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San Diego International Airport leaders have settled on a $2.2 billion plan to rebuild Terminal 1 and part of Terminal 2. How they will pay for it all or even half of it, though, is still unknown.
Officials are forging ahead with environmental review of the whole project, a process that will take 18 to 24 months and cost at least $2 million while staff attempt to identify their financial options.
If successful, in store is the replacement of the 1960s-era Terminal 1 used primarily by Southwest Airlines, the replacement of Terminal 2’s east wing and an extension on the west side, and two new parking structures to add to the parking structure already in the works.
The airport as most passengers know it would be radically changed.
After kicking around several conceptual designs this year, the airport board selected an option it says can be easily built in stages with less disruption to daily operations. The chosen design will also make the eventual reconstruction of the airport’s only runway easier by allowing officials to use the current taxiway as a runway for six to nine months, officials said.
Here’s an aerial view of the current airport configuration, and the new one envisioned.
Planning major projects takes time, and the economy and passenger travel may change things for the better and boost revenues. But when you are in need of a billion dollars, it’s clear getting the entire project done anytime soon through just conventional means isn’t going to work.
As a result, airport officials are looking beyond traditional bond debt and searching for large investments by private companies that could lead to a privately operated Terminal 1.
“It is very real, the fact that we don’t have the funding necessary to build a project of that magnitude,” said San Diego City Councilman David Alvarez, who sits on the San Diego International Airport board. “We aren’t the federal government. We can’t go into debt beyond what we have as income coming in.”
Though still a long way off from having a final funding plan for the project, here is a look at the funding sources being considered and the one option – the equivalent of a tax hike – that officials seem to have already ruled out.
The No-Brainer: Airport Revenue Bonds
Airport staff hope to finance $1 billion of the cost by issuing debt backed by future airport revenues, including cash from concessions, airlines, passenger fees, parking and other usual sources.
The airport’s $1 billion “Green Build” project opened in 2013 was funded this way, which expanded Terminal 2 by adding 10 gates, as well as new roadways, shopping and dining options. Since that debt is still on the books, the capacity for more debt is limited.
Staff told the board new 35-year bonds could be issued in 2019 and bring in $1 billion in new money. Debt payments on those bonds would begin in 2022, but even taking this familiar path would require some revenue growth, cost-cutting and possibly postponed construction in order for it to pencil out without facing a credit downgrade.
What about the other $1.2 billion? Airport officials may need to get creative.
The ‘You Use It, You Buy It’ Option: Tenant Financing
Tenant financing calls for those who occupy the space to pay for the project on their own. We’re looking at you, Southwest Airlines, Alaska Airlines, Frontier and maybe Westfield, the chain mostly known for its shopping malls.
Airports elsewhere, like Houston, Dallas and Ft. Lauderdale, Fla., have all had success letting tenants take on construction projects before ultimately buying back the completed facilities, San Diego airport staff told the board last month.
Westfield Group has been involved in several such projects, including a $26 million redesign of Terminal 5 at Chicago’s O’Hare International Airport, as well as multiple terminal projects at LAX with help from the various airlines that operate there. Westfield is even teaming up with Southwest Airlines to renovate Terminal 1 at LAX for $508 million.
Still, the size of San Diego’s Terminal 1 project “may not be ideal for tenant funding opportunities,” according to a November staff report.
And whether Southwest Airlines would be open to something similar (or much larger) in San Diego remains to be seen.
Southwest executive Steve Hubbell did pen a broad letter of support for the project last month as chair of the local Airline Airport Affairs Committee. “We look forward to continuing to work with the Authority to develop an optimal design and financing approach for this critical program,” he wrote.
San Diego International has already dabbled in this sort of arrangement on a small scale with its Fixed-Base Operator building, which provides hangars, fuel stations and other services. Landmark Aviation completed the $39 million project in 2014 in exchange for a 37-year, $315 million lease.
Outsource It, Big Time: Public-Private Partnerships
Public-private partnerships are essentially another name for outsourcing or privatizing. This option can come in many forms, but on a large scale, construction costs and debt would be borne by the private entity. In return, the airport would give up operation and maintenance of the terminal for decades.
Though uncommon in the United States, large agreements have been done before. John F. Kennedy International Airport took this route in 1994 by partnering with four airlines for its Terminal 1 project, and again in 1997 when it partnered with a non-airline company to build Terminal 4 for $1.4 billion. Both terminals are still privately operated today.
LaGuardia Airport is currently in the midst of a $4 billion terminal overhaul with a private non-airline group called LaGuardia Gateway Partners, which will design, build, finance, operate and maintain the terminal that serves half of the airport’s passengers.
Though promoted for its decreased risk to the airport, partnerships can also be risky, and have failed before.
Stewart International Airport in New York was wholly privatized under a 99-year lease with United Kingdom National Express Group in 2000. Seven years later, the airport was back in government hands when the company sold its lease interest to the Port Authority of New York and New Jersey.
Multiple efforts to privatize Chicago’s Midway International Airport have also floundered, including a short-lived $2.5 billion 99-year lease that was canceled in 2009 due to fundraising difficulties during the recession.
On a much smaller scale, San Diego International entered a public-private partnership with Aviation Facilities Company Inc. The company designed, built and financed a new receiving and distribution center opened in November 2012 where food, beverages and other goods are processed. The airport plans to pay the company back over 20 years in $73,000 monthly installments.
Pursuing a public-private partnership for Terminal 1 would keep the costs off the airport’s books, but also mean a great loss of airport control and likely higher financing costs.
Here are two more options not presented to the board.
The Never Used Option: Property Assessments
San Diego International Airport was spun off from the Port of San Diego to become its own agency in January 2003.
The state legislation that created the agency gave the airport the option of levying a special assessment on area property owners or tenants who benefit from airport services and improvements. Exactly how the airport could do so to fund their Terminal 1 dreams isn’t clear and may not be feasible. Generally, such assessment districts require simple majority approval from those charged. It could be argued that shop and restaurant owners who will benefit from the renovated terminal space should pay for it.
Airport Authority CEO Thella Bowens said during an interview earlier this year she was unaware the assessment option even existed. The option wasn’t presented to the board, although airport Spokesman Jonathan Heller said it hasn’t been ruled out.
“The Airport Authority makes a point of not relying on local taxes. That’s been part of our financial strategy from the beginning,” Heller said. The options presented to the board, he said, “represent what we believe at this point in time to be the most effective and practical solutions to funding.”
The Hail Mary: Congress
The other option not included in staff’s preliminary financial plan is a Congress-approved increase to the fees airports are allowed to charge passengers to fund capital improvements.
“Moving things through Congress is difficult in the best of circumstances,” said Robert Gleason, chair of the San Diego International Airport board.
Airports have been allowed to collect $4.50 from passengers for each flight for more than a decade. President Barack Obama’s efforts to get Congress to increase the amount by another $4 have so far been unsuccessful.
Airports and airlines have lobbied hard on opposing sides of the issue, and no action was taken on the proposal this year. Passenger charges may be reconsidered as soon as next year. If such an increase ever came to pass, it would mean tens of millions of dollars in new annual revenue for San Diego International.
Alvarez mentioned one other option that could result in local tax dollars being spent on the terminal: The infrastructure bond planned by regional planning agency SANDAG. For that to happen, airport officials would need to elbow their way onto an already crowded list of needs, the bond would have to make it onto the ballot and get voter approval.