AUSTIN | ABIA Updates

[LoneStarMike]

FWIW, Here's some information on the low-cost terminal and Viva Aerobus that answers some questions asked earlier such as why Austin was picked over San Antonio or Houston, who Viva Aerobus' target market is, etc. It's the closed caption log from a presentation made back in June to the City Council by Jim Smith of the City's Aviation Dept. with susbsequent questions posed by some of the Council members.

Note: Since these log files are derived from the Closed Captions created during the Channel 6 live cablecasts, there are occasional spelling and grammatical errors. These Closed Caption logs are not official records of Council Meetings and cannot be relied on for official purposes. For official records or transcripts, please contact the City Clerk at 974-2210.

Closed Caption Log, Austin City Council Meeting 06/21/2007

Mayor Wynn: So apologize for the delay this afternoon, but now council will take up our two posted briefings that we have outlined. We were scheduled this morning to have a briefing regarding a proposed possible new airline service at Bergstrom. We'll take up that briefing if aviation staff is here and then we'll go to our afternoon briefing, which was some of the results of property analysis we've been doing on Austin Energy's tract in far Eastern Travis County. Welcome Jim Smith.

Jim Smith: Mayor, Council members, I'm here with a relatively short briefing to let you know what we've been working on. It is not an action item. If things go well in the negotiation, hopefully we'll be back in July to bring you an action item on it. Fundamentally, this is about improving Austin's competitive posiition so that we can compete for air service specifically on the handout. The next step - what we're proposing -- we're proposing to lease some land at the airport to General Electric General Aviation Services [sic] and the purpose for that is to build and operate a low-cost terminal.

I'll entertain what a low cost firm national [sic] is in a moment and why do we want to proceed with this? The first one is that we have an opportunity. We've been negotiating with an airline out of Mexico for five new nonstop flights to five destinations in Mexico, and we've had a lot of difficulty attracting international flights, specifically to Mexico. So this is something that we've been working very hard on. The airline is Viva Aerobus. It's a relatively new airline in Mexico. It's been around a year and they are following the ultra low cost business model, which I'll explain too, which is [different from] the typical business model of an airline. We also have [the] opportunity to position Austin to compete for this ultra low cost service as it continues to grow.

Some [of] you may have read some of the articles about Skybus, which is a new Airline headquartered in Columbus, Ohio which has just started flying. They are also following this new ultra low cost business model and we would obviously try to use this facility to compete for their business as well.

Finally, we have an opportunity with GE to form a strategic partnership that would advance Austin's business. If we can partner successfully with General Electric, then we have a large worldwide company who would be trying to make Austin a successful operation and it would enhance our marketing power significantly.

Ultra low cost service - it's a successful business model in Europe, Asia and Mexico. In Europe, it's been around for over 10 years. And Ryan Air, which was the pioneer of this model, is now the largest carrier in you are ron. [sic] Some of you may have flown it or read about it, but they're famous for their five dollar fares, 29-dollar fares, 30-dollar fares. Relatively cheap fares. The business model is if they can keep their fares low enough, they will stimulate new demand from people who weren't flying previously. And because they stimulate the demand, they also put pressure on the communities to provide them the type of facilities which allows them to keep their costs down. It's based on the Ryan Air success model. Very low fares to stimulate demand. This is no frills service. You get a cheap fare, but you pay for everything else ala carte. You want food, you pay for it. You want bags, you pay for it. You want a drink, you pay for it. That's the type of service they provide. In terms of facilities, they don't use loading bridges. You load on the ramp. And again, to keep the costs down on the types of facilites and again because they don't come to every community and they encourage people to drive to one location, they try and solicit incentives from communities in order to bring their service to your community.

For example, in negotiating with Viva Aerobus, they only plan to come to one city in Texas, so we were working against Houston, San Antonio and other cities to try to get them to make Austin their hub for flights into Mexico. The bottom line is this new ultra low cost business model is a differentiated model from the typical airline operation and it requires low cost facilities. The bottom line is these people don't come to your community unless you can provide them a lower cost facility than your typical airline terminal.

