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AGENDA REPORT

Ordinance: Approval of Proposed Fiscal Year 2016-17 Airline Landing Fee Rates and Terminal Space Rental Rates (Aviation) MEETING DATE: 6/23/2016 AMOUNT: $74.9 million Estimated Annual Rates & Charges Revenue ($32.3 million from Airfield, $42.6 million from Terminal) PARTIES INVOLVED: Various Passenger and Cargo Airlines, and Other

Commercial Tenants, Using the Airfield Ramps and Runways, and Occupying Space Within the South Airport Terminal Complex at Oakland International Airport

SUBMITTED BY: Bryant L. Francis, C.M. Director of Aviation APPROVED BY: J. Christopher Lytle, Executive Director ACTION TYPE: Ordinance EXECUTIVE SUMMARY This action would give first reading to an ordinance amending Port Ordinance No. 3634, as previously amended, relating to Landing Fee Rates and Terminal Space Rental Rates (“Rates & Charges”) assessed to all scheduled, charter and itinerant passenger and cargo airlines, and charged to many other tenants occupying space within the Terminal Complex at Oakland International Airport (OAK).

BACKGROUND The Port of Oakland (Port) establishes Rates & Charges by ordinance on a fiscal year basis. The Rates & Charges proposed in this Agenda Report will be effective July 1, 2016 for signatory1 airlines and will be effective October 1, 2016 for non-signatory airlines other non-airline tenants. The Landing Fee Rates are calculated based on budgeted operating expense, debt service requirement, capital projects amortization and equipment depreciation in the Airfield Cost

1 “Signatory” airlines are those airlines who have executed the Port’s standard form Airline Operating Agreement

and are members of the Airport Airline Affairs Committee (AAAC). The AAAC member airlines have agreed to accept a July 1st effective date for Rates & Charges even if such date would be retroactive to the effective date of the applicable Board-adopted ordinance. Furthermore, non-signatory airlines pay a 25% premium on Rates & Charges as shown on the Schedule of Landing Fee Rates and Terminal Space Rental Rates.

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Center, a true-up deficit or surplus for prior years, offset by other non-airline revenues earned in the Airfield Cost Center, less an allowance for air service development incentives. The net expense is divided by the forecasted FY2016-17 aircraft landed weight operated by both cargo and passenger airlines. Similarly, the methodology used to determine Terminal Space Rental Rates is based on budgeted FY2016-17 Terminal Cost Center operating expense, debt service requirement, capital projects amortization and equipment depreciation, a true-up surplus or deficit for prior years, offset by budgeted concession revenue earned in the terminals plus other designated revenue, less an allowance for air service development incentives. The resulting net revenue is divided by the number of square feet leased by the domestic passenger airlines to derive the Effective Average Terminal Space Rental Rate. There are eight “Categories” of Terminal Space Rental Rates, listed on Attachment A – Schedule of Landing Fee Rates and Terminal Rental Rates. As mentioned above, budgeted Rates & Charges calculations include true-ups derived from audited results from prior fiscal years. These true-ups are necessary because each year’s Rates & Charges are calculated using budgeted revenues and expenses. These are subsequently adjusted (either up or down) to reflect actual revenues and expenses realized in each budget year. Historically, as agreed with the airlines, these adjustments have been spread across two or more years to minimize annual Rates & Charges variability. Revenues derived from the Landing Fee Rates and Terminal Space Rental Rates cover the net expenses for the Airfield and Terminal Cost Centers. The airlines are not responsible for OAK’s other cost centers: Cargo, Fueling, Ground Access, Leased Areas, Maintenance Hangar, and North Field. Each year, the Port meets with the AAAC member airlines to discuss the proposed Rates & Charges and to answer pertinent questions. This year’s meeting was held on May 10, 2016. Based upon Aviation’s proposed FY2016-17 budget and the AAAC member airlines’ concurrence obtained at that meeting, the recommended Rates & Charges for FY2016-17 are detailed in the Analysis.

