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Ontario Airport Transfer Questions and Answers

1.    How much have other local governments paid for transferring control of a commercial airport?

For commercial airports, nothing.  Local governments have bought small privately owned general aviation airports for some estimate of value, but for publicly owned commercial airports like Ontario International Airport (ONT), all transfers of control have been made without payment.

There have been several transfers of a large publicly owned commercial airport from one public owner to another in the past 20 years, including the transfer of San Diego Lindbergh Field from the Unified Port District to the San Diego County Regional Airport Authority; transfer of Detroit Metropolitan Wayne County Airport from Wayne County to the Wayne County Airport Authority; and transfer of Port Columbus International Airport, Rickenbacker International Airport, and Bolton Field to the Columbus Regional Airport Authority. 

In all these cases, the airports were transferred to the new public operator without any payment for the airport. 

2.    How much did Los Angeles/LAWA pay for ONT?

Essentially nothing.  In 1985, when ownership of the airport was transferred to the Los Angeles Department of Airports (now called LAWA), the City of Los Angeles paid $58,329.58 to Ontario to settle various obligations remaining from the 1967 Joint Powers Agreement (JPA). 

In the 1967 JPA, Los Angeles agreed to certain financial obligations in assuming control of the airport:

• Payment of funds to reimburse Ontario for the actual cost of retiring outstanding airport bonds;
• Payment to Ontario for the actual costs of providing police and fire services at the airport;
• Payment to reimburse Ontario for its actual costs in acquiring additional land at the airport by inverse condemnation around the time Los Angeles assumed control;
• Commitment to invest $20 million in the airport over 10 years (not a payment to Ontario); and
• Payment to Ontario of $5 million after 10 years, reduced by the amount Los Angeles spent on marketing and improving the airport, as an incentive for Los Angeles to work toward increased air service.

None of these commitments involved a purchase payment for the airport, in 1967 or in 1985.  The 1985 transfer agreement acknowledged the $58,329 payment and noted that Los Angeles had previously paid $4,028,913 in satisfaction of certain of its obligations under the 1967 JPA. [Note:  These payments were in satisfaction of LA’s obligations under “Sections 6 and 9” of the 1967 Agreement, which are the sections dealing with airport bond retirement and the $5 million payment.]   There was no appraisal of the airport in 1967 or in 1985 used in these agreements, and no payment at all for the value of the airport.

Accordingly, Los Angeles obtained ONT through a transfer of governance that provided for allocation of particular costs, but did not involve any payment tied to the actual value of the airport itself.  In sum, Los Angeles essentially obtained the airport for no real value, by a transfer without meaningful consideration.  It should also be noted that in 2012 ONT is operating at nearly the same activity level in terms of air service and passengers that it did in the mid-1980s when L.A. acquired the airport.

3.   How much do Los Angeles taxpayers have invested in ONT?

Nothing.  We know of no expenditure of any kind from the Los Angeles General Fund for ONT. 

4.   What is LAWA owed for its investment in ONT?

Every airport operator invests in its airport, but that does not mean there is a debt owed to the airport operator.  This spending isn’t “investment” in the usual sense of an investor investing principal and expecting it to be paid back.  For airport projects, the airport operator obtains FAA grants for part of the cost, borrows the remainder by issuing bonds, and pays off the bonds by adding the bond payments to future airport user charges.

In the normal course of operating and maintaining the airport in a safe and serviceable manner, LAWA has undertaken projects over the years at ONT totaling hundreds of millions of dollars.  However, all the costs of those projects were paid for by ONT airline and user fees, by FAA grants to LAWA specifically for ONT, and by the $4.50 Passenger Facility Charge (PFC) collected by airlines from their passengers as part of the ticket price.

Revenues generated by LAWA’s other airports have not been used to subsidize ONT.  In fact, the opposite is true.  Los Angeles City records indicate that leases at ONT generated surpluses that were used to subsidize LAWA’s other airports for many years, until the late 1990’s.  Moreover, LAWA charges ONT a 15% “administrative” fee on revenues to reimburse LAWA for its services to ONT—ONT is paying LAWA, not the other way round. 

So, it is very misleading to suggest that LAWA has invested hundreds of millions of dollars in the airport without explaining that the past costs of those investments have already been paid by ONT users or federal grants, and that Ontario has offered to assume any current outstanding bond obligations.  Once that debt is retired or assumed by Ontario, LAWA can point to no unreimbursed investments or expenditures at ONT.  ONT has always paid its own way, and will continue to do so.

5.  Are the LAX passenger facility charges (PFCs) that were collected at LAX and used at ONT a “debt” that ONT owes to LAWA?

