This Digest is a summary of the important developments in airport law in 2018, including: a list of principal cases decided last year; new FAA rules, policies, and guidance; and reports, studies, and articles of particular interest to airport legal professionals. The most significant change to the airport law landscape in 2018 came with the passage and enactment of the most recent FAA Reauthorization Act. The Reauthorization Act touches elements of airport funding, non-aeronautical development, airport noise, hazardous chemicals in ARFF foams, and other important issues for airport sponsors. With reauthorization legislation in the rear view mirror, sponsors now have longer-term certainty, but airports must wait to see how FAA will implement some of the trickier provisions of the law. There are dozens of new statutory requirements relevant to airports and to FAA regulation of airports – some of which are self-executing, some require new FAA regulations, others contemplate revised agency policies or guidelines, and, finally, some demand studies or reports (often with ambitious time deadlines). For a full summary of the FAA Reauthorization Act, see Kaplan Kirsch & Rockwell’s Airport Law Alert on the legislation, released in October 2018.

Entering 2019, the newly divided Congress and changes to committee chairpersons will affect airportrelated matters, though it is impossible to predict how or what changes might be in store. FAA will finally have a new permanent Associate Administrator for Airports: Kirk Shaffer, who is no stranger to airports (he previously held senior airport management positions) or to FAA management (he previously served in the same position for several years under President George W. Bush). With Mr. Shaffer’s appointment, we can expect changes in other senior FAA Airports Division assignments. As of yet, there is no indication of who may be named to the FAA Administrator post. Other topics that will continue to be hot issues in the new year include PFAS (fire fighting foam), litigation over Metroplexes, and potential TIFIA legislation. These and other issues are discussed in our July 2018 Semi-annual Airport Law Digest and our December 2018 Airport Law Alert.

We hope you find this Digest useful in your efforts to remain current in the always-evolving legal and regulatory framework that governs airports. If you have questions about any of the materials in this Digest, please contact editor Nicholas M. Clabbers or any other Kaplan Kirsch & Rockwell attorney who normally represents you.

L I T I G A T I O N

FEDERAL COURT DECISIONS

NEPA.  Informing Citizens Against Runway Airport Expansion v. FAA, No. 17-71536, 2018 U.S. App. LEXIS 35416 (unpublished 9th Cir. Dec. 18, 2018) (rejecting NEPA-based challenge to FAA’s decision to approve a runway extension at small airport in Hamilton, MT).

Metroplex/Next Gen.  Vaughn v. FAA, No. 16-1377, 2018 U.S. App. LEXIS 33827 (D.C. Cir. Nov. 30, 2018) (unpublished) (dismissing various NEPA, Clean Air Act, and procedural challenges to FAA’s redesign and implementation of the Southern California Metroplex).

Private Rights of Action.  Randel v. Parkland Homeowners Ass’n, No. 18-cv-00804-MEH, 2018 U.S. Dist. LEXIS 195015 (D. Colo. Nov. 15, 2018) (holding that the Federal Aviation Act contains no private right of action for plaintiffs alleging that HOA failed to file required Form 7480-1 for changes to local sport airpark).

Safety Authority.  Gyves v. City of Houston, No. H-18-0891, 2018 U.S. Dist. LEXIS 1285422 (S.D. Tex. Oct. 30, 2018) (finding no due process violations and no liability under § 1983 where pilot pulled a jetway emergency release lever in violation of airport rules and regulations and was subsequently banned from airport premises).

Rates and Charges.  Star Marianas Air, Inc. v. Commonwealth Ports Auth., No. 17-CV-122018 U.S. Dist. LEXIS 149507 (D. N. Mar. I. Aug. 30, 2018) (dismissing for lack of subject matter jurisdiction a claim that airport sponsor had breached its use and lease agreement with airline and holding that 49 U.S.C. § 47107 and FAA’s Rates and Charges Policy provides no private right of action).

Sponsor Liability.  Afoa v. Port of Seattle, 421 P.3d 903 (Wash. Jul. 19, 2018) (in case involving injured independent contractor employee, finding that sponsor was not jointly and severally liable for airlines’ portion of damages despite sponsor’s nondelegable duty to maintain a safe workplace).

Crash Liability.  Deutsche Lufthansa AG v. Mass. Port Auth., No. 17-CV-11702-DJC, 2018 U.S. Dist. LEXIS 119580 (D. Mass. Jul. 18, 2018) (where airline alleged claims against an airport sponsor for damage to an aircraft resulting from uncleared snow on the taxiway, granting motion to dismiss negligence per se claim but denying a motion to dismiss under breach of contract theory).

Drone Regulations.  Taylor v. FAA, 895 F.3d 56 (D.C. Cir. Jul. 6, 2018) (dismissing petition for review, which challenged FAA’s regulation of small UAS as beyond the agency’s statutory authority). Drones and Privacy. Elec. Privacy Info. Ctr v. FAA, 892 F.3d 1249 (D.C. Cir. Jun. 19, 2018) (dismissing challenge to FAA’s decision not to promulgate privacy-specific UAS regulations because petitioners failed to establish standing).

Airport Closure.  Nat’l Bus. Aviation Assn. v. Huerta, 737 Fed. Appx. 1 (D.C. Cir. Jun. 12, 2018) (dismissing challenge to FAA settlement agreement with the City of Santa Monica that permits closure of the airport in 2028 because preliminary agreement was not final agency action and thus was not reviewable); see also Scott v. City Council for the City of Santa Monica, No. 17-07329 (C.D. Cal. Dec. 15, 2017) (dismissing complaint alleging that City Council failed to hold a public hearing in violation of California state law before entering into settlement agreement).

Petition for Review.  Skydive Myrtle Beach Inc. v. Horry Cty. Dep’t of Airports, 735 Fed. Appx. 810 (4th Cir. Jun. 5, 2018) (dismissing as untimely a challenge to FAA decision in Part 16 matter where petitioner failed to submit petition within 60 days of service of the agency’s decision).

Air Carrier Permits.  Air Line Pilots Ass’n v. Chao, 889 F.3d 785 (D.C. Cir. May 11, 2018) (on the merits, rejecting challenge to Department of Transportation’s issuance of air carrier permit to Norwegian Air because nothing requires the Secretary to deny a permit on public interest grounds alone).

Preemption.  Bailey v. Rocky Mt. Holdings, LLC, 2018 U.S. App. LEXIS 11969 (11th Cir. May 8, 2018) (holding that the balance billing provision in Florida’s personal injury protection statute, which prohibits medical providers from charging in excess of a fee schedule amount, operates as a state-imposed regulation on air carrier rates and that the Airline Deregulation Act preempts the application of the balance billing provision to air carriers).

Airport Revenue.  Clayton Cty. v. FAA, 887 F.3d 1262 887 F.3d 1262 (11th Cir. Apr. 24, 2018) (dismissing petition for review for lack of jurisdiction where non-sponsor municipality challenged letter setting forth FAA’s interpretation of statute requiring taxes on aviation fuel to be used for airport purposes and the court did not find the FAA letter to constitute a final agency action).

Metroplex/NextGen.  Citizens Ass’n of Georgetown v. FAA, 886 F.3d 130 (D.C. Cir. Mar. 27, 2018) (dismissing petition for review of FAA’s NextGen flight patterns in DC Metroplex because challenge was filed more than 60 days after issuance of FONSI).

Subject Matter Jurisdiction.  Boneyard Acquisitions, LLC v. Bibb Cty., 2018 U.S. Dist. LEXIS 44956 (N.D. Ala. Mar. 20, 2018) (dismissing complaint for lack of subject matter jurisdiction where plaintiff alleged airport sponsor had extinguished easement in accordance with federal law).

Grant Assurances.  SPA Rental, LLC v. Somerset-Pulaski Cty. Airport Bd., 884 F.3d 600 (6th Cir. Mar. 7, 2018) (upholding FAA’s finding of no unjust discrimination where complainant was not similarly situated to other entities).

Labor and Employment.  Frungillo v. Bradford Reg’l Airport Operating, 2018 U.S. Dist. LEXIS 39739 (W.D. Pa. Mar. 12, 2018) (finding that co-defendant municipalities were not “joint employers” with their collectively incorporated airport authority for purposes of plaintiff’s FMLA and ADA claims).

Standing and NEPA.  Kaufmann v. FAA, 2018 U.S. App. LEXIS 1393 (6th Cir. Jan. 22, 2018) (finding that petitioners did not have standing nor a federal cause of action against airport sponsor engaged in tree trimming using solely state funds).

False Claims Act.  United States ex rel. Durkin v. Cty. of San Diego, 2018 U.S. Dist. LEXIS 5550 (S.D. Cal. Jan. 11, 2018) (dismissing complaint alleging airport sponsor made false statements in grant applications because plaintiff had not sufficiently alleged how the statements led to the sponsor securing federal funds or the Defendant’s knowledge of the falsity of the statements).

Noise.  BRRAM, Inc. v. FAA, 721 Fed. Appx. 173 (3d Cir. Jan. 9, 2018) (on NEPA appeal brought by airport neighbors, affirming FAA decision to use categorical exclusion to approve amendment to operating specifications allowing new air carrier to use airport).

First Amendment.  McDonnell v. City & Cty. of Denver, 878 F.3d 1247 (10th Cir. Jan. 4, 2018) (overturning district court’s grant of preliminary injunction against airport sponsor and finding that sponsor was not required to grant an exception to its regulations on speech-related activities for exigent circumstances).

PENDING CASES

Judicial Review.  Kisor v. Wilkie, No. 16-1929 (U.S. Sup. Ct. cert granted Dec. 10, 2018) (non-airport case implicating possible reconsideration of judicial deference to agency interpretations of its own rules (Auer deference)).

Metroplex/NextGen.  Howard Cty. v. FAA, No. 18-2360 (4th Cir. filed Nov. 14, 2018) (challenging flight procedures at Baltimore-Washington International Thurgood Marshall Airport).

Revenue Diversion.  Air Transp. Ass’n. of Am., Inc. v. FAA, Case No. 18-1157 (D.C. Cir. respondent’s brief filed Nov. 13, 2018) (petition for review of Part 16 decision finding no violation of Grant Assurance 25 where airlines alleged that airport sponsor had impermissibly charged them certain utility fees it then paid to the City of Portland).

Metroplex/NextGen.  Maryland v. FAA, No. 18-1302 (D.C. Cir. filed Nov. 8, 2018) (petition for review of FAA decision denying administrative petition for supplemental environmental assessment concerning DC Metroplex and BWI).

Drones.  Elec. Privacy Info. Ctr v. Drone Advisory Committee, et al., Civ. Action No. 18-833 (D.D.C. motion to dismiss filed Jul. 3, 2018) (complaint alleging that DOT’s Drone Advisory Committee is failing to make meetings open to the public).

Metroplex/NextGen.  Maryland v. FAA, No. 18-1173 (D.C. Cir. filed Jun. 26, 2018) (petition for review of FAA implementation of new approaches at Washington National Airport).

ADMINISTRATIVE DECISIONS

Rates and Charges.  Sound Aircraft Servs. v. Town of E. Hampton, FAA Docket No. 16-14-07, Director’s Determination (Jan. 2, 2019) (finding no grant assurance violations where complainant alleged that the Town impermissibly raised its rates and charges and violated FAA’s prohibition against revenue diversion when it raised both landing fees and fuel flowage fees).

Revenue Diversion.  United Airlines v. Port Auth. of N.Y. & N.J., FAA Docket No. 16-14-13, Director’s Determination (Nov. 19, 2018) (finding the Port Authority in violation of its grant assurance obligations regarding the fee methodology in place at Newark Liberty International Airport and its use of airport revenue because the Port failed to provide transparency as to the rate calculations and its own accounting practices).

Skydiving and Safety.  Kurtz v. City of Casa Grande, FAA Docket No. 16-16- 01, Final Agency Decision (Nov. 19, 2018) (affirming Director’s Determination and finding that sponsor violated Grant Assurances 22 and 23 by improperly prohibiting skydiving because the proposed operations could be safely accommodated with certain mitigation measures).

Labor Unions.  OBM Onsite Services-West, Inc., No. 19-RC-144377, 2018 NLRB LEXIS 550 (N.L.R.B. Nov. 14, 2018) (holding that independent baggage handlers at Portland International Airport fell under the jurisdiction of the National Mediation Board and the Railway Labor Act, not the National Labor Relations Act).

Gate Allocation.  In re Compliance with Federal Obligations by the City of Dallas, FAA Docket No. 16-15-10 (Notice of Investigation served Aug. 7, 2015, since dismissed without prejudice) (FAA investigation into possible grant assurance violations related to a failure to accommodate air carrier requesting gate space).

Standing.  Dover Development, LLC v. St. Louis Reg’l Airport Auth., FAA Docket No. 16-17-09, Final Agency Decision (May 23, 2018) (affirming Director’s Determination and holding that complainant did not have standing where it was neither an airport tenant nor had any aircraft based there and was only an occasional user of airport facilities). 

Revenue Diversion.  Air Transport Assn. of Am., Inc. v. Port of Portland, FAA Docket No. 16-16-04, Final Agency Decision (May 18, 2018) (affirming Director’s Determination finding no violation of Grant Assurance 25 where airlines alleged that airport sponsor had impermissibly charged them certain utility fees it then paid to the City of Portland).

Economic Discrimination.  Pelzer v. Michigan, FAA Docket No. 16-16-05, Director’s Determination (May 16, 2018)  (finding sponsor in violation of Grant Assurance 22 where lease negotiations generally lacked transparency or clarity about requirements to operate on the airport, and where sponsor provided no reasons for prohibition on temporary commercial operations).

Legal Fees and Airport Revenue.  Nat’l Bus. Aviation Assn., Inc. v. Town of E. Hampton, FAA Docket No. 16-15-08, Director’s Determination (Mar. 26, 2018) (finding that attorney’s fees and other costs paid by sponsor to defend use restriction was permissible use of airport revenue).

Exclusive Rights.  Atlantic Beechcraft Servs., Inc. v. City of Fort Lauderdale, FAA Docket No. 16-17-03, Director’s Determination (Mar. 7, 2018) (finding that no Grant Assurance 22 or 23 violations existed where a subtenant’s lease agreement with a sponsor’s lessee prohibited certain commercial maintenance activities within the leasehold area).

Acquisition of Property.  Boggs v. City of Cleveland, FAA Docket No. 16-16-15, Final Agency Decision (Jan. 26, 2018) (affirming Director’s Decision dismissing complaint alleging Grant Assurance violations where sponsor chose not to acquire private property shown on the Airport Layout Plan).

