Hartsfield-Jackson’s future hangs on lease with Delta

By Maria Saporta

For decades, Delta Air Lines and the city of Atlanta have played a delicate dance.

Both have proclaimed their eternal love for each other — crediting each other for their own growth.

That partnership has led to Delta becoming the world’s largest airline and Hartsfield-Jackson becoming the largest and busiest airport in the world.

And yet both have had to balance that love with their own self-interests.

For Delta, that self-interest is to limit the amount of airline competition that comes to Hartsfield-Jackson Atlanta International Airport by trying to have as much control as it can over the airport.

But for the city and the airport, that self-interest is making sure that there’s enough airline competition to keep fares as competitive as possible and that Atlanta residents have multiple travel options. At the same time, the city wants to make sure Delta keeps its headquarters and its major hub in Atlanta along with its well-paying jobs.

The city and Delta are now trying to strike that delicate balance once again with the current negotiations on a master lease agreement between the city and the airline.

The situation is further complicated by several factors.

Atlanta Mayor Shirley Franklin would like to complete the deal while she’s still in office (which is less than three months). Plus, she has said she’s willing to give Delta a favorable deal in the spirit of the unique history between the city and the airline.

Delta knows of the mayor’s desire to do a deal (and it would love to negotiate with Franklin rather than an unknown new mayor), so is taking full advantage of its bargaining position.

But the draft agreement that has been struck between the mayor’s office and Delta executives is raising great concern for how it potentially would limit competition at Hartsfield-Jackson.

What makes these negotiations even more troubling is that it’s clear that Franklin and her office have taken the lead in these negotiations instead of the professional executives at Hartsfiled-Jackson, specifically Ben DeCosta, the airport’s general manager. Earlier this year, Delta CEO Richard Anderson made it clear that he wanted to negotiate directly with Franklin and freeze out DeCosta from the process.

As a result, the draft agreement is now being challenged by the Federal Aviation Administration for having “several potentially anticompetitive provisions” in a letter dated Oct. 9.

Also, AirTran, the second largest airline serving Atlanta, has expressed similar concerns in a letter to DeCosta on Sept. 10.

The agreement is now in the hands of the Atlanta City Council. On Monday, Oct. 26 at 3 p.m., the council’s Transportation Committee will hold its second workshop within a week to examine and potentially revise the proposed lease.

For starters, the agreement is merely a proposed extension of the current 30-year master lease between Delta and the city, an agreement set to expire next September. Initially, the hope among airport officials had been to negotiate a totally new agreement from scratch. But in the interest of time, the mayor and Delta decided it would be easier to extend the current lease.

As proposed, the master lease would last for seven years, beginning next September.

But most airports are striking leases for shorter terms because of the fluctuations in the economy and the airline industry.

“The lease agreements that have been negotiated more recently have been for five years,” said Debby McElroy, executive vice president for the Airports Council International – North America. “Seven years a little longer than normal, and the fact that it’s an extension of an existing lease makes it even more unusual.”

So point one, should the new master lease be for five years instead of seven?

Second, Delta and many other airlines have enjoyed “exclusive” use of gates at Hartsfield-Jackson. Because of the exclusivity on gates, there are limited opportunities for other airlines to begin or expand service at Hartsfield-Jackson.

The new agreement eliminates the exclusive gates and converts most to “preferential” gates.

“There is a new provision that I’m quite pleased with, and that is the preferential gate provision,” Franklin said at the Transportation Committee’s work session last Wednesday. “This gives the city a higher level of competition because it puts airlines on notice that when they are not using the gates, they revert back to the airport.”

(When gates are reverted back to the airport, they become common use gates, giving the city and the airport maximum flexibility to lease out those gates as needed).

But there’s a big difference of opinion when it comes to “preferential” gates as to what should be the level of use required before they revert back to the airport and become common use gates.

Originally, the draft agreement called for gates to revert to the airport if traffic at a gate was less than 675 seats per day. The FAA expressed concern that such a level could be considered as being “de facto” exclusive, meaning Delta would be able to maintain its hold on all its existing gates.