The next page is an example. Have some pictures there of the concept of differentiated products for different airlines at airports, and the particular one you've got here is Singapore. In the upper right hand corner, you have the standard Singapore terminal which is widely acknowledged as one of the top three in the world. But yet when they have one of the top airports in the world, they've determined they need differentiated products and the picture on the lower right shows you their luxury terminal. There are airlines flying which now have just a first class and business class product and they want a higher class terminal facility. And then you see to the left of that they also have a budget terminal which is for the people who want the lowest fare possible. So in Singapore, they have three types of terminals, all differentiated for different markets.

The following page is the Monterrey low cost terminal, which we went down to look at and study because this is where Viva Aerobus is [head]quartered and this is what the City of Monterrey had to build to have Viva Aerobus come to their area. You can see the type of facility it is. It's a single story type of facility with no loading bridges similar to a cargo type facility. Just used for processing passengers as quickly and cheaply as possible. Again, the last picture there is the Singapore budget terminal which gives you an indication of what they're like. So far, all of these low budget terminals have a typical similar type of design.

Why we're bringing this to you is the bottom line is air service these days is a very, very competitive marketplace and communities have to position themselves to compete successfully to get airlines to come to your communites. The low cost model encourages competitive proposals. Skybus now, when they [...] come to communities, they want competition, so they'll pick three or four airports in a geographic region and you bid against each other to see who will give them the best deal, which is essentially what Viva Aerobus did and [we] were successful with that particular solicitation, but the bottom line is this competition requires communities to take risks if they want to win these particular proposals.

So why [are] we talking to General Electric? In the first sense, they're an existing tenant at the cargo part. We have a relationship with General Electric today. They're already one of our tenants. They also cooperated with us on making the proposal to Viva Aerobus in Mexico. So we competed jointly and the bottom line [in] my opinion [is] that the only reason they're coming to Austin is because we had GE as a partner and they knew we were serious about providing them the type of facilities that they wanted. GE clearly has a brand and presence in key global markets. They have relationships with airline customers around the world. They have relationships with 230 airlines and 70 countries, so they have tremendous connections to try to market Austin and make our facility successful. Why are we not building this ourself? First of all, Viva Aerobus wants to start flying by the holidays. So by Thanksgiving or Christmas they want to start flying and there's no way the City can move quick enough to put facilities in place to meet that type of time line.

There's also risk involved. While we compete for the airlines, the airline business is a shaky business. More than 50 percent of those businesses go bankrupt or get into trouble, so we don't want to risk a lot of our capital with these types of situations. So finding a strategic partner or a partner like GE who is willing to risk their capital in conjunction with us helps us preserve our capital for the expansion of the existing terminal while GE moves ahead with the low cost terminal that we've been talking about. The lead structure that we're talking about would be consistent with existing leases at the airport. Fundamentally, the city's role at the airport is landlord. We are not a direct service provider to any of the customers. What we do is we lease land to other businesses who then in turn build the facilities necessary to serve their customers. Whether it's the airlines, whether it's the cargo facilites, whether it's general aviation, Sky Chef that provides foods, we basically lease them land and they run the business to provide service.

Essentially, we give a lease to the entity, they build and operate the facility and at the end of the lease the city inherits that particular [facility]. We become the owners of that the same way we will inherit the hotel at the end of 30 years and fixed base operator facilities at the end of 30 years. So the term of the [...] lease is usually equal to the useful life of the facility and the typical facility we're talking about is typically a 25 to 30 year facility. Finally, we charge a base rent and also a percentage rent which gives us rent based on the success of the operation. So the bottom line is offering air service in any community is a competitive business and for us to compete effectively a strategic partner will help in our ability and also help mitigate our risk as we try to preserve our capital as much as possible. Finally, in terms of next steps, we're going to proceed with negotiations with General Electric. We are hopeful that those [end] up successfully but we're still in the very early stages of doing that. Viva Aerobus has committed to coming to Austin. We just have to get the facilities in place. So ideally, it's our game plan to come back to Council in your meeting towards the end of July to come back with a proposal and a lease structure with General Electric to provide these particular services. With that, I'll stop and answer any questions you may have.

