American Airlines slams United 'gate perks' in US$8.5bn O'Hare revamp

By Bloomberg News, March 1 2018
American Airlines slams United 'gate perks' in US$8.5bn O'Hare revamp

American Airlines. is crying foul over a planned US$8.5 billion renovation of Chicago’s O’Hare International Airport, claiming a “secret provision” awards additional gates to United in a terminal slated to be torn down.

The arrangement favoring Chicago-based United was “inserted at the last minute,” American said. United called the claim “disingenuous,” denied there was a secret deal and said it had an agreement with the city for five additional gates back in 2016 – a pact it said American has tried to block “at every opportunity.”

The spat between the airlines, which operate competing hubs that dominate the airport, threatens to disrupt a long-overdue expansion that is the biggest in O’Hare’s history. Chicago plans to issue as much as US$4 billion in bonds backed by the airport’s revenue, such as terminal rents and landing fees, to pay for the first major capital improvements at the hub’s terminals in more than 25 years.

“American and United hold all the marbles,” said Joe Schwieterman, transportation professor at DePaul University in Chicago. “Their objections could bring the whole project to a standstill. But expect them to play a poker game with full intensity, and I think that’s what American is doing.”

Tantrum at a 'turning point'

The city said it wasn’t concerned that Fort Worth, Texas-based American isn’t on board with the deal. Chicago Mayor Rahm Emanuel called the eight-year project “a game changer for O’Hare” and a “turning point” for the city.

The renovation would create two new passenger concourses for domestic flights, while a terminal would be torn down and rebuilt as an international gateway shared by United, American and their alliance partners. United carries about 32 percent of passengers at O’Hare while American has 27 percent, according to the U.S. Transportation Department.

“This was not about the competition between those two airlines,” said Emanuel, adding that he’s not picking one airline over another. “It was about the competition between Chicago and all the other cities and we’re securing that.”

Tilting the competitive balance?

But the expansion plan risks upsetting an uneasy balance of power between American and United.

The Chicago airport, once the world’s busiest, operates under an unusual master agreement that gives the two airlines veto rights over any major capital projects.

The agreement, which expires in May, stymied growth while preserving an equilibrium of sorts that allowed United and American to successfully operate dueling hubs even as competition shrank at airports such as Dallas-Fort Worth International and Minneapolis-St. Paul International.

“There was a mutual understanding that freezing O’Hare in place was acceptable to American and United because they were closely watching each other,” Schwieterman said. “Now that’s been blown open.”

United and American each announced plans last year to add flights at O’Hare, in moves seen as attempts to defend their market share at a crucial mid-continent hub. Competition between the carriers already had been stoked in 2016 when Scott Kirby, a longtime colleague of American Chief Executive Officer Doug Parker, left as the airline’s president and took the same job at United.

Gates at the heart of dispute

The latest dispute focuses on Chicago’s agreement to award United five of eight gates that will become available in O’Hare’s Terminal 2.

American said that until Feb. 15, it believed all eight of the gates in Terminal 2 would be for common use, or open to all carriers.

It said the city unilaterally decided to award five of the gates to United, and then dismissed without explanation American’s request to speed construction of three other gates so it could counter the last-minute changes.

United disputed that there was any last-minute secret deal. The airline said it reached a pact with Chicago in 2016 for five additional gates to counter a comparable expansion by American. While American blocked that agreement, Chicago is now honoring it, United said.

“This is about equal treatment,” said Gavin Molloy, vice president of corporate real estate at United.

The O’Hare proposal will widen United’s advantage in gate allocation by 50 percent, Franco Tedeschi, American’s vice president for Chicago, said in an email to employees. Putting new gates into operation quickly is important because the city will award space in parts of the renovation based on how much flying each airline does.

Support needed from both airlines

Chicago’s goal of overhauling the airport without raising taxes increases the importance of getting buy-in from both United and American, said Dan Solender, head of municipal bonds at Lord Abbett & Co.

“It would be an issue if the airlines don’t agree,” said Solender, whose firm manages about US$20 billion of state and local securities, including O’Hare debt.

The debt deal is still doable without American, said Richard Ciccarone, Chicago-based president of Merritt Research Services, which analyzes municipal finance. “But having a second anchor airline will provide more confidence to the marketplace,” he said.

The first transaction on the O’Hare financing won’t come to market until the end of this year at the earliest, according to Carole Brown, Chicago’s chief financial officer. JPMorgan Chase & Co. is expected to lead the first deal, based on Brown’s recommendation.

It’s not surprising to have areas of dispute in a large capital program, or that the two airlines would want to leverage their operations at O’Hare, said Seth Lehman, head of airport ratings at Fitch Ratings. O’Hare has about US$7 billion of outstanding debt, Lehman said. With this deal, it could climb to more than US$10 billion in the next few years.

“Ultimately the city has more control to the whole process because they’re trying to serve all the carriers,” he said. “We still believe the carriers will ultimately nail down a deal that allows them to proceed.”

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