Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. This financial shock has created a number of legal and financial issues.
Below are some considerations for airport sponsors to keep in mind.
Supplemental Airport Grant-In-Aid Funding
First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through “Grants-In-Aid for Airports.” That $10 billion is divided into the following categories:
- $500 million, which can be used to fund any grant made under the FY20 Appropriations Act (P.L. 116-94)
- An amount of $7.4 billion, which can be distributed to airport sponsors “for any purpose for which airport revenues may lawfully be used.” The “purpose for which airport revenues may lawfully be used” is widely viewed as a reference to the FAA’s Policy on “Permitted and Prohibited Uses of Airport Revenue” (Revenue Diversion Policy). (By comparison, the competing House of Representatives version of the bill contained no such restriction.) That $7.4 billion is divided in half and distributed in two ways:
- 50% is “allocated among all commercial service airports based on each sponsor’s calendar year 2018 enplanements as a percentage of total 2018 enplanements for all commercial service airports.”
- 50% is “allocated among all commercial service airports based on an equal combination of each sponsor’s fiscal year 2018 debt service as a percentage of the combined debt service for all commercial service airports and each sponsor’s ratio of unrestricted reserves to their respective debt service.”
- Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs).
- If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. 47114 (as modified by the CARES Act), then the remainder is distributed in the same manner as the $7.4 billion—based on a mixture of enplanements and debt service.
- $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS).
- The FAA may retain up to $10 million to “fund the award and oversight” of grants made pursuant to the CARES Act.
Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act.
By way of comparison, in the past two fiscal years (FY19 and FY20), the federal government has appropriated approximately $3.35 billion in “regular” Air Improvement Program (“AIP”) spending and an additional $400–$500 million in discretionary AIP grants. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020.
Anticipated “Phase 4” Legislation
Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. President Donald Trump has already tweeted his support for such an infrastructure bill. Under one version of an infrastructure plan floated by House Democrats (the Moving Forward Framework), airports and airspace improvements would be funded, in part, by an increase in PFCs. PFCs have been set at $4.50/passenger since 2000, and increasing the PFC maximum has been a priority of the airport industry for some time. Airlines are likely to oppose any PFC increase, and in the absence of any increase, infrastructure spending would likely be funded through additional appropriations to the Airport and Airway Trust Fund.
Bond Covenants and Indenture Pledge of Revenues
The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. While the bulk of the $10 billion appropriated for airport sponsors can be used, if necessary, to make bond principal and interest payments, airport sponsors may be faced with difficult decisions about how to prioritize needs during the financial stress. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds.
Minimum Annual Guarantees
Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). These MAGs are usually based on some percentage of the prior year’s revenue and are intended to provide the airport sponsor with a revenue floor from these concession contracts. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. These MAG clauses in concession contracts should be carefully reviewed. If the airport sponsor determines that it is in its best interest to waive the MAG, then these clauses can be replaced with an alternative fee structure, such as a simple percentage of sales or some other agreed-upon metric of performance. If, on the other hand, the airport sponsor decides to enforce the terms of a MAG, then it should carefully review the concession contract to determine the terms of enforcement and whether the concessionaire has any basis to refuse to pay the MAG.
Terminal Closure and Footprint Reductions
Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. Airlines, while they may be able to reduce some operating costs associated with vacated premises, must still cover all their fixed and operating costs associated with the vacated space. Airport sponsors should carefully review the maintenance and operation (M&O) expense allocation methodology in their terminal leases to confirm the method for allocating costs for vacated space. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines’ changed operating circumstances. If, on the other hand, an airport sponsor decides to enforce the M&O expense allocation in its terminal leases, then the terminal leases should be carefully reviewed to determine the terms of enforcement and what rights the airlines have under those leases.
For information on the business impacts of COVID-19, please visit our COVID-19 Resource Center, which we continue to update as the situation evolves. If you have questions about COVID-19’s impact on your business, please reach out to your Loeb relationship partner or email us directly at COVID19@loeb.com.