Mayor Wynn: Thank you. Questions for staff, Council? Councilmember Leffingwell.

Leffingwell: I believe you don't know for sure yet, but the anticipated term of the lease would be somewhere in the neighborhood of 90 [sic] years depending on what you determine to be the life of the building?

Jim Smith: Right. For the facility, normally about 25 to 30 years is generally the typical life of the building we have in our lease structure today.

Leffinwell: At the end of that time, it would revert to city ownership?

Jim Smith: Right

Leffinwell: What about things like concessions, parking, public transit, things like that? Are those all negotiable items?

Jim Smith: Yes, they are and in terms of -- object be obviously with General Electric putting their property at risk, they have to get a return on the investment. So we have to develop pro formas with them from both sides on what their stinlts [sic] are on the volume of traffic, how much money will be paid, what they have to pay us in lease structure, and make sure it's a fair return. So yes, the concessions would be part of the negotiations. The parking will probably be part of the negotiations. We may choose to ask General Electric to build the parking to serve this facility rather than us build it. All those things have to be worked out during the negotiation and we're not that far along yet.

Leffingwell: OK. Last question. Is this going to be exclusively for the use of Viva Aerobus?

Jim Smith: No. They will be the first tenant, but we are hopeful that -- first of all, these facilities are modular in design, so they can easily be expanded. Our goal is to market Austin as having now two different products. We have the main terminal for the traditional airline, but the ultra low cost business model is a growing business model and more airlines are entering it and we want to be competitive in going after and recruiting them to come to Austin.

Leffingwell: And finally, just looking at the map, there's no connectivity between the existing terminal and this low cost terminal?

Jim Smith: No.

Leffingwell: It's accessed through a different route

Jim Smith: We're still negotiating, but right now it looks like we would put this on the south side of the airport and you would actually access it from Burleson Road as opposed to [Highway] 71

Leffingwell: And initially you plan four gates?

Jim Smith: It would be three or four gates max to get it started.

Mayor Wynn: Councilmember Kim


Kim: What if the public wants some connectivity between the low cost terminal and the main terminal? If they want to catch flights going to other destinations and other airlines, what would be the option? Is that something we would provide or hire a private transporter or our airport shuttle service.

Jim Smith: Well, there's always transportation options, wlits [sic] super shuttle, taxi cab, in a we can provide [sic] There's a variety of ways of doing it. The first thing to do is to judge what is the level of transfer traffic. Generally, this is not transfer traffic. This is destination traffic the way most -- 98% of everything we get at the airport today is what they call origination and destination. We don't have a lot of transfers taking place at our airport because we're not a hub. So that isn't a major portion of the business be. [sic] But yes, there will probably be occasional people looking to get from one terminal to the other and we'll have to accomodate that, but it will probably be some type of a bus facility or whatever. Again, this is not planned out yet.

Kim: And as far as where the destinations are in Mexico, have those been announced yet? Do you have any idea where they are?

Jim Smith: Monterrey will definitely be one of them because that's where they're headquartered. The rest, they're plan[ning] to go file with the FAA this week. They've delayed until this week, so that will show up next week and I don't have the final destinations myself yet. So other than Monterrey being one of them.

Kim: Thank you very much

Mayor Wynn: Further questions?

Martinez: I wanted ask a quick question about -- I guess Councilmember Leffingwell kind of asked about the services, the transportation to get out there, parking, but I assume policing services will be the same way? Will they provide their own or is this part of the Federal Customs Program? How will that work since these are international flights? Would we be providing policing services out there?

Jim Smith: There's different levels of security there. The Transportation Security Agency is the entity which actually screens passengers. They will have to have a presence in this facility. We've already had preliminary discussions with them to do that. Immigration will have to have a presence in this facility because it's international. So we've already had discussions with them to be prepared for this. In terms of just security -- in terms of our security of police or whatever it is, yes we would still be providing that the same way we do in the existing terminal.