No.  PFCs do not produce a pot of funds that can be used by the airport operator for any purpose; PFC collections are approved by the FAA to be used for specific airport projects.  LAWA requested to use some LAX PFCs at ONT at the suggestion of the airlines serving both airports, and FAA approved the specific projects at ONT.  Thus the PFCs were used for projects requested by LAWA and the airlines, and approved by the FAA, for the benefit of all parties.  The PFCs were spent for the approved purposes, and there is no repayment that is required or that even makes sense.

As mentioned below, Ontario has offered to use future ONT PFC collections for eligible projects at LAX, if FAA approves, in recognition of the LAX PFCs used for partial funding of the ONT terminal.  However, that is a voluntary offer by Ontario, and not acknowledgement of any actual expenditure by LAWA or debt owed by ONT.

6.  Doesn’t LAWA have substantial debts still to pay off from ONT projects?

LAWA has approximately $73 million in bonds outstanding for ONT projects.  The bonds are being paid off by ONT user fees and PFCs.  While this amount of debt sounds large, it is actually quite low in comparison with other airports in the U.S. with the same size enplanements as ONT.  As explained below, Ontario is offering that all outstanding bond debt would either be assumed by Ontario or retired and replaced by new bonds issued by Ontario.  As a result, after the airport is transferred to Ontario, LAWA would have no remaining debt or other financial obligations for ONT.

7.  Is it true that the bonds for ONT projects are backed by LAWA?

No, the bonds for ONT projects are supported only by revenues generated by ONT itself.  LAWA has not guaranteed or provided other financial support for the bonds.

8.  What is the FMV of the airport?

The market value of the airport is irrelevant.  Los Angeles did not buy the airport from Ontario, and Ontario should not have to buy its airport back.  Even if it were legal for Los Angeles to sell the airport at a market price—and that’s  questionable—a sale to Ontario would be totally inconsistent with Los Angeles’ commitments to the citizens of Ontario under the 1967 Joint Powers Agreement between Ontario and Los Angeles.

Although there have been many transfers of commercial airports from one public entity to another, in no prior case has the transferring city, county, or state attempted to “sell” the airport and certainly in no prior case has the transferring entity ever attempted to do so at the highest possible price.

This is a unique situation.  By law, Ontario airport must continue to be used as an airport open to the public.  It cannot be converted to a shopping center, a housing development, or an office park. Large parts of the airport—e.g., the airfield, ramp, and passenger terminal—have no corresponding private sector counterparts.  Even the more commercial areas of the airport are restricted in ways that off-airport commercial properties are not.

Under federal law, the City of Ontario cannot receive any income from the airport.  ONT does not produce, or have the potential to produce, surplus revenue; the airport’s costs are approximately the same as its revenues and this will remain the case even if Ontario manages the airport so as to increase passenger traffic.   For most commercial buyers, this would make the fair market value of the airport zero or close to zero.  The fact that the airport has little value as a commercial enterprise is evident from the private sector responses to LAWA’s 2011 Request for Expressions of Interest from private airport operators.

Any approach to appraisal would need to acknowledge that the airport is limited by federal obligations to airport use, and that major parts of the airport are subject to federal restrictions on what users can be charged.  In the end, ONT is a public transportation terminal which LAWA originally committed to operate for the benefit of the citizens of Southern California.

9.  Did LAWA defer development at LAX to put ONT development first?

No.  In the 1990’s, PFCs were being collected at LAX, but LAWA did not have sufficient eligible LAX projects ready to make use of the amounts collected.    The airlines serving LAX and ONT suggested that the mounting collections be used for needed projects at ONT, and LAWA agreed.  The FAA approved, and a combination of LAX and ONT PFCs were used as partial funding for the new ONT terminal.

The decision to do the ONT terminal project at that time resulted from the fact that it was a needed project that was ready to go, and had nothing to do with any decision to delay improvements at LAX in favor of ONT.  If the LAX PFCs had been needed at that time at LAX, then they would certainly have been used at LAX, and the ONT terminal would have been funded differently.

10.  What are Los Angeles’ fiduciary responsibilities regarding ONT?

LAWA has claimed it has a fiduciary duty to the City of Los Angeles to obtain fair market value for transfer of the airport, but legally LAWA is the City of Los Angeles.  LAWA is an agency of city government, not a trustee with independent legal obligations, and it is the obligations of the city itself that are the only controlling factor.  Other jurisdictions have transferred a commercial airport to another public owner for no charge at all, and Los Angeles can do the same.

