September 30, 2008

City Receives $2.521 Billion Winning Bid For Chicago Midway Airport

Mayor's Press Office    312.744.3334

Mayor Richard M. Daley announced today that the City of Chicago has received a winning bid of $2.521 billion from Midway Investment and Development Company, LLC for a long-term lease of Midway Airport.

"As the first privatization of a major American airport, this transaction will provide unprecedented benefits for the traveling public, the airlines and the taxpayers of Chicago," said Mayor Daley.

"For the traveling public, the lease will mean the benefits of a world-class airport operator whose airports have been acclaimed for the range and quality of their amenities and service.

"For the airlines, the lease will mean lower and more predictable airport rates and charges which will improve their financial situation.

"And for the taxpayers of Chicago this transaction will provide more than $1 billion in net proceeds that can be used during this difficult economy to make the infrastructure investments needed to move Chicago forward, as well as protect our Chicago taxpayers. During this very tough economy, this is very good news for our city," the Mayor said.

State law requires that 90% of the net proceeds - in this case, more than $1 billion, are used for infrastructure improvements, and up to half of the net can be used for the pension funds. The use of the remaining 10% of net proceeds is unrestricted.

Daley said it is too early to speculate on what projects the fund will support, but the potential is substantial.

"With this agreement in place, the question next becomes how we will use the discretionary portion that is available to us once Midway debt has been paid. We are assessing that now and I will address it more directly in my budget speech in two weeks," he said.

"But, I think it's important to also make clear today that the nation's economy has grown worse in the last several months and so has Chicago's," he said.

But, he said, it wouldn't be responsible to use all of the balance of the proceeds from the Midway agreement as a one time payment to help balance next year's budget.

"That would only put off until next year the difficult decisions that must be made now. It would only make our financial problems worse and I won't do that. So, because we expect the economy to get even worse, we would be forced to make further spending cuts. It's too early to speculate on the final plan, which we're still developing," the Mayor said.

Midway Investment and Development Company, LLC (MIDCo) is a consortium consisting of Citi Infrastructure Investors (New York, USA), YVR Airport Services Ltd. (YVRAS) (Vancouver, Canada), and John Hancock Life Insurance Co. (Boston, USA).

YVR Airport Services owns and operates 18 airports on three continents. 50% of YVR Airport Services is owned by Vancouver Airport Authority - operator of Vancouver International Airport (YVR), which is consistently rated as one of the top-five airports in the world, and is one of only four AA rated airports worldwide. Together YVR and YVRAS' airports welcomed more than 45 million passengers in 2007. Citi Infrastructure Investors owns the remaining 50% of YVR Airport Services.

In a statement, MidCo said: "The long-term concession and lease of Chicago Midway International Airport represents a landmark, long-term airport privatization opportunity in the United States. MIDCo was attracted to this opportunity given the existing world-class airport facilities and the ability to work with the airlines serving the airport, the City of Chicago, and the employees at Midway Airport. We believe together, in this partnership, we can build on the success and reputation of the airport."

Paul A. Volpe, the city's Chief Financial Officer, said the successful conclusion of this transaction would be the city's third infrastructure privatization.

"Thanks to the leadership of Mayor Daley, the City of Chicago has once again proven that it can conclude innovative transactions even in the most difficult of economic times.

This transaction will allow us to make much-needed capital investments while other cities and states have suspended infrastructure improvements," said Volpe.

"This is a unique opportunity for Chicago," he added.

The Midway transaction is enabled by the Federal Aviation Administration's (FAA) Airport Privatization Pilot Program, adopted by statute in 1996. The statute allows up to 5 U.S. airports to be privatized, only one of which can be a "hub" airport the size of Midway.

The federal program requires approval of 65% of Midway's airlines -- both in terms of number of airlines operating and landed weight.

Four of the five airlines now operating at the airport - including Southwest Airlines, AirTran Airways, Delta Air Lines, Northwest Airlines, - have executed a new airport use agreement, as well as the airport concession and lease agreement, and are formally committed to support the transaction. They represent 80% of the airlines and over 95% of the traffic at Midway.

The fifth airline at the airport - Frontier Airlines, which is now in bankruptcy - has expressed support and indicated their intent to be party to the new use agreement, subject to obtaining necessary approvals.

"We are extremely grateful to our airline partners for working with the city in a truly collaborative manner throughout every step of this groundbreaking transaction," said Volpe.

"We are particularly grateful to Southwest - which has by far the greatest stake in the operations of Midway - for their approach, which recognized the great value the financial structure would provide for their customers, as well as the enhanced services that could be provided by a world-class airport operator," he added.

The bid is the culmination of a process that began in 2006. The city filed a preliminary application with the FAA to participate in the pilot privatization program in late 2006; announced a preliminary understanding of agreement terms with Southwest Airlines in November of 2007; and in February 2008 announced a preliminary understanding with 65% of the airlines and issued a request for qualifications from airport operators.

In April, the city received qualification statements from six potential bidders. After making qualification determinations, the city began an extensive due diligence process with the bidders and the federal government, as well as use agreement negotiations with the airlines.

The consummation of the transaction will require the approval of the FAA and the Transportation Security Administration, which must approve a revised Airport Security Plan for the airport.

The City itself will continue to provide all police and fire services at the airport, and the TSA will continue to perform all of its current function in passenger screening and other areas.

Volpe said that the city has worked closely with the FAA and the TSA in developing the agreements for the transactions and does not anticipate difficulty in obtaining final approval. Under the statute, FAA approval will require a minimum of 60 days following submission of a final application

The transaction is subject to the approval of the Chicago City Council and Daley said he anticipates submitting it for approval at the Council meeting on October 8. If the Council approves, the City will then submit the final FAA application and hopes to obtain approval before the year-end. The actual closing of the transaction will take place following that approval

Under the terms of the 99-year lease, MIDCo will pay the entire $2.521 billion in upfront rent to the city at the closing and will have the right to operate the airport subject to all of the terms of the lease, which include detailed operating standards governing all aspects of airport operations, from safety and security aspects of runway maintenance to cleanliness and other qualities of terminal facilities. Both the city and the airlines will have the right to take action for any failure of the operator to meet the standards.

The lease requires MIDCo to assume a new 25-year use agreement with the airlines. As part of the agreement, airline rates and charges are capped at the outset at a level below total 2008 charges and then remain frozen at that level for 6 years.

Thereafter, the total fees can be raised by no more than "core CPI" (CPI excluding food and energy costs) for the remainder of the 25-year term. The airlines generally retain their existing gate rights at the airport. Rates can be raised to reflect capital improvements only with the approval of the airlines, unless the improvements are government-mandated.

Midway International Airport is located approximately 10 miles southwest of Chicago's downtown and occupies nearly one square mile of land. Six airlines provide nearly 300 daily flights to approximately 55 destinations. In 2007, Midway's five runways handled nearly 304,000 flights and more than 19 million passengers. The airport creates 90,000 jobs for the region and contributes an estimated $7 billion a year in economic activity.