Empty Airport Hurts Operators Getting the Rent The New York (NY) Times When the soaring new Terminal 4 opened last spring at Kennedy International Airport, the mantra of its operators was ''passenger service'' -- a nod to the wide array of shops, restaurants and other services that would cater to a growing surge of air travelers. They were so confident of that surge that rather than setting fixed rents in their leases with tenants, they took the unusual step of letting the rents float, based solely on the number of passengers passing through the terminal. But what happens when the passengers don't show up? That is the question now facing the operators -- a consortium of the Dutch firm Schiphol, the Wall Street financial company Lehman Brothers and the real estate company LCOR Inc. In the last year, the number of passengers going through Terminal 4 has plummeted 22 percent, largely because of the economic downturn and jitters among the nation's air travelers after the Sept. 11 terror attacks. Suddenly the consortium is suffering from falling revenue from leases for the airlines, shops and other tenants in Terminal 4, which was one of the first in the nation to be managed by a private concern other than an airline. Last week, Fitch Ratings downgraded the consortium's bonds to speculative levels. As if that were not enough, the consortium continues to be besieged by the effects of bitter political disputes between New York City, which owns Kennedy, and the Port Authority of New York and New Jersey, which operates it under a lease. (The consortium, in turn, leases the terminal from the Port Authority.) Because these disputes have made the fate of the airport's operations uncertain after the Port Authority lease with the city expires in 2015, the consortium has had to make provisions to repay its debt earlier and take on financing costs 40 percent higher than it originally envisioned. The bond issue in 1997 that financed Terminal 4, which replaced the International Arrivals Building, totaled $1 billion. In downgrading the bonds, Fitch analysts stressed that they thought the consortium could probably rebound, given its combination of an experienced airport operator, Schiphol, and the financial acumen of LCOR and Lehman Brothers. But they were concerned, they said, about the passenger-based leases. ''This is not your normal arrangement,'' said Jessica L. Soltz, an analyst with Fitch, noting that most other airport leases set a minimum rent that allows terminal operators to recoup basic costs. ''It is an arrangement that is good when things are good, but the real problem is on the downside.'' Back in the late 1990's, when the consortium took on operation of Terminal 4, trends in the airline industry were pointing to larger numbers of foreign travelers using Kennedy. With the airways crowded and the resulting delays, the consortium predicted that people would spend more time in the airport, and spend more money. Of course, Terminal 4 is not the only airport business feeling the pinch. David Z. Plavin, president of the Airport Council International of North America, said that bond rating and financial companies have put nearly all of the nation's airport operators on watch lists in the wake of the economic downturn and the Sept. 11 attacks. ''But mostly what this is,'' Mr. Plavin said of the plight of the Terminal 4 consortium, ''is a blow to all of the people going around trying to sell privatization of airport operations of the kind you have at Kennedy.'' Terminal 4 was intended to be the Port Authority's showpiece of privatization's promise of efficient and profitable airport management. But it suffered from Rudolph W. Giuliani's criticism of the Port Authority's stewardship of the airport from early on in his mayoralty. He said the agency lavished capital improvement and marketing resources on Newark International Airport at the expense of Kennedy and the city's other major airport, La Guardia, stunting city revenues under the lease. In his second term, Mr. Giuliani set out to hire a company to monitor Port Authority airport operations -- a move the agency greeted with defiance. According to one of Mr. Giuliani's economic advisers at the time, John Dyson, and to officials of the consortium, the Port Authority would not let the consortium disclose to the city the terms of its lease for Terminal 4 as it was being developed. Authority officials say it is standard operating procedure to keep terms of leases secret while they are being negotiated. But Mr. Dyson and others pointed out that the authority had provided such details for at least two other airport tenants that led to the city's granting them extensions beyond the 2015 expiration of the Port Authority's lease. Because it could not see the terms, Mr. Dyson said, the Giuliani administration refused to extend the consortium lease into the time when the city would regain control over the airports. As a result, said David A. Sigman, development general manager for the Terminal 4 operators, the consortium had to structure bonds based on a repayment schedule of 15 years rather than 30. This meant a ''dramatic increase'' in debt payments between 2000 and 2009 -- $11 million to $32 million more a year, he said. ''It was something we put in place to get the deal started,'' Mr. Sigman said. ''No one expected that we would live with this arrangement for the whole time.'' Back when projections for passenger traffic were optimistic, the consortium saw itself meeting even these onerous debt burdens in the short term, as well as making a profit. So, too, did analysts. But with the decline in passengers, the consortium was unable to pay the additional debt for 2001 and will not be able to cover it this year, Mr. Sigman said. Instead, that debt will accrue to a large balloon payment by 2015. Victor Van Der Chijs, president and chief executive of Schiphol USA, concedes that the passenger-based leases are ''very sensitive to downturns,'' but he and others insist that long-term trends will smooth out what seems like a roller coaster ride now. One hopeful sign, he said, is that the Port Authority and the new administration of Mayor Michael R. Bloomberg are getting along. The consortium has entered into serious negotiations with the city to extend its lease on Terminal 4 beyond 2015, enabling it to spread out its debt payments. But city officials caution that those negotiations depend on resolving broader issues with the Port Authority. For its part, the port agency has allowed the consortium to share lease and other financial information with City Hall. Still, the recent drop in passengers, and revenue, comes as a bit of a shock to Schiphol, which has been known for efficient and profitable operation of airports in Amsterdam and elsewhere. ''We at Schiphol have not experienced any decline in passengers in 80 years until now,'' Mr. Van Der Chijs said. ''The hiccup in the economy is just a little deeper and a little longer than most forecasted. But we still believe in the New York market as one of the most important in the world.'' Attend the Newark Airport Airline Collectible Show & Sale: http://www.freeyellow.com/members/psa188/page1.html