COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING - COMMITTEE ON COMMERCE AND ECONOMIC DEVELOPMENT - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, May 11, 2005, 10:20 a.m. BILL 050133 - An Ordinance amending Section 10 18-201 of The Philadelphia Code, entitled "Leases of Airport Facilities," by requiring Council approval of rates, charges and fees set forth in certain leases or other agreements relating to the use of City airport facilities, under certain terms and conditions. PRESENT: COUNCILMAN W. WILSON GOODE, CHAIRMAN COUNCILMAN MICHAEL A. NUTTER, VICE-CHAIR COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO COUNCILMAN JUAN F. RAMOS COUNCILMAN DARRELL L. CLARKE COUNCILMAN FRANK DICICCO COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN JAMES F. KENNEY V A R A L L O Incorporated Litigation Support Services 1835 Market Street, Suite 600 Philadelphia, PA 19103 215.561.2220 215.567.2670 2 5/11/05 - Bill 050133 - Commerce
Good morning. This Committee is called to order. This is a public hearing of the Commerce and Economic Development Committee on Bill No. 6 050133. My name is W. Wilson Goode, Jr., Chair of the Committee. I'd like to note that a quorum is present. To my far left is Councilman Frank Rizzo. To my immediate left is Councilman Marian Tasco. My far right is Councilman Juan Ramos. To my immediate right is Vice-Chair Michael Nutter. Also present is Councilman Frank DiCicco. The title of Bill No. 050133, an Ordinance amending Section 18-201 of The Philadelphia Code, entitled "Leases of Airport Facilities," by requiring Council approval of rates, charges and fees set forth in certain leases and other agreements relating to the use of City airport facilities, under certain terms and conditions. Our first witness is Mr. Charles Isdell, Director of Aviation. Good morning, Mr. Isdell. Please state your name for the record. 3 5/11/05 - Bill 050133 - Commerce
Good morning, Chairman Goode, members of the Committee. My name is Charles Isdell. I'm Director of Aviation for the City of Philadelphia and I am here representing the Department of Commerce, Division of Aviation. I'm pleased to have the opportunity to testify today on behalf of the Administration regarding Bill 050133. We have copies of our testimony, which you should have, and with your permission, I can go through it immediately.
Your testimony has been given to the stenographer. You can feel free to summarize, if you'd like.
Okay. The Administration does not support the passage of Bill No. 050133. The Home Rule Charter and subsequent legislation enacted by City Council in previous years has created a regulatory framework that has enabled the airport to respond efficiently to its business environment. As a result, during this Administration, the airport has experienced dramatic gains and is now a pivotal engine in 4 5/11/05 - Bill 050133 - Commerce the regional economy. Our passenger traffic continues to set new records, including a and a half 5 percent increase in calendar 2004 and a 23 and 6 a half percent increase in the first quarter 7 of calendar 2005. 2 billion annually in travel 10 costs. 11 We opened a first-class 12 international terminal in May of 2003 to 13 accommodate our record growth in international 14 service, which has been over 235 percent over 15 the past ten years. S. Airways. Under the Home Rule Charter, Section 25 4-500(c), the Department of Commerce may grant 5 5/11/05 - Bill 050133 - Commerce leases and licenses for the use of City airport facilities. And with your permission, rather than read the excerpts from the Charter, I'll just go to the remainder of my testimony and emphasize that the citations here are from the Philadelphia Code 18-201, Subsection 1. Bill No. 050133 would require express City Council approval by ordinance of any rates and charges incorporated in a lease or other agreement for more than one year. The Administration believes that requiring Council to engage in this level of scrutiny on a transaction-by-transaction basis would not significantly improve the rates and charges accruing to the City, and would also impede the City in negotiating expeditiously, particularly when Council is out of session. The Division of Aviation has made good use of the authority Council has granted us under the current Code provisions. Through competitive processes and fair market appraisals, we have been able to set rates and charges in a fair and equitable manner as 6 5/11/05 - Bill 050133 - Commerce required by federal law. The Philadelphia airport system is self-sustaining and cost competitive. At this point, it will be helpful to describe the current business framework under which the airport system operates today. The principal contract governing airport operations is the City/Scheduled Airline Use and Lease Agreement, hereafter referred to as the Agreement. The Agreement has been in effect since 1974 and expires in June of 2006. Under this Agreement, the scheduled airlines, by paying rates and charges, underwrite the airport's net annual budget, which is our operating expenses and debt service, less non-airline revenues generated from concession contracts, ground leases and other sources. In exchange for funding the annual budget, the scheduled airlines have certain approval rights over airport capital projects and rate-setting. An approval of the annual rates and charges by a majority-in-interest of the scheduled airlines is binding. To 7 5/11/05 - Bill 050133 - Commerce interpose a City Council approval in this process would complicate and delay the imposition of annual rates and charges and could be viewed as a diminution of the scheduled airlines' rights under the Agreement. Our rate-setting process is not only effective financially, it is transparent. The Federal Aviation Administration requires that all airport rates and charges be non-discriminatory, so that similarly situated airlines and others receive similar opportunities to pay the same rates. On average, the airport receives about $20 million in improvement grants from the FAA each year. Thus, compliance with all federal grant assurances is critical for the continuation of this important revenue stream. We set base rates at reasonable, marketable levels, then provide for annual adjustments to ensure that rates stay commensurate with the value of airport facilities.
Presently, there are approximately 100 airport contracts that have durations of 8 5/11/05 - Bill 050133 - Commerce over one year. These include 37 airline contracts, concession contracts, 32 4 development leases, six pipeline right-of-way 5 contracts, seven agreements with the FAA and 6 various contracts with other governmental 7 agencies. Under Bill 050133, City Council 8 authorization of rates and charges in each 9 case by ordinance would be required before 10 agreements of this nature could be executed. 11 With most airport contracts, rates 12 and charges cannot be negotiated separately. 13 Rather, they are part of an array of 14 interrelated contract provisions that must be 15 negotiated collectively to ensure overall 16 economic feasibility for the City and the tenant. Consequently, a change to a single rental rate or user charge could lead to changes to other key contract provisions. Given all of the above, we believe that passage of Bill 050133 would adversely impact the airport's ability to continue what we believe has been its effective performance in negotiating contracts that are in the best interest of the City. For example, five years 9 5/11/05 - Bill 050133 - Commerce ago, a program at Northeast Philadelphia Airport was initiated to develop several vacant parcels of land for non-aeronautical use. This program has been successful, as evidenced by the development of a Flyers Skate Zone, an Aviation Institute of Maintenance training facility, a Washington Savings Bank and the scheduled construction of a new Wawa convenience store. At Philadelphia International Airport, successful negotiations recently led to an agreement with Enterprise Leasing to construct a new rental car facility, the first at this airport in over 15 years. Hertz maintenance functions are now performed at a new facility located on airport property along Bartram Avenue, and Lincoln Financial will soon break ground on a new hangar within the airport's corporate hangar complex on Hog Island Road. We believe the airport's ability to bring these development opportunities to fruition could have been seriously delayed and, thus, jeopardized had Bill 050133 been in effect. 10 5/11/05 - Bill 050133 - Commerce The bill would also cover a replacement for our master concession agreement, which runs through 2013. The current agreement, which emerged from a competitive RFP process, followed by a complex negotiating period, involves approximately 150 subtenant agreements. It has been a great success financially and has also transformed airport concessions into among the finest in the industry. Again, we do not see the need for this change. All rates and charges and the basis for their calculation are available to City Council at any time. Council also has approval rights over the airport system's operating and capital budgets. We value Council's role in establishing the parameters for permissible rates and charges, a role that has worked well for more than 50 years. Indeed, the results have never been more successful. We ask Council to continue their support, which has enabled us to grow a better airport. We also ask that Council continue to allow us the 11 5/11/05 - Bill 050133 - Commerce necessary flexibility on a transactional basis to meet market realities. I'll be happy to answer questions.