Since then, the agreement has been further watered down to only 600 seats per gate per day, which would make it even harder for the airport to get back control of gates that weren’t being used to their full potential. Airport officials have said that a better number would be between 700 to 750 seats per gate per day.

Going to only 600 seats per gate per day would represent a 20 percent drop in Delta’s current traffic.

“Our information indicates that even after 9/11 and the recession it didn’t get anywhere close to that,” McElroy said. “That means airlines could tie up the gates, and the airport would not have the flexibility and ability to accommodate new competition.”

For that reason, McElroy said most airports “moving toward common use” gates and away from exclusive or preferential gates.

What would that mean for Atlanta? McElroy said she was visiting with officials at Southwest Airlines earlier this month. “Atlanta is really the only large airport left where you don’t have a Southwest presence,” she said.

Although Delta might not want Southwest at Hartsfield-Jackson, people flying in and out of the airport could benefit by having another low-cost carrier.

So point two: should the new agreement call for more gates to be common use rather than preferential?

And point three, should the required usage level for the preferential gates be closer to 700 than 600 seats per day per gate?

Another major area of concern is the “Majority in Interest” {MII) clause. That clause requires that a dominant airline or airlines at an airport approve additional capital expenses at the airport.

For example, if Hartsfield-Jackson wanted to build more common use gates to welcome other airlines to the airport, then Delta could have veto power to prevent such an investment and thereby limit competitors.

The FAA expressed concern that the city is not changing or removing the MII clause in the proposed agreement.

“These MII provisions are disappointing since our best practices have found that MII restrictions, particularly those affecting new capacity construction, can adversely impact competition at airports,” the FAA wrote in its letter to DeCosta.

So point four: should the city remove the clause that gives veto power to Delta on new capital expenses at the airport?

Another critical issue is how to make sure the FAA is comfortable with any new master lease agreement the city strikes with Delta.

“I do think the FAA letter is a pretty strong indication of their concern,” McElroy said. “Having the FAA weigh in with that letter at this point is significant.”

Why does it matter if the FAA doesn’t approve of the Atlanta agreement?

“The FAA, at a minimum, could withhold federal funds that go to Atlanta,” McElroy said. “The removal of that funding, which is significant for Atlanta, would make it very difficult to meet their safety and security obligations.”

The situation is even further complicated by the fact that the Obama administration may take a harder line on anti-competitive provisions in such lease agreements and that both the U.S. Department of Transportation and the U.S. Department of Justice could penalize Atlanta.

“We have not seen from the Obama administration an indication of how they might respond,” McElroy said. “Atlanta is the first major hub to be going through these negotiations.”

So point five: what does the city need to do to make sure the FAA and the federal government endorse a new master lease between Delta and the airport?

As much as the city of Atlanta loves Delta, it also must not forget how important the other airlines are to keeping Hartsfield-Jackson competitive.

No one argues that point better than the letter AirTran’s executive vice president of operations, Stephen Kolski, wrote to DeCosta.

“Ben, it is appropriate to again emphasize that continuing the status quo on gate assignments at (Hartsfield-Jackson) after the current lease term expires would not only be a grave disservice to AirTran but also to the traveling public, the community, the city, the region and fair competition,” Kolski wrote.

“While AirTran is not the largest airline providing service at (the airport), it is the airline that has brought competitive low fares to (Hartsfield-Jackson) and helped propel it to the busiest and best airport in the nation. It’s time that AirTran be permitted to compete on a fair and level playing field…”

So when the Atlanta City Council’s Transportation Committee meets on Monday, it must weigh the city’s great love for Delta with a desire to keep its options open for future relationship with other airlines.

Maria Saporta, Editor, is a longtime Atlanta business, civic and urban affairs journalist with a deep knowledge of our city, our region and state.  Since 2008, she has written a weekly column and news stories for the Atlanta Business Chronicle. Prior to that, she spent 27 years with The Atlanta Journal-Constitution, becoming its business columnist in 1991. Maria received her Master’s degree in urban studies from Georgia State and her Bachelor’s degree in journalism from Boston University. Maria was born in Atlanta to European parents and has two young adult children.

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