F E D E R A L   L E G I S L A T I O N

FAA Reauthorization Act of 2018, Pub. Law No. 115-254 (Oct. 5, 2018).

Consolidated Appropriations Act, 2018, Pub. Law No. 115-141 (signed Mar. 23, 2018) (extending FAA authorization through Sept. 30, 2018).

F E D E R A L   R U L E S,   O R D E R S,   A N D   G U I D A N C E

THE WHITE HOUSE

Memorandum of Understanding Implementing One Federal Decision Under Executive Order 13807 (eff. Apr. 9, 2018).

Press Release, Building a Stronger America: President Donald J. Trump’s American Infrastructure Initiative (Feb. 12, 2018); see also Legislative Outline for Rebuilding Infrastructure in America (Feb. 2018).

DEPARTMENT OF TRANSPORTATION AND FAA ORDERS, POLICIES, AND ADVISORY CIRCULARS

Advisory Circular No. 150/5370-10H, Standard Specifications for Construction of Airports (Dec. 21, 2018).

Draft Order 5090.5, Formulation of the NPIAS-ACIP (comments due by Feb. 15, 2019).

Standard Operating Procedure 11.00, Consultant Fee Analysis (Oct. 1, 2018).

Extension to Order, Operating Limitations at John F. Kennedy International Airport, 83 Fed. Reg. 46,865 (Sept. 19, 2018).

Response to Part 23 Issues/Recommendations Submitted by ACI-NA (Sept. 10, 2018).

Advisory Circular No. 150/5395-1B, Seaplane Bases (Aug. 31, 2018).

Advisory Circular No. 150/5200-38, Protocol for the Conduct and Review of Wildlife Hazard Site Visits, Wildlife Hazard Assessments, and Wildlife Hazard Management Plans (Aug. 20, 2018).

Advisory Circular No. 150/5360-13A, Airport Terminal Planning (Jul. 13, 2018).

Supplemental Guidance on the Airport Improvement Program (AIP) for Fiscal Years 2018-2020, FR Doc. 2018-14675 (Jul. 9, 2018).

Contract Provision Guidelines for Obligated Sponsors and Airport Improvement Program Projects (updated Jun. 19, 2018).

Draft Advisory Circular No. 150/5200-36B, Qualifications for Wildlife Biologist Conducting Wildlife Hazard Assessments and Training Curriculums for Airport Personnel Involved in Controlling Wildlife Hazards on Airports (Jun. 5, 2018).

Proposed Policy, Policy on the Temporary Closure of Airports for Nonaeronautical Purposes, 83 Fed. Reg. 24,438 (May 29, 2018).

Notification of Procedures, Notification to UAS Operators Proposing To Engage in Air Transportation, 83 Fed. Reg. 18,734 (Apr. 30, 2018).

Guidance Document, Compliance with Requirements for Timely Processing of [DBE and ACDBE] Certification Applications (Apr. 29, 2018).

Draft Advisory Circular No. 150/5345-43J, Specification for Obstruction Lighting Equipment (Mar. 21, 2018).

Draft Advisory Circular No. 150/5100-13C, Development of State Aviation Standards for Construction at Non-primary Public-use Airports and Use of State Highway Material Specifications for Individual Projects (Mar. 2, 2018).

Draft Advisory Circular No. 150/5345-54C, Specification for L-884, Power and Control Unit for Land and Hold Short Lighting Systems (Feb. 6, 2018).

Draft Advisory Circular No. 150/5345-26E, FAA Specification for L-823 Plug and Receptacle, Cable Connectors (Feb. 6, 2018).

Advisory Circular No. 150/5340-30J, Design and Installation Details for Airport Visual Aids (Feb. 2, 2018).

INTERNAL REVENUE SERVICE

Private Letter Ruling No. 201847001 (Nov. 23, 2018) (tax exempt bond compliance guidance).

R E P O R T S,   S T U D I E S,   A R T I C L E S,   A N D   O T H E R   P U B L I C A T I O N S

U.S. DEPARTMENT OF TRANSPORTATION

Office of Inspector General, Report No. AV2019005, Opportunities Exist for FAA to Strengthen Its Review and Oversight Process for Unmanned Aircraft System Waivers (Nov. 7, 2018).

Office of Inspector General, Report No. AV2018041, FAA Needs to More Accurately Account for Airport Sponsors’ Grandfathered Payments (Apr. 17, 2018).

Office of Inspector General, Report No. AV2018030, FAA Needs To Strengthen Its Management Controls Over the Use and Oversight of NextGen Developmental Funding (Mar. 6, 2018).

U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Report No. 19-238R, Airport Funding: Alternative Methods for Collecting Airports’ Passenger Facility Charges and Implementation Factors to Consider (Dec. 20, 2018).

Report No. 18-110, Small Unmanned Aircraft Systems: FAA Should Improve Its Management of Safety Risks (May 2018).

Report No. 18-236, Aviation Security: TSA Uses Current Assumptions and Airport-Specific Data for Its Staffing Process and Monitors Passenger Wait Times Using Daily Operations Data (Feb. 2018).

CONGRESSIONAL RESEARCH SERVICE

Report No. R45404, Supersonic Passenger Flights (Nov. 14, 2018).

TRANSPORTATION RESEARCH BOARD, AIRPORT COOPERATIVE RESEARCH PROGRAM

Reports

Report 193:  Strategies for Airports to Reduce Local Stormwater Utility Fees (Dec. 2018).

Report 188:  Using Existing Airport Management Systems to Manage Climate Risk (Dec. 2018).

Report 190:  Common Performance Metrics for Airport Infrastructure and Operational Planning (Nov. 2018).

Report 187:  Transportation Emergency Response Application (TERA) Support Materials for Airport EOC Exercises (Nov. 2018).

Report 191:  A Primer to Prepare for the Connected Airport and the Internet of Things (Oct. 2018).

Report 189:  Design Considerations for Airport EOCs (Oct. 2018).

Report 186:  Guidebook on Building Airport Workforce Capacity (Sept. 2018).

Report 185:  Airport Air Quality Management 101 (Jul. 2018).

Report 184:  Executive Summary for the Guidebook on Understanding FAA Grant Assurance Obligations (May 2018) (individual volumes listed in Web-Only Documents).

Report 183:  User Guides for Noise Modeling of Commercial Space Operations – RUMBLE and PCBoom (Apr. 2018).

Report 182:  Guidance for Planning, Design, and Operations of Airport Communications Centers (Jan. 2018).

Synthesis Reports

Synthesis 93:  Sustainability’s Role in Enhancing Airport Capacity (Oct. 2018).

Synthesis 92:  Airport Waste Management and Recycling Practices (Sept. 2018).

Synthesis 91:  Microgrids and Their Application for Airports and Public Transit (Aug. 2018) (joint report with Transit Cooperative Research Program).

Synthesis 90:  Incorporating ADA and Functional Needs in Emergency Exercises (Jul. 2018).

Synthesis 89:  Clean Vehicles, Fuels, and Practices for Airport Private Ground Transportation Providers (Jul. 2018).

Synthesis 87:  Airport Participation in Oil and Gas Development (Apr. 2018).

Synthesis 86:  Airport Operator Options for Delivery of FBO Services (Feb. 2018).

Synthesis 88:  Airport Community, Water Quality Events, and the Aircraft Drinking Water Rule (Jan. 2018).

Web-Only Documents

Web-Only Document 36:  Enhanced AEDT Modeling of Aircraft Arrival and Departure Profiles, Volume 1: Guidance (Sept. 2018).

Web-Only Document 36:  Enhanced AEDT Modeling of Aircraft Arrival and Departure Profiles, Volume 2: Research Report (Sept. 2018). 

Web-Only Document 44:  Understanding FAA Grant Assurance Obligations Volume 1: Guidebook (May 2018).

Web-Only Document 44:  Understanding FAA Grant Assurance Obligations Volume 2: Technical Appendices (May 2018).

Web-Only Document 44:  Understanding FAA Grant Assurance Obligations Volume 3: Research Report (May 2018).

Web-Only Document 44:  Understanding FAA Grant Assurance Obligations Volume 4: Summary of AIP Grant Assurance Requirements (May 2018).

Web-Only Document 35:  State of the Industry Report on Air Quality Emissions from Sustainable Alternative Jet Fuels (Apr. 2018).

Web-Only Document 33:  Commercial Space Operations Noise and Sonic Book Modeling and Analysis (Apr. 2018).

O T H E R   P U B L I C A T I O N S

Airports Council International – Europe, Addressing the Future of Aviation Noise (Dec. 4, 2018).

National Academies of Sciences, Engineering, and Medicine, Assessing the Risks of Integrating Unmanned Aircraft Systems into the National Airspace System (Jun. 2018).

A PDF of this Semi-annual Airport Law Digest is available.

Click here to view the publication.

Several new developments in recent weeks could have significant implications for airports and their financial arrangements. This special Airport Law Alert addresses these recent developments. Of particular note, legislation was introduced in Congress and the Internal Revenue Service has issued a private letter ruling, each of which may be beneficial to airports. There have also been two recent decisions that have significant precedential importance for airports nationwide.

TIFIA FOR AIRPORTS

On November 15, Senators Duckworth and Perdue introduced the TIFIA for Airports Act, which would expand the types of projects eligible for inclusion in the TIFIA program to include airport capital projects that are eligible for funding with passenger facility charges. The Transportation Infrastructure Finance and Innovation Act (TIFIA) provides credit assistance for qualified surface transportation projects but airport projects have not been eligible for this program.

The bill would make $10 million available for subsidy costs of TIFIA credit assistance agreements entered into prior to September 30, 2020. If enacted, the TIFIA for Airports Act would leverage this subsidy to provide a valuable new tool for low-cost financing for airport projects. The Department of Transportation’s Build America Bureau, which administers the TIFIA program, has been seeking ways to broaden the program to support airport development. It is important to note that a number of multi-modal airport projects have already benefitted from TIFIA loans or loan guarantees. While it is always difficult to provide a prognosis for legislation in this Congress, the fact that it has bipartisan support gives the bill a greater-than-usual likelihood of being enacted. We will continue to monitor this proposal. For more information, please contact Dave Bannard.

TAX EXEMPT BOND COMPLIANCE GUIDANCE

A private letter ruling issued by the Internal Revenue Service on November 23 clarifies how airports can maintain compliance with private activity bond requirements when developing non-traditional revenue sources from terminal concessions. Tax exempt bonds issued to finance terminals at airports are typically issued as qualified airport private activity bonds under section 142(a)(1) of the Internal Revenue Code. That section requires that at least 95 percent of the net proceeds of the bonds must be applied to provide airport facilities, but certain types of facilities, such as a health club facility, a facility primarily used for gambling or a store, the principal business of which is the sale of alcoholic beverages for consumption off premises, are prohibited uses of such bond proceeds.

The airport sponsor that sought the private letter ruling anticipated that, as part of its concession program, it was likely to have one or more shops the principal business of which would be selling alcoholic beverages for consumption off premises, such as a wine store. The airport sponsor proposed to contribute a certain sum of funds generated from airport revenues, and not from its revenue bonds (“equity”), and allocate that equity to finance the capital costs associated with the build-out in the terminal for the prohibited use. The sponsor also noted that it expected that over the life of the terminal facility, it was probable that the shop selling alcoholic beverages would be relocated one or more times. The IRS looked to the statutory history of the original provision prohibiting such uses and found that the application of a reasonable allocation method, such as proposed by the airport sponsor would not cause the interest on the bonds issued to fund the remaining terminal improvements to become taxable.

The primary lesson from this private letter ruling is that airports would be prudent to consider allocating the airport sponsor’s own funds to pay a certain percentage of the cost of terminal improvements to ensure that the sponsor retains the flexibility to take advantage of new concession opportunities that might not otherwise be permitted if 100 percent of the costs of the terminal were funded from tax exempt bond proceeds. This allocation can be done on a floating basis, in other words, the equity contributed by the airport sponsor can be allocated to capital costs associated with a prohibited use, rather than a specific portion of the terminal, so that the prohibited use can be moved within the terminal.

Given the importance of generating concession revenues and the never-ending search for new concessions concepts, this is an important principle for airport sponsors to incorporate into their financial plans when funding terminal improvements with tax exempt bonds.

For more information on this IRS ruling, please contact Dave Bannard.

FAA FINDS THAT PORT AUTHORITY OF NY & NJ VIOLATED ITS GRANT ASSURANCE OBLIGATIONS IN ITS EXPENDITURES FOR NON-AIRPORT PURPOSES

On November 19, the FAA’s Director of Airport Compliance and Management Analysis issued a Director’s Determination in United Airlines v. Port Auth. N.Y. & N.J., finding that the Port Authority had violated its grant assurance obligations regarding the fee methodology in place at Newark Liberty International Airport (EWR) and its use of airport revenue. The Director’s Determination is particularly significant for sponsors whose historical use of airport revenue, like the Port Authority’s, enjoys grandfathered status under the airport revenue and highlighted the importance of airport sponsors having a transparent and well-documented rate setting methodology in place.

United Airlines alleged that certain fees imposed by the Port Authority at EWR were unreasonable and led to the accumulation of excess surplus revenues. The Port Authority assesses a “Flight Fee” based on the takeoff weight of aircraft whereby a derived markup is added to certain of the Port Authority’s actual costs attributable to EWR. The Port Authority intended that this combination of the actual costs and markup would recover the direct and indirect costs of operating EWR.

The Director held that the “application of a markup as a means to recover certain costs is not impermissible,” but emphasized that “the markup must be explained and justified” in order to satisfy the Port Authority’s obligation to allocate costs through a reasonable and transparent cost allocation formula. Here, the Director found that the Port Authority’s use of a single ledger for all of its facilities (i.e., JFK, EWR, LGA, as well as non-airport facilities) made it virtually impossible for the FAA or the airlines to understand and validate the Port Authority’s allocation of expenses to EWR. Even if EWR’s fees were ultimately reasonable and not unjustly discriminatory, the FAA found that the failure to provide transparency as to the rate methodology in place at EWR was, in and of itself, a grant assurance violation. Notably, the Director rejected the Port Authority’s argument that the rate methodology was not reviewable because it was embodied in an agreement between the parties.

United also alleged that the Port Authority was unlawfully diverting airport revenue to other projects, in violation of the FAA’s Revenue Use Policy and the terms of the Port Authority’s grandfathering agreement which allows the Port Authority to divert a portion of airport revenue to non-airport facilities owned by the Port Authority.