Thank you for your testimony, Mr. Isdell. Let me note for the record that Councilman Clarke has joined us. Councilwoman Miller was here but had to leave for other Council business. Council President Verna was also here but had to leave for the same reason. At this time, I'll take questions from members of the Committee. The Chair recognizes Councilman Nutter.
Thank you, Mr. Chair. Thank you, Mr. Isdell, for your testimony. Just a couple of questions about your testimony. First, you make reference to, on what I guess is , concern about negotiating expeditiously, particularly when Council is out of session. I would think by now -- you're a fairly well-experienced public 12 5/11/05 - Bill 050133 - Commerce servant -- that that is about one of the worst excuses not to do something. Are you under the impression that if there was some urgent matter out at the airport, that this City Council would not be responsive and somehow paralyze the operations of the government?
And I certainly acknowledge that, Councilman. And I should have said good morning.
Well, I just think from a practical point of view, even when Council is in session, there are obviously legal requirements that have to do with the advertising, the first reading, first and second reading, et cetera, et cetera. I am not an expert in that particular --
Has that 13 5/11/05 - Bill 050133 - Commerce interfered with your activities out at the airport so far over the last 50-plus years?
It certainly has delayed the processing of -- I can't -- I'm trying to think of a good example to give you.
I honestly cannot at the moment, Councilman, that's correct, but --
I think if you're going to talk about delays in the process, you may want to also give some additional thought to whether the delay took place as a result of known advertiser requirements, which I think have been in the Home Rule Charter for 50-plus years, versus when did the document or the necessary document get to City Council and did it arrive here in a timely fashion. Many things that end up over here, which sometimes we end up doing either at the last minute or at the crush at the end of a, quote/unquote, end of a particular session, 14 5/11/05 - Bill 050133 - Commerce does in fact come as a result of when things arrive, not how long we take to process data and information. If you bring something in at the last minute, it will appear to have been done under a certain amount of duress. If you get stuff over here fairly early, I think this is a rather productive body. Wouldn't you agree?
I would certainly agree with that, but I think that we're both under -- when I say "we both," I mean both the airport administration and obviously the Council, is also under great strain to deal with many, many issues and pressing contingencies throughout the year and sometimes we have to get in line with others that are more pressing.
Well, that's why we're all public servants and we try to do the best that we can under the circumstances, right?
Okay. 15 5/11/05 - Bill 050133 - Commerce Let's go further in your testimony. You talk about the 100 airport contracts that have durations of over one year. Could you provide to the Chair a list of each of the contracts, the name of the vendor involved, the duration of the contract, when did it start, when is it scheduled to end, and the dollar amount involved in those contracts? Tell me in the course of the past year, of those 100 or so contracts, how many of them expired in the course of the past year?
I may have to consult with Deputy Director Ed Anastasi for a moment to answer that question.
Councilman, we can get that information. We don't have it with us today, but we can certainly answer that question expeditiously.
How about off the top of your head? It's probably not every day you renew one of these, so, I mean, 16 5/11/05 - Bill 050133 - Commerce do you have a recollection in the past year or so how many expired?
I would really not want to hazard a guess, but City Solicitor Dan Cantu-Hertzler has also reminded me that just for the purpose of clarity, the contract expiration date is one consideration, but also during the term of multi-year contracts, sometimes the rates and charges change more often than the contract itself.
With reference to the ordinance, even though the contract might be, say, a 15-year contract that doesn't expire for X number of years, because the rates change on an annual basis or even more frequently sometimes, the ordinance might require that we still come to Council regardless of the expiration date of the contract.
Well, when you do these contracts, I assume you have either escalator clauses built in or 17 5/11/05 - Bill 050133 - Commerce anticipated rate changes in the schedule, right?
Yes, but -- excuse me. My name is Ed Anastasi, Deputy Director of Aviation for Finance and Administration. There are contracts that we do have that have escalator provisions. They are mainly the development-type contracts where you start off with a ground lease rate and then that has escalated based upon CPI. However, in a number of other contracts, it's really based -- and I'm thinking offhand about the Airline Use and Lease Agreement. It's really based upon the budget. That's the starting point. And the airlines' rates and charges annually are set by the budget, less, just for simplicity, less non-airline revenues, and the airlines pay the difference in terms of terminal rentals, ticket counter rentals, landing fees and so on. So there is no automatic escalator in those contracts. They would really be 18 5/11/05 - Bill 050133 - Commerce based upon the budget for that particular year.
And as you lay all of that out, certainly any of those kinds of contingencies, anticipated or unanticipated, could be incorporated into the provisions of a contract, which I assume you presently do, right?
Yes, Councilman, but the rates could not. So if the ordinance 12 specifies that we need to come back to City Council for approval of the actual rates; for instance, the landing fee each year, there isn't a way within the contract presently to calculate that up front, so that we'd come back to you -- we'd come to you just the one time for that particular airline contract.
Right. Okay. And what this bill does is essentially more formally address the issue that was raised by the Solicitor's opinion some many, many years ago that specifically stated that Council had the authority because of the essentially in excess of one year issue, 19 5/11/05 - Bill 050133 - Commerce Council had the authority in this area to make such approvals by ordinance, right?
I think I'm going to ask the City Solicitor to respond to that.
There was a Solicitor's opinion I believe from 1954 that addressed this particular issue and said that Council had authority in this area; is that correct?
Yes. I'm Dan Cantu-Hertzler, Chief Deputy City Solicitor for Regulatory Affairs. There's a series of Solicitor opinions starting in the '50s concerning the authority of the Department of Commerce to enter into leases for more than one year without Council approval, but also going with 20 5/11/05 - Bill 050133 - Commerce that is the authority of Council to constrain the rates and charges. So that's correct.
So when we sort through all of that, my short question, and hopefully your short answer, is, Council has the authority to do what is being proposed here; is that correct?
I'm not prepared to give a definitive opinion, but, generally speaking, Council does have that authority.
Okay. And this is an issue that involves multi-year contracts over which, at the moment, Council has no involvement whatsoever; is that correct?
Yes. This does concern rates and charges set for multi-year contracts, yes.
But other contracts out at the airport? 21 5/11/05 - Bill 050133 - Commerce
Okay. What is the process that you go through regarding these contracts? How are they awarded?
Could I get a point of information? Are we talking about the contracts between the airline and the -- I just want to be clear on what contracts we're talking about, because there are contracts between the airlines and Use and Lease Agreement, there's contracts on the concession, there's contracts for development. I just kind of like want to know what are we talking about here and your answer, response.
Right. Actually, the answer to the question is certainly associated with what you're asking as well. My answer was going to be that the methodology differs with the type of agreement. When we talk about airline contracts here, I think we're -- first of all, when we spoke earlier of the master Use and Lease 22 5/11/05 - Bill 050133 - Commerce Agreement, there are only currently five signatories to that agreement. There were many more when it was signed back in 1974, but some of them are no longer in business. So there are other airlines that operate at Philadelphia International Airport that are not signatory to the master agreement, the 32-year agreement. Those are the ones that have individual agreements that are referenced here. Is that correct?
Again, I think I would ask Ed to describe a typical airline agreement that's outside of the Use and Lease Agreement.
