Many view securitization as the culprit behind our subprime woes. However, the basic tenet of securitization remains a valuable financing tool whose benefits have yet to be fully realized. Though commonplace in the private sector, securitization is largely foreign to public finance, particularly in the troubled transportation sector. This article addresses the compelling case for applying securitization techniques to reduce airport financing costs for beleaguered airlines and helping address capacity constraints at high "origin and destination" airports such as JFK, LaGuardia, Newark and LAX.
Historically, airports have allocated valuable terminal space by entering into leases with select airline carriers. These leases confer rights to use the slots and gates and permit the airline to sublease unused gates to other carriers. This has resulted in giving a preference to those airlines able to enter into long-term leases to finance the construction of new terminals through the issuance of tax exempt special facility revenue bonds ("SFRBs"). The resulting hoarding of gates has led to inefficiencies in the scheduling of flights and pricing of tickets. Most importantly, such SFRBs have been structured, and thus priced, by airline financial advisors and municipal bond underwriters based upon the volatile credit of the airlines, making these bonds the darlings of high-yield investors, by delivering compelling revenues year after year.
Today, with the proliferation of low-cost carriers and record passenger demand, the jostling for rights to gates and slots at optimum times at the nation's busiest airports has escalated. The Department of Transportation ("DOT") has recognized that more than three quarters of nationwide departure delays may be traced back to congestion at New York area airports. In grappling with possible solutions to the crisis, a DOT committee has acknowledged that gate allocation methodology pursuant to monopolistic long-term leases fails to optimally benefit the public. Industry experts agree that a new paradigm is needed.
That new paradigm could be based upon a securitization model. Rather than entering into leases with airlines with low credit ratings, airports could enter into terminal leases with bankruptcy-remote special purpose entities ("SPEs") which, in turn, could sublease the coveted gates and slots a diverse array of airlines. The investment grade ratings given to such demand-based financings at high origin and destination airports would result in the lowest possible financing costs for cash-strapped airlines.
Such a change would enable airports to substantially improve congestion because the goal of such SPEs, as set forth in their charter documents, would be to maximize utilization of valued assets - gates and runways - without regard to any individual airline's credit rating, business plan or political clout. The "gate subleasing SPE" could monitor the usage of gates, maximizing passenger use and minimizing congestion by using price incentives and other mechanisms to smooth the flow of traffic and reduce departure delays.
The legal and financial impact would be dramatic. By financing terminals based on intense competition for gates, interest rates would be drastically lower. Typically, airports either use their own credit by issuing general airport revenue bonds or rely on the "junk" credit of US airlines by issuing SFRBs. By substituting SPEs as obligors of the SFRBs, insuring that the SPEs meet rating agency criteria, investors could be largely insulated from the risk of airline bankruptcies, resulting in otherwise unattainable investment grade ratings. The 200 to 400 basis point difference in interest rates would be directly passed on to the airlines. This use of SPEs to coordinate the allocation of gates not only would enable airports to avoid costly entanglements in airline bankruptcies but would also protect bondholders from interruptions in the payment of principal and interest because the SPEs could utilize reserve funds to pay bondholders pending the eviction of defaulting airlines.
In summary, by interposing standard bankruptcy-remote SPEs between municipal airports and the airlines using the gates, airlines could save serious cash and the risks of nonpayment could be substantially reduced. Securitization may well redeem itself by offering a practical solution to the dysfunctional runway allocation arrangements currently causing irksome delays for the traveling public.
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