The Director concluded that the revenue use statute did not allow grandfathered airports to fund “facilities not owned or operated by the [sponsor], or [] facilities that merely support [sponsor] owned facilities or operation.” The Director also found that the Port Authority had committed funding for such ineligible facilities. But, because of the Port Authority’s accounting practices, the FAA could not determine whether airport revenue was used for such facilities. Indeed, the Director observed, “[i]t is probably true that not every dollar used on these projects was from revenue generated at the airport. However, because [Port Authority] funds are commingled, it is reasonable to conclude that airport revenues were used for impermissible purposes.” The Port Authority’s inability to clearly and transparently document the sources and uses of airport revenues, in other words, led the FAA to conclude that the Port Authority had unlawfully diverted airport revenue.

The Port Authority will have thirty days to submit a corrective action plan demonstrating how it will modify its accounting practices, as well as determine the total amount of airport revenues unlawfully diverted over the past six years and credit EWR accounts accordingly. The Port Authority may also appeal the Director’s Determination to the Associate Administrator.

The Director’s Determination stands as a sharp reminder of the importance of documenting the sources and uses of airport revenues, even for sponsors with grandfathered airport revenue uses. Further, the decision clarifies that revenue use statute does not permit the lawful diversion of airport revenue toward facilities that are not owned or operated by the airport sponsor.

For more information on this decision and its implication for other airports nationwide, please contact Eric Pilsk or Dave Bannard.

D.C. CIRCUIT REJECTS CHALLENGES TO SOUTHERN CALIFORNIA METROPLEX

On November 30, the D.C. Circuit issued an unpublished memorandum decision denying four Petitions for Review challenging the FAA’s implementation of NextGen arrival, departure, and en route procedures in Southern California, known collectively as the SoCal Metroplex. The case involved claims by Culver City, the Santa Monica Canyon Civic Association, and two individuals focusing on whether the FAA adequately addressed environmental impacts relating to noise, air quality, and climate change.

In a short, non-precedential decision, the D.C. Circuit rejected all of Petitioners’ arguments with only a brief discussion of each point. In summary, here are the Court’s principal holdings:

• Noise Impacts under Vision 100. Petitioners argued that the FAA failed to meet its obligation under Section 709(c)(1) of the Vision 100 Act, to “take into consideration, to the greatest extent practicable, design of airport approach and departure flight paths to reduce exposure to noise and emissions pollution…” The Court rejected that argument by pointing to evidence in the record that the FAA had made changes to the Metroplex procedures in order to address noise and emissions concerns while still providing airspace efficiency and safety enhancements as called for in the Vision 100 Act.
• Air Quality Conformity. Petitioners argued that the FAA had failed to comply with the Clean Air Act’s conformity requirements by concluding that the SoCal Metroplex could be presumed to conform to the Clean Air Act State Implementation Plan. Petitioners asserted that because most of the changes would occur below the 3,000-foot “mixing height” and would increase fuel burn, the FAA could not presume that the procedures would have only a de minimus effect. The Court rejected those arguments finding that, in fact, most of the changes would occur above 3,000 feet and that the FAA was justified in finding the changes below 3,000 feet were de minimus based on the multi-factor balancing test the FAA was authorized to use in connection with NextGen projects.
• Climate Change/Greenhouse Gases. Petitioners argued that the FAA had failed to adequately consider how the SoCal Metroplex would affect global warming because the FAA claimed that the project would increase greenhouse gas emissions by only a small amount. Petitioners argued that Council on Environmental Quality guidance did not permit dismissing climate change impacts based only on a comparison to global emissions. The Court found, however, that the project greenhouse gas emissions were so small they fell below the CEQ’s threshold for conducting further analysis.

Unlike in the Phoenix case, in which the FAA relied on a Categorical Exclusion for its environmental analysis of NextGen procedures, the FAA prepared an Environmental Analysis and Finding of No Significant Impact before implementing the SoCal Metroplex. On that record, the Court was willing to give the FAA considerable deference, with respect to both the FAA’s balancing of interests in designing the new air traffic control procedures and in the FAA’s construction of its own orders and guidance. This decision underscores how difficult it is to challenge FAA decisions regarding air traffic control and safety.

The case is Vaughn v. FAA, Case No. 16-1377 (D.C. Cir. Nov. 30, 2018) and a copy of the Court’s decision can be found here. For more information about the litigation, please contact Peter Kirsch.

CONGRESSIONAL LEADERSHIP CHANGES; LACK OF FAA POLITICAL LEADERSHIP

With the midterm elections and changes in Congressional leadership, there will be several changes that will affect airport-related matters in the Congress. While some formal appointments have yet to be made, we do know that Congressman Peter DeFazio, Democrat from Oregon will be leading the House Transportation and Infrastructure Committee. DeFazio is an outspoken opponent of privatization of the air traffic system and a supporter of greater infrastructure investment. Rep. Sam Graves of Missouri will be the ranking Republican on the Committee. The House Aviation Subcommittee will be led by Rep. Rick Larsen, Democrat of Washington.

On the Senate side, while there has not been a shift in party control, several members of the Commerce Committee have changed and the leadership of that committee will also be changing. At this writing, it is not entirely clear who will lead the aviation panel, though Sen. Roger Wicker of Mississippi will lead the Committee. Other appointments should be announced in coming weeks.

On the Administration side, there is no new definitive news from the FAA. There remains no permanent FAA Administrator or Associate Administrator for Airports, two positions that are key to airport sponsors. The Washington gossip mills are working overtime but the White House has not made any announcements. There are personnel acting in those and other senior FAA positions. There is no timetable for filling the political positions.

For more information about Washington political happenings, please contact Steven Osit or Peter Kirsch.

Kaplan Kirsch & Rockwell publishes Airport Law Alerts to announce late-breaking developments in legislation, regulation, and policy for our clients and colleagues. Nothing in our Alerts is intended as legal advice, and readers are reminded to contact legal counsel for legal advice on the matters that appear in our Alerts.

Click here to view the publication.

On October 5, 2018, the President signed H.R. 302 into law as the FAA Reauthorization Act of 2018. This represents the first long-term reauthorization of FAA and AIP since 2012; the agency has been operating under interim- and short-term extensions for some time. In addition to the general reauthorization, the Act contains a number of changes to existing law that will have an effect on airport sponsors. This Alert provides detailed discussions of the most significant of those changes, including those concerning the Airport Improvement Program, Passenger Facility Charges, non-aeronautical development on airports, drones/unmanned aerial systems, and noise issues. A longer list of changes of interest to airport sponsors appears on the end of this Alert.

This Alert is not intended to be a comprehensive summary of all of the provisions that may be of interest to airports and their lawyers, but serves to highlight the provisions that most directly affect airports.

For more information on any of the provisions mentioned in this Alert, and to determine how it will affect a particular airport, please contact the attorney with whom you usually work or those noted at the end of each topical summary.

AIRPORT IMPROVEMENT PROGRAM

Section 111 of the Act appropriates $3.35 billion per year through fiscal year 2023 for the Airport Improvement Program, which represents no change from current levels. While the certainty of these AIP funds for the next five years is welcome, the lack of any increase is disappointing for airport sponsors.

Beyond the funding levels, the Act makes several other notable changes to the AIP. Section 132 mandates that medium and large hub airports maintain an area for nursing mothers to feed their infants in each passenger terminal building. Section 138 permits closed-circuit television systems in public areas to be eligible for AIP grants. Section 151 opens the door for certain airports to receive increased AIP entitlement funds: if an airport’s CY 2012 enplanements were at least 10,000, Section 151 directs FAA to apportion entitlement funds based on CY 2012 enplanements, even if those enplanements later fall below 10,000, as long as the airport maintains scheduled service for FYs 2018 through 2021. It also also provides an annual entitlement of $600,000 for each airport with annual passenger enplanements between 8,000 and 10,000.

For more information about the changes to AIP, please contact Katie van Heuven or Steven Osit.

PASSENGER FACILITY CHARGES

Despite considerable pressure from the airport industry groups to do so, Congress did not raise the cap on Passenger Facility Charges in the Act, and those PFCs remain capped at $4.50 per passenger. This is doubly disappointing for airport sponsors not only because there is no lifting of the cap but because the five-year length of the Act means a revisiting of the cap is not likely to occur until 2023 at the earliest. The Act does take two important steps in reducing the regulatory burdens on the sponsor’s ability to impose PFCs. First, Section 121 eliminates the “significant contribution” test, whereby airport sponsors were previously required to make a special showing to assess a $4.00 or $4.50 PFC. Under the Act, sponsors no longer need to make such a showing in order to receive PFC authorization from FAA at the $4.00 or $4.50 per passenger level. Second, that Section expands a previously existing pilot program to permit all airports (not just nonhub airports) to use a streamlined notice and 30-day waiting period process for imposing PFCs instead of securing affirmative FAA approval. While airports would have preferred an increase in the cap, these other regulatory reforms should allow for some relief in funding projects with PFCs.

For more information about PFC issues, please contact Dave Bannard, Eric Pilsk, or Peter Kirsch.

NON-AERONAUTICAL DEVELOPMENT

Many airports have battled FAA in recent years on the agency’s authority to regulate non-aeronautical development on airport property. In a win for airports, Section 163 of the Act takes two significant steps to limit FAA’s authority over non-aeronautical development. First, the Act explicitly limits FAA’s authority to “directly or indirectly regulate” non-aeronautical property transactions at an airport, except: (1) to ensure the safe and efficient operation of aircraft, or the safety of people and property on the ground, (2) to ensure the receipt of fair market value for the use or disposal of property, or (3) where the property was itself purchased with AIP grants or is subject to the Surplus Property Act. The Act also limits FAA’s authority to review and approve ALP amendments to only those amendments that “materially impact” safety and efficiency for aircraft operations, or that “adversely affect the value of prior Federal investments to a significant extent.” This is an important restriction because FAA’s position in some Airports District Offices has been that an ALP amendment and FAA approval is required for any non-aeronautical development (even on property which has been released from grant obligations), which often triggers environmental review and slows development efforts.

We expect that it will take some time for airports and FAA to reach an agreement on the precise impact of Section 163; however, these two changes should give airports much greater flexibility to develop non-aeronautical uses with only limited FAA regulation.

For more information about non-aeronautical development, please contact Peter Kirsch or Nick Clabbers.

NOISE

The Act contains several provisions related to airport and aircraft noise. Section 173 requires FAA to finish within one year its long-delayed evaluation of alternatives to its current noise metric and threshold, the Day Night Average Sound Level (DNL) and 65 dB limit. Section 175 requires FAA to consider using diverging departure flight paths or lateral spacing to address community noise concerns when proposing or adjusting departure procedures, if requested by the airport operator and community leaders. Sections 179 and 187 require FAA to undertake various studies about the health effects of noise on local communities, after which FAA would have to make recommendations within two years for revising land use compatibility guidelines (14 C.F.R. Part 150) to reduce noise exposure. Section 180 mandates that each FAA Regional Administrator designate an ombudsman to address public concerns about airport noise, though regional noise officers have likely already filled those positions.

For more information about these and other noise issues, please contact Peter Kirsch.

FIREFIGHTING CHEMICALS

In recent months, there has been an increasing awareness and concern regarding perfluorinated compounds (PFAS), a catchall term for certain ingredients in firefighting foams commonly used at airports. While these chemicals have been in use for decades as FAA-required elements of firefighting foam, recent research suggests that they are harmful to human health. Section 332 addresses this issue by mandating that within three years, FAA not require the use of fluorinated chemicals to meet the performance standards in Advisory Circular 150/5210-6D. Airport sponsors should still be aware of this issue, however, because, as possible past and current PFAS users, they may be liable for future regulatory requirements, potentially including remediation efforts, and claims by water system operators or individuals.

For more information about PFAS and related issues, please contact Polly Jessen.

PRIVATIZATION PILOT PROGRAM

The Act expands and makes changes to the Airport Privatization Pilot Program, which has now been retitled as the Airport Investment Partnership Program. The changes are likely the result of the lack of interest in the program, despite widespread interest in public-private partnerships in other spheres. To date, there are only four airports in the program, and FAA has only received twelve applications since 2001 (most of which were withdrawn). Section 160 of the Act, however, removes the previous cap of 10 airports in the program, perhaps in anticipation that other changes to the program may invite additional airports to participate. The most important of these changes is to allow privatization of a part of an airport, such as a terminal, consolidated rental car facility or parking (as opposed the entire airport). The Act also allows an airport operator to apply on behalf of multiple airports under its control in a single state (i.e., allows privatization of an airport system) and allows for a $750,000 planning grant to the airport sponsor. In addition, Section 160 mandates that if the application is approved, the sponsor and the leaseholder/private owner shall be exempt from repayment of federal grants, return of property acquired with federal assistance, and the use of proceeds from the airport’s sale or lease to be used exclusively for airport purposes (previously, FAA had discretion to grant these exemptions). These changes give airport sponsors greater flexibility in potentially privatizing all or parts of their operations and incentivize private parties to participate, though it should be noted that the Act retains the ability of airlines to object and stop a sponsor’s privatization efforts.

For more information about the changes to the privatization program, please contact Peter Kirsch or Steve Kaplan.

DRONES

The Act contains more than 40 separate provisions regarding drones or unmanned aerial systems (UAS). Most address regulation of UAS in flight and do not directly concern airports, but will nonetheless have an effect on airport operations. Section 348 requires FAA to issue safety regulations to authorize commercial delivery of goods using drones (Amazon and other online retailers were strong advocates for this provision). Perhaps the biggest regulatory shift is Section 349, which concerns recreational or “hobbyist” drones and repeals the previous exemption of “model aircraft” from FAA regulations. Section 349 now requires that recreational drones meet operating requirements, mandates that operators pass FAA-imposed aeronautical knowledge testing, establishes the qualifications for community-based organizations that may develop safety guidelines (previously, those organizations were not defined), and requires airspace authorization from FAA coextensive with that required of commercial drone operators. Section 373 requires the Comptroller General to undertake a study on the regulation of UAS and the appropriate role of local governments, and Section 351 codifies the DOT’s UAS Integration Pilot Program, which also endorses the concept of co-regulation between FAA and local governments.

Two additional provisions that specifically affect airports are worth mentioning. Section 383 requires FAA to test UAS hazard mitigation systems at public-use airports, which will then become eligible for AIP funding once approved. Section 384 makes it a crime to knowingly interfere or disrupt the operation of a manned aircraft with unmanned aircraft or knowingly operate an unmanned aircraft in a runway exclusion zone near an airport.

For more information about these provisions or other drone issues, please contact Eric Smith or Steven Osit.