The Use and Lease Agreement, the rates and charges that are calculated in the Use and Lease Agreement are basically the starting point to charge other airlines under their specific agreements. 23 5/11/05 - Bill 050133 - Commerce The process we go through is, we break the budget out for the Use and Lease Agreement carriers by cost center, and then we also break out all of our non-airline revenues by cost center as well. And in what the airlines pay, the airline rate is based upon the difference between those two numbers, the net cost, if you will, of the airport. And that's how we calculate the landing fee. If it's an airfield cost, it comes into the landing fee calculation. If it's a terminal cost, it comes into the terminal rental calculation. Once we agree upon the rates for the upcoming year with the signatory airlines, those rates are used for the other airline agreements that we have with other carriers; for instance, commuter airlines, other carriers that are not party to the long-term Use and Lease Agreement. They end up paying essentially the same rates that we've developed out of the Use and Lease Agreement calculations.
If I can 24 5/11/05 - Bill 050133 - Commerce elaborate, too, in terms of methodology, now that group of agreements we would typically not do an RFP or a competitive invitation. More typically an airline comes to us, like Southwest Airlines, for example, and says to us, We would like to start operating at your airport, what are your standard terms and conditions, what are your rates and charges, and we would give them a package and they would sign off on that standard airline agreement. I don't know that there is any negotiation that goes on, particularly with regard to rates and charges, because they've already been established in the process that Ed just described. So that's how those agreements are entered into, I think, back to Councilman Nutter's question. When you talk about concession contracts, those are typically done through request for proposals, a public process, which we can document. We do advertising and we do a negotiated agreement with the assistance of the Law Department, and obviously the most 25 5/11/05 - Bill 050133 - Commerce familiar of those is the master concession agreement with MarketPlace Redwood that was entered into in 1994, I believe, and the one that now runs through 2013. The other concession agreements, I think some of the ones that are referred to are, for example, with rental car companies. And, again, those are -- I'm not sure because I wasn't at the airport when they were entered into, whether there was an RFP or some process whereby all the companies like Hertz and Avis were basically asked, Do you want to do business at the airport, this is our standard rental car agreement. And I think they all pay the same percentage of their income in order to operate on airport property. And, again, that's a long-term agreement, because most of them invest in capital improvements at the start of the contract and they need a certain number of years to recapture the investment that they've made. Anything you want to add on the concession?
That's it. I 5/11/05 - Bill 050133 - Commerce would just also add that there are other concessions; for instance, the airport advertising concession, which provides for interior ads within the terminal building, and that was done through an RFP process, I believe, approximately a year ago. And there is also a baggage carts concession, which I believe was done in the same manner, where they pay us a percentage of their gross revenues. Just other examples of concession contracts that we have and how they've come to be.
When we talk about development leases, we mentioned 32 development leases. Those are more on the order of the Wawa or the Washington Savings or the corporate hangars. Again, I think more often than not a corporate entity would approach us with an interest in doing business at the airport, not necessarily as a result of advertising or solicitation by the airport, and we, with the help of the Law Department, enter into negotiations. Sometimes the terms and conditions 27 5/11/05 - Bill 050133 - Commerce that the City imposes would cause a vendor to decide not to come on board. Most of the time I think we've been successful in accommodating any vendor that wants to do business at the airport. The example we cited at Northeast Airport was somewhat unique in that we identified parcels. Northeast Airport was actually losing money for many years, so as one method to try to get them back out of the red, we decided to utilize unused parcels of land up there, and in that case, we did a public process with a public -- one or two, I think, public meetings where we invited any interested developers to look at the available parcels and submit proposals. And over the ensuing four or five years, as it says here, we've been able to attract new businesses to the airport property, which creates new revenue streams. And we've worked very closely with the Northeast Airport residential community around the airport to make sure that those new entities are not in any way in opposition to 28 5/11/05 - Bill 050133 - Commerce the benefit of the community. And particularly the Flyers Skate Zone and the Aviation Training Institute, for example, are seen as improvements that the community benefits from. And then the next-to-the-last group is pipeline right-of-way contracts. I think many of them are for very, very long duration. Again, they're negotiated with the Law Department. And if a company like Sunoco either wants to relocate a pipeline or do some work on a pipeline, they approach us to either get an agreement to do that or to utilize an existing agreement to gain access to the property and do what they have to do. But those are not -- also, those are not the type of agreement where we would put out request for proposals. They exist because of the infrastructure that already exists underneath the airport property and, in some cases, under the Delaware River to the refineries on the other side of the river. And then the agreements with the Federal Aviation Administration, for the most 29 5/11/05 - Bill 050133 - Commerce part, are operating agreements that have to do with how the air traffic control tower interacts with the airport's operations department, whether that be during de-icing operations or other extraordinary conditions or just day-to-day ramp control for aircraft leaving the gate and going out to the point where they're handed off to the controllers to take command of the aircraft from that point forward. So I've tried to differentiate the different types of agreements that we're talking about here and hopefully also address Councilman Nutter's question about what the methodology is for entering into those agreements.
I probably have one last general question for Mr. Isdell.
Mr. Isdell, I appreciate you going through that. Again, you're obviously aware and 30 5/11/05 - Bill 050133 - Commerce you make reference in your testimony to Section 18-2001(1), which you know was established in the Code by City Council and lays out a whole series of steps and procedures. Let me ask this question based on your testimony: Do you think that there is any appropriate role for City Council in this contracting process involving these leases or agreements that extend for multi years, extend on a multi-year basis?
Could you either speak up or pull the mic a little closer.
Yes, I do think that there is a role for City Council. My understanding is, the existing Code provisions have to do with setting standards for how rates and charges are established, without necessarily requiring that every new lease or every new change in rates and charges would, in and of itself, require a separate 31 5/11/05 - Bill 050133 - Commerce ordinance, and that has worked well for us. I think that if there is a desire by Council to take a more active role, we would like to at least have a dialogue about how we could do that in a practical way that would not tie our hands and potentially have a negative impact on an opportunity, an economic development opportunity, that might come along and might in fact need a very quick turnaround in terms of decision. So I don't have a real specific description of how that relationship could work, but I certainly think there is a role, that was your question, for City Council, yes. However, I would -- the one example that came to mind after your initial question of a situation that might have really been catastrophic for us was that we had a provision in the lease with the airlines to do mid-year rate changes in the event of highly unusual circumstances that would create a budget deficit, and obviously the example which we frequently refer to, and I know it becomes hackneyed at times, but if you 32 5/11/05 - Bill 050133 - Commerce remember the fiscal year that 9/11/01 occurred in, in the month or two following that incident, our revenues and the airlines' revenues obviously had plummeted significantly and we were contemplating a mid-year rate change in a way that would have not only been of assistance to the air carriers, but it also would have enabled the airport itself to reach June 30th without going into a deficit situation. And I just think that if we had had to go through that at the time, notwithstanding Council's willingness to work with us on an emergency basis, it could have been devastating if we weren't able to make that change. What we did in fact was, we went over our operating budget and made some very, very drastic reductions that enabled us to get through the year without a rate reduction, and we were fortunate that our passenger traffic recovered by the start of calendar 2002 pretty much back to the pre-9/11 levels. But that's the best example I could give you in answer to your earlier question. 33 5/11/05 - Bill 050133 - Commerce
And I appreciate that. You don't have to feel embarrassed about using that particular example as obviously as extreme or as devastating as that might be, and I would only respond to you that knowing that, it would seem to me that the Council acting in a responsible fashion, while we can never anticipate those kinds of situations, certainly it is real and there would certainly, I think, be a mindset to have provisions in an ordinance that could allow you to obviously function and operate under an extreme emergency or a completely unusual set of circumstances. I think the issue here is not to use the phrase "hamper" -- or maybe that was Mr. Cantu-Hertzler. I don't think there's an interest here to try to hamper the operations of the airport. You have done a good job out there. I think the issue is one of what is the appropriate role and oversight for City Council in this contracting process, especially involving multi-year contracts, and 34 5/11/05 - Bill 050133 - Commerce notwithstanding the fact that you've been doing something a certain way for a long period of time and may have many successes, this process does pretty much date from back in the '50s, and I think in the current environment, all of our contracting process and procedure probably warrants some amount of review, if not updating. The Council President submitted this legislation. The airport is mostly, I think, within her district. She has a great interest. I introduced the bill on her behalf, but certainly any of us individually may have our own views about our contracting process and just trying to make sure that it is as open and transparent as possible. But, of course, the Charter does provide for Council to have direct involvement in multi-year contracts anyway, as I'm sure you're well aware. So thank you. Thank you, Mr. Chair.
