations to increase passenger traffic at Los Angeles International Airport, which has undergone significant renovations in recent years.
Los Angeles World Airport (LAWA) officials reject those assertions, maintaining that the drop in passenger traffic through Ontario is a function of the sputtering economy and the doldrums in the airline industry generally.
Ontario officials have pushed ever more strenuously – including seeking legislation in Sacramento and Washington, D.C. and conducting an intense public relations campaign – to have Los Angeles return ownership and management of the airport to Ontario.
At one point, Ontario city officials, led by councilman Alan Wapner, were suggesting that Los Angeles should simply deed the airport back to Ontario as a public benefit transfer, propounding that the airport had no value as marketable real estate. Quietly, however, the city of Ontario made a confidential offer to purchase the airport for $50 million and an assumption of $71 million in bond debt related to financing for improvements that had been made to the airport and another $125 million to repay Los Angeles for passenger facilities charges collected at Los Angeles International Airport that were used to make improvements at Ontario Airport.
On September 21, Santana, who in March was directed by the Los Angeles City Council’s Trade, Commerce and Tourism Committee to examine the feasibility of transferring Ontario Airport to local control, released his 100-page analysis calling for Los Angeles to “respectfully” decline Ontario’s $246 million offer. Rather, Santana suggested, the two cities carry out discussions relating to viable options for Ontario’s purchase and Los Angeles’s sale of the airport along with the shared ownership and management of ONT between officials from Los Angeles World Airports, the owner and operator of the airport, and Ontario and San Bernardino County, who have members that make up the majority of the Ontario International Airport Authority board.
That crucible of negotiations would lead to a determination of the airport’s a fair market value, which Santana indicated was well above what Ontario had offered.
Santana was assisted in compiling the report by New Jersey-based Acacia Financial Group.
“Ontario Airport, despite the economic downturn affecting both the national and local economies with its corresponding effect on airline service levels and passenger volume, is an important regional transportation asset,” the report states. “With a focused and innovative approach in creating a new business model for the airport, Ontario Airport could become a stronger driver of economic growth in the Los Angeles region.”
In calling for the rejection of the $246 million offer, Santana still signaled that the offer represented a beginning point for negotiations. “While the conceptual proposal by the city of Ontario has limitations, it does provide a vehicle in which to open a dialogue between the city and Ontario and pursue commonalities between the parties,” he stated.
Santana suggested the airport is a far more valuable commodity than the city of Ontario has suggested.
“With the proper mix of innovative management and operational models and efficiencies, Ontario Airport could become a strong contender for the busiest regional medium-hub airport in the Los Angeles Basin,” Santana wrote.
Santana said Ontario’s offer was problematic for technical legal reasons, as well. “The $50 million transaction payment to the city of Los Angeles’ general fund is meant by Ontario to be a reimbursement of the city’s costs for transferring the airport; however, such a payment appears to be viewed by the FAA [Federal Aviation Administration] as a potential revenue diversion under federal aviation law. The FAA regulations define airport revenue as any revenue that the sponsor (owner) derives from the use or sale of airport property. Likewise, federal airport grants like those received by LAWA require that the airport revenue be used solely for capital and operating costs of the airport, the local airport system or other local facilities substantially related to the air transportation of passengers or property. As a consequence, the city attorney is of the opinion that payment to the city’s general fund would likely violate the FAA revenue use diversion rules.”
Santana said the city of Los Anglees had four basic options, consisting of maintaining ownership of the airport and the status quo; marketing the airport to the highest bidder; negotiating a selling price and acceptable legal terms with Ontario and transferring ownership and operations to Ontario; or entering into an agreement with Ontario and the Ontario International Airport Authority for operation of the airport.
Last year Los Angeles floated the idea of privatizing the airport and selling it and its assets to an investor or firm specializing in airport operations. The city sought parties interested in just such an arrangement, eliciting responses from ten domestic and international entities, including American Airports Corporation, a California-based airport operator; Airport Property Ventures, a California-based airport operator; AMP Capital Investors, an Australian infrastructure fund manager; Aviation Facilities Company, a Virginia-based airport manager and developer; Carlyle Group, a Washington DC-based private equity firm; Fraport, a German airport investor, owner and manager; GMR Airports, an Indian airport operator; Goldman Sachs Infrastructure Partners, a New York-based infrastructure fund; Incheon International Airport Corporation, a Korea-based airport operator; and Munich Airport Consulting, a German airport operator.
The transfer of the airport to a private sector operator could happen in relatively short order, according to Santana.
“The estimated time needed to structure and execute a management services contract could take as little as six months,” Santana wrote.
Los Angeles World Airports recently hired the firm of Leigh Fisher to make a calculation of the airport’s fair market value. Leigh Fisher pegged the airport as being worth at least $243 million and as much as $605 million. The calculations were based on cash flow expectations over the next half century.
According to Santana, “The final value will be determined through negotiations between the parties but should not be less than the fair and reasonable recovery of LAWA’s investment.” Given that total investment by Los Angeles over the years has reached $550 million, the asking price would appear to be $550 million.
Los Angeles officials have privately told the Sentinel that if Ontario were to make an offer of $450 million, it would be accepted.
Ontario city councilman Alan Wapner, who is leading his city’s efforts to wrest Ontario Airport back from Los Angeles, resisted making any commitment with regard to the dollar figure Ontario will be willing to pay to purchase the airport, and he quibbled with the use of the term purchase.
“FAA regulations dictate that an airport, as a public benefit property cannot be sold,” Wapner said. “It was never Ontario’s intent to buy the airport from Los Angeles. The $50 million we offered was money to be paid to Los Angeles in consideration for dissolving the joint powers agreement.”
Pressed about the language in Santana’s report stating that the amount to be paid to Los Angeles for relinquishment of ownership and operation of the airport “should not be less than the fair and reasonable recovery of Los Angeles World Airports’ investment,” Wapner said that the amount Ontario would be prepared to pay under that formula was $0. “That one is easy,” Wapner said. “Zero. Los Angeles and Los Angeles World Airports have never invested any money in Ontario Airport outside of $58,000 in legal fees they accrued when they got the airport in 1985. If you can show me documentation that Los Angeles or Los Angeles World Airports invested any money beside that, I’d love to see it.”
When quoted the $550 million asking price and $450 million minimum expectation prices, Wapner said, “Any negotiating on the price will be done at the negotiating table and not publicly in the media.”