Ontario Escalates Hostilities In Clash With LA Over Airport Ownership

(April 12) ONTARIO–The jousting between Los Angeles World Airports, the entity that manages and operates Ontario International Airport, and Ontario municipal officials and their allies continues over the terms by which the ownership of the airport should be returned to Ontario.
This week,  Ontario rejected Los Angeles’s offer to sell the airport back to Ontario for $474 million and then followed up with a threat of legal action against Los Angeles.
Ontario, which deeded the airport to the city of Los Angeles in 1985, has come to rue that move.
While Ontario Airport prospered and grew under the management of the Los Angeles Department of Airports for four decades, since 2008 passenger traffic into and out of Ontario  has steadily declined. Ontario officials blame Los Angeles and its successor to its Department of Airports, Los Angeles World Airports, for the decreases. They maintain that Los Angeles World Airports (LAWA) has purposefully operated and promoted the airport inefficiently as part of its design to promote ridership at Los Angeles International Airport.
In response to an ever more vituperative campaign by Ontario officials, LAWA officials, on behalf of Los Angeles, have been negotiating transfer of control of the airport, or outright ownership, with Ontario officials.
Since the forging of an agreement between Los Angeles and Ontario in 1967, Los Angeles, first under its Department of Airports and then under the aegis of LAWA, has managed the airport’s operations.
Using its leverage over  airlines based upon its ability to dole out or withhold favorable gate positions at Los Angeles International Airport, the Los Angeles Department of Airports induced more and more airlines to fly into and out of Ontario. By 1969, flights out of Ontario dramatically increased. In short order, Continental Airlines, PSA, Western, United, American Airlines, Hughes Air West, and Delta established routes from Ontario. In the early 1970s, Ontario was in competition with John Wayne Airport in Orange County, which at that time was expanding dramatically. Though a benchmark of 10 million passengers at the airport by 1975 was not achieved, the Los Angeles Department of Airports still assiduously promoted Ontario International.  In 1981, a modern, second east-to-west runway was built, necessitating the removal of the old northeast-to-southwest runway. Los Angeles officials stepped up pressure on Ontario officials to have them cede ownership of the airport in total to Los Angeles, but Ontario’s then mayor,  Robert  Ellingwood, resisted, maintaining that all of the criteria specified in the transfer portion of the 1967 agreement had yet to be met. As tensions mounted between the cities and Ontario began levying a parking tax at the airport, which L.A. objected to as unwarranted and illegal in a lawsuit, Ellingwood pressed for the recission of the joint powers agreement and for Ontario to take full control of the airport. Los Angeles, which  had control over the revenue being generated at the airport and was bankrolling the cost of operations there, threatened to stand down from the joint powers agreement, leaving Ontario in the position of paying all operational costs.  Ellingwood’s four council colleagues, believing Ontario did not have the financial means to operate the airport on its own, broke with him and during Ellingwod’s absence from the February 19, 1985 council meeting, voted 4-0 to transfer title to the airport to the city of Los Angeles.
In 1987, the departure runway was extended to the east.  In 1997 and 1998, Los Angeles built two modern 530,000-square foot terminals at the airport at a cost of $270 million. In 2005-2006, the airport’s departure runway was repaved, received storm drains, and runway lighting was improved. The airport’s taxiways were widened. The same year Aeroméxico started seasonal flights to Guadalajara and Mexico City, making Ontario a true international airport.  The airport was also renamed Ontario/LA International Airport, ostensibly to avoid confusion with an airport in Canada.
In 2007, use of the airport peaked, with 7.2 million passengers enplaning there and using its terminals. In recent years, Ontario Airport has seen its use decline. In 2008, 6.2 million passengers took flights from the airport, a drop of 13.5 percent compared to 2007. In 2009, the airport had 4.95 million passengers pass through it. That trend continued in 2010, with 4.8 million travelers flying from Ontario International. Simultaneously Los Angeles World Airports was undertaking a flurry of improvements at Los Angeles International Airport intended to make traveling in or out there more convenient to its passengers.
Just under 4.6 million passengers took flights out of Ontario International in 2011. That figure dropped to 4.5 million in 2012.
In 2009, Ontario officials, believing that Los Angeles airport officials were intent on driving up passenger traffic in Los Angeles, potentially to the detriment of Ontario, began a dialogue with Los Angeles World Airports about combating the downward trend in passenger traffic at Ontario. But Los Angeles airport officials were not keen on surrendering any share of the market Los Angeles International had captured in the aftermath of the extensive improvements made there. They countered with offers to improve the marketing of Ontario Airport, at one point offering to bankroll such a marketing campaign to be run by Ontario officials. Ontario declined that offer.
Ontario officials gravitated toward the conclusion that reacquiring the airport was paramount and that not leaving its destiny in the care of Los Angeles officials, whose first loyalty consisted in keeping Los Angeles International Airport thriving, was the only realistic approach to the problem.
