LAX dispute could increase airfares

An acrimonious dispute between the city’s airport agency and low-cost carriers over terminal rents at Los Angeles International Airport could lead to increased fares and force officials to delay long-awaited plans to modernize the aging facility.

The disagreement became public recently when airlines took the unusual step of airing concerns about what they consider to be a major rate increase.

“This would catapult LAX to the most expensive airport in Southwest’s system,” Bob Montgomery, the airline’s vice president of properties, told airport commissioners Monday. “This will damage our ability to offer low fares.”

The city’s airport agency does not rely on tax dollars but has a separate budget funded primarily by landing and terminal fees from airlines and revenue from airport shops, restaurants and parking.

The feud between the airlines and the agency mirrors a nationwide tug of war between airport operators seeking to raise money to improve their facilities and cash-strapped carriers coping with high fuel prices.

In Los Angeles, the disagreement threatens to return the city to the testy relationship it had with airlines in the early 1990s, when officials raised landing fees at LAX, saying they needed the money to keep pace with growth.

That battle led to years of court challenges, threatened to close the airport and challenged then-Mayor Richard Riordan’s business-friendly reputation. The dispute also led officials to temporarily halt construction on improvements to terminals operated by American and United airlines.

Today, officials with Los Angeles World Airports, the city agency that operates LAX, say it has been subsidizing the airlines for years and must start charging fair market rent -- as well as higher fees to clean and maintain terminals -- to fund increased security costs and airport improvements. Those fees would not be enough, however, to pay for major projects -- requiring officials to go to the carriers for more money later.

“The costs associated with security at LAX terminals are absorbed by LAWA,” wrote Patricia V. Tubert, a deputy executive director for the agency, in answer to questions posed by The Times. “This subsidization of this cost on behalf of the air carriers has become onerous and unfair.”

In the 2004 fiscal year, for example, security costs at LAX reached $93.1 million. Only about 45% -- or $42 million -- of those charges were recovered from landing fees paid by airlines, officials said.

Airlines in Terminals 1 and 3 say the agency’s proposal would put them at a competitive disadvantage because airlines with long-term leases would not be subject to the higher rents.

“LAWA’s proposal seems designed to create an acrimonious business climate,” executives from Southwest, U.S. Airways and Alaska Air Group wrote to Lydia Kennard, the agency’s executive director. “We intend to oppose the discriminatory and unlawful rent formula by all legal and regulatory means.”

Carriers with long-term leases may be required to pay more for maintaining and operating their terminals under new rates proposed by the airport. An attorney representing these airlines -- including United, American, Delta and Continental -- told commissioners they opposed the higher fees and would sue if they’re enacted.

Low-cost carriers in Terminals 1 and 3 contend that they already pay more in rent than carriers with long-term leases. Airlines with these agreements paid millions to improve their terminals, but it is unclear what the debt on those improvements is today and whether it should entitle them to pay less rent, their competitors say.

The proposed leases would raise the current average base rental rate in Terminal 1 from $6.67 per rentable square foot per year to $21.67. In Terminal 3, the rate would go from $5.06 to $17.50.

Airlines say the higher rents and other fees amount to “an astonishing 277% increase overnight.” The change would force them, they say, to raise ticket prices and reduce flights -- actions that would have a ripple effect across the airport.

“As soon as their fares increase, the other carriers will follow suit,” said Roy Goldberg, a partner at Sheppard Mullin in Washington, D.C., who represents Southwest, Alaska, U.S. Airways Group, Frontier and AirTran.

“Los Angeles citizens have it good now,” Goldberg added. “Average transcontinental fares are in the $400 range rather than the $1,700 range. If this increase goes through, you can expect the $1,700 fares.”

The city’s airport agency officials counter that the rate increases would raise airlines’ costs only slightly -- by up to $2.85 per boarding passenger at the end of the five-year lease -- and still would leave LAX less expensive than other major airports. They say they are willing to phase in the increases.

“LAWA is hopeful that the minor increase in fares ... will not result in the loss of any passengers,” Tubert wrote. “However, we are mindful of the need for regionalization and, to the extent that airlines choose to fly out of [Ontario] or [Palmdale], our regionalization goals will be advanced.”

Airlines paid about $6 per boarding passenger to operate at LAX in 2005, compared with $9 at Chicago’s O’Hare International Airport, $12.90 at Denver International Airport and $15 at Miami International Airport.

“Six dollars is very competitive,” said Douglas J. Kilcommons, a director at Fitch Ratings who follows LAX. “There is flexibility to increase rates. If LAWA is going to move forward with capital improvements, they’re going to need to develop these revenue streams.”

The city’s airport commissioners urged the airlines and airport officials to reach a deal before the Dec. 4 commission meeting, saying they plan to make a decision at that time.

Carriers and airport officials plan to meet this week, with both sides saying they hope they can find common ground.

But even if the low-cost carriers and airport agency get a deal, airport officials are set to begin negotiating new leases with international carriers in the Tom Bradley International Terminal early next year.

The airport has offered these carriers terms similar to those presented to the low-cost airlines.

The international carriers already are signaling their displeasure at the city’s proposal to increase their rates, saying higher costs would put them at a competitive disadvantage against carriers with long-term leases that also fly international routes.

jennifer.oldham@latimes.com