ANALYSIS The proposed FY2016-17 Rates & Charges described in this Agenda Report are based on the Port’s FY2016-17 budget for OAK’s Airfield and Terminal Cost Centers and includes reimbursements of Port cash for completed capital improvements. They reflect charges for Capital, Equipment Depreciation, Insurance, Maintenance, and Operating costs in the Airfield and Terminal Cost Centers, including true-up credits or charges for prior fiscal years, that are partially off-set by (i) anticipated non-airline revenues, and (ii) reduced for the amount of air service development incentives attributable to each cost center. The overall results include a net growth in the Airfield costs and corresponding increased Landing Fee Rates, and a net increase in the Terminal costs and higher Terminal Space Rental Rates.

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Total Terminal Cost Center Expenses $69,902,840

Less: Revenue Credits

Rental Car Revenue $14,388,995

Terminal Concessions Revenue 8,774,325

Other Terminal Building Revenue 5,747,623

Utilities Revenues 753,623 (29,664,566)

Add: Revenues Credited to IAB 461,094

Prior Year True-Ups 1,216,287

Cooperative Advertising 700,000

Terminal Net Requirement $42,615,655

Less: Loading Bridge Requirement (1,263,413)

Adjusted Terminal Net Requirement $41,352,242

Domestic Airline Leased Space 161,952 Square Feet

Effective Average Terminal Rental Rate $255.34 Per Square Foot

CALCULATION OF EFFECTIVE AVERAGE TERMINAL RENTAL RATE

Total Airfield Cost Center Expenses $35,423,636

Less: Non-Airline Airf ield Revenues (1,488,488)

Add: Prior Year True-Ups (1,636,056)

Airfield Net Expenses $32,299,092

Landed Weight (in 1,000 pounds) 10,323,800

Signatory Landing Fee Rate $3.13 Per 1,000 Pounds

CALCULATION OF SIGNATORY LANDING FEE RATE

Airfield Cost Center FY2016-17 total Airfield expenses are estimated at $35.4 million. The total true-up credit applied to the FY2016-17 Landing Fee Rates is $1.6 million, which is a combination of FY2013-14 and FY2014-15 surpluses, credited back to the airlines’ rates over two fiscal years. Additionally, the Airfield expenses are offset by estimated FY2016-17 non-airline airfield revenues of $1.5 million. This results in FY2016-17 Airfield Net Requirement of $32.3 million. The Landing Fee Rates are established by dividing the Airfield Net Requirement by the projected FY2016-17 landed weight of 10,323,800,000 pounds (10.3 billion pounds), a 5% increase over FY2015-16 budgeted landed weight. The FY2016-17 Signatory Landing Fee Rate equals $3.13 per thousand pounds of landed weight, a net 7% increase or 19¢, from a budgeted $2.94 per thousand pounds of landed weight in FY2015-16. Terminal Cost Center FY2016-17 total Terminal expenses are estimated at $69.9 million. Additionally, there is a $1.2 million true-up charge, which is half of FY2014-15 Terminal revenue deficit, which will be collected from the airlines over two fiscal years. The Terminal expenses are then offset by estimated FY2016-17 non-airline Terminal revenues of $29.2 million, less $0.7 million of domestic air service development incentives. This results in FY2016-17 Terminal Net Requirement of $42.6 million. To establish the Effective Average Terminal Rental Rate, the Terminal Net Requirement is further adjusted for passenger loading bridge janitorial and maintenance expenses, totaling $1.3 million, which is charged to the airlines for their use of the holdrooms and loading bridges, separate from the charges for terminal rents. The adjusted Terminal Net Requirement is then divided by the total domestic airline leased space of 161,952 square feet, resulting in FY2016-17 Effective Average Terminal Rental Rate of $255.34 per square foot. The $255.34 per square foot Effective Average Terminal Rental Rate is 12%, or $27.59 per square foot, higher than the FY2015-16 rate of $227.75 per square foot.

