Development

Charlotte airport close to lease with biggest tenant, American Airlines

An American Airlines jet takes off at Charlotte Douglas International Airport this week. 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 this week. 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

The coming year will be pivotal for Charlotte Douglas International, as the airport negotiates a new master lease with its biggest tenant, American Airlines, and plows ahead with an ambitious round of expansion.

The airport is close to a lease with American and other airlines that fly from Charlotte, interim Aviation Director Brent Cagle said. He expects to sign a lease before the current deal expires in June.

The new lease will establish the fees Charlotte Douglas charges the airlines, which makes it a crucial agreement. To keep the airlines’ costs lower, Charlotte Douglas splits profits from parking and concessions in the terminal with the airlines – another arrangement that’s spelled out in the current lease.

“We’re starting to iron out all of the final terms and conditions and look at what the next steps will be,” Cagle said. Airport negotiators have been meeting with the airlines for almost a year, he said. Cagle expects the new lease to run for five to 10 years – significantly shorter than the current lease, which has been in place for 30 years.

Charlotte Douglas is usually touted as the city’s most important economic asset. With almost 700 daily flights, the airport ranks as the sixth busiest in the nation in terms of takeoffs and landings. That’s a huge draw for companies looking to relocate to the Charlotte region, and helps the city punch above its weight class.

But the airport is heavily dependent on one carrier – American Airlines – which operates more than 90 percent of daily flights. It’s known as a “fortress hub,” similar to Delta Air Lines-dominated Atlanta.

And about 80 percent of passengers each year at Charlotte Douglas are connecting from one plane to another, rather than starting or stopping their trip in Charlotte. As a result, the airport is far more dependent than its peers on connecting passengers.

During the years, that has led to speculation and worry the hub could be at risk, especially as US Airways and its predecessor airlines struggled and merged with competitors. But American, which completed its merger with US Airways this year, has consistently affirmed its commitment to the city. And it hasn’t cut service, except for a few new European routes.

Charlotte Douglas’ major draw has always been its status as a low-cost airport for airlines to operate. That’s why its revenue-sharing provisions have been a key part of the current lease.

Last fiscal year, Charlotte Douglas gave the airlines $14.8 million worth of profits from parking and concessions, according to the airport’s financial statements. Most of those payments go to American.

Cagle wouldn’t talk about specific terms in the new lease while it’s under negotiation, and an American spokesperson declined to comment beyond saying that negotiations are going well. So far, there are no indications of major tensions in the lease talks – something that’s not always the case as airlines seek lower fees and airports try to pay for expansion plans.

United Continental’s former CEO Jeff Smisek was 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 unlikely. The airlines like Charlotte’s low costs, and Charlotte Douglas and city officials like having a major hub airport. Even though the airport is embarking on a 10-year, $2.5 billion expansion plan to add terminal space, gates, a wider entrance road and a new runway – which will likely increase costs for the airlines – American has said it supports those plans.

“Charlotte is in an enviable position,” Mann said. “That would generally make it an easier negotiation than an airport like Seattle, where costs are rising dramatically.”

For passengers, of course, Charlotte Douglas isn’t quite so low cost. The average domestic airfare from Charlotte was almost $464 in the first quarter this year, 19 percent higher than the national average of $388. That’s a reflection of the limited alternatives: A few low-cost carriers such as Frontier Airlines fly from Charlotte, but only to a handful of destinations.

Negotiations vary by airport

Other airports around the country are negotiating new leases with their major carriers, and the terms vary. While airlines try to keep their landing fees and rent low, the airports typically seek revenue to fund expansion projects.

In Denver, the airport reached a deal with United that runs for 20 years. The airport cut costs and fees it charged United by millions of dollars in exchange for the airline promising to maintain service levels during the terms of the lease. Atlanta’s Hartsfield-Jackson is negotiating with Delta, seeking a 20-year deal that would fund the airport’s $6 billion expansion plan.

Charlotte Douglas is 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. So, for example, the city couldn’t take excess airport revenue and use it to build a new police station.

Cagle said signing a new lease –which Charlotte City Council would have to approve – 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.

“It really allows us to understand what our requirements will be as we move forward in our capital program,” Cagle said. “It defines what (the airlines’) commitment will be as we start to move forward.”

Cagle said the airline lease under negotiation will be for a much shorter term than the current agreement.

“It’s clear that it won’t be a 30-year lease,” said Cagle. 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,” said Mann.

The airport plans to start or continue work on key projects this year. Cagle said 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.

The airport also plans to wrap up a new master plan and development plans 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 new, parallel runway, which could open in the early 2020s.

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

Ely Portillo: 704-358-5041, @ESPortillo

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