Business

Charlotte nears new lease with American Airlines

An American Airlines jet takes off at Charlotte Douglas International Airport recently. The coming year will be pivotal for Charlotte Douglas, as the airport negotiates a new master lease with American Airlines and plows ahead with an ambitious round of expansion.
An American Airlines jet takes off at Charlotte Douglas International Airport recently. The coming year will be pivotal for Charlotte Douglas, as the airport negotiates a new master lease with American Airlines and plows ahead with an ambitious round of expansion. rlahser@charlotteobserver.com

Charlotte’s airport is closing in on a new lease with American Airlines, and the final terms will shape the experiences of thousands of travelers who fly to and from the city every day.

Under the current lease, Charlotte Douglas International Airport is the lowest-cost major airport for American, making it economical to keep Charlotte as one of the biggest airline hubs in the nation, with nearly 700 flights a day.

This hub status means the city has more nonstop flights for business and leisure travelers, but American’s dominance at the airport has also helped push fares higher.

So far, the players in the lease negotiations won’t discuss specifics but say the talks are going smoothly. Should that trend hold, it bodes well for both the airport’s ambitious growth strategy and for travelers’ plentiful flight choices.

As a “fortress hub,” Charlotte Douglas is unusually reliant on one carrier: American Airlines operates more than 90 percent of its daily flights. And about 80 percent of the airport’s passengers are connecting between planes rather than starting or ending their trips in Charlotte.

Unlike other American Airlines hub cities such as as Dallas/Fort Worth, Chicago and New York, Charlotte’s 150 or so nonstop destinations are far more than the city could support if it weren’t a major spot for passengers to connect. That means American has enormous leverage in the closed-door negotiations.

The new lease likely won’t impact fares because they are much more heavily determined by fuel, labor costs and the demand for air travel.

Interim Aviation Director Brent Cagle and American Airlines declined to comment on the terms each is seeking. Cagle said he expects to sign a new lease in the coming months, before American’s current 30-year deal expires in June.

“We’re starting to iron out all of the final terms and conditions and look at what the next steps will be,” Cagle said. He expects the new lease to run for five to 10 years – significantly shorter than the current lease, which has been in place since 1985.

The agreement won’t have an impact on local taxpayers. As an independently financed department of the city, the airport gets its funding from the fees it charges airlines, parking and concessions revenue and federal grants. Local tax revenues don’t go to the airport, and under federal law, money the airport generates can’t be used for non-airport projects. For example, the city can’t take excess airport revenue and use it to build a new police station.

The airport wants to ensure that it remains an attractive hub with low charges to airlines, while at the same time guaranteeing enough revenue to fund a new concourse, expanded roadway and terminal renovations.

American, like other airlines that fly from Charlotte, wants to keep its costs as low as possible. The airline has a good deal at Charlotte Douglas, which it has told analysts is its most profitable hub.

In addition to the lowest per-passenger cost of any major hub airport ($2.28 per passenger vs. $6.86 in Dallas/Fort Worth and $19.13 in Miami, according to a 2013 study), Charlotte Douglas splits its profits from parking and concessions with American to keep the carrier’s costs even lower.

A team led by assistant aviation director Haley Gentry is representing Charlotte Douglas in monthly negotiation meetings. All airlines are invited, but American is clearly the most prominent at the table. The current lease covers several other airlines in addition to American, but it doesn’t preclude other carriers from flying to and from Charlotte.

Lease negotiations can be tense and high-stakes. United Continental’s former CEO Jeff Smisek was abruptly fired this fall after federal investigators started probing whether the airline started a money-losing flight from New York to Columbia to curry favor with the director of the Port Authority of New York and New Jersey. United was negotiating a new lease at the three New York-area airports and trying to keep its costs down.

Aviation analyst Bob Mann said Charlotte’s starting point as a low-cost hub for American means friction is less likely.

“Charlotte is in an enviable position,” Mann said. “That would generally make it an easier negotiation.”

Lower fares, parking fees?

One of Charlotte travelers’ biggest gripes about the airport is that while it’s a low-cost hub for the airlines, it usually isn’t low-cost for local passengers.

The average domestic airfare from Charlotte was almost $464 in the first quarter this year, 19 percent higher than the national average of $388. A few low-cost carriers such as Southwest and Frontier Airlines fly from Charlotte, but only to a handful of destinations.