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South Field Aircraft Parking Fees Pursuant to Port Ordinance No. 3634, all aircraft operators pay aircraft storage fees for the time those aircraft are parked on the airfield or at the Terminal Complex. Fees are established in eight (8) hour intervals, and on a daily or monthly basis, and based on wingspan or nose-to-tail length. Rates for passenger aircraft are significantly less than for cargo aircraft, and the fee is waived for the first three (3) hours for passenger airlines. In addition, rates between North Field and South Field are not consistent. Finally, these rates have not been adjusted since at least April 2001 when Port Ordinance No. 3634 was adopted by the Board. The below table illustrates South Field rates for some of OAK’s most common aircraft types operated by passenger and cargo airlines:

Aircraft Type Operation Monthly 1st 8 Hours 2nd & 3rd 8 Hours

Daily

B737 or A320 Passenger $ 293.00 $ 21.00 $ 10.00 $ 31.00

B757 Passenger 566.00 38.00 20.00 57.00

B767 or A330 Passenger 698.00 47.00 24.00 70.00

B757-200 Cargo 3,456.00 232.00 114.00 460.00

A300-600 Cargo 5,508.00 369.00 182.00 733.00

B777-200 Cargo 9,072.00 608.00 299.00 1,206.00

For Fiscal Year 2015-16, anticipated revenue for aircraft parking is $145,000, which is 100% passed on to the airlines as a credit toward the Landing Fee Rates, and equates to approximately 1¢ (0.3%) out of the FY2015-16 Landing Fee of $2.94. A similar impact to the Landing Fee Rates is forecasted for FY2016-17. Keeping track of when aircraft are parked on the airfield, what type of aircraft, and for what duration, and then billing each airline, is administratively burdensome for Port staff. Similarly, the airlines face an equal burden in confirming the Port’s observations and billing, and then paying invoices. In consultation with the AAAC member airlines, Port staff recommends holding in abeyance the provisions of Port Ordinance No. 3634 as it relates to passenger and cargo aircraft parking fees at the South Field for signatory airlines, at least FY2016-17. Parking Rates for itinerant airline aircraft on the South Field, and all North Field parking rates, remain applicable. During this one-year abeyance, Port staff will research the viability of charging the commercial airlines for aircraft parking, and evaluate and rationalize the aircraft parking rate structure. It is anticipated that any modifications to the aircraft parking fees will be recommended in the FY2017-18 Rates & Charges analysis and agenda report.

Impact of Proposed Rates & Charges. Cost Per Enplaned Passenger (CPE)2 is a commonly used metric for comparing airport terminal and airfield expenses paid by passenger airlines.

2 As described above, airlines operating at OAK reimburse the Port for expenses associated with providing and

maintaining the airfield and terminal facilities, less any non-airline revenues. The cost to the passenger airlines

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With the Rates & Charges proposed in this Agenda Report, budgeted FY2016-17 CPE for airlines serving OAK, and CPE for the prior three years at OAK, San Francisco International Airport (SFO) and Mineta San Jose International Airport (SJC) are summarized below:

Cost Per Enplaned Passenger

Fiscal Year OAK SFO SJC

2016-17 $10.70 $17.26 $10.90

2015-16 9.77 17.26 10.90 2014-15 10.52 16.79 10.50 2013-14 10.44 15.91 11.95

Detailed Rates & Charges. The proposed Schedule of Landing Fee Rates and Terminal Space Rental Rates (including eight Categories of Terminal Space Rental Rates that make up the Effective Average Rental Rate) are shown on Attachment A. BUDGET & STAFFING Approval of the proposed FY2016-17 Rates & Charges will generate sufficient revenues for the Port to recover net budgeted operating expenses, debt service payments and costs of completed capital improvements, funded with Port cash, in the Airfield ($32.3 million) and Terminal ($42.6 million) Cost Centers for FY2016-17. These revenues will be trued up against actual net expenses, based on audited FY2016-17 financials. The proposed action does not have any staffing impact. MARITIME AVIATION PROJECT LABOR AGREEMENT (MAPLA) The matters contained in this Agenda Report do not fall within the scope of the Port of Oakland Maritime and Aviation Project Labor Agreement (MAPLA) and the provisions of the MAPLA do not apply. STRATEGIC PLAN The action described herein would help the Port achieve the following goals and objectives in the Port’s Strategic Plan

(http://www.portofoakland.com/pdf/about/strategicPlan2011-2015.pdf)

Goal A: Create Sustainable Economic Growth for the Port and Beyond

Goal A: Objective 1: Maximize the use of existing assets.