PARTIAL LIST OF RELEVANT SECTIONS IN FAA REAUTHORIZATION ACT OF 2018

• Sec. 111 – Reauthorizes the Airport Improvement Program at $3.35 billion per year through 2023
• Sec. 121 – Eliminates Passenger Facility Charge “significant contribution” test and expands expedited review pilot program
• Sec. 122 – Requires DOT to engage an outside research organization for an independent study of airport infrastructure financing needs
• Sec. 123 – Directs FAA to issue a final policy on intermodal access projects and Passenger Facility Charge eligibility
• Sec. 132 – Requires mothers’ rooms in medium and large hub airports
• Sec. 133 – Contract tower reform, including revisions to cost-benefit analysis
• Sec. 138 – Eligibility of CCTV projects for AIP funding
• Sec. 143 – Requires the Government Accountability Office to conduct a study on repealing revenue diversion grandfathering provision
• Sec. 144 – Requires the Government Accountability Office to conduct a study on the use of proprietary exclusive rights
• Sec. 151 – Permits certain small airports to receive AIP entitlement grants based on 2012 enplanement data
• Sec. 158 – Authorizes $1 billion annually for supplemental discretionary grants
• Sec. 159 – Amends the Anti-Head Tax Act to prevent state or local government from collecting a tax, fee, or charge “upon any business located at a commercial service airport or operating as a permittee of such airport that is not generally imposed on sale or services by that state, political subdivision, or authority unless wholly utilized for airport or aeronautical purposes”
• Sec. 160 – Amends Privatization Pilot Program by eliminating airport cap, requiring FAA to waive grant reimbursement and take profit from operations, allow sponsor to have an interest in the purchaser, and allowing privatization of an airport system
• Sec. 163 – Non-aeronautical development land use regulatory reform
• Sec. 164 – Allows commercial service airports with 8,000 passenger boardings and receiving only seasonal service to qualify as primary
• Sec. 173 – Requires DNL alternatives study to be issued within 1 year
• Sec. 174 – Requires updates to noise exposure maps for significant changes to operations
• Sec. 175 – Requires consideration of dispersal headings on community request for RNAV departures
• Sec. 176 – Requires FAA review of community involvement practices for Metroplex
• Sec. 179 – Requires FAA study on relationship between aircraft speed and noise
• Sec. 181 – Requires FAA study and rule by March 2020 on supersonic aircraft standards, including noise, and ad hoc consideration of supersonic type certification in the interim
• Sec. 187 – Requires completion of noise exposure study within two years
• Sec. 189 – Mandates a higher education study of the impact of airport noise on community health
• Sec. 190 – Environmental mitigation pilot program
• Sec. 349 – Complete overhaul of regulation of recreational drones
• Sec. 373 – Requires Comptroller General to study role of federal, state, and local governments in regulation of UAS
• Sec. 383 – Requires FAA to test UAS hazard mitigation systems at airports, and makes approved design eligible for AIP funding
• Sec. 384 – Criminalizes certain flights of UAS near airports
• Sec. 570 – Study on whether an airport Federal credit assistance program would helpful
• Sec. 451 – Increases to Essential Air Service funding through 2023
• Sec. 452 – Requires Comptroller General to study EAS program for potential budgetary savings
• Sec. 455 – Includes reforms and appropriations to the Small Community Air Service Development Program

Kaplan Kirsch & Rockwell publishes Airport Law Alerts to announce late-breaking developments in legislation, regulation, and policy for our clients and colleagues. Nothing in the Alerts is intended as legal advice, and readers are reminded to contact legal counsel for legal advice on the matters that appear in our Alerts.

SEC Adopts Amendment to Rule 15C2-12 Expanding Scope of Continuing Disclosure

On August 20, 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 15c2-12 (the “Rule”)¹ adding two additional events that must be disclosed through a filing with the Municipal Securities Rulemaking Board’s (“MSRB”) Electronic Municipal Market Access (“EMMA”) system within ten (10) business days of the occurrence of either of the events. These amendments are effective 180 days after the amendments are published in the Federal Register. The two new events are:

“Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material;” and

“Default, event of acceleration, termination event, modification of terms, or other similar event under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.”

The term “financial obligation” is also newly added to the Rule by the amendments and means:

“a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule.”

As a result of the amendments to the Rule, it is likely that both issuers of municipal securities as well as broker dealers that underwrite such securities will need to revisit and update their internal processes and procedures relating to continuing disclosure and due diligence.

BACKGROUND

Rule 15c2-12 as originally adopted by the SEC in 1989 and it regulates the issuers and borrowers of the proceeds of municipal securities (collectively “obligated persons”) by requiring that underwriters of municipal securities obtain and review an official statement relating to the debt being issued. Although the SEC is not permitted to directly regulate disclosure by issuers of most municipal securities, the SEC has been able to indirectly regulate such disclosure through its oversight of broker dealers for such securities. The Rule has been amended several times and now also requires underwriters to reasonably determine that obligated persons have undertaken in a continuing disclosure obligation to provide certain annual information and notice of certain events to the MSRB through a filing with EMMA.

The most recent amendments to the Rule are primarily intended to address the growth of direct placements of municipal securities, including bank loans and similar structures, by requiring that notice of such additional debt (if material) and the material terms relating to such debt be provided and that notice of financial difficulties relating to such obligations also be provided. However, the amendments to the Rule are to be read broadly, and both obligated persons and underwriters will need to understand their new obligations under the Rule.

UNPACKING THE AMENDMENTS

Financial Obligation. In order to be able to effectively understand the amendments to the Rule, it is important to focus on the defined terms and elements of the new events. The new term, “financial obligations” is at the heart of the amendments. As the issuing release makes clear, the term is intended to be read broadly and includes “debt, debt-like, or debt-related obligations”, whether they are short-term or long term obligations. In essence, if an obligated person enters into a financial obligation that could have an impact on the rights of the holders of outstanding debt or that competes with such debt for repayment, the obligated person should report the incurrence of such financial obligation and its material terms within ten (10) business days after the financial obligation becomes legally enforceable.

The term includes debt instruments, including bonds and notes, derivatives that relate to existing or planned debt instruments, and guarantees of either of the foregoing obligations. The SEC states that “the timely disclosure of both the incurrence of a debt obligation, if material, and the obligation’s material terms that affect existing security holders” are important to the proper functioning of the markets. The SEC has indicated that the term financial obligation should be read broadly and, although the term “lease” was dropped in the final rule from the definition of financial obligation, lease arrangements entered into by obligated persons that operate as vehicles to borrow money will constitute financial obligations and must be disclosed, if material. The SEC states that the term “debt obligation” is meant to be broader than many state law definitions of debt. Debt is deemed to be “incurred” when the obligation is enforceable against the issuer of the debt.

Derivatives subject to the event notice requirements of the Rule are also intended to be read broadly, but only as they relate to debt, even if the debt will be issued in the future. The determination is based on whether a reasonable person would view it as likely or probable under the facts and circumstances that the obligated person will incur the related yet-to-be-issued debt at a future date. Thus, for example, a forward starting interest rate swap relates to planned debt, because the swap has no economic purpose unless the debt is issued. In contrast, however, a derivative that is designed to mitigate investment risk would not be subject to the Rule’s disclosure requirements.

Lastly, a guarantee is intended to include a contingent financial obligation of the obligated person to secure the obligations or a third party or obligations of the obligated person and includes guarantees of both debt instruments and derivatives. In the context of a guarantee, both the guarantor and the party whose obligation is guaranteed should make an independent determination of whether such guarantee is material and should be disclosed to EMMA. Thus, in many cases, both parties will need to file an event notice.

Note that a financial obligation does not include any municipal security for which an official statement is filed with EMMA, but may include either a derivative or guarantee relating to or supporting such a municipal security. Thus, even if the official statement of an issue of bonds is filed with EMMA, if those bonds are guaranteed or a derivative is entered into with respect to such bonds, a separate filing likely should be made.

Obligated Person. The term “obligated person” is used in the Rule to describe the person who is actually responsible for the repayment of a municipal security. Thus, the issuer of a bond or note will often be the obligated person, but where the proceeds of such a debt obligation is loaned to another party, such as through a conduit issue, and the borrower is required to repay the loan, the borrower will be considered to be the obligated person.

Materiality. One of the most difficult and contentious issues relating to the Rule has been the proper definition of the term “material”. In the issuing release relating to the amendments, the SEC acknowledges that many commenters have noted that the term “material” has become “vague, ambiguous and unpredictable,” especially since the SEC’s Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative. In response, the SEC states that the type of analysis undertaken in connection with the MCDC Initiative is distinct from the analysis of whether a piece of information is material, and once again cites the TSC v. Northway standard that a fact is material “if there is a substantial likelihood that, under all the circumstances, the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available.”² Thus, the SEC urges that the same standard used in determining what information should be included in an official statement in connection with the original issuance of a debt obligation should be used to determine whether a financial obligation, or its terms, is material and must be disclosed. Nevertheless, this issue is likely to one of the more difficult aspects of implementing the amendments to the Rule and will benefit from careful and thoughtful analysis on a case by case basis.

Agreement to covenants … or other similar terms. The second part of the new fifteenth event notice is a list of terms in a debt instrument that could have an impact on other debt obligations of the obligated person, such as covenants, events of default, remedies or priority rights. For example, in many directly placed obligations with banks, issuers are required to agree to a separate continuing covenants agreement that may contain additional or more stringent terms than the obligated person’s master indenture. In such case, a default under the continuing covenants agreement may allow the bank holding such debt to accelerate it, to the potential detriment of the holders of other debt obligations. Thus, when entering into any new financial obligation, the obligated person should consider whether any of its terms are different from those governing its outstanding debt and, if so, whether those terms could have an adverse impact on the current debt holders. If so, then disclosure is likely necessary.

Default, event of acceleration … or other similar events … any of which reflect financial difficulties. The second new event is intended to provide timely notice of any event relating to the obligated person’s debt obligations that may be indicative of financial stress. This is intended to be read broadly, as evidenced by the fact that a “default”, rather than a formal event of default is the chosen term. Thus, where a situation arises that, with the passage of time or the giving of notice, could ripen into an event of default, if indicative of financial difficulty, notice of such an event should be provided. An example of an event not constituting “financial difficulties” would be the failure to provide timely notice of a change of address of the obligated person, while a late payment may or may not reflect financial difficulties. Similarly, “other similar events” may include a waiver by a lender of a covenant due to the obligated person’s being in financial difficulty. Thus, where there is a change in the terms of an underlying agreement or other instrument due to financial difficulties, the obligated person should make a timely filing.

Filing Period. The new event notices must be filed within ten (10) business days of the occurrence of the event. The SEC noted that it had received many comments that noted that the new events would often be disclosed in annual financial statements as well as requesting additional time to make such filings. The SEC indicated that the Commission believes that it is important that notice of these events be made available to the markets in a timely manner. Thus, obligated persons will need to establish means to ensure that the person(s) responsible for making event notice filings are aware of these new events with sufficient time and resources to prepare and file a compliant notice within ten (10) business days of the occurrence of the event.

Effective Date. The amendments to the Rule will be effective 180 days after notice of the amendments is published in the Federal Register, or sometime in late February 2019. Until then, obligated persons and broker dealers are not required to comply with the amendments to the Rule and the MSRB will be working to update the EMMA system to accept these additional filings. Note that all bonds and other debt instruments issued before the effective date of the amendment will not be subject to the requirements of the amended Rule, but once a new continuing disclosure obligation is undertaken with respect to a series of bonds or other obligations that includes the new events, the requirements of event 16, requiring notice of default or other events reflecting financial difficulties, will be applicable to all financial obligations of the obligated person.

STEPS TO TAKE

In order to prepare for the amendments to the Rule, both issuers and underwriters of municipal securities should consider taking several steps, including the following:

• Updating existing internal practices and procedures to reflect these amendments. Disclosure policies should be reviewed and revised, if appropriate, to reflect the necessity of filing or, in the case of underwriters, obtaining and reviewing event notices for the incurrence of material financial obligations or occurrence of events that reflect financial difficulties.
• Additional training for appropriate staff may be prudent, both to familiarize them with the new requirements and to assist in identifying when these events occur and must be reported.
• Given the short (ten (10) business day) timeframe within which to file an event notice, making a filing a part of the incurrence of any debt obligation may be good practice, and in negotiating the terms of such an obligation, if they differ from those that govern existing debt obligations, the issuer will want to assure that the material terms will be disclosed in a timely manner (or conformed to the issuer’s standard terms).
• New continuing disclosure obligations entered into in connection with debt or other financial obligations issued after the effective date of the amendments to the Rule will have to include the new event notice requirements, and underwriters will need to review such continuing disclosure obligations to ensure that they incorporate these provisions.
• In addition, underwriters will also likely be forced to engage in more substantial due diligence in connection with new issues of municipal securities. In addition to the tasks previously performed, they may wish to obtain copies of all debt, debt-like or debt-related obligations of the obligated person and review them to be sure that such obligations and their material terms have been disclosed, if required. Furthermore, if there has been any change in terms of any financial obligation that reflects financial difficulties, underwriters will likely need to determine whether there has been timely filing relating to such events.

Given the complexity of the new amendments to the Rule, it is likely that both obligated persons and underwriters will not seek to implement its provisions substantially earlier than the effective date of the Rule.

CONCLUSION

The amendments to the Rule impose substantial new and complex requirements on both issuers and borrowers of municipal debt obligations as well as the underwriters of such obligations. Both sets of parties should familiarize themselves with the amendments and prepare for implementation of the amendments well in advance of the effective date of the amendments in February 2019.

Please contact David Bannard if you have any questions about the amendments to this Rule or any content in this Alert.

Kaplan Kirsch & Rockwell publishes Finance Law Alerts to announce late-breaking developments in legislation, regulation, and policy for our clients and colleagues. Nothing in the Alerts is intended as legal advice, and readers are reminded to contact legal counsel for legal advice on the matters that appear in our Alerts.

1. 17 CFR 24015c2-12. 
2. See TSC Industires, Inc. v. Northway, Inc., 426 U.S. 438, 440 (1976).

P3 Airport Projects: An Introduction for Airport Lawyers (Second Edition)

This publication is for informational purposes only and is NOT intended to be used for the purpose of providing legal advice—including the application of law to any particular set of facts and circumstances—and does not necessarily represent the views of any particular federal government entity.  Readers are urged to confer with their counsel and consultants about their particular facts and to address any particular legal questions.  Additional copies are available from Kaplan Kirsch & Rockwell.

This short guide is intended as background reading for airport lawyers who are interested in learning the basics of airport public-private partnerships (P3s), about various P3 approaches, and about recent P3 airport activity in the United States.¹  Nevertheless, this guide should serve as a foundation to inform internal discussions and to prepare for more detailed conversations with potential private sector partners.  Note that at the end of the guide is a list of resource materials that may be instructive when preparing for such discussions and conversations.