They began pushing Los Angeles to allow a public agency-to-public agency transfer of the airport at no consideration, reversing the 1985 action.
Los Angeles officials balked at that.
Quietly, so as to not publicly contradict its official position that the airport grounds are a public benefit property and thus of no sales value, the city of Ontario privately tendered a $250 million offer to Los Angeles World Airports for transfer of the airport’s title and operational control. That offer included the city assuming $75 million of the outstanding bond debt obligations for past improvements to the airport, $125 million in future passenger facility charges to be realized at the airport and $50 million cash.
Los Angeles World Airport officials scoffed at the $250 million figure, pointing to the $560 million in improvements made to the airport since 1967 utilizing revenues generated at both Ontario and Los Angeles International Airports, Federal Aviation Administration grants, and proceeds from bonds issued by the city of Los Angeles at Los Angeles World Airports’ direction.
Last year, Los Angeles World Airports commissioned an appraisal of Ontario Airport by the consulting firm of Leigh Fisher, which pegged the airport as being worth at least $243 million and as much as $605 million, depending on cash flow expectations over the next half century.
Los Angeles World Airport officials indicated that bargaining toward an eventual sale would start at the high end of the estimate, i.e., $605 million. At one point, Gina Marie Lindsey, the executive director of Los Angeles World Airports, indicated  that a buyer, public or private, would need to put up $560 million, an amount equal to the investment in improvements made at the airport over the last 45 years while Los Angeles has had operational control there. Privately, Los Angeles World Airports officials have suggested Los Angeles would be amenable to selling the airport to Ontario for $450 million.
Ontario officials, who created with the county of San Bernardino the Ontario International Airport Authority last year as an entity intended to eventually wrest ownership of the airport from Los Angeles and subsequently manage its operations, maintain Los Angeles World Airports has greatly inflated the airport’s value.
The Ontario International Airport Authority recently commissioned Oliver Wyman, a New York-based consulting firm, to review and refute Leigh Fisher’s estimation of the airport’s fair market value. Oliver Wyman delivered a document that met Ontario’s specifications, one that said the property was not worth the  $243 million to $605 million Leigh Fisher derived but rather had a breathtaking value below zero – i.e., from negative-$78 million to negative-$104 million.
“The low valuation for ONT (the Federal Aviation Administration acronym for Ontario International), even under a privatization valuation approach, should come as no surprise to anyone who has analyzed ONT’s finances, high airport charges, competitive position and passenger traffic trends,” according to Oliver Wyman.
Oliver Wyman paints a picture of such dire prospects at Ontario Airport that it leaves the reader of  the report questioning why any entity would be interested in acquiring it.
No investor using sound investment guidance criteria would consider purchasing the airport, Oliver Wyman maintains. The average rate of return for the S&P 500 since the Great Depression has stood at 7.1 percent annually. Even if the airport were to be valued at the minimum $243 million Leigh Fisher envisioned for it, it would still need to garner $17.25 million in profit per year to meet the S&P average, which Oliver Wyman asserts, “is inconceivable… based on ONT’s revenue and operating profile.”
In fact, the airport is incapable of generating any profit whatsoever, Oliver Wyman maintained, in that expenses will outrun revenues.
Oliver Wyman said Leigh Fisher’s notion that a private operator can take over Ontario Airport and drive down its per enplaned-passenger charge – which at $12.68  is one of the highest in the nation  –  and then operate successfully charging $10 per passenger was highly questionable.
Oliver Wyman pitched the concept of making a public agency-to-public agency transfer of the airport for no consideration. That option was more viable, Oliver Wyman wrote, than selling the airport to a private operator, which the firm said, would not be able to run the facility at a profit.
In delivering the report, Oliver Wyman acknowledged it was hampered by not having available, and not being able to rely upon, financial documents relating to Ontario Airport’s operations that are in the exclusive possession of Los Angeles World Airports.
This week, in a letter to Lindsey dated April 10 and stamped “privileged and confidential” but which was immediately leaked to the press, Ontario City Manager Chris Hughes referenced Lindsey’s heretofore undisclosed $474.5 million counteroffer to sell the airport made in response to Ontario’s $250 million purchase proposal. Hughes rejected that counteroffer and threatened legal action, stating, “LAWA’s approach in this matter…leaves Ontario with no meaningful option other than to pursue its legal remedies arising from LAWA’s conduct in connection with the airport.” On Thursday April 11, the Washington, D.C.-based law firm of  Sheppard Mullin Richter & Hampton  filed a 67-page administrative claim against the city of Los Angeles and Los Angeles World Airports charging them with chronic mismanagement of the airport. The claim seeks to abrogate the 1967 joint powers agreement between the two cities.

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