LAX Row Spurs Departure Fee - 2007-04-23

American, Delta, Northwest and US Airways this month followed United Airlines in adding $10 surcharges on all flights departing from Los Angeles International Airport. United began imposing the surcharge on April 11, citing a rent increase that Los Angeles' aviation authority last year applied to all carriers at LAX.

Other carriers operating out of the airport, including Continental, have not levied a surcharge but have joined the fight against the rent increase they claim is unfair and designated for unspecified projects.

Buyers and consultants suggested there is little recourse in mitigating the surcharge, which some characterized as a de facto fare increase. "Everything's negotiable," said Management Alternatives vice president John Heilner, "but if I were an airline I'd be very reluctant to do that because it sets a terrible precedent for my other customers." Yet, buyers contend that if the surcharges stick, it could add thousands to travel expenditures from what is the fifth-largest airport in the country by departures, according to the U.S. Bureau of Transportation Statistics.

Sparking the surcharge, United said the LAX aviation authority enacted a "unilateral rent increase" retroactive to 2006 that amounts to a $10 million hike in annual expenses for the carrier. United, with the largest LAX carrier operations, holds more than 15 percent marketshare. The domestic carriers that enacted the surcharge represent nearly 44 percent of LAX marketshare, airport operating statistics show.

"Passing along this surcharge to our customers is not our preferred action, but the recent sharp increase in costs to operate at LAX has left United with no other option," said United senior vice president of planning Kevin Knight. "We have a great interest in LAX developing into a world-class airport, supported by a long-term modernization plan, but we have no interest in paying higher fees without greater benefit for our customers."

LAX operator Los Angeles World Airports in a statement said the surcharge "wildly exceeds the airline's full and fair share of the costs to maintain and operate its terminal facilities at LAX." LAWA said United in 2006 enplaned more than 4,885,353 passengers at the airport, and "assuming the same level of traffic this year," the increase would generate more than $48 million—far exceeding the $10 million in additional costs that the carrier is seeking to recover. "United appears to be exploiting a justified increase in its maintenance and operations costs in order to dramatically increase profits on Los Angeles passengers," LAWA said.

United said it is not alone in charging that the airport is overcharging for rent. The carrier said it and other airlines sued LAWA over the rent increase, claiming it violates its contract with the airport operator. Airlines in court documents said the increases are "unjust, unreasonable and unduly discriminatory" and requested a "refund of all fees determined to be unlawful, plus interest."

"As much as corporate travel managers feel like it's taxation without representation on behalf of the corporate dollars that we spend, the airlines have got to feel the same about this issue," said Pfizer director of global travel Phil Dunphy. "If they want to pass on some surcharge that causes people to leave LAX and take their business over to Orange County, then go for it. That's what it's all about: what people are willing to pay for."

Dunphy added: "It hasn't come up in any of our discussions. I don't know whether it would be something that's negotiable, or if there's another way to make it up to us."

Twelve of 17 Los Angeles-based travel buyers in response to a Los Angeles Business Travel Association straw poll expected the surcharge to stick. Several said they would consider using alternative airports to avoid fees.

One travel buyer with high LAX traffic said it would be difficult to counteract the surcharges, as encouraging travelers to use alternative airports or airlines would be impractical.

Management Alternatives' Heilner concurred: "I certainly can't imagine any company changing their airport decisions, but suppose Continental continued not to match and the other guys continued to charge it. If you had 5,000 departures a year, is it worth $50,000 to change preferred carriers? Could be worth it for some companies."

Meanwhile, in filings with the U.S. Department of Transportation, AirTran Airways, Frontier Airlines, Southwest Airlines and US Airways, among others, have posted complaints over the increased airport charges at LAX. Such international carriers as British Airways, Cathay Pacific, Japan Airlines, Qantas and Swiss also have objected to DOT over LAWA's rent increase.

Airlines in DOT filings argued that LAWA has not specified what the rent increases would fund. "While much has been promised, there is no concrete, approved plan for what specifically is to be done, when and at what cost."

LAWA said, "Under the terms of their existing leases, United and other carriers are responsible for the full costs of maintaining and operating LAX facilities and LAWA has the right to pass along increases in its costs of operating the terminals, which it does for the benefit of the airlines. LAWA has discussed with the airlines their responsibility to pay fair and reasonable costs to maintain and operate their respective terminals and other facilities at LAX, particularly in the years following the 2001 terrorist attacks. Since then, LAWA has largely shouldered the increased security-related costs itself."

Fred Clark, executive director of Laxtec Corp., a nonprofit organization representing carriers that operate out of LAX, said LAWA last year changed the basis for rent charges from "usable" space to "rentable" space. Clark, in testimony to DOT, said airlines pay rent on about 56 percent of terminal space, but under revised rules the carriers would pay rent on approximately 88 percent of terminal space—"a change that is forecast to generate new revenues for LAWA in excess of $115 million during the five-year term of the new lease agreement."

The carriers said other airport operators in California have more clearly defined capital improvement initiatives, while "LAWA has failed to define the cost, timing and priority of any plans to upgrade and improve the existing infrastructure." Airlines further argued that LAWA is operating at a profit and the added funds would only create a surplus. "It is unreasonable to impose higher rates on the Thomas Bradley International Terminal airlines when LAWA is profitable at current rates and is building reserves in order to fund unspecified future capital projects," the airlines argued.