A P3, in the broadest sense, is nothing more than a contractual relationship between a public entity (an airport sponsor or proprietor in this context) and a private sector entity or entities that allocates responsibility for delivery of services, investment of capital, and assumption of risk.  The underlying principle of any P3 in the transportation realm is that by leveraging the respective skills and assets of the public and private entities, it should be possible to improve the efficiency by which transportation functions are provided.  While any contractual relationship between a public and private entity could be called a P3, the use of the term P3 in this manner can result in confusion given the longstanding role of the private sector in operating airport concessions and in developing and operating airport-related projects.  As a result, in the U.S. airport context, the term P3 is most often used to refer to an arrangement by which services or investments that traditionally have been provided by an airport sponsor are instead provided by a private sector entity.

Several toll roads failed (in that their private operators filed for bankruptcy) and had to be taken back by a public agency.  In the U.S. airport industry, early discussions similarly focused on full airport privatizations (modeled on similar transactions in Europe), as, for example, under the FAA’s statutorily-authorized Airport Privatization Pilot Program.²

Over the past several years, U.S. P3 structures have evolved in the airport environment.  They have begun to find a balance between adhering to the core interests of the public entity and engaging productively with the private sector.  Airport P3s are more often targeted to specific development projects where significant capital is needed or risk is to be allocated – such as the various terminal projects at JFK and LaGuardia, the Great Hall project at Denver, the privately developed ultra-low cost carrier terminal at Austin, or the privatized terminal at Paine Field in suburban Seattle.

 I.     IDENTIFY PROJECT GOALS                         

In considering a delivery system for a potential project, one of the most important questions for a public entity to ask is “What are our goals, and in light of those goals, why should we consider a P3 structure instead of a traditional project delivery, procurement, and financing process?”

While a P3 can be very helpful in certain circumstances, it is neither a panacea nor a source of free money.  P3s can also create certain liabilities for the public entity that need to be addressed.  Being thoughtful in understanding the public sponsor’s goals for any project and the reasons why it might want to consider a P3 structure is a vital element in the success of any project. Public entities choose P3s for a variety of benefits that are applicable to the airport context, including:

• Project delivery – can improve efficiency and save time and money;
• Project procurement and innovation – can promote competition not only on cost, but also on alternative design and technical considerations; 
• Risk allocation – can transfer certain risks to the private sector developer/concessionaire;
• Accountability – can provide a single point of responsibility for all elements of project delivery;
• Financing alternatives – can be more flexible where there are cash flow or borrowing capacity limits of a public entity.  Additionally, private capital (both equity and debt) can be used to bring additional financial discipline to a project;
• Customization – can increase the ability to customize contract terms to address specific project and authority concerns (including the adaptability of private sector counterparties for non-standard terms);
• Limitation on recourse and financial risk exposure – can reduce financial risk; even though a failed P3 project will have adverse consequences for the public agency, those consequences can be reduced (relative to a traditional public project) so that, in the most extreme case of a developer default or bankruptcy, a material portion (and potentially all) of the financial loss that would otherwise be retained by the public sector will be borne by the private sector;
• Long-term maintenance – can provide for long-term maintenance; often long-term operation and maintenance of a facility is included in a P3 structure, providing a long-term commitment to specified standards at a known, fixed cost for the foreseeable future; and
• Addressing life-cycle cost issues– can package design/construction with operations/maintenance responsibilities to optimize the delivery of both.

Notwithstanding these benefits (not all of which, of course, are available for every P3 arrangement), there are risks to the public entity in any P3 arrangement.  Therefore, it is particularly important early in project planning to define the reasons why (and what kind of) a P3 path is being considered.  P3 projects pursued without either clear goals or a clear understanding of the technique can be problematic, and result in performance below expected standards.

A public entity’s own internal capabilities are essential for making a P3 approach successful. While many agencies focus on the initial P3 procurement, it is equally important to be attentive to internal capacity over the entire term of the P3 arrangement.  Long-term success is absolutely dependent upon the public agency’s ability to provide robust ongoing contract administration (during the construction period), and oversight of operation and maintenance over the entire contract period.  Contract management expertise and discipline are crucial beginning with the initial pursuit of a P3, because a successful procurement is built upon an understanding of (and preparation for) future project management challenges.  Therefore, a public entity must understand that a P3 approach will not eliminate internal administrative costs (though they may be different or lower).  The likelihood of success could be seriously undermined if the public entity fails to ensure that that internal capacity is available – from the beginning of the project.

 II.     TYPES OF P3 ARRANGEMENTS: SERVICE DELIVERY                         

Different approaches to private airport investment in the United States illustrate the variability in the amount of the private investment and degree of governmental control.  It is therefore useful to distinguish between P3 arrangements that are primarily designed to provide services or management for airport operations and those that are designed to deliver, operate and maintain a capital project.  This section outlines the permutations of P3 arrangements that are used for delivery of services for an airport.

• Service Contracts – Contracting for non-core services, such as cleaning, elevator and electric walkway maintenance, shuttle bus operations, financial consulting and engineering and design services are routine at airports in the United States.  This option requires little or no private capital investment and would not typically be referred to as a P3 absent an unusually broad scope or other customizations.
• Management Contracts – This option provides a vehicle for private management of existing airport facilities ranging from parking facilities to an entire airport system.  Like the previous option, this approach is common in the United States with many permutations in the level of management control and extent to which operations are the responsibility of the management firm.  In the U.S., airport proprietors generally at least retain contractual control over key decisions such as compliance with use and lease agreements, planning, environmental policy, and debt policy and capital expenditures.  Where the project to be managed was funded with governmental bonds, there may be tax requirements that must be considered when negotiating the management agreement as well.  This option may be appropriate once an airport is built, or may grow from a design, build and finance structure.  It is not likely to meet a local government’s need for capital investment.
• Airline or User Consortia – Airlines and other users increasingly perceive that they can save costs and increase operational control over airport assets by offering to enter into consortia to operate key airport assets.  The most common are fuel supply or delivery consortia, in which the consortium may just operate the fuel system or may construct and finance the system as well.  Consortia are also used for other facilities such as baggage claim, jet bridges, underwing services and other airport functions that exclusively serve one class of users (e.g., airlines).  The degree of control over management, operations and capital investment can vary considerably.

 III.     TYPES OF P3 ARRANGEMENTS: PROJECT DELIVERY                         

The delivery of capital projects (e.g., a terminal, parking garage, etc.) is getting increased attention at airports.  There are considerable variations in how a P3 could be employed in project delivery.  The term P3³ encompasses an array of project delivery arrangements, some of which are traditional in the airport sector, as well as several that are new (at least in the United States).  The following are the main categories, many of which are likely already familiar to airport management⁴:

• Full Privatization, Long-Term Lease, or Sale – Under this model, the airport proprietor enters into a long-term concession and lease, or (less often) sale of an airport.  This can be accomplished either through the FAA’s Airport Pilot Privatization Program (APPP) or outside that program if the requisite legal constraints are addressed.  Airports’ experience with the APPP suggests that it is not a particularly useful model for most airports.  While there are four airports participating in the program today (San Juan, PR; Westchester County, NY; St. Louis Lambert, MO; and Hendry County, FL), only two (San Juan and Stewart Airport in Newburgh, NY) have been formally approved, while the other airports’ applications are pending, and a greater number of airports have been considered and rejected, or withdrawn from, the program.⁵  By comparison, in 2016 there were 28 “majority private” (largely P3) and 79 “fully private” airports in Europe.⁶  In addition to being cumbersome to use, the APPP has not proven to be effective or workable in the U.S. investment marketplace.  Many sponsors also find the approach untenable because it would deprive the local government of the ability to maintain control over airport assets.
• Private Airport Development – There has been much discussion in the trade press and in academic circles about privately-funded airports, built and operated without federal assistance (i.e. without AIP grants).  Branson Airport (Missouri) is currently the only privately-owned and developed commercial passenger airport in the United States.  Branson has had enormous difficulty with its financing, has defaulted several times on its indebtedness, and is not generally seen as a viable precedent.  One variation on this model that has rarely been used in the United States is the private development of an airport which is then sold or leased to a public entity.  Fort Worth Alliance Airport, in Texas, is the closest example in the U.S.  Alliance Airport is a cargo- and general aviation-only airport.  It was a P3 venture, built mainly with public funds (on privately owned land donated to the City of Fort Worth).  The motivating private sector goal was the development of the 14,000 acres on and around the airport that was owned by the developer.  This approach is particularly useful for sponsors considering greenfield sites with considerable developable land either adjacent or nearby where there is sufficient demand for such development.
• Design-Bid-Build (DBB) – This contracting structure is perhaps the most traditional, (so much so that many in the P3 industry do not consider it to be a P3 structure).  Under a DBB, the public entity engages an architect and/or a design engineering firm.  A hard bid for contractors is solicited only after completion of the final design.  The public entity retains responsibility for financing and operating/maintaining the project.
• Design-Build (DB) – This structure combines design and construction in one contract, usually based on a 30 percent design, and imposes responsibility and liability on one entity (usually the contractor or a special purpose/joint venture entity between the designer and contractor).  It is typical for a DB contract to be a fixed-fee arrangement.  Generally, the public entity is responsible for financing, operating and maintaining the project.  There is a relatively new variation on DB known as Progressive Design-Build (PDB) in which the PDB team is selected, usually based on qualifications alone, much earlier in the design process.  After the design is further progressed (often between 50 percent and 75 percent complete), the design-builder will provide the owner a guaranteed maximum price for the project.  Owners should be aware that while early involvement of the design-builder can lead to efficiencies, and an active owner working collaboratively with the design-builder can identify and mitigate costly risks early in the design phase, the negotiated nature of the contract price may lead to a higher cost of construction than a true competitive bid DB procurement.​
• Design-Build-Finance (DBF) – Under a DBF, the procurement, design, construction, and financing (complete or partial) are combined into one contract.  The public entity retains responsibility for the operation and maintenance.  Under this model, the design-builder assumes responsibility for most of the design work (usually beyond 30 percent design, as with a typical DB procurement), construction and full or partial financing of the project.  Financing under a DBF can take many forms, and DBF has been used to mitigate cash flow concerns with short-term financing, later “taken out” by the public entity retaining long-term operations and maintenance responsibility.  Alternatively, financing can include traditional, long-term financing by the private entity.  The inclusion of private financing can also result in the contribution of private equity capital to the project structure and a more complete risk transfer.
• Design-Build-Operate-Maintain (DBOM) – The DBOM model combines design and construction with long-term operation and maintenance into one contract, resulting in all of those functions becoming the responsibility of the contractor.  The public entity assumes the financing responsibility for the project, while retaining the project revenue risk and any upside from project revenue.
• Design-Build-Finance-Operate-Maintain (DBFOM) – This model is perhaps the one most commonly identified with transportation P3s in the U.S.  Under a DBFOM, the developer or concessionaire is responsible for designing, constructing, financing, operating, and maintaining the project.  The Automated People Mover and Consolidated Rental Car Facility projects at LAX both follow this model, with the former project having recently achieved financial close following execution of a contract, and the latter expected to be awarded in 2018.  The typical length of a DBFOM contract is the period of construction plus 30-35 years, but it is important to recognize that there is not a single approach and the DBFOM model is evolving in the airport context.  Generally speaking, the public entity retains full ownership of the project, but that, too, can be subject to some permutations.  Financing is repaid either by project revenues going to the developer or by availability payments⁷ made by the public entity to the developer starting at project completion.  Availability payments are often a useful tool to align the interest of the developer in receiving payment with those of the public entity in the facility being operated over the long-term in accordance with specified standards.  Either financing approach can also include milestone payments to the developer or other earlier/fixed payments as funding permits, which reduce the amount required to be financed by the private developer, and thus, the overall cost of the project.  To enable the private financing, the developer also invests private equity capital (typically 10-30 percent) that is repaid over the term of the project.  Basic examples include a toll road, with toll revenue going to the developer, an airport terminal with revenues going to the developer along with some guaranteed availability payments, and a transit line with only availability payments.  Financing techniques can, where permitted, include federal programs such as TIFIA and PABs⁸,  in addition to grants used to supplement or repay the private financing.
• DBFOM with a Pre-Development Agreement (PDA) – This model, becoming more common in U.S. P3s, combines a typical DBFOM structure with the early selection of a developer, similar to the Progressive Design-Build model.  A typical DBFOM procurement requires a project scope that is sufficiently developed to solicit proposals that fully allocate design, construction, operation, and maintenance responsibility over the full project term in order to enable the developer to bid a comprehensive plan of finance for the full project at a fixed price.  For various reasons, owners, however, may desire to pursue a DBFOM, but also need to engage a developer team at an earlier stage of project design and development.  In that instance, a PDA approach provides real benefits.  Under the PDA approach, a competitively selected bidder takes the initial risk of developing a project, and, in exchange, receives a right-of-refusal to enter into the DBFOM contract on a negotiated basis once the project is deemed feasible.  This arrangement is beneficial during the early stages of a P3 project when the scope and costs have not been completely defined.  Private bidders will often propose an array of innovative development plans, and the owner, while retaining termination rights, selects the most feasible plan.  The private entity is often reimbursed for—or often shares—its project development and bid preparation costs.
• Operate-Maintain / Concession and Lease – The above models address initial project delivery.  In addition, there are forms of long-term operations and maintenance or concession and lease arrangements that can qualify as P3s.  At the most extreme, these would extend to the entire airport (as is the case for many European airports, but is not generally possible in the United States except through the FAA’s Airport Privatization Pilot Program).  However, such arrangements can be downscaled below the level of a whole airport but still cover complex and high value airport operations.  The purpose of using such arrangements would be to achieve some of the benefits of a P3 with respect to the delivery of a service or the operations and maintenance of a particular facility.  In essence, this P3 is itself a permutation of the traditional maintenance or capital investment models.
• Development Rights in Exchange for Infrastructure Investment – This tool is relatively new in the airport industry but involves an exchange with a private sector investor in which the investor builds crucial infrastructure facilities that may not themselves be revenue-producing (e.g., runways or airfield facilities) in exchange for the ability to develop vacant airport real estate and retain revenue and profits from any development on the site.  This approach gives the airport sponsor access to considerable capital without having to forfeit control over the capital facility itself.  At airports with considerable vacant developable land, this arrangement can produce a win-win for the sponsor: investment in new infrastructure and new commercial or industrial development can enhance the economic value of the airport in the community.