Goal A: Objective 3: Increase revenue, job creation and small business growth.

for operating at OAK can be divided by the number of enplaned passengers to compute the average airline CPE. The CPE can be compared to industry averages, other airports and other airline costs, and can be used by the Port to evaluate the financial impact on OAK’s airlines of increasing or decreasing airport operating expenses.

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2013-14 2014-15 2015-16 2016-17

OAK

SFO

SJC

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Goal D: Improve the Port’s Financial Position

Goal D: Objective 1: Improve cash position and debt service coverage ratio (DSCR). LIVING WAGE Living wage requirements, in accordance with the Port’s Rules and Regulations for the Implementation and Enforcement of the Port of Oakland Living Wage Requirements (the “Living Wage Regulations”), do not apply because the requested action is not an agreement, contract, lease, or request to provide financial assistance within the meaning of the Living Wage Regulations. ENVIRONMENTAL This ordinance is exempt pursuant to the California Environmental Quality Act (CEQA) Guidelines Section 15273 (a). CEQA does not apply to the establishment, modification, structuring, restructuring, or approval rates, tolls, fares, and other charges by public agencies which the public agency finds are the purpose of: (1) Meeting operating expenses, including employee wage rates and fringe benefits; (2) Purchasing or leasing supplies, equipment, or materials; (3) Meeting financial reserve needs and requirements; (4) Obtaining funds for capital projects necessary to maintain service within existing service areas; or (5) Obtaining funds necessary to maintain such intra-city transfers as are authorized by the city charter. GENERAL PLAN This action does not change the use of any existing facility, make alterations to an existing facility, or create a new facility; therefore, a General Plan conformity determination pursuant to Section 727 of the City of Oakland Charter is not required.

OWNER-CONTROLLED INSURANCE PROGRAM (OCIP)/ PROFESSIONAL LIABILITY INSURANCE PROGRAM (PLIP) The Owner Controlled Insurance Program (“OCIP”) and Professional Liability Insurance Program (PLIP) do not apply to the matter addressed by this Agenda Report as it is not a capital improvement construction or design project. OPTIONS

1. Approve (i) the proposed Rates & Charges for Landing Fee Rates and Terminal

Space Rental Rates for FY2016-17 to recover Airfield Cost Center and Terminal Cost Center expenses budgeted in FY2016-17; and, (ii) for FY2016-17, hold in abeyance aircraft storage fees for signatory passenger and cargo airlines parking on the South Field. This is the recommended action. Or,

2. Do not approve (i) the proposed Rates & Charges for Landing Fee Rates and

Terminal Space Rental Rates for FY2016-17 and maintain current rates, thereby

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undercharging Landing Fee Rates and undercharging the airlines and other tenants for Terminal Space Rental Rates, which will generate a revenue shortfall in the Airfield and Terminal Cost Centers; and, (ii) do not hold in abeyance any aircraft storage fees, which would result in a slight decrease in the Landing Fee Rates.

RECOMMENDATION It is recommended that the Board adopt an ordinance amending Port Ordinance No. 3634, as previously amended, to (i) establish the FY2016-17 Rates & Charges for Landing Fee Rates and Terminal Space Rental Rates as detailed on the attached schedule, and (ii) for FY2016-17, hold in abeyance – for signatory passenger and cargo airlines – the aircraft storage fees specified in Sections 9.a.(1). 9.a.(3), 9.b.(1) and 9.b.(2), both subject to the Port Attorney’s review and approval as to form and legality. \\portoakland.internal\users\JLS\bmark\Documents\Rates & Charges\FY16-17\FY2016-17 Rates & Charges-Agenda Report.F1 (2016-06-23).docx

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ATTACHMENT A

SCHEDULE OF LANDING FEE RATES AND TERMINAL SPACE RENTAL RATES Landing Fees Current Charges Proposed – FY2016-17 Signatory, Based Airlines

