In Ontario’s legal battle to gain control over LA/Ontario International Airport, a new audit contends that the sale price offered by Los Angeles is inflated by at least $181 million.
If Ontario wants the airport back, Los Angeles officials have said, the Inland Empire city can buy it for about $400 million.
LA/Ontario is a valuable asset, they say, and Los Angeles World Airports, which has operated the airport since 1967 along with Los Angeles International and Van Nuys, must “be made whole” and recover its investments.
But an audit of airport financial records suggests that LAWA has invested dramatically less than what it has claimed.
The accounting firm Ernst & Young conducted the review for Ontario, which has sued Los Angeles to regain control of the struggling airport, where passenger volumes have plunged about 40% since 2007.
Talks about a possible sale broke off in mid-2014, setting the stage for further proceedings in Riverside County Superior Court. Decisions on several key motions are pending.
The audit contends that Los Angeles airport officials double-counted about $4 million in debt and failed to subtract investments that were repaid. It also claims Ontario is not obligated to pay back $128 million raised from airline passengers to build new terminals and other facilities.
“The analysis greatly undermines L.A.'s claims that it is somehow entitled to hundreds of millions of dollars,” said Andre Cronthall, an attorney representing Ontario. “In fact, the net outlay of funds by Los Angeles World Airports is a small fraction of that amount.”
Cronthall said the audit was prepared in case sales talks resume or Superior Court Judge Gloria Connor Trask rules in Ontario’s favor and clears the way for the city to regain control of the airport.
Los Angeles airport officials declined to comment on the audit. But Maria Tesoro, a spokeswoman for LA/Ontario, said, “We look forward to all the facts being presented in an appropriate context and as part of the current adjudication process.”
Los Angeles airport officials have insisted for several years that LA/Ontario is worth hundreds of millions of dollars. In 2013, the consulting firm LeighFisher said the fair market value of LA/Ontario was between $243 million and $605 million.
Ontario, in turn, hired the Oliver Wyman consulting firm, which countered that the airport was worth a negative $78 million to $104 million due to its severe passenger decline in recent years and forecasts for a slow recovery. From 2007 to 2013, passengers dropped from 7.2 million to fewer than 4 million. Last year, the number of travelers increased about 4%.
Ontario officials point to another valuation done for Los Angeles in 2013 by Frasca & Associates that put the value as low as $140 million if the transaction involved a government entity.
The Ernst & Young audit, by Bjorn L. Malmlund, a forensic accountant, addressed about $196 million in payments, loans and investments that Los Angeles officials have said the city of Ontario must pay back to reacquire the airport.
Malmlund concluded that Los Angeles World Airports double-counted about $4 million in debt and overlooked $49 million in LA/Ontario loans and investments that were paid back using revenue and fees charged to its airline passengers.
According to the audit, the largest block of money, about $128 million that Los Angeles used for construction at LA/Ontario, does not need to be repaid. LAWA has claimed it should be compensated because the money came from fees charged to passengers at LAX.
But audit details state that the Federal Aviation Administration approved the fees for use only at LA/Ontario. Malmlund noted that LAX did not have any projects eligible to use the fees at the time, and airlines and Los Angeles airport officials wanted the money spent at LA/Ontario.
What happened to another $15-million investment by Los Angeles World Airports is unclear. The money appears to have been budgeted for projects at LA/Ontario, but Malmlund stated in a sworn deposition in December that he could not tell whether it was actually spent at the airport and that he needed more research.
Malmlund’s audit suggests that LA/Ontario has been the source of substantial revenue for LAWA.
He concluded that between 2001 and 2013, LA/Ontario, using revenue from its airlines, paid about $86 million in administrative fees to the Los Angeles agency. From 1994 to 2013, LA/Ontario collected about $165.3 million in fees from passengers, which earned about $44 million in interest, he said.
When Malmlund was questioned in a deposition, Los Angeles attorneys challenged his accounting experience. They contended he had never analyzed airport finances before and was unfamiliar with government accounting practices and facilities fees charged to passengers. He countered that airport financial records are similar to those of private businesses and institutions.
The attorneys further questioned an important assumption Malmlund used for the audit. He said he was advised by Ontario officials that facilities fees charged to LAX passengers and used for LA/Ontario projects did not have to be repaid because the revenue did not belong to Los Angeles.