 IV.     SELECTING THE BEST P3 APPROACH                         

The rigorous evaluation of projects, including those that are the subject of unsolicited proposals, is essential to determine if a P3 structure is appropriate.  The analysis of whether a P3 approach is appropriate starts with the very basic analysis of what the public entity is trying to accomplish.  Among the questions that sponsor management should ask are the following:

• Is the public agency implementing elements of a master plan?
• Is the project focused on a revenue generating opportunity such as a parking garage or a consolidated car rental facility?
• Is the sponsor considering an unsolicited proposal for a new facility or project that is optional but could enhance the attractiveness of the airport or provide an additional revenue stream (e.g., airport hotel or solar farm)?

There is not one single evaluation process that public agencies should use for deciding whether to pursue a P3 opportunity.  Evaluation processes range from Virginia’s Office of Public-Private Partnerships⁹ annual project pipeline review and Pennsylvania’s Board review of projects on an individual basis¹⁰ to the Los Angeles County Metropolitan Transportation Authority (LA Metro) Office of Extraordinary Innovation’s efforts to foster significant unsolicited proposals.¹¹

For some airport sponsors, a less formal and institutionalized process is likely to be more appropriate, but the fundamental premise should remain the same – it is critical for airport management to have a clear and robust internal process to review prospective projects in detail on a multi-disciplinary basis and for that evaluation to proceed independent of any specific proposal.  Such process should typically be conducted in consultation with capable external advisors, particularly those with relevant financial, legal and technical expertise.

After initial screening, an effective evaluation process considers issues such as desirability, technical feasibility and financial feasibility.  There may be more formal steps which may be appropriate, such as a value-for-money (VfM) study, also referred to as the P3 “business case” by some P3 sponsors.  A VfM study typically compares a traditional public sector approach (the “public sector comparator”) with a “shadow bid” for delivery of the same project as a P3, taking into account differences in construction costs (including lifecycle efficiencies under the P3), delivery schedule, public versus private financing costs, and project risk allocation.

In the end, any good evaluation process must leave considerable room for old-fashioned hard questions and experienced common sense knowledge.

 V.     FINANCIAL CONSIDERATIONS                         

A P3 structure does not produce free money.  A P3 structure can, however, allow for financial innovation and structuring that increases the value achieved when deploying limited funds.

Regardless of what structure is selected, the airport proprietor must have a way to pay for, or let the P3 developer earn, its investment and a return on its capital and risk.

The developer/concessionaire will want to be repaid its equity investment, be able to repay (and demonstrate to lenders its ability to repay) any loans, and earn a reasonable rate of return.  There are typically three primary payment models for P3s:

• Project revenues, such as user fees, utility fees, parking revenue, rental fees, concession revenues, advertising or other business revenue and lease revenue;
• Availability payments are payments made by the public entity or project sponsor to the concessionaire or developer in exchange for the delivery of the project and the performance of an ongoing service (e.g., operations and maintenance).  These can be funded from various public sources, including project revenues; non-project revenues such as taxes; or for an airport such as landing fees, concession revenues, grant funds, PFCs, and non-aeronautical lease payments.  Availability payments are typically made once a facility is in operation and depend on the developer achieving stated operational and reliability standards.  These payments can be paired with progress or milestone payments paid during construction that cover part (but not all) of the construction cost; or
• Management fees, which are paid on a fee-for-service basis, a time-and-materials, fixed-fee or any of the other traditional bases for paying purely for services rendered.

Regardless of the exact payment model, any P3 that involves the investment of private equity and debt will need to have a payment structure that is creditworthy and bankable as determined by private investors and lenders.  This requires an analysis of the public entity’s legal authority to enter into the necessary agreements, and often also includes an analysis of the creditworthiness of the public funding sources underlying payment commitments to the private developer.

 VI.     ILLUSTRATIONS OF P3 MODELS                         

Los Angeles.  Los Angeles World Airports (LAWA) has procured two major P3 projects, the $4.9 billion Automated People Mover (APM) system and the $1 billion Consolidated Rental Car Center (ConRAC), as part of a larger capital improvement program.  The APM project is being undertaken by a consortium team including ACS Infrastructure Development, Dragados, Hochtief, Flatiron, Fluor, Balfour Beatty, and Bombardier.  The ConRAC project has yet to be awarded.  Both projects use an availability payment model, adapted to the different project facility needs.

New York.  In the airport context, the new $4 billion Delta Terminal D (and C) at LaGuardia is being financed and constructed by a joint venture of Goldman Sachs and Delta Airlines, with a $600 million contribution by the Port Authority of New York and New Jersey.  This follows the Central Terminal B $4 billion P3 project already underway at LaGuardia, which is being undertaken by a consortium team including Vantage, Meridiam, and Skanska.

Houston.  Houston Airport System’s version of a P3 was one in which Southwest Airlines funded and constructed a five-gate international terminal at Houston-Hobby.  The challenge presented by the project was that Southwest needed an international terminal and accompanying facilities on a timetable that the Houston Airport System might not practically have been able to meet.  Southwest assumed responsibility for construction and is being repaid from rental revenue from itself, other tenants and concessionaires.  Houston pursued this approach for a number of financial as well as political reasons, the most important of which was the strong desire to keep Southwest happy and to complete the project on an aggressive schedule acceptable to Southwest.  By shifting the construction burden to Southwest, Houston was able to shift any political risk for project overruns or delays to Southwest.  The project was completed on time in 2015; at opening, Southwest was the only international carrier using the facility.

Chicago.  The City of Chicago initiated a unique procurement process to invite private partners to propose an express airport connector service linking the Loop (central business district) with O’Hare International Airport.  The project is being developed without public subsidy, thereby leaving revenue risk entirely with the selected developer.  The City provided bidders with extensive flexibility as to terms, routing, and technology.  At the conclusion of the bidding process, the City selected the Boring Company, who proposed an entirely below-ground system to be built using proprietary tunneling technology and to be operated using “skates” based on Tesla vehicles.  The City and the Boring Company are currently negotiating the terms of a definitive agreement.

Seattle.  An innovative example is Paine Field, near Seattle, the home to Boeing’s widebody manufacturing facilities.  Snohomish County, the airport sponsor of Paine Field, was confronted with an unusual political conflict when two airlines indicated a desire to begin commercial passenger service at the airport for the first time.  Accommodating the airlines was a political minefield, but legally, the airport sponsor could not reject the request.  In order to maintain an arms-length relationship with the accommodation of passenger service, the sponsor entered into a P3 agreement for the construction of a new terminal to accommodate scheduled passenger service.  The approach is essentially a DBFOM approach in which the developer is assuming all of the construction and financing risks, but the developer also retains most of the operating profit (there is only a de minimis profit sharing with the airport sponsor).  To package this arrangement, Snohomish County entered into a traditional ground lease, with the developer assuming both the risk and reward from new passenger service.  The private sector developer is responsible for all contractual relationships with carriers and suppliers at the terminal.  The terminal will open late in 2018 with 24 daily flights from three carriers.  All available space in the terminal will be allocated before the terminal opens.

Austin.  The City of Austin entered into a long-term agreement with a private entity to design, build, finance, operate, and maintain an existing airport buildAustin–Bergstrom International Airport (AUS) was experiencing substantial growth and had difficulty accommodating all of the carriers that sought to serve the airport.  This solution partially alleviated the necessity for several new gates while providing the ULCCs operating at AUS with a facility consistent with their business model.

Denver.  Denver’s $1.8 billion Jeppesen Terminal redevelopment project (known as the Great Hall Project) is intended to expand the capacity and improve the user experience of the airport’s main passenger terminal.  The project was procured using a PDA procurement methodology.  The City of Denver did not prescribe a particular design or approach during the bid process, but instead invited the preferred bidder to enter into pre-development negotiations during which the terms of the final agreement were negotiated.  The private partner consortium includes Ferrovial Airports, Magic Johnson Enterprises/Loop Capital, and Saunders Concessions.

Non-Airport Projects.  Sometimes P3 projects are driven by financing issues, such as cash flow, as was the case with the Denver Regional Transportation District (RTD)’s EAGLE P3 rail line to Denver International Airport.  RTD had sufficient revenue from its sales tax levy but could not make revenue available in the timeframe necessary to build the project on its schedule.  RTD also did not have sufficient remaining debt capacity to issue its own debt.  Other imperatives also made a P3 approach attractive, including the desire to shift long-term operations and maintenance to the private sector.  In that project, the concessionaire is repaid through availability payments.

A different example in the highway context is Denver’s Central 70 Project, currently being undertaken by the Colorado Department of Transportation (CDOT), the Colorado High Performance Transportation Enterprise (HPTE), and the Colorado Bridge Enterprise.  The primary motivations behind CDOT’s decision pursue a P3 were to shift price, schedule, and certain other construction-related risks on this highly-complex construction project to the developer, and to achieve cost certainty for the long-term operations and maintenance of the project.  This decision was based on a comprehensive VfM study.  Payments to the developer are through a series of milestone and availability payments.  The relatively limited toll revenue expected to be generated from the new managed lanes will be retained by HPTE and used toward payments made to the developer for operations and maintenance of the project.

 VII.     LIABILITIES AND RISK ASSESSMENT                         

Liability.  Even though in most P3 projects, the public entity shifts the construction and project delivery risk, as well as long-term operations and maintenance obligations, to the private developer, there are still inherent risks for the public sector.

P3 projects tend to be long-term endeavors with various liability issues arising at different stages of the contract.  Two particular areas are often identified as the primary financial risks within the contract¹²:

• The direct payments to the developer/concessionaire such as availability payments or milestone payments; and
• Contingent liabilities, such as payments for termination events or relief/compensation events, which may reflect risk allocation between the public entity and the developer.

Understanding, negotiating, and being prepared to address these liabilities in a P3 agreement are critical for public entities.  Appropriate project management plays a significant role in ensuring that these liabilities are properly managed.  Otherwise, change order or relief/compensation event mechanisms can be abused, or performance and compliance regimes can fail to have their intended effect.  Identifying these contingent liabilities and planning for them will help the public entity evaluate the merits of a P3 structure.

Risk Allocation.  Project risk allocation is another factor often cited by public entities as a reason for pursuing a P3 structure.  Risks such as construction and project delivery, environmental contamination, and compliance with FAA regulatory requirements can be transferred – but only up to a point, and only effectively where future contract administration considerations are paired with a detailed understanding of the project’s unique challenges (beyond what precedent might suggest in terms of risk allocation).  Developers often resist accepting certain risks (especially environmental risks) without considerable economic compensation.  A public entity needs to be rigorous in evaluating what risks it wants to allocate and why, and in assessing the economic impact of shifting risks to the developer.  In addition, developers are likely to price the perceived quality of the public entity’s expected oversight of the project into the transaction.  Those public entities with a robust project management capability often find that costs are substantially lower than for those agencies who are unprepared to comprehensively oversee a complex project.  Such preparations can help the public entity in successfully deriving the best value possible from its decisions with respect to transferring risk.

 VIII.     REGULATORY CONSIDERATIONS FOR AIRPORT P3s                         

For airport projects, one unique complexity is the need to maintain compliance with the FAA Grant Assurances and the related FAA regulatory requirements.  Not only are the Grant Assurances not drafted with any sensitivity to P3 imperatives but the FAA’s general unfamiliarity with many P3 approaches means that navigating these requirements requires awareness, creativity and time.  It is their unfamiliarity with the unique FAA regulatory structure that makes some European investors uncomfortable with the U.S. market.

Airport P3 projects are subject to regulatory considerations that are often absent in other P3 efforts, even in the transportation sector.  There are several overarching regulatory impediments that have made sponsors—and some investors—reluctant even to consider P3 opportunities:

• Revenue Use.  Under federal law, most airports must operate as a closed fiscal system, meaning that all revenue generated at the airport (or on airport-owned real estate) must be used only for the capital and operating costs of the airport.  Other infrastructure P3s do not generally have this constraint, which means that models applicable to roads, rail or utility infrastructure may not necessarily be directly transferrable to the airport environment.
• Regulatory Comfort.  The FAA is relatively unfamiliar with many P3 arrangements, even ones that are common in other arenas.  Agency staff has limited expertise in navigating the regulatory hurdles for various P3 arrangements.  As a result, the agency has provided relatively little guidance and direction to airport proprietors on what is, and is not, permissible in the highly regulated airport industry.  While the FAA continues, at Congress’ direction, to officially to support its Airport Privatization Pilot Program, it has been less enthusiastic to provide broad based guidance on how to structure P3 transactions.  The guidance that does exist is generally highly fact-specific to a particular airport.
• Grant Assurances.  Airport sponsors who accept federal grant funds (which include virtually all commercial service airports and thousands of general aviation airports listed in the FAA’s National Program for Integrated Airport Systems), are subject to a complex web of obligations that attach to the receipt of grant funds.  These obligations, known as grant assurances, generally carry a 20-year duration from the date of the last FAA grant, although some are perpetual.  Accompanying the grant assurances is a complicated set of contractual provisions that the FAA requires be included in any airport sponsor contract with private sector entity.¹³  The sheer number and breadth of these contractual provisions could significantly discourage private investment unless or until the FAA provides greater clarity on the extent to which the grant assurances apply to private sector partners in a P3 arrangement.
• Mandatory Contract Language.  FAA requires that an airport sponsor’s contracts contain both a subordination clause, (subordinating the relationship to any current or future FAA contractual or regulatory requirements) and a long list of contract clauses.  These clauses address issues such as civil rights, labor relations, contracting with disadvantaged business enterprises, and other topics which are not necessarily common in the private sector or in the airport sector in other countries.  The FAA has yet to provide any guidance on the extent to which these requirements apply to P3 arrangement or, more generally, to private sector contractors who have no contractual privity with the FAA.
• Authority to Enter into P3 Contracts.  Each state’s laws are different in their authorization for public agencies to contract with private sector entities to deliver services.  Procedural predicates, limitations on the length of leases (or prohibitions on sale of public assets), and other contracting restrictions vary state-to-state and even within a state.  Both legal and practical requirements with respect to use of union contracts may also affect the viability of P3 arrangements.
• Airlines and Other Users.  Airlines and other airport users have historically been skeptical of P3 arrangements because of the fear that they will result in higher rates and charges, could lead to diversion of revenue from the airport and, perhaps most importantly, could reduce the political and practical control that users traditionally have over airport decision making.  As more of these arrangements prove successful, this skepticism is likely to dissipate.

###

Annotated Bibliography of Selected Reference Materials

The Transportation Research Board Airport Cooperative Research Program (ACRP) published a comprehensive guide to airport privatization in 2012 which has become the authoritative handbook for airport privatization efforts:

• Airport Cooperative Research Program (ACRP) Report 66: Considering and Evaluating Airport Privatization, TRANSPORTATION RESEARCH BOARD (2012), http://www.trb.org/Publications/Blurbs/167156.aspx.

