Thursday, September 10, 2015

United Ouster Highlights Tensions With Airports • Airlines regularly negotiate with airport authorities, seeking lower fees, upgrades to facilities

The Wall Street Journal
Updated September 9, 2015 11:52 p.m. ET

The federal investigation that led to the ouster of United Continental Holdings Inc. Chief Executive Jeff Smisek spotlights the often thorny relationship between airlines and airport authorities that, while little-noticed by fliers, is critical to how carriers run their businesses.

Mr. Smisek’s abrupt departure, along with that of two other senior United executives, flowed from a federal probe into the airline’s relationship with David Samson, former chairman of the Port Authority of New York and New Jersey, which runs New York’s three main airports.

Airlines routinely negotiate with the entities that operate U.S. airports, seeking lower fees, improved access to terminals, and upgrades to facilities. Lease negotiations with airports can be hard-fought, but airlines often have more leverage in their negotiations with other cities than they do in New York—and aren’t shy about using it, industry experts say.

Delta Air Lines Inc., for example, three years ago approached the Metropolitan Airports Commission, which runs the Minneapolis Airport, pressing it for a share of the revenue the airport gets from gift shops and other concessions, says Jeffrey Hamiel, the commission’s CEO. After two years of negotiations, the parties revamped Delta’s existing lease to give it a share of additional concession revenues if the airline—the airport’s largest tenant—brought in more passengers.

Mr. Hamiel said the parties “at times became frustrated” during the talks. “We don’t have a lot of cash to give away, nor should we,” he said. “But we set priorities and Delta got more input.”

A Delta spokesman declined to comment.

Relations between airlines and airports are especially tough in New York, given the Port Authority’s control of all three main airports: Newark Liberty International, John F. Kennedy International and La Guardia. For United and its big rivals, those airports serve not only as access points to the biggest U.S. market for air travel, but also as gateways for lucrative trans-Atlantic routes.

United, formed by the 2010 merger with Continental Airlines, has been pressing the Port Authority for years for better terms at Newark. The airport handled almost 400,000 flights and 35.6 million passengers last year, and United is by far the largest carrier, controlling nearly two-thirds of the departing seats from Newark this month, according to flight-data company Innovata LLC.

Discussions with the Port Authority intensified during Mr. Samson’s tenure. United’s main complaint was the fees it paid at Newark, though the carrier also has pushed the authority on projects such as an improved rail link from Newark to New York City and better maintenance facilities, according to government officials, people familiar with the airline’s discussions, and filings from United and the authority in a dispute before the Federal Aviation Administration.

United says the Port Authority fees for using Newark are by far the highest in the nation, 59% higher than at Chicago’s O’Hare International Airport and 75% higher than at JFK. United has argued that the fees are inflated because of profligate spending at the Port Authority. It points to a costly labor agreement between the Port Authority and the authority’s police department, and the authority’s use of funding to pay for repairs to the Pulaski Skyway, a New Jersey highway that the authority doesn’t own. That diversion of funds is the subject of a criminal inquiry by Manhattan District Attorney Cy Vance, according to people familiar with the case.

The Port Authority has responded that United’s fees at Newark are set by the same formula used for other airlines, and that they are commensurate with the cost of maintaining and operating the assets of the airport and other needs of the authority that keeps the region’s airports running.

Prosecutors from the office of U.S. Attorney Paul Fishman have been seeking information on United’s negotiations with the Port Authority during Mr. Samson’s tenure, according to people who have seen the subpoenas. Among the prosecutors’ areas of inquiry is whether Mr. Samson, who was appointed in 2011, asked United for a special weekly flight to Columbia, S.C., near his vacation home, during the negotiations.

Tuesday’s executive exits from United were a surprise to federal authorities pursuing the investigation, who weren’t aware of any action on the Samson probe in recent weeks that would have triggered the shake-up, a person familiar with the matter said on Wednesday.

United has said only that the three executives stepped down as the result of an internal company investigation that was prompted by subpoenas in the federal probe. Another person familiar with the situation said on Tuesday that Mr. Smisek’s departure was strictly related to what the company found in its probe, and wasn’t driven by board concerns about Mr. Smisek’s overall management performance.

United started that flight in September 2012, and canceled it March 2014, days after Mr. Samson resigned from his position. The flights to and from Columbia, which offered 350 seats each way per month, were typically 60% full in 2013 and just under 39% full last year, according to figures from Innovata and the Transportation Department. That’s well below the typical load rate on U.S. domestic flights today, which is above 80% nationwide.

Airlines frequently add new flights, and airport authorities often offer financial incentives such as reduced landing fees to encourage them. Carriers normally do economic studies beforehand to handicap whether the flights will make money, but sometimes will start new flights to “be good citizens” and try to please the states where they operate, said aviation consultant Michael Boyd of Boyd Group International. “There’s nothing wrong with that,” he said. However, if the Columbia flight was a quid pro quo involving Mr. Samson personally, “that certainly would be unethical,” Mr. Boyd said.

Mr. Samson hasn’t commented on the Columbia flight. A United spokeswoman declined to comment.

Michael E. Levine, law professor at New York University, said relations between airlines and airports have long been tense in New York because of the Port Authority’s clout. In other big cities, different airports are often controlled by separate entities: San Francisco International, for example, competes with airports in Oakland and San Jose.

“The Port Authority has been shameless over the years about using its monopoly,” said Mr. Levine.

The Port Authority didn’t respond to a request for comment.

With Newark, people familiar with the matter say United’s negotiations with the Port Authority also were caught up in a split within the agency, which is jointly controlled by the New Jersey and New York governors. Mr. Samson, an ally and appointee of New Jersey Gov. Chris Christie, wanted to strike a deal with United, the people said, while New York officials didn’t want to cut the airline a break.

One thing the Port Authority doesn’t control is who gets to fly to and from New York. The FAA controls the number and allocation of takeoff and landing slots at the city’s three main airports. The only other airport where the FAA does that is Reagan National airport near Washington, D.C.

—Rebecca Davis O’Brien and Jack Nicas contributed to this article.

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