Under the current airport lease, the airlines must sign off on major expansions. That gives American a potential way to limit competition because the airline could say no to new gates designed to lure low-cost carriers that could eat into its market share. American has approved the airport’s expansion plans, which include nine new gates in a new satellite concourse. That will allow Charlotte Douglas to keep up with gradually increasing passenger numbers but doesn’t represent a major expansion to its existing 96 gates.

Don’t expect the new lease to result in significantly lower-cost air fares because the cost of a ticket has much more to do with an airline’s major costs (fuel, which is especially volatile, and labor) and demand (how many seats are full on each flight) than smaller airport fees. When airlines price tickets, the landing fees of an individual airport are a small piece of the complex calculations.

Still, American has been zealous about keeping costs in Charlotte low. That allows American to make money running a hub that relies mostly on connecting passengers in Charlotte.

Earlier this year, the airline lobbied legislators to eliminate sales taxes on jet fuel. The N.C. General Assembly complied, saving the airline millions annually.

Charlotte Douglas’ revenue-sharing provisions are another key part of keeping the airlines happy. Under the current lease, Charlotte Douglas gives the airlines 40 percent of its profits from parking and concession sales. Last fiscal year, Charlotte Douglas gave airlines $14.8 million, according to financial statements. The payments are split up based on how much space the airlines lease, meaning most go to American.

So, could the airport lower parking fees and concession prices at the airport if it cut the revenue-sharing from the next lease? In theory, Charlotte Douglas could charge travelers less and still keep the same amount of revenue if it stopped sharing with the airline.

But such a move isn’t likely. The concessions, such as restaurants and shops, are run by third-party vendors that set their own prices. And parking revenue is pledged to pay off bonds that funded projects such as the new hourly parking deck, so Charlotte Douglas can’t easily reduce such fees.

Shorter lease likely

Other airports around the country are negotiating new leases with their major carriers, and the terms vary.

In Denver, multiple airlines warned the airport in 2013 that rising costs could put its hub status in jeopardy. The airport later reached a new lease with United that runs for 20 years – after it cut costs and fees it charged United by millions of dollars in exchange for the airline promising to maintain service levels. Atlanta’s Hartsfield-Jackson is negotiating with Delta Air Lines, seeking a 20-year deal that would fund the airport’s $6 billion expansion plan.

Others have gotten shorter deals. Philadelphia, another American Airlines hub city, signed a five-year lease with the airlines in July.

Charlotte City Council, which will vote on the lease, will face pressure from the business community to keep American happy. Charlotte Douglas is usually touted as the city’s most important economic asset.

Only a couple years ago, the state legislature tried to take control of Charlotte Douglas from City Council and give it to a new, regional commission because lawmakers said they were concerned rising costs would put the hub in jeopardy. The effort ultimately stalled in a tangled lawsuit, but the threat still lingers over the airport’s moves.

Cagle, the interim aviation director, said the new lease under negotiation will be for a much shorter term than the current agreement. He said airlines aren’t willing to sign very long agreements as easily as they would in decades past, when the aviation business was less turbulent.

Mann, the aviation analyst, said shorter leases can allow airlines to exert more influence over an airport’s major expansion plans.

“They want to have periodic control over what the airport is spending and how that translates into a cost factor for carriers,” Mann said.

Cagle said signing a new lease will allow the airport to plan for issuing bonds to fund Charlotte Douglas’ ambitious expansion plans. Revenue from airline fees will be an important source of funds for the program. Since the airlines have given the plans their approval, they are likely to endorse a lease that will give Charlotte Douglas enough revenue to pay for the plans.

The airport is building a new, satellite concourse, adding more lanes to its terminal roadway and starting renovations on the terminal this year. Charlotte Douglas is also finishing a new development plan for the thousands of vacant acres surrounding Charlotte Douglas, which have drawn interest from developers. And Cagle said the airport will launch an environmental impact study for a fourth parallel runway, which could open in the early 2020s.

“It’s going to be a very, very busy year,” Cagle said.

Ely Portillo: 704-358-5041, @ESPortillo

Projects underway at Charlotte Douglas

This coming year at the airport, travelers should expect to see:

▪ Construction on the airport’s new terminal roadway (between the terminal and hourly parking deck), which Charlotte Douglas is increasing from three to eight lanes. Work on the $40 million project has already started, and it is expected to last more than two years.

▪ Work on a new concourse and gates north of Concourse A, where the rental cars were located. The $310 million project will take place in two phases, with the first bringing nine new gates and the second 16 new gates.

▪ Site work for a new control tower the FAA is building. The 376-foot tower would be more than twice as tall as the current tower.

▪ Construction on the airport’s planned terminal renovation and rehabilitation project.

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