Who would be unhappy with your present airline lease agreement process?
I said who would be unhappy with the present airline lease agreement process?
Have you gotten any complaints from other airlines who would be interested in this process?
The general sense at the moment -- and we are meeting monthly with the scheduled carriers to work out a new agreement to take effect July 1, 2006 when the current agreement expires. I think the main sense that we have is that, first of all, it is -- right now it's 31 years old. Many things have changed in the industry and there are some provisions in the agreement that are problematic for both sides. We would like to be somewhat freer 36 5/11/05 - Bill 050133 - Commerce from the airlines' approval of our capital programs, which they currently have, for any project that exceeds $100,000. It needs the majority-in-interest vote in order for us to proceed with a capital improvement at the airport, which is a very small number by today's standards. At the same time, the sense on both sides is that the idea of having an agreement of that length is not appropriate in today's business environment. So we're both looking at a shorter-term agreement so that we can in fact make changes as the marketplace and the airline industry changes rather than being stuck with a lease that goes out beyond most of our lifetimes. We definitely think that the new lease will be more of a five-year duration rather than a 20- or 25-year duration. And there are a number of issues such as that that we think would be improved with a new agreement. But as Councilman Nutter said, I think we've learned on both sides over the last 31 years, we're familiar with how this 37 5/11/05 - Bill 050133 - Commerce agreement works, we have a certain comfort level with it, and it rarely has presented impediments to us in terms of our operations or our capital program, because both sides of the airlines and the City have made it work, but it certainly is outdated at this point and there is lots of room for improvement. But relative to this particular conversation on the ordinance and the Council approval of rates and charges changes, I don't see any airline complaint about the current arrangement. I think that they would be concerned if we needed to go to Council each year after they agreed on rates and charges and they then were entering into a new fiscal year on July 1 without a clear understanding of whether or not the new rates and charges were going to take effect or not. That would probably create a problem for them. Maybe Ed could speak to that better than I.
Yes. We do have each year a negotiating process with the airlines based upon our operating budget, as I said, and that's typical of most airports that 38 5/11/05 - Bill 050133 - Commerce I can think of throughout the country. And at the end of that process, we have rates and charges for the next year that both the City and the airlines have agreed upon, and I think there could be some concern, as Charlie suggests, that even though we have an agreement on the rates, another step would be involved to submit those rates to City Council for ordinance as well.
At what time do you begin your process for negotiating of the contract? You wouldn't start in May to negotiate something for July. Maybe you could begin the discussion early enough so it would get to Council and be approved prior to July 1. It's a matter of adjusting the starting date on negotiations.
Actually, the process is outlined in the agreement like how it works. There are certain deadline dates for the airlines to submit to us their projections of their activity levels for the coming year, and we submit to them a proposed budget, and our budget actually starts with 39 5/11/05 - Bill 050133 - Commerce the City process. We go through the same process as other City agencies. The difference being that our budget when it's approved by Council obviously is an authorization level to spend certain amounts, but we have to earn the income from the airlines in order to -- we don't take money obviously from the General Fund. So the way the process works today is, we go through the City budget process first and generally we prepare a City budget with a pretty good sense of where we're going to go in the airline process, but after our City budget is presented to Council and hopefully approved, the airline budget process really starts in May or in mid April for the first submissions, and then in May, again, according to the lease provisions, we have to do exchanges of information, and then ultimately we have a submittal to them, which they frequently review on a line-item basis similar to the way we would come before City Council. So we really have a double process 40 5/11/05 - Bill 050133 - Commerce that we go through, and more often than not, the airlines, particularly because of their dire financial situation in recent years, ask us to make further economies and cuts in our budget from what we initially submit to them. So the budget that we end up with that generates the rates and charges for the new year, July 1, is slightly different and frequently a little bit less than what Council has approved for us in the earlier months of the year. And, again, this is a process -- we've become familiar with it, we work it out, and generally it all falls into place in time for the new rates to take effect on July 1st. And we promulgate the rates and charges through the process that's described through the Records Department. So with having said all that, we could probably give you kind of a chronology of how our budget process works today and maybe even some sense of how it would be impacted if there was another councilmanic review after the airline review and what that 41 5/11/05 - Bill 050133 - Commerce would entail for us to give you a more specific answer to your question. It might take us a couple days to put that together.
I have one other question. I know Market Redwood works with the vendors to negotiate their contracts. Do they make the final decision about who gets the contract? Is there any involvement there by your office or a panel or any other people involved in the process of selecting vendors?
Well, there is an involvement by both the airport and by the Minority Business Enterprise Council. When MarketPlace negotiates a lease, say, for a new hat store or a new eating establishment, the City has the final approval before that lease goes into effect. We have --
The Airport Director. The Commerce Director, actually, 42 5/11/05 - Bill 050133 - Commerce has the final authority for all of our agreements. During the process, MarketPlace, under their agreement, has extremely stringent DBE requirements that are monitored on a monthly basis by the MBEC, so that when we present -- when they present to us a new vendor or a new agreement for a sublease for a new store or a new eating establishment, it has to fit into a template that is pretty rigid in terms of there has to be a certain amount of minority participation, female participation, there has to be local participation. And we don't approve those agreements without discussing them with MBEC, and if in fact there are DBE agreements, they have to have been certified by MBEC. That is our involvement in the process. And I believe I've stated in Council hearings in the past, if you look at the record since 1994, I don't think the airport or the City has ever rejected a submittal by MarketPlace because, in my mind, they were hired because they are retail management 43 5/11/05 - Bill 050133 - Commerce people. This is what they do. We've tried to give them a free hand to make the program successful and not interfere. I myself have am not a retail person. So we generally go with their judgment so long as they're living up to all the terms and conditions of the agreement, which is pretty onerous on them, and that's the way the process works. So they submit sublease proposals to us. They're reviewed. They're also reviewed by the City Solicitor's office for conformity to City Code and to all the other requirements in the agreement, and ultimately if they meet all those agreements, we have tended to approve their submittals.
What about the other professional services contracts? How are they determined?
Professional services contracts at the airport are done through a public either request for proposals or a request for qualifications process. We have a standard practice which we could detail 44 5/11/05 - Bill 050133 - Commerce for you in writing. We advertise. We also have to meet certain federal requirements in terms of how we award professional services contracts, particularly if any of those contracts might ultimately do work on a federally funded project and, therefore, be partially or fully reimbursable by federal funds. But we treat all of the contracts in a uniform way, in that we do public advertising, we do a request for proposal, we include the Minority Business Enterprise Council in the process in terms of goal-setting and review of submittals, and we do a rating process when proposals are submitted. We establish a team of appropriate management personnel who review all the proposals, give them scores using standard score sheets that we've established. Those scores and that management or screening committee, if you will, makes a recommendation on the award to the appropriate deputy at the airport, and that deputy ultimately brings 45 5/11/05 - Bill 050133 - Commerce that recommendation to myself and Deputy Director Anastasi so we make a final decision. When we make a final decision, that is really just a recommendation to the Commerce Director. The final contract has to be signed off on by the Commerce Director under the Charter. So it's kind of a voluminous process, but I think it's worked very well for us, and that's professional services contracts. That's how we do them.