Landing Fee $ 2.94 $ 3.13 Training Landing Fee 1.47 1.56 Minimum Charge Per Landing 36.70 39.11 Non-Signatory, Based Airlines

Landing Fee 3.67 3.91

Training Landing Fee 1.83 1.96 Minimum Charge Per Landing 45.87 48.88 Non-Based Airlines

Landing Fee 3.67 3.91 Training Landing Fee 1.83 1.96 Minimum Charge Per Landing 45.87 48.88 Terminal Space Rental Rates Per Sq. Ft. Per Month Per Sq. Ft. Per Month

Category I: Ticketing Counter 22.333 24.992 Category II: Office Space 20.100 22.493 Category III: Baggage Claim 17.867 19.993 Category IV: Baggage Make-Up 15.633 17.494 Category V: Ticket Counter (Common Use) 11.167 12.496 Category VI: Office Space (Common Use) 10.050 11.247 Category VII: Baggage Make-Up (Common Use) 7.817 8.748 Category VIII: Concession Office/Storage Space 3.908 4.374 Other Charges

Holdroom, Loading Bridge 54,479.00 per month 56,491.00 per month

Secondary Use, Signatory, Based Airline 278.20 297.70 with Holdroom per enplaning operation per enplaning operation

Secondary Use, Non-Signatory, 347.75 372.13 Based Airline with Holdroom per enplaning operation per enplaning operation

Secondary Use, Signatory, Based Airline 2.14 2.29 without Holdroom per enplaning passenger per enplaning passenger

Secondary Use, Non-Signatory, 2.68 2.86 Based Airline without Holdroom per enplaning passenger per enplaning passenger

Secondary Use,

2.68 2.86 Holdroom & Loading Bridge per enplaning passenger per enplaning passenger Non-Based Airline

Secondary Use, Signatory, 2.14 2.29 Affiliated Airline per enplaning passenger per enplaning passenger

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Other Charges (Continued) Current Charges Proposed – FY2016-17

Secondary Use, Non-Signatory, 2.68 2.86 Affiliated Airline per enplaning passenger per enplaning passenger

Secondary Use, Signatory, Affiliated Airline 1.79 2.08 Using Small Aircraft per enplaning passenger per enplaning passenger

Secondary Use, Non-Signatory, 2.24 2.60 Affiliated Airline Using Small Aircraft per enplaning passenger per enplaning passenger

Baggage Claim Area, 1.78 1.83 Non-Based Airline per deplaning passenger per deplaning passenger

Terminal Use Fee 3.89 4.10 Non-Based Airline per enplaning passenger per enplaning passenger Ticket Counter Use 550.00 550.00 Scheduled/Non-Scheduled-Int’l/Domestic Per Aircraft turn Per Aircraft turn International Passenger Handling Facilities 10.00 10.00 Use Fee Per Arriving Passenger Per Arriving Passenger Baggage Conveyor Facility Fee Terminal 1 366,017.00 409,586.00

(Shared by all Terminal 1 Airlines, allocated by

%deplaning passengers in Terminal 1)

(Shared by all Terminal 1 Airlines, allocated by

%deplaning passengers in Terminal 1)

Baggage Conveyor Facility Fee Terminal 2 278,041.00 311,138.00

(Shared by all Terminal 2 Airlines, allocated by

%deplaning passengers in Terminal 2)

(Shared by all Terminal 2 Airlines, allocated by

%deplaning passengers in Terminal 2)

Self-Service Check-In Unit (SSUs) 50.00 50.00 Per Unit Per Month Per Unit Per Month Airline Services Providers

All Airline Services Providers (except construction contractors) pay a Concession Fee of Ten Percent (10%) of Gross Revenue Subject to a Minimum Monthly Fee: Monthly Minimum Fee Monthly Minimum Fee Operating at the South Field 250.00 250.00 In-Flight Catering Services Providers 500.00 500.00 Operating at the North Field 500.00 500.00

Fixed Annual Fee Fixed Annual Fee Construction Contractors 500.00 500.00