Martinez: And maybe you mentioned this and I missed it earlier, but what would be our initial investment to build a structure, a separate structure or separate facility? What is our initial it [sic] investment or the total investment?

Jim Smith: From ABIA? Well, we're negotiating that. At this stage of the game it's potentially that our potential investment will be nothing more than leasing the land and GE will put up the capital. But again, as we negotiate this out, that may change slightly depending on what we think is most important for us to accomplish in this transaction.

Martinez: So it sounds like this is a Mexican Airline that is targeting the heavy immigrant community here in the United states? That's where their target market is?

Jim Smith: First of all, their business model is intended to have very inexpensive seats, basically all under $100.00. A lot of them for $25.00, $35.00, that type of thing. In Mexico their business model revolves around the fact that less than five percent of the people of Mexico fly today because they can't afford the fares. So the goal is if they can get the fares down for every increment they can keep the fares down, they will stimulate that much more traffic in Mexico. So the boon to us and why the tourism community in Austin is excited about this is that means a whole lot more tourists coming to the Austin area. And they may decide to go to Houston and San Antonio after they land here, but at least they're going to come into Austin.

The other thing that this business model tries to accomplish on the U.S. side of this is because the fares will be so low , they anticipate that people will be driving from Houston and San Antonio in order to take these flights, and then we get the benefit [of] that business as well. So the business model -- this has been proven successfully in Europe, Asia, Mexico, wherever it's been used, is you will get people to drive relatively long distances to get a cheap flight to a destination and by being a community which hosts this, hopefully us, then we get the benefit of both incoming and outgoing passengers for that reason.

Martinez: But none of the safety standards, regulations, we're not creating some two tiered flight system?

Jim Smith: No. You all have to meet the same FAA standards and everything else to fly in the U.S. You will get different contract standards on the plane because you will be squeezed in a little tighter on the plane so they can put more seats in there and things like that.

Mayor Wynn: Further comments, questions?

Leffingwell: Standard fees that apply to all airlines coming into ABIA, are they going to be the same? Are they going to pay the same landing fees that everybody else pays?

Jim Smith: The FAA requires that you cannot discriminate among the airlines, so all landing fees, rental rates that we charge for the airlines have to be the same for everybody. Now, for new certain routes we as an airport offer incentives for a certain period of time which reduces one airline's rates [when] they introduce service to a new destination, but those expire at a certain point and then everybody's rates become the same.So Viva Aerobus will pay the same as anyone else at the airport.

Leffingwell: The reason I ask the question is in some of the material that you furnished us, it said that they usually look for out of the way airports that have very low landing fees. I didn't know that we were in that classification.

Jim Smith: We're not. We don't have what you would consider a low landing fee, but because we're proposing to build them a terminal that is lower cost, that their rental rate inside the terminal will be significantly less than the rental rate we charge in the main terminal. And that's what you find in Europe, what they did in Amsterdam and Frankfurt. They basically got the rent to down to about half of what is was in the main terminal.

Mayor Wynn: Councilmember Martinez

Martinez: One last follow-up. If we contract with GE and we simply just lease the land, I want us to make sure that we put provisions in there that any construction that takes place at ABIA, Infrastructure building, that we continue to do everything we can to meet and exceed our minority participation goals. I don't want us to get into a situation where we just sign a lease and some company comes in here and builds whatever they want using outside firm, outside labor. I want to make sure that it speaks easy the values of Austin and that we contract locally.

Jim Smith: We try and do that through all the leases at the airport. Almost everything which is done at the airport is through a lease arrangement Faye, so we put those items in there.

Martinez: Thanks

Mayor Wynn: Further comments, questions? Thank you Mr. Smith. Interesting stuff. So Council, without objection, we'll now go to our afternoon briefing, which is a presentation and update on the City's -- Austin Energy's 2800 some-odd acre tract of land in far Eastern Travis County.