Just a couple of questions. Unfortunately, I wasn't able to be present at your budget presentation, so I just want to get a couple of questions in as it relates to that. 46 5/11/05 - Bill 050133 - Commerce With respect to the airport leases in the terminals, what terminals are coming up in terms of expiration for leases?
Well, the Use and Lease Agreement that we've been talking about that was signed in 1974 that expires July 1 of next year, 2006, that's for all --
I thought they were done in increments. So we will essentially be in a position to negotiate all gates, all airlines at that particular time?
Right. And what we've tried to do in the last five years, whenever an opportunity comes up; for example, an existing tenant like TWA goes out of business and makes gates then become available, when we reuse those gates, we have not entered into what we call exclusive leases with any one airline during the last five years. We've switched from what we call 47 5/11/05 - Bill 050133 - Commerce exclusive leases to preferential or common use leases, which gives the City and the airport much more control over the gates than what we had in the old days under the 1974 type agreement.
The capital investments that airlines may make at gates, does that play in any way, shape or form -- or upon the negotiation of the lease, that investment that's made is based on what they anticipate the long-term lease will be? There have been some upgrades at some of the gates, haven't there?
Yes. Those are done -- generally speaking, if an airline wants to do improvements to its own leasehold area, like U.S. Airways, for example, wants to upgrade the hold rooms and the carpeting and seating in their gate areas, that's done through their own -- they would do their own financing, and the airport's role, the City's role, would be to grant permits for the construction based on submittals that they give us. 48 5/11/05 - Bill 050133 - Commerce So there are parts of the airport that are considered common use, and we're responsible to maintain and refurbish them as necessary, and that's done either with bond issue money, with passenger facility charge money, but the airline exclusively leased areas that they want to refurbish, that's their own project and we just serve as a landlord.
So if that particular airline was not successful in reupping their lease at that particular gate that they've made capital improvements, then that's just too bad?
No. I think we generally provide -- in other words, if they invested in those spaces and then when we had the opportunity we said to them, We're going to move you from, say, A to B or from C to D and, therefore, you wasted your money, we would provide for them to either get some kind of residual value for their investment or -- that would be agreed upon before they actually leave. 49 5/11/05 - Bill 050133 - Commerce
Would that come out of the new lease with the new airline carrier?
Yes. I think more and more what we're looking at is the airport taking control of more and more of the facility and making it kind of flexible, in that the signage behind the ticket counters, for example, the displays that you see at the gate just before you get on the plane, what we want to do more and more is make that all common use, so that not only does the airport own it and control it, but it would be much easier for us as this industry evolves when one airline disappears and another airline comes in, there wouldn't be a great expenditure of capital money to make that change. We would really like to control the whole facility. It will take us time to get to that point, but we want to more and more make it so that airlines don't create spaces within the airport that become very proprietary and very difficult to assign to a 50 5/11/05 - Bill 050133 - Commerce different carrier on a daily basis. And what we've tended to say is the European model of how airports are run is the model that a lot of U.S. airports are moving toward with the leases that are being signed in this decade. Many, many airports like us in the U.S. entered into agreements in the 1970s that are now coming up for renewal for the first time, and along with the notion that we don't want 30-year agreements anymore, we want shorter-term agreements, we also want agreements that give the airport control over its facilities and not get ourselves dependent on a particular tenant or, as you described, have a particular tenant make a big investment in space, that next week we might want to put a different airline into that space. So it is a challenge, but -- I don't know if I'm answering your question or not.
Well, I want to be clear. Assuming that there is a carrier that has made a recent substantive capital improvement to a gate and they are not successful in reupping their lease, how 51 5/11/05 - Bill 050133 - Commerce exactly -- do we reimburse them? I'm not quite clear how they get made whole as a result of --
If we were to recapture a gate from an airline that had made a significant capital investment in that gate area, I think that we would probably find a way to make them whole, I guess is -- maybe Ed can answer the question.
I guess that's what I'm asking, how do you make them whole. Does that come out of the airport fund? Does that come out of the new lease with the new carrier?
I think it kind of depends upon the type of investment that they've made. For instance, let's say they purchased new loading bridges and ABC Airline purchased new loading bridges for Gate D-1, let's say. In that case, if we were to take that gate away from them, the airline could 52 5/11/05 - Bill 050133 - Commerce actually take the loading bridge and reassign it, say, to another airport. However, if they make improvements in our passenger hold rooms; for instance, new rugs, new carpeting, new lighting, something like that, those improvements just stay with the airport, and there is no buyback or amortization period on those types of improvements. But if it is something that they could actually take off the airport; for instance, like a loading bridge as I just described, they have the right to do that under the current Use and Lease Agreement. And I would just defer to Dan if there is anything else in particular relating to that.
I do think, Councilman, the one thing from your question that I just want to make sure that I'm not misunderstanding, I think it would be very unlikely in the new lease that there would be any air carrier that we would say to them, You 53 5/11/05 - Bill 050133 - Commerce can't use our airport anymore. That's not the intent at all. We want to make the airport available to more carriers, and one of the impediments in the past has been, for example, in Terminals B and C, you have a single air carrier, which is U.S. Airways, that has exclusive control over all those areas, and, yes, in fact, they have invested in carpeting and paneling and some gate podiums and seating, but it would be much better for us if we had control of that space in the future. We could replace the carpet. We could make the carpet throughout the airport uniform and not have proprietary decorations and signage and things like that, which makes it almost impossible to give a smaller, newer carrier an opportunity to use that space. So when we talk about preferential and common use space as opposed to exclusively leased space, we're trying to move in a kind of evolutionary way toward an airport that's much more flexible from day to day. But nobody would be denied access to it. Quite the contrary. We would be trying to give 54 5/11/05 - Bill 050133 - Commerce access to more carriers.
Okay. Thank you. Getting back to one of the earlier questions about Council's involvement, kind of somewhat related to this ordinance but just generally in any of the contracts, leases as it relates to the airport and you've indicated a number of categories. And you may not even be able to do this, but in terms of degrees of difficulty, so to speak, if we were involved, can you kind of talk about which one of those categories would be the most problematic if this bill would be implemented or some similar type of legislation were enacted to increase the Council's involvement?
The one example I gave earlier about a catastrophic budgetary impact in the middle of a fiscal year such as what happened after 9/11, if this ordinance, 55 5/11/05 - Bill 050133 - Commerce in other words, were to require that every time we change the rates and charges for the airlines that we had to come back for a Council ordinance, I think that could have very negative effects on our ability to operate. And, again, as Councilman Nutter pointed out, I know that the Council has always been supportive of the airport and would probably be willing to respond even in an emergency way, but, again, an ordinance has to be passed. I mean, the majority of Council members has to approve it, and if we were, for whatever reason, not to be able to secure approval, we would not be able to change the rates in a situation like that. So it is of concern to us that we could get into situations that would make normal conduct of business impossible. Even if that's just for a short duration of time, it could be problematic for us.
Well, I'm thinking 56 5/11/05 - Bill 050133 - Commerce the most recent agreement at Northeast Airport was with the Wawa Corporation, and I guess my understanding -- I was not personally involved in the negotiations, but my understanding is that it was a very difficult negotiation, with a great deal of back and forth, changing and amending right up until the last minute. And, again, it may be better for the Law Department to describe the process, but I guess our sense would be that we could enter into an agreement in principal with a company like that. We could set the wheels in motion to then have an ordinance put together to approve such an agreement, but at least from that particular case, I think it would not be out of the question that at the last minute, they would come in with some new request or new terms and conditions. In the way we work today, we're able to do those negotiations and make those changes in a pretty flexible way based on what we think is the best interest of the airport. If we had to keep coming back and forth to Council or amending an ordinance each time we 57 5/11/05 - Bill 050133 - Commerce were in a negotiation like that, I do think that a potential developer or vendor could take advantage of that and kind of twist our arm in ways that they can't today because they know that we do have a certain amount of independence. Again, that might not be the best example, but that's what popped into my mind.