The U.S. Department of Transportation has published a number of useful guides and reports on P3s for transportation infrastructure:

• Successful Practices for P3s: A Review of What Works When Delivering Transportation via Public-Private Partnerships, U.S. DEPARTMENT OF TRANSPORTATION (2016), https://www.transportation.gov/sites/dot.gov/files/docs/P3_Successful_Practices_Final_BAH.PDF.
• Guidebook for Risk Assessment in Public Private Partnerships, U.S. DEPARTMENT OF TRANSPORTATION (2013), https://www.fhwa.dot.gov/ipd/pdfs/p3/p3_guidebook_risk_assessment_030314.pdf.
• Risk Assessment for Public-Private Partnerships: A Primer, U.S. DEPARTMENT OF TRANSPORTATION (2012), https://www.fhwa.dot.gov/ipd/pdfs/p3/p3_risk_assessment_primer_122612.pdf.
• Value for Money Assessment for Public-Private Partnerships: A Primer, U.S. DEPARTMENT OF TRANSPORTATION (2012), https://www.fhwa.dot.gov/ipd/pdfs/p3/p3_value_for_money_primer_122612.pdf.

The Congressional Research Service has published a guide for Congress on airport privatization options for its consideration:

• Rachel Y. Tang, Airport Privatization: Issues and Options for Congress, CONGRESSIONAL RESEARCH SERVICE REPORT (2016), https://fas.org/sgp/crs/misc/R43545.pdf.

On a global level, the World Bank maintains a reference guide and related information related to P3s:

• Public Private Partnerships Reference Guide – Version 3.0, PPP KNOWLEDGE LAB (2017), https://pppknowledgelab.org/guide/sections/83-what-is-the-ppp-reference.

Endnotes

¹  The World Bank notes, “[t]here is no standard, internationally-accepted definition” for P3 (also known as PPP) and, as a result, “[t]he term is used to describe a wide range of types of agreements between public and private sector entities”. See What Are Public-Private Partnerships?, PPPIRC World Bank Group, http://ppp.worldbank.org/public-private-partnership/ (last visited June 24, 2018).  For purposes of this paper, we use the term P3 to refer to “contractual agreements between a public agency and a private sector entity that allow for greater private sector participation in the delivery of transportation projects”, as such definition emphasizes that such arrangements can come in different forms and are distinguished primarily because they differ relative (i.e. “greater” participation) to customary existing practice.  See Public-Private Partnerships (P3) submitted to DEPARTMENT OF TRANSPORTATION FEDERAL HIGHWAY ADMINISTRATION, https://www.fhwa.dot.gov/ipd/fact_sheets/p3.aspx (last visited June 24, 2018).  This approach is appropriate in the U.S. airport context given an existing baseline of private sector involvement in airport infrastructure delivery and management.

²  See infra note 5.

³  See supra note 1.

​⁴  The U.S. Department of Transportation’s publication “Successful Practices for P3s,” (March 2016), is a good reference document.  It is important to recognize that, if an airport proprietor intends to seek AIP funding for a project, not all project delivery mechanisms are available and many that may satisfy federal requirements are not familiar to federal contracting officers.  It may be necessary to educate local FAA officials if the airport were to pursue any of these alternatives.  See Successful Practices for P3s: A Review of What Works When Delivering Transportation via Public-Private Partnerships, U.S. DEPARTMENT OF TRANSPORTATION (2016), https://www.transportation.gov/sites/dot.gov/files/docs/P3_Successful_Practices_Final_BAH.PDF (last visited June 24, 2018).

⁵  The Airport Privatization Pilot Program was established by federal law in 1966. 49 U.S.C. § 47134 (2012). According to the FAA, the program is “designed to allow airports to generate access to sources of private capital for airport improvement and development.” See Fact Sheet – What is the Airport Privatization Pilot Program, FEDERAL AVIATION ADMINISTRATION (Dec. 20, 2017), https://www.faa.gov/news/fact_sheets/news_story.cfm?newsid=21614 (last visited June 24, 2018).  See also Airport Privatization Pilot Program, FEDERAL AVIATION ADMINISTRATION, https://www.faa.gov/airports/airport_compliance/privatization/ (last visited June 24, 2018).  Federal law limits the number of participating airports to 10, of which only one can be a large hub airport and at least one must be a general aviation airport.  There are currently only four airports participating in the program: (1) a small general aviation airport in Hendry County, Florida; (2) Westchester County Airport; (3) St. Louis Lambert International Airport; and (4) Puerto Rico’s San Juan Luís Muñoz Marín International Airport, of which only San Juan is formally approved.  Eight other airports have considered or started participation in the program but have later dropped out.  The principal advantage of participation in the program is that federal law waives certain prohibitions on revenue diversion as a mechanism to encourage private investment.  Nevertheless, the rigidity of the program and of the procedural requirements has made the APPP unattractive to most airport proprietors and to investors.

⁶  See The Ownership of Europe’s Airports, AIRPORTS COUNCIL INTERNATIONAL (2016), http://newairportinsider.com/wp-content/uploads/2016/04/ACIEUROPEReportTheOwnershipofEuropesAirports2016.pdf (last visited June 24, 2018).

⁷  Availability payments generally are contractually guaranteed payments the public entity makes to the private entity to pay for construction, cost of capital, and operation and maintenance, and usually involves projects with little revenue generation.  The “availability” of the payment typically refers to the availability of the asset that has been the subject of the P3 and the stated operational standards that must be met in order to achieve all or a percentage of the payments.  By contrast, for a revenue generation project, there are usually no availability payments and the private entity receives all or part of the upside profit from the project itself, such as a parking structure or terminal facility.

⁸  U.S. DOT’s Build America Bureau (BAB) administers both the Transportation Infrastructure Finance and Innovation Act (TIFIA) loans as well as the Private Activity Bond (PAB) program.  See About the Build America Bureau, U.S. DEPARTMENT OF TRANSPORTATION, https://www.transportation.gov/buildamerica/about (last visited June 24, 2018).

⁹  See, e.g., Final 2016 Virginia P3 Project Pipeline, VIRGINIA PUBLIC-PRIVATE PARTNERSHIPS (Jan. 4, 2016), http://www.p3virginia.org/wp-content/uploads/2016/02/Final-January-2016-P3-Project-Pipeline.pdfIRGINIA PUBLIC-PRIVATE PARTNERSHIPS, http://www.p3virginia.org/ (last visited June 24, 2018); Draft Implementation Manual and Guidelines for the Public Private Transportation Act of 1995, VIRGINIA PUBLIC-PRIVATE PARTNERSHIPS (Jan. 2016), http://www.p3virginia.org/wp-content/uploads/2016/01/PPTA-Implementation-Manual-01-04-2016-final-posted-to-website-before-Jan-CTB.pdf.

¹⁰  See Providing for Public Private Transportation Partnerships Implementation Manual & Guidelines, THE COMMONWEALTH OF PENNSYLVANIA 16 (Sept. 29, 2014), https://www.dot.state.pa.us/public/Bureaus/press/P3/P3ImplementationManual&Guidelines.pdf (last visited June 24, 2018).

¹¹  Between February 2016 and June 2018, LA Metro received 108 unsolicited proposals for P3s.  See Partnerships and Unsolicited Proposals, LA METRO OFFICE OF EXTRAORDINARY INNOVATION, https://www.metro.net/projects/oei/partnerships-ups/ (last visited June 24, 2018).

¹²  See supra note 4, at 33.

¹³  The FAA has published a comprehensive list of required contract language.  See Contract Provision Guidelines for Obligated Sponsors and Airport Improvement Program Projects, FAA AIRPORTS (June 19, 2018), https://www.faa.gov/airports/aip/procurement/federal_contract_provisions/media/combined-federal-contract-provisions.pdf (last visited June 24, 2018).  While this comprehensive list, has been useful, it has also left open a number of complex questions concerning the circumstances under which language must be included in contracts with no federal financial involvement or where the airport proprietor has no direct contractual privity.  Id.

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Articles

FAA Reauthorization Bill Passes House; Senate Process Underway

In late April, the House of Representatives passed a six-year FAA reauthorization bill.  This is a significant step forward in the effort to reauthorize the FAA, since the House has been unable to reach consensus on long-term reauthorization for several years, and the FAA has operated under short-term extensions for some time.  This most recent bill passed the House after Congressman Bill Shuster—outgoing Chairman of the Committee on Transportation and Infrastructure—dropped his proposal to privatize the FAA’s air traffic control functions – an idea that was previously met with significant resistance.  The House bill includes several provisions that should be of interest to airport sponsors:

• Limits FAA regulation of non-federally sponsored airport property to facilitate airports’ ability to generate non-aeronautical revenue
• Requires some airports to provide sanitizing equipment in mothers’ rooms and baby-changing tables in restrooms
• Directs the FAA and GAO to undertake various studies related to noise impacts of air traffic on local communities
• Adds contract tower construction as an eligible activity under the AIP small airport fund
• Allows AIP funds to be used to construct storage facilities to shelter snow removal, aircraft rescue, and firefighting equipment meeting certain conditions regardless of whether federal funding was used to acquire the equipment
• Directs the FAA to partner with nongovernmental organizations, state, and local agencies to prevent recreational unmanned aircraft from interfering with the efforts of emergency responders

Despite House passage of the bill, there remains a long and winding road ahead for reauthorization.  The Senate still needs to act on its own bill, and there must be a Conference Committee to reconcile the inevitable differing House and Senate visions for FAA reauthorization.  Senate action is not expected until late 2018 at the earliest.  The FAA’s current authorization expires on September 30, 2018.  As a result, there remains is a strong likelihood that Congress will again need to extend that authority on a short-term basis, as it has repeatedly done in the past.  We will continue to update our clients and friends on significant new developments or opportunities for airports to participate in the process.  For more information, please contact Peter Kirsch at pkirsch@kaplankirsch.com or Steven Osit at sosit@kaplankirsch.com.​

Late Breaking: FAA Announces Process and Short Deadlines for Supplemental Airport Improvement Program Funding Requests

On July 9, 2018, the FAA is expected to publish the process for airport sponsors to apply for supplemental Airport Improvement Program (AIP) funds for 2018 through 2020.  This supplemental AIP funding was authorized by the Consolidated Appropriations Act, 2018, which also set criteria for projects that are to receive “priority consideration” in the disbursement of funds.  Projects are to receive “priority consideration” if they are located at (a) certain nonprimary airports (Regional, Local, or Basic airports not located in a Metropolitan or Micropolitan area), or (b) primary airports classified as Small Hub or Nonhub.  For requests for funding in fiscal year 2018, sponsors and their projects must be eligible for “priority consideration” under this criteria and must submit a brief application and summary of the eligible project to the appropriate FAA office by August 8, 2018.  For requests for funding in fiscal years 2019 and 2020, any eligible NPIAS airport sponsor must submit a request for funding by October 31, 2018, with a more robust application that includes explaining the status of the proposed project (specifically, ALP and environmental reviews).  The specific material the FAA requires for sponsor submissions under each deadline can be found in the document linked above.  For more information, please contact Peter Kirsch at pkirsch@kaplankirsch.com or Steven Osit at sosit@kaplankirsch.com.

Airport Firefighting Chemicals Potentially Contaminate Water Systems

In recent months, there has been an increasing awareness and concern regarding perfluorinated compounds (PFAS), a catch-all term for certain ingredients in firefighting foams commonly used at airports.  While these chemicals have been in use for decades, recent research suggests that they are harmful to human health and that airports are a serious potential source of contamination to local water supplies. This year, water supplies near Westchester County Airport and Fairbanks International Airport were both found to have contamination above the levels set in an EPA health advisory.  Airport sponsors should be aware of this issue because as possible PFAS users, they may be susceptible to claims by water system operators or individuals seeking compensation for cleanup costs or other damages – indeed, at least one case has already been filed to that effect.  Firm partner Polly Jessen recently published an article on these issues in the Colorado Municipal League Newsletter (see page 3).  For more information, please contact Polly Jessen at pjessen@kaplankirsch.com.

AOPA Seeks Enhanced Regulatory Oversight over FBO Pricing Practices

Over the past several months, the Aircraft Owners and Pilots Association (AOPA) has launched an aggressive campaign against the sponsors of certain airports, where a single fixed-base operator (FBO)—most commonly, Signature Flight Services—operates all fuel flowage and transient general aviation (GA) aircraft parking.  Last summer, AOPA filed informal Part 13 complaints with the FAA against Asheville Regional Airport, Key West International Airport, and Waukegan National Airport.  AOPA later voluntarily dismissed its complaint against Waukegan after it discovered that alternative transient GA parking was available there.  More recently, the organization threatened similar litigation against ten other airports on its so-called Airport Access Watch List, announced in April 2018.  In AOPA’s view, the pricing practices of FBOs at these airports effectively amount to an access restriction for transient GA users which, AOPA alleges, the sponsor has a duty to resolve under its AIP grant assurance obligations.

While AOPA’s efforts have so far been directed at a relatively small number of airports, its claims strike at the very essence of the relationship between airport proprietors and FBOs doing business on the field.  The FAA does not regulate FBOs directly and has repeatedly affirmed its position that pricing for aeronautical services is best determined by the marketplace.  The FAA has also traditionally afforded airport proprietors substantial discretion as to the manner in which they select and manage FBOs – a position the agency reaffirmed in a December 2017 Q&A document summarizing the federal regulatory landscape with respect to FBOs.  However, AOPA’s claims ask the agency to not only review the prices charged by FBOs, but to then also substitute its judgment for that of the airport proprietor.

So far, however, AOPA’s litigation efforts have been unsuccessful.  On June 7, 2018, the FAA issued a decision in the Part 13 filed against Asheville, finding that the sponsor was in compliance with its federal obligations.  The agency determined that the sponsor reasonably concluded that the FBO’s pricing practices were reasonable and that AOPA had not provided any evidence that would justify “second-guessing” the sponsor’s conclusion.  The FAA also found that Signature, the FBO at Asheville, is entitled to set its fees and pursue a business model that provides a reasonable return of its investment.

The FAA also issued a decision in the claim against Key West, finding in favor of the airport sponsor on all but one of the areas of concern raised by AOPA. It remains to be seen how much further AOPA will take it claims. AOPA has threatened additional litigation, potentially including a formal Part 16 complaint, and continues to aggressively advocate for sponsors to address high FBO prices.  For more information, please contact Steven Osit at sosit@kaplankirsch.com.