Los Angeles does, however, have a fiduciary obligation to the City of Ontario, which conveyed the airport to Los Angeles under a Joint Powers Agreement.  The JPA expressly acknowledges that the transfer will be for the benefit of the City of Ontario, in addition to other southern California airport users.  Ontario did not simply give ONT to Los Angeles, to allow Los Angeles to sell the airport to the highest bidder.  Rather, the JPA establishes a relationship of trust between the cities, obligating Los Angeles to use its control of the airport for the benefit of the City of Ontario and airport users.  It is totally inconsistent with the letter and spirit of the JPA for Los Angeles to suggest that it can require a FMV sale price from Ontario for return of the airport, which would confer an undeserved windfall on LAWA’s other airports by imposing an enormous financial burden on the City of Ontario and the airport itself.  Ontario does not intend to pay for purchase of ONT in any event, but the idea should not even be on the table given Los Angeles' fiduciary responsibilities regarding the airport.

11.  Why hasn’t Ontario accepted LAWA’s repeated offers to let Ontario take responsibility for marketing ONT?

Marketing an airport to airlines and travelers can be successful only if the marketer as operator is responsible and accountable for the facilities, amenities and service levels the airport offers. Integration of operation and marketing are essential to growing an airport.  Changing the marketing entity at ONT does not address the systemic problems that caused the severe decline in air service and passenger activity.  These issues can only be addressed by a local operator with a vested interest in the airport making the greatest possible contribution to its market and the regional economy. Inclusion of ONT in another city’s airport department with a competing airport does not serve the public interest. 

LAWA’s proposal to bifurcate responsibility and accountability for marketing ONT is not surprising given the drastic reductions it made in ONT’s marketing budget in recent years and its failure to follow through on the L.A. Mayor’s directive to invest savings LAWA realized by closing Palmdale Regional Airport in 2008 to promote ONT. Another sign of LAWA’s lack of commitment to ONT in this area is seen in the contract it awarded LA Inc. in 2011 for airport marketing.  This contract excludes ONT while two previous five-year contracts with LA Inc. approved in 2001 and 2006 specifically included ONT marketing in their scope.

Finally, it is not clear that LAWA would be supportive of any marketing program for ONT that would increase flights or provide incentives to airlines if those efforts would have an effect on LAX passenger traffic. This inherent potential for a conflict of interest between the airports has been acknowledged by LAWA itself in discussions regarding marketing.   LAWA's attenuated marketing offer is not enough to address the underlying cost and management issues at ONT, and not enough to turn the airport around.

 12.  Is the decline in passenger traffic at ONT unique?

Yes, using LAWA’s own numbers and comparing ONT against all other medium size U.S. airports, it has suffered a greater loss of passengers than all but one airport, Cincinnati (where Delta discontinued its hub operation after merging with Northwest).  ONT ranks second among 36 medium size airports in terms of the percentage of passengers lost since either 2005 or 2007 (the two reference years chosen by LAWA in its comparisons). ONT’s drop in passengers is by far the worst of the Los Angeles area airports.

Source: LAWA summary of airport records published February 2012

LAWA points out that Oakland and San Jose have also suffered substantial passenger declines.  Doesn’t that show that this really is a California-wide problem? 

San Francisco area travelers will recall that Southwest Airlines pulled out of SFO in 2001, creating an unusual situation in which SFO had almost no service by low cost carriers.  That situation continued until 2007.  By then, Virgin America and JetBlue had concluded that SFO represented an under-served airport.  At about the same time that JetBlue and Virgin America started service at SFO in 2007, Southwest re-started SFO service as part of a competitive battle.  The net result is that the three San Francisco area airports now all have significant low cost service.  The redistribution of service between the three airports, however, has caused significant one-time declines at both Oakland and San Jose. 

Low Cost Carrier Passengers in the San Francisco Area Moved Back to SFO as JetBlue and Southwest Moved Operations to SFO to Compete with Virgin America

Taking away the effect of this one-time re-balancing of low cost airline service among the San Francisco airports, we find that, over the longer term, both Oakland and San Jose have experienced healthy passenger growth while ONT has not.

Passenger Change at ONT, OAK, SJC

1991-2011

Another reason given by LAWA for ONT’s poor performance is the failure of ExpressJet which had used ONT as a focus city in 2007 and 2008.  The facts, however, do not support this conclusion.  The number of ONT passengers peaked in 2005 well before ExpressJet began its build-up.  During its peak, ExpressJet never carried more than about 6% of ONT passengers.

The only medium size airport in the U.S. which has lost a greater percentage of passengers than ONT is Cincinnati.  Yet even Cincinnati does not fare as badly as ONT once connecting passengers are excluded.  In other words, if we just compare the number of passengers actually traveling to or from Cincinnati in 2005, 2007, and 2011, we find that the Cincinnati has lost about 6% of these passengers since 2007, and about 30% since 2005, substantially better than ONT.

In summary, for multiple reasons, including the way that LAWA managed ONT in a difficult environment, ONT has suffered disproportionately and stands by itself among medium size U.S. airports.