Mr. Chairman, I'm finished this line of questioning at this time.
Thank you, Mr. Chairman. On that same line of questioning, 58 5/11/05 - Bill 050133 - Commerce meaning no disrespect, it sounds like you described something that we as Council members either collectively or individually do almost on a daily basis with developers. And deals that are put on the table, whether there's public money involved or not, deals come across our table constantly and we try to negotiate. So I don't see where that would be anything that different than what we already do as Council members. I want to go back to the MarketPlace. Could you again briefly describe what their role is?
Well, they were hired as developer and concession management company for all of the food and retail concessions at the airport, food, beverage and retail. The agreement started in 1994. Their role is to negotiate leases with individual vendors, whether it be TGI Friday's or the Gap. They negotiate the leases. They manage the relationships with the vendors. They also have a capital investment of their own where the City provides, for 59 5/11/05 - Bill 050133 - Commerce example, a space in the retail mall. We give them a shell. The landlord has a certain responsibility for fitout, and in that case, the landlord is MarketPlace Redwood, and then the vendor itself does the final specific fitout for their location. And they basically negotiate leases. They do them, I think, in some cases through request for proposals when the issue is, well, we've got a space here and we think we need a hat store or we need a tie store, so let's go out to the market and see who is interested. But they also have, I believe, the flexibility in a given instance to meet -- the requirements in the lease say that there needs to be national brands, there needs to be local vendors and there needs to be minority participation, and then overlaid all of that, there needs to be street pricing. There are times when they see a need for a particular kind of vendor in a particular space in what is really just a shopping mall where they might not be able to get a lot of interested applicants. 60 5/11/05 - Bill 050133 - Commerce So whether they do an RFP for every individual space or not, I'm not sure, but I think in some cases when they need a national brand like Gap to come, they simply negotiate an agreement with the Gap. Those agreements are then presented to the City Law Department, and I believe they're all reviewed by the MBEC, and ultimately they're submitted to the airport for approval before they're finalized. And as I say, I think in, if not a hundred percent, almost a hundred percent of the cases over the last ten years, we have reviewed their submittals and with very little input from the airport, we've said, Go ahead, proceed. And the results, I think, speak for themselves. The program has been enormously successful. For the first time in history last year, it collected over a hundred million dollars in gross receipts. For 2002 and 2003, it was rated by Airports Council International as the best program in North America. It's won numerous individual awards and I think --
"It" 61 5/11/05 - Bill 050133 - Commerce meaning MarketPlace?
The program. We think of it as a partnership. I mean, it's the City, it's the airport and it's MarketPlace Redwood as our retail developer. But, again, they were presented if you -- the agreement is about this thick, but if you try to lay it out in kind of a template, they have to meet a whole lot of criteria on an annual basis relative to minority participation, female participation, street pricing, mix of national stores like the Gap with local stores. And so long as they meet all those criteria, we've tended to give them a pretty free hand to negotiate the subleases with vendors, and the program has been a success I think both financially and aesthetically.
An airport-wide. The entire airport was under a long-term concession agreement with what was originally ARA and then became Aramark. And even though you might walk through the airport and see what looked like different stores with different names on them, they were all in fact Aramark stores with Aramark employees in them. The big change in 1994 was this notion that we treated the airport more like a retail mall with a retail developer and individual stores are leased individually. There's not like one big company that staffs and manages a whole bunch of stores.
Was Aramark held to the same criteria that MarketPlace Redwood is being held to?
In terms of the leases and the mix and the minority participation and the --
So there's 63 5/11/05 - Bill 050133 - Commerce actually two different types of --
I can't speak because I wasn't really involved. We're going back a little bit in time, but I think the Aramark agreement was more of a typical airport concession agreement that was done probably in the '70s that had to do with you put out an RFP, you ask who will invest the most dollars in some infrastructure here and who will give us the highest percentage of their gross revenues, and that person wins or that company wins. And so there were no real -- the kinds of requirements that I'm talking about that came out in the mid '90s were the result of a real revolution in the airport business that started at London Heathrow and spun off the company BAA, which got a major contract at the Pittsburgh Airport and created what many people feel is the most successful airport mall in the country. And we, the City of 64 5/11/05 - Bill 050133 - Commerce Philadelphia, sort of copied that model. Again, I wasn't personally involved in that, but that's how we got to where we are today.
Part of the agreement sets forth the compensation levels for both the City and for MarketPlace. Basically, MarketPlace pays the City a guarantee, an annual guarantee, and that's based upon the number of in end-plane passengers that goes through the terminals.
It's at 65 5/11/05 - Bill 050133 - Commerce the end of the year then?
It's an annual guarantee, but it's billed to MarketPlace every month. It's a monthly invoice that goes out to them, and they make payment to the City. However, there is also under this arrangement a profit-sharing formula. Each month MarketPlace reviews all of the revenues that it receives, subtracts that from all of its expenses and ends up with a profit or a loss. In the past few years, I can't think of a specific month where there was a loss. So it has been operating at a profit. And there is a way that the profit is distributed between MarketPlace Redwood and the City, and specifically it's a split whereby the City, the airport, receives approximately 70 percent of the profit and MarketPlace Redwood receives the other 30 percent. So that's the way that MarketPlace -- that's the major way that MarketPlace is compensated, through the splitting of profits from the concession 66 5/11/05 - Bill 050133 - Commerce program.
So they act more or less as kind of brokers for the facility. I own a building. I don't want to be dealing on a daily basis, weekly basis with my tenants, so I hire a management company to take care of the internal issues on leasing the space, collecting the rent, making sure the building is being run properly, right?
And I don't have a problem, I guess, with what they've done there. I think that the mixed use and the facilities that I've been through when I go through the airport are quality. There's no question in my mind about that. I just see this as possibly -- and I'm not saying -- I'm not sure if we can do it better. It just seems to be that there's a middle management layer of expenses that maybe we could save money on doing if we -- because the Commerce Department ultimately has to sign off anyway and the Law Department reviews all the 67 5/11/05 - Bill 050133 - Commerce leases, if I heard Mr. Isdell correctly. So I don't know if we need to be paying someone to do that. I may be oversimplifying this, but I'm just wondering if there was an easier way of doing it that would be less of a cost to the City where we can be benefiting by some of that 30 percent fees, which MarketPlace Redwood is entitled to for their work. I'm not saying they're not entitled to. I'm just wondering. Because that 30 percent, do you have any idea of what approximately that comes to on an annual basis, what that adds up to?
I believe the way it stands right now, the minimum annual guarantee comes to about $7 million a year, and the profit probably is in the area of between a million and a million and a half.
No. We get the 7 million. 68 5/11/05 - Bill 050133 - Commerce
They get 30 5 percent of that million and a half, let's say, 6 that's the profit. 7
Yes. The minimum annual guarantee, which is the amount that's based upon the passengers, that comes to the airport, the City. And the profit presently, the annual profit from the MarketPlace concession program, is about a million and a half, I believe. So if it is a million and a half, MarketPlace would keep 30 percent approximately of that million and a half and the other 70 percent would come to the airport.
Does that money go into our General Fund or does it go into your capital?
That's treated 69 5/11/05 - Bill 050133 - Commerce like all other airport revenues, in that it is allocated to the Aviation Fund to pay aviation expenses in accordance with federal law.