FAA Still Without Permanent Administrator, Several Other Key Positions

In January, FAA Administrator Michael Huerta’s term expired, and his Deputy Daniel Elwell became Acting Administrator.  Now six months later, there has been little movement from the White House to nominate a new permanent administrator.  Among the candidates reportedly being considered: Elwell; John Dunkin, the President’s personal pilotpublically lukewarm about his appetite for the job.  Whoever the permanent Administrator may be, the nominee will be faced with a bevy of challenges related to the agency’s Congressional reauthorization, NextGen litigation, UAS regulations, and other issues.

Those challenges will only be exacerbated by the continued vacancies at the highest levels of the agency.  According to the FAA’s organizational chart, two of five Associate Administrator posts and three of nine Assistant Administrator positions are currently filled by acting individuals.  Among the high-level positions currently vacant are the Associate Administrator for Airports and the Assistant Administrator for NextGen.  Winsome Lenfert continues to be the Acting Associate Administrator for Airports.  In addition to these high-level political vacancies, many senior civil service positions are vacant because of agency departures.

FAA Wins Most Recent NextGen Battle, But War Continues

Last year, the City of Phoenix won a victory against the FAA, successfully arguing that by instituting new NextGen flight patterns without appropriate consultation, the agency violated the National Environmental Policy Act and the National Historic Preservation Act.  That case has reverberated throughout the airport community.  In a recently decided case that was just as closely watched across the country, the FAA scored a win of its own when the D.C. Circuit held that a citizen group’s challenge to FAA’s new NextGen flight patterns in the D.C. Metroplex came too late.  Fights over NextGen procedures, however, continue elsewhere – a challenge to the NextGen flight patterns in the SoCal Metroplex is still pending in the D.C. Circuit, and the State of Maryland recently filed two petitions (one administrative and one judicial) regarding flight paths at Ronald Reagan Washington National Airport and at BWI Thurgood Marshall Airport.  For more information, please contact Peter Kirsch at pkirsch@kaplankirsch.com.

Litigation

(Listed in Reverse Chronological Order)

Court Decisions

Airport Closure.  Nat’l Bus. Aviation Assn. v. Huerta, 2018 U.S. App. LEXIS 16095 (D.C. Cir. June 12, 2018) (dismissing challenge to FAA settlement agreement with the City of Santa Monica that permits closure of the airport in 2028 because preliminary agreement was not final agency action and thus was not reviewable); see also Scott v. City Council for the City of Santa Monica, No. 17-07329 (C.D. Cal. Dec. 15, 2017) (dismissing complaint alleging that City Council failed to hold a public hearing in violation of California state law before entering into settlement agreement).

Petition for Review.  Skydive Myrtle Beach Inc. v. Horry Cty. Dep’t of Airports, 2018 U.S. App. LEXIS 15089 (4th Cir. June 5, 2018) (dismissing as untimely a challenge to FAA decision in Part 16 matter where petitioner failed to submit petition within 60 days of service of the agency’s decision).

Air Carrier Permits.  Air Line Pilots Ass’n v. Chao, 889 F.3d 785 (D.C. Cir. May 11, 2018) (on the merits, rejecting challenge to Department of Transportation’s issuance of air carrier permit to Norwegian Air because nothing requires the Secretary to deny a permit on public interest grounds alone).

Preemption.  Bailey v. Rocky Mt. Holdings, LLC, 2018 U.S. App. LEXIS 11969 (11th Cir. May 8, 2018) (holding that the balance billing provision in Florida’s personal injury protection statute, which prohibits medical providers from charging in excess of a fee schedule amount, operates as a state-imposed regulation on air carrier rates and that the Airline Deregulation Act preempts the application of the balance billing provision to air carriers).

Airport Revenue.  Clayton Cty. v. FAA, 887 F.3d 1262 (11th Cir. Apr. 24, 2018) (dismissing petition for review for lack of jurisdiction where non-sponsor municipality challenged letter setting forth FAA’s interpretation of statute requiring taxes on aviation fuel to be used for airport purposes and the court did not find the FAA letter to constitute a final agency action).

Area Navigation.  Citizens Ass’n of Georgetown v. FAA, 886 F.3d 130 (D.C. Cir. Mar. 27, 2018) (dismissing petition for review of FAA’s NextGen flight patterns in D.C. Metroplex because challenge was filed more than 60 days after issuance of FONSI).

Subject Matter Jurisdiction.  Boneyard Acquisitions, LLC v. Bibb Cty., 2018 U.S. Dist. LEXIS 44956 (N.D. Ala. Mar. 20, 2018) (dismissing complaint for lack of subject matter jurisdiction where plaintiff alleged airport sponsor had extinguished easement in accordance with federal law).

Grant Assurances.  SPA Rental, LLC v. Somerset-Pulaski Cty. Airport Bd., 884 F.3d 600 (6th Cir. Mar. 7, 2018) (upholding FAA’s finding of no unjust discrimination where complainant was not similarly situated to other entities).

Labor and Employment.  Frungillo v. Bradford Reg’l Airport Operating, 2018 U.S. Dist. LEXIS 39739 (W.D. Pa. Mar. 12, 2018) (finding that co-defendant municipalities were not “joint employers” with their collectively incorporated airport authority for purposes of plaintiff’s FMLA and ADA claims).

Standing and NEPA.  Kaufmann v. FAA, 2018 U.S. App. LEXIS 1393 (6th Cir. Jan. 22, 2018) (finding that petitioners did not have standing nor a federal cause of action against airport sponsor engaged in tree trimming using solely state funds).

False Claims Act.  United States ex rel. Durkin v. Cty. of San Diego, 2018 U.S. Dist. LEXIS 5550 (S.D. Cal. Jan. 11, 2018) (dismissing complaint alleging airport sponsor made false statements in grant applications because plaintiff had not sufficiently alleged how the statements led to the sponsor securing federal funds or the Defendant’s knowledge of the falsity of the statements).

Noise.  BRRAM, Inc. v. FAA, 721 Fed. Appx. 173 (3d Cir. Jan. 9, 2018) (on NEPA appeal brought by airport neighbors, affirming FAA decision to use categorical exclusion to approve amendment to operating specifications allowing new air carrier to use airport).

First Amendment.  McDonnell v. City & Cty. of Denver, 878 F.3d 1247 (10th Cir. Jan. 4, 2018) (overturning district court’s grant of preliminary injunction against airport sponsor and finding that sponsor was not required to grant an exception to its regulations on speech-related activities for exigent circumstances).

Pending Cases

Area Navigation.  City of Culver City v. Dept. of Trans., Case No. 17-1010 (D.C. Cir. appellee’s brief filed May 15, 2018) (consolidated challenge by various parties to FAA’s new flight patterns in the SoCal Metroplex).

Premises Liability.  Afoa v. Port of Seattle, 189 Wn.2d 1015 (Oct. 5, 2017) (granting partial review of Washington Court of Appeals decision holding that the Port had a “nondelegable duty to ensure a safe workplace” on the airfield at Seattle-Tacoma Airport, and was therefore liable for the injuries of an independent contractor’s employee).

Air Tours.  Pub. Employees for Envt’l Responsibility v. FAA, No. 17-cv-2045 (D.D.C. motion to dismiss filed Dec. 14, 2017) (seeking injunctive relief requiring FAA to develop Air Tour Management Plans for various national parks and recreation areas).

Administrative Decisions

Gate Allocation.  In re Compliance with Federal Obligations by the City of Dallas, FAA Docket No. 16-15-10 (Notice of Investigation served Aug. 7, 2015, since dismissed without prejudice) (FAA investigation into possible grant assurance violations related to a failure to accommodate air carrier requesting gate space).

Revenue Diversion.  Air Transport Assn. of Am., Inc. v. Port of Portland, FAA Docket No. 16-16-04, Final Agency Decision (May 18, 2018) (affirming Director’s Determination finding no violation of Grant Assurance 25 where airlines alleged that airport sponsor had impermissibly charged them certain utility fees it then paid to the City of Portland).

Economic Discrimination.  Pelzer v. Michigan, FAA Docket No. 16-16-05, Director’s Determination (May 16, 2018) (finding sponsor in violation of Grant Assurance 22 where lease negotiations generally lacked transparency or clarity about requirements to operate on the airport, and where sponsor provided no reasons for prohibition on temporary commercial operations).

Legal Fees and Airport Revenue.  Nat’l Bus. Aviation Assn., Inc. v. Town of E. Hampton, FAA Docket No. 16-15-08, Director’s Determination (Mar. 26, 2018) (finding that attorney’s fees and other costs paid by sponsor to defend use restriction was permissible use of airport revenue).

Acquisition of Property.  Boggs v. City of Cleveland, FAA Docket No. 16-16-15, Final Agency Decision (Jan. 26, 2018) (affirming Director’s Decision dismissing complaint alleging Grant Assurance violations where sponsor chose not to acquire private property shown on the Airport Layout Plan).

Federal Legislation

Consolidated Appropriations Act, 2018, Pub. Law No. 115-141 (signed Mar. 23, 2018) (extending FAA authorization through Sept. 30, 2018).

Federal Rules, Orders, and Guidance

(Listed in Reverse Chronological Order)

The White House

Memorandum of Understanding Implementing One Federal Decision Under Executive Order 13807 (eff. Apr. 9, 2018).

Press Release, Building a Stronger America: President Donald J. Trump’s American Infrastructure Initiative (Feb. 12, 2018); see also Legislative Outline for Rebuilding Infrastructure in America (Feb. 2018).

Department of Transportation and FAA

Supplemental Guidance on the Airport Improvement Program (AIP) for Fiscal Years 2018-2020, FR Doc. 2018-14675 (publication expected Jul. 9, 2018).

Contract Provision Guidelines for Obligated Sponsors and Airport Improvement Program Projects (updated Jun. 19, 2018).

Draft Advisory Circular No. 150/5200-36B, Qualifications for Wildlife Biologist Conducting Wildlife Hazard Assessments and Training Curriculums for Airport Personnel Involved in Controlling Wildlife Hazards on Airports (Jun. 5, 2018).

Proposed Policy, Policy on the Temporary Closure of Airports for Nonaeronautical Purposes, 83 Fed. Reg. 24,438 (May 29, 2018).

Guidance Document, Compliance with Requirements for Timely Processing of [DBE and ACDBE] Certification Applications (Apr. 29, 2018).

Draft Advisory Circular No. 150/5345-43J, Specification for Obstruction Lighting Equipment (Mar. 21, 2018).

Draft Advisory Circular No. 150/5100-13C, Development of State Aviation Standards for Construction at Non-primary Public-use Airports and Use of State Highway Material Specifications for Individual Projects (Mar. 2, 2018).

Draft Advisory Circular No. 150/5345-54C, Specification for L-884, Power and Control Unit for Land and Hold Short Lighting Systems (Feb. 6, 2018).

Draft Advisory Circular No. 150/5345-26E, FAA Specification for L-823 Plug and Receptacle, Cable Connectors (Feb. 6, 2018).

Advisory Circular No. 150/5340-30J, Design and Installation Details for Airport Visual Aids (Feb. 2, 2018).

Reports, Studies, Articles, and Other Publications

U.S. Department of Transportation

Office of Inspector General, Report No. AV2018041, FAA Needs to More Accurately Account for Airport Sponsors’ Grandfathered Payments (Apr. 17, 2018).

Office of Inspector General, Report No. AV2018030, FAA Needs To Strengthen Its Management Controls Over the Use and Oversight of NextGen Developmental Funding (Mar. 6, 2018).

U.S. Government Accountability Office

Report No. 18-236, Aviation Security: TSA Uses Current Assumptions and Airport-Specific Data for Its Staffing Process and Monitors Passenger Wait Times Using Daily Operations Data (Feb. 2018).

Transportation Research Board, Airport Cooperative Research Program

Reports

Report 184: Executive Summary for the Guidebook on Understanding FAA Grant Assurance Obligations (May 2018) (individual volumes listed in Web-Only Documents).

Report 183: User Guides for Noise Modeling of Commercial Space Operations – RUMBLE and PCBoom (Apr. 2018).

Report 182: Guidance for Planning, Design, and Operations of Airport Communications Centers (Jan. 2018).

Synthesis Reports

Synthesis 93: Sustainability’s Role in Enhancing Airport Capacity (pre-publication draft released Jun. 2018).

Synthesis 87: Airport Participation in Oil and Gas Development (Apr. 2018).

Synthesis 86: Airport Operator Options for Delivery of FBO Services (Feb. 2018).

Synthesis 88: Airport Community, Water Quality Events, and the Aircraft Drinking Water Rule (Jan. 2018).

Web-Only Documents

Web-Only Document 44: Understanding FAA Grant Assurance Obligations Volume 1: Guidebook (May 2018).

Web-Only Document 44: Understanding FAA Grant Assurance Obligations Volume 2: Technical Appendices (May 2018).

Web-Only Document 44: Understanding FAA Grant Assurance Obligations Volume 3: Research Report (May 2018).

Web-Only Document 44: Understanding FAA Grant Assurance Obligations Volume 4: Summary of AIP Grant Assurance Requirements (May 2018).

Web Only-Document 35: State of the Industry Report on Air Quality Emissions from Sustainable Alternative Jet Fuels (Apr. 2018).

Web-Only Document 33: Commercial Space Operations Noise and Sonic Book Modeling and Analysis (Apr. 2018).

Unmanned Aircraft Systems

Decided Cases

Taylor v. FAA, 2018 U.S. App. LEXIS 18381 (D.C. Cir. Jul. 6, 2018) (dismissing petition for review, which challenged FAA’s regulation of small UAS as beyond the agency’s statutory authority).

Elec. Privacy Info. Ctr v. FAA, 2018 U.S. App. LEXIS 16400 (D.C. Cir. Jun. 19, 2018) (dismissing challenge to FAA’s decision not to promulgate privacy-specific UAS regulations because petitioners failed to establish standing).

Pending Cases

Elec. Privacy Info. Ctr v. Drone Advisory Committee, et al., Civ. Action No. 18-833 (D.D.C. filed Apr. 11, 2018) (complaint alleging that DOT’s Drone Advisory Committee is failing to make meetings open to the public).

FAA Rules, Orders, and Guidance

Notification to UAS Operators Proposing To Engage in Air Transportation, 83 Fed. Reg. 18,734 (Apr. 30, 2018) (setting forth procedure to seek an air taxi operator exemption to hold economic authority from DOT for companies proposing to engage in certain air transportation operations with UAS).

Reports, Studies, and Articles

National Academies of Sciences, Engineering, and Medicine, Assessing the Risks of Integrating Unmanned Aircraft Systems into the National Airspace System (pre-publication draft released Jun. 2018).

United States Government Accountability Office, Report No. GAO-18-110, Small Unmanned Aircraft Systems: FAA Should Improve Its Management of Safety Risks (May 2018).

A PDF of this Semi-annual Airport Law Digest is available.