Delta wields clout in new airport lease talks

Delta's mammoth hub at Hartsfield-Jackson brings a daylong sea of passengers through the airport.

Credit: AJC file

Credit: AJC file

Delta's mammoth hub at Hartsfield-Jackson brings a daylong sea of passengers through the airport.

Atlanta’s economy is inextricably tied to Delta Air Lines’ massive hub at Hartsfield-Jackson International Airport — which puts the city in a tricky position when it comes time to negotiate the airline’s lease.

That time is now, as Hartsfield-Jackson and airline executives meet to hash out a new lease for carriers at the world’s busiest airport.

Airport general manager Miguel Southwell said he expects to negotiate a 20-year lease with an option for a 10-year extension, meaning the negotiations going on now would influence the airport’s future through at least 2035.

Such lease negotiations include basic financial terms such as gate rental rates, but they also can influence how easy it is for other airlines to enter the market and expand — and thus shape fare competition and the cost of flying out of Atlanta.

“For the consumer, they would like to see variety, they would like to see carriers coming in and providing competition,” said Anming Zhang, a professor at the Sauder School of Business at the University of British Columbia. Yet the dominant carrier may want to negotiate terms that limit competition, while the airport wants assurance that its facilities will be occupied.

Talks on a new deal started in earnest in February. The current lease, an extension negotiated in 2009, expires in 2017. Neither Southwell nor Delta spokesmen gave comments on specific financial terms they are seeking.

For Hartsfield-Jackson, the lease negotiations are tied to Atlanta’s dependence on Delta’s massive hub and its corporate headquarters for economic vitality and jobs.

“Delta is what’s making Atlanta what it is,” said Colorado-based aviation consultant Mike Boyd.”The care and feeding of Delta will be the care and feeding of Atlanta’s future.”

Hartsfield-Jackson has historically charged rates to airlines that are lower than many other large airports.

Majority rules

The Atlanta airport lease with airlines also includes what’s known as “majority-in-interest,” or MII, provisions that essentially require the airport to get approval from the majority for major airport projects and expansion. Votes are weighted to give larger tenants more clout, which could enable a big player like Delta to block projects that could add capacity and allow more competition.

The rationale for weighting is that airlines — in this case Delta — eventually pay for airport projects through lease payments and landing fees.

“There’s trade-offs,” said Jonathan Williams, assistant professor of economics at the University of Georgia’s Terry College of Business. “Atlanta wants to remain a Delta hub for a long time. Delta wants to ensure that it can continue to make money out of Atlanta for a long time. And so in that respect, I think the Atlanta airport actually has an incentive to maybe not do the most customer-friendly thing.”

But the Federal Aviation Administration has raised concerns about MII clauses, saying they could be anti-competitive. The FAA in letters after the contentious 2009 lease negotiations said “our best practices have found MII restrictions can adversely impact competition at airports by limiting the ability of the airport to expand facilities to meet demand from new entrants or expanding incumbent carriers.”

Other airports also have MII clauses, but some have limited them by exempting certain projects or have committed to eliminating them, according to an FAA report.

The Atlanta city council amended its approval of the 2009 deal to direct the city to consider the FAA’s recommendation and eliminate the MII provision in the next contract.

Southwell, installed last year, said he plans to keep the provision.

“It makes sense,” Southwell said. There’s a “balance that you have to strike…. You have a major hub carrier that not only serves this airport, but is headquartered here with tens of thousands of employees. It is in the city’s interest to continue to anchor the commitment with that carrier.”

Delta said the new agreement will “provide for continued investment in the airport’s infrastructure,” with costs that will incentivize more flights and drive economic benefits.

Felicia Moore, the council member who championed the amendment suggesting the MII be reconsidered, said last week, “I do think they should take heed to some of the sticking points that we had last time,” adding that to keep Hartsfield-Jackson at the top of the industry “we’ve got to be able to give the consumer what they want.”

Southwell said even with the MII clause, the airport can still accommodate other airlines by making gates available.

“It’s worked out that we’ve never had a problem,” Southwell said. “That criticism hasn’t panned out. If airlines want to come in here, they can.”

Space issues

But it’s not always easy for new or growing carriers to get space at the airport.

Southwest Airlines CEO Gary Kelly has said that Southwest could not have entered Atlanta with the scale that it planned without acquiring AirTran and its gates at Hartsfield-Jackson.

When Frontier Airlines recently announced its expansion at Hartsfield-Jackson, Frontier president Barry Biffle said how much Frontier can grow in Atlanta “will be entirely dependent on how much gate access we can get.”

Delta controls about 84 percent of the market at Hartsfield-Jackson. Fortress hubs like Delta’s in Atlanta are known for having higher fares, in part because of limited competition.

Hartsfield-Jackson has benefited from having a large low-cost carrier to compete against Delta, with AirTran and now Southwest. Among the 100 largest U.S. airports, Atlanta had the 23rd highest fares as of the third quarter of 2014, according to federal data.

“With hubs you do tend to get higher fares… the company is in more of a monopolistic position to be able to charge those higher fares,” said Brian Campbell, chairman of Alexandria, Va.-based consulting firm Campbell-Hill Aviation Group.

“Delta I think has been pretty successful in persuading the powers that be that they are a huge employer, they are essential to the local economy. And I don’t think there’s much doubt about that,” Campbell said. “The question is, well, if Delta didn’t get its way, is it going to take down that hub,” as the airline threatened to do in the last round of negotiations.

“I don’t ever see that happening. I think Delta is invested and committed to Atlanta for life.”