And the airlines are generally supportive of the program as it is today because it has generated significantly more revenue than the old program under Aramark, which means ultimately that the airlines' costs are reduced proportionately by this new source of revenue that we've created. The other thing, if I could just respond to one of your earlier questions a little more completely, there are airports, and I think Atlanta is the biggest one that I'm aware of, that actually run their own concession programs. They don't have a retail developer. I believe Atlanta does have a consulting company that supports the Atlanta in-house staff that manages their program. But when you go to conferences like I do from time to time, this is a matter of great debate from time to time, what is the best way to do this, and I would say if you 70 5/11/05 - Bill 050133 - Commerce look at the current environment, not only in the U.S. but throughout the world, the really best concession programs, the ones that win the awards, the ones that are generating the most revenue for their landlords, are the ones that are managed by these types of developers like MarketPlace. So my instinct would be to keep things the way they are. And, in fact, the very best airports like London Heathrow, which was the pioneer for becoming a shopping mall in the middle of an airport, and Schiphol Airport in Amsterdam, they've become so good, that they have spin-off companies that then go out and try to manage these types of programs at other airports. We haven't gotten that good yet, but that would sort of be the ultimate goal of a program like this, I think. We have been imitated by some other airports due to our success, but we haven't yet become a spin-off company.
How deeply involved is the Law Department and the 71 5/11/05 - Bill 050133 - Commerce Commerce Department in scrutinizing the recommendations that come forth from MarketPlace Redwood? Basically it sounds like we are at their mercy more or less in their recommendations, because there's really no 7 internal -- and correct me if I'm wrong -- there's really no internal involvement but for the documents that may be presented to the Law Department to make sure that the new entity, the hat store or the food eatery or the Gap, is meeting the requirements of that document that's part of the original criteria for doing business there. So is there a way in which we scrutinize that? Are you aware of anything? How do I know that Vendor Wilson Goode, his contract or his agreement with MarketPlace Redwood is either better or inferior to a bid that I had put in? Is there any oversight that you know of?
The first thing that I should have mentioned before is, the agreement says that the City's approval of the subleases may not be unreasonably withheld. So if we were to object to a vendor that they 72 5/11/05 - Bill 050133 - Commerce were proposing, we would certainly have to give good justification for why we were opposing them.
That's what I said earlier. I believe in the ten-year history of the program, we've never rejected a proposal from MarketPlace.
I'm concerned about favoritism. I mean, I'm not accusing them of that. I'm just concerned that this third-party entity that is contracted to do this basically has, it sounds like, pretty much autonomy on what they do. And I'm not suggesting that they're doing anything improper or immoral here, but I'm wondering if there is any oversight other than the document that they say that Vendor Wilson Goode or Vendor DiCicco, we're going to sign 73 5/11/05 - Bill 050133 - Commerce them up because they're going to bring their business to our airport and it's a good mix and it's a good fit. How I do know that --
We have an in-house Properties Department that monitors the program day to day and is our liaison, if you will, with MarketPlace Redwood. And, yes, along with the Law Department, our Properties staff reviews these leases, and on a monthly basis, we meet with the Minority Business Enterprise Council and the MarketPlace management people, MarketPlace and Redwood. We go over their numbers to date every month. We look at whether or not they are living up to the goals and objectives that were established in the original agreement in 1994. And for the most part, they've exceeded those goals. We also discuss what their plans are for future opportunities at the airport, and I would say based on our experience with them and the procedures that they have utilized and described for us in selecting vendors up until now, we have been satisfied that they've done 74 5/11/05 - Bill 050133 - Commerce it in a competitive process and they've done it in an open process and that they give opportunities to new entrants. In fact, part of the program is to use the carts that you see throughout the airport as an opportunity for new entrants, because to get an in-line store does require significant capital investment, which small companies don't always have. So we've seen the kiosk program as an opportunity to get local small businesses, minority, female-owned businesses. And, frankly, we've been disappointed that we haven't been able to get more start-ups into the airport that way. We've had a few success stories where somebody gets in, works a cart for a couple years and ultimately moves into an in-line program. We've had a couple wonderful stories where one woman in particular went through that process and now has stores in several different airports around the country. But I think, by and large, we would like to get more stories like that, and we're working very hard in terms of having workshops 75 5/11/05 - Bill 050133 - Commerce and seminars and soliciting involvement from local companies to do that. But to answer your question, the oversight ultimately, it is our final responsibility. We do have to sign off on behalf of the City. My point was that we've tended -- and I'll speak for myself. I've tended to not try to second-guess them, because they were hired as retail management people. These are people who manage shopping centers in New England and in the Boston area. That's how they originally came into a competitive process. The City negotiated, you might recall, with BAA, the company that I mentioned that came out of London and ended up -- is now managing the Pittsburgh program, and they recently won the contract to manage the Baltimore Washington program. I think the City negotiated with BAA for close to a year and was not able to reach an agreement, partly because of the rigidity of the requirements that I've described to you and BAA did not wish to take on some of the burden that was 76 5/11/05 - Bill 050133 - Commerce being imposed upon them. MarketPlace Redwood was brought in subsequently. I think another good part of a year went by negotiating the agreement prior to 1994, and I think that the record shows that they've lived up to the agreement and they've done an excellent job, and part of that is to offer opportunities to participate at the airport in a fair and equitable way.
I think we all would agree that we'd like to see more of the start-up companies, the local companies, people who don't have the financial wherewithal to do the other facilities, the built-in, or whatever you referred to those facilities, and do the kiosks. We all support that. I have one final question. There's an RFP process I believe that you testified to earlier that MarketPlace Redwood initiates for these vendors. When they're soliciting vendors, there's an RFP.
I believe they use RFPs for most of their opportunities, but I 77 5/11/05 - Bill 050133 - Commerce don't think they use them for every one. What I was trying to describe, there may be a particular need for a certain kind of a store that they see to fit in with a typical retail mall and --
That's the area that I'm a little uncomfortable about. It almost could be Vendor A because Vendor A is connected to somebody else and Vendor B may be just as good or even better, but there's some influence. And I'm not accusing anybody, but it leaves the door open for that kind of influence, in my opinion. And I don't know if there's anything in that document, that agreement that had been established, that protects the interest of everyone, including the airport, when it comes to selecting vendors, but that seems to me that there's a hole in that document somewhere if it's not in there.
Well, I think I need to do a better job, and I can do that. I'll go back --
I'm not 78 5/11/05 - Bill 050133 - Commerce accusing anybody. Just in light of things that are going on around here and have been, those are kinds of things that I think lead to the bigger problems that we -- could lead to some of the bigger problems that we have in terms of contracts and who gets the contracts and who is connected to whom in order to get that contract.
Well, I can do a better job of excising from the big agreement. I can give you the sections, which aren't that lengthy, that do describe the process that they have to proceed, and we can get that to you.
If you would supply that to the Chair, that would be helpful.
What we could also do is give you, I think, a rundown of, say, out of X number of, say, 115 stores at the airport, how many of them were done through RFPs or competitive process versus the other ones. The ones I was referring to that 79 5/11/05 - Bill 050133 - Commerce might not come out of an RFP are really more the national brands, like where if you want to have a Gap, you're not going to do an RFP.
The big chains, the Gaps and the -- I understand that. Thank you. And I did take up a lot of time, but thank you. Thank you, Mr. Chairman.
Thank you, Mr. Chairman. A few years ago we had a hearing in here relative to the monopolistic situation at the airport relative to gates. Do you remember that hearing?
And I raised at the time the potential of Southwest Airlines coming on, and I believe -- correct me if I'm paraphrasing your testimony incorrectly -- but airport officials' position was that Southwest Airlines would not be interested in coming to a city like 80 5/11/05 - Bill 050133 - Commerce Philadelphia because of their corporate policy or operational policy of having to get their planes down, cleaned and up, and Southwest, even if the gates were available, wouldn't be interested in an airport like Philadelphia because of that problem. Do you remember giving me that impression?
I think if not word for word, you're right on target with that recollection.
We were as surprised as anybody else. And I think one of the reasons they agreed to come here, which has probably been detailed in the press, but they spent a good number of weeks here literally with people -- I mean, we didn't know they were here, but they had people with binoculars just watching planes come and go with stop watches and trying to figure out whether they could make it work or not. I think there were a couple of 81 5/11/05 - Bill 050133 - Commerce factors that worked very much in our favor. One was the specific location of the TWA gates relative to the runways, which just ironically happened to be gates that are probably the easiest to get to and from the runways from. And the fact that we had a brand new parking garage that was just built to connect to Terminal E. That's a big issue with Southwest, because they bring local passengers. So I would say that if I want to gild the lily here, I would say that we acknowledged that there were challenges to getting a Southwest or even an AirTran or a Frontier here and getting them to stay and grow here, and we tried to address some of those challenges, but part of the reason Southwest is here was luck, and we certainly acknowledge that.
Or bad luck on the part of U.S. Air. I think it was a combination of factors probably. But the reason I raise it is because there seems to be this reticence to want Council to be involved 82 5/11/05 - Bill 050133 - Commerce in this business when we raised an issue as a body ahead of our time relative to Southwest and we're rebuffed that it could never happen. I don't see why Council's involvement ongoing or in the future would be a negative when the Council raised an issue that turned out to be a boom for the airport. Now, we didn't cause it. You guys weren't negotiating necessarily with them because you didn't think they wanted to be here. They were doing it on their own. But certainly having our involvement and brains thinking 14 about this economic engine that's one of the 15 major drivers of economics in our City, why 16 wouldn't you want to have us involved in that? 17
I think my comments earlier -- I'm not sure if you were here at the time, but I said that I do think there is a role for Council, and I certainly don't mean to imply that you shouldn't be involved. I would also harken back to -- the ordinance that you're talking about had to do with not allowing any one carrier to have more 83 5/11/05 - Bill 050133 - Commerce than 50 percent of the gates at the airport. The vast majority of my testimony against that ordinance had to do with the fact that it would literally have put U.S. Airways out of business in Philadelphia. I think that would still be true today.
Some of us in here when we introduce legislation, we do so to the extreme in order to come back to the center, because sometimes if you start in the center, you come back to nothing. And that leads me to the overseas terminal issue. I mean, there's 13 gates in the new overseas terminal; is that correct?
No. At the present time, they're all common use, and that was a request of U.S. Airways, which we were very happy to accommodate.
Who are we out there trying to bring in here from underserved areas in the world that you can't 84 5/11/05 - Bill 050133 - Commerce get to Philadelphia from like Central and South America or Eastern Europe, Western Africa and Pacific Rim?
That is a very difficult challenge. I think the biggest emphasis or focus of our air service, international air service development team right now, is preparing for the possibility that if we lose U.S. Airways, we would lose many of the international destinations they provide to us today. And we do have some contingency plans and we've been talking to some airlines about replacing some of that service. I would much rather be using the same resources to go out and bring new international routes to Philadelphia, such as I know you have focused in the past on Central, South America and the Pacific Rim. U.S. Airways would argue that their affiliation with the Star Alliance gives us tremendous new access to the world that we did not have in the past, which is one more reason why we're concerned about the possibility of 85 5/11/05 - Bill 050133 - Commerce losing them. We're very excited to have them, starting this week and next week, to serve Venice and Barcelona for the first time out of Philadelphia, but I have to honestly tell you, we're not really focused right now on trying to bring in non-stop service to the Pacific Rim. I think American is probably our best chance to get activity to Central and South America. We have talked to American many times. They do not seem to be in a growth mode at the present time, but I certainly understand based on past experience, Councilman, that I might be back here next year eating my words, and I hope that is the case.
I want to move to the concession contracts for a second. Without being specific and without talking about any specific case or any specific individual, have any officials from the airport been interviewed or appeared or have any had any interface with federal authorities relative to any probe? 86 5/11/05 - Bill 050133 - Commerce
Have yourself or any officials at the airport relative to any activity at the airport -- I want to be that specific, but I'm moving in the concession contract area -- been interviewed or have appeared or have had any interface with federal authorities relative to any probe of criminal activity or potential criminal activity?
The direction that I got from the City Solicitor was if any questions came up relative to the federal probe, that they should be directed to the City Solicitor and that I should not respond to them.
Okay. Understanding that silence speaks volumes, why wouldn't you let the legislative body involved in the process of contracting, whether that's 87 5/11/05 - Bill 050133 - Commerce concession contracts or professional service contracts? In this environment, would it not seem sensible to have more light and more openness in the process of determining who gets what contracts and how much money they make? I mean, this is -- again, I'll go back, this is the largest economic engine probably the City has. How many thousand employees, 30?
28,000 employees. Why would not the officials, the Commerce Director, yourself or others, want 15 elected members, elected by the public, to 16 have access or input or knowledge of what's 17 going on down there? What's the harm?
I don't think we've said that we don't want the Council to have access.
We're going to delay things, we're not going to allow you to operate in a business manner, we're going to delay stuff, everybody down there is going to get antsy. The airlines are going to get 88 5/11/05 - Bill 050133 - Commerce all nervous and the vendors are going to get nervous and potential concessionaires get nervous. But if in fact there's an investigation of what goes on down there relative to concessionaires and concession contracting, if there is -- you can't answer the question -- why wouldn't you want this open in an open process? To me, it just seems logical you'd want all this open to protect yourself.
I think we do have an open process, and the only thing that I've responded to in the testimony today is, as I understand, the proposed ordinance has to do with Council needing to approve rates and charges for any agreement that exceeds one year. We think that that could cause -- it would be an onerous burden on both us and the Council to actually achieve that goal.
Well, there's other onerous burdens that the public bears and as we go forward with these revelations, the public has been bearing a pretty onerous burden and will continue to 89 5/11/05 - Bill 050133 - Commerce bear an onerous burden unless this kind of activity is open to the public scrutiny beyond just the approval of the Commerce Director or the Mayor, whoever the mayor is. I mean, there's one elected official who certainly has a right to be involved in it. There's an appointed official, which is appointed by one elected official. I don't think that provides the scrutiny and the openness necessary for the public to be at ease that things are all well down there or anywhere else in the government, for that matter.
As far as I know, everything that we do at Philadelphia International Airport is an open process. It's a public process. All of our records are open to the public. We don't have any non-public processes that I'm aware of.
We have some process that includes an RFP and some that do not. We're not sure which is an RFP and which isn't. We have read articles in the paper where people who have been mentioned who have 90 5/11/05 - Bill 050133 - Commerce contracts down there certainly have political connections, and that doesn't make them bad people, but you got to wonder, the average vendor, whether or not you need political connections to be successful there or to even get there in the first place. All these things create kind of a veiled secrecy or privacy that I don't think is deserving of a public entity like the airport. That's my opinion.
Notwithstanding our opposition to the bill as it's written today, we feel that we're doing everything we possibly can to remove that veil and make the process as open as possible.
I had heard a rumor that during the course of the consideration of the professional service contract for the facilities maintenance at the airport that there was a time when we were ready to throw out the bids and start over. Did that situation ever come -- is that an accurate portrayal?
The facilities 91 5/11/05 - Bill 050133 - Commerce maintenance contract is a procurement bid. It's not a professional services contract.
Had you ever recommended or were going to recommend that that bid be thrown out and start over?
Okay. Fine. All right. That's it, Mr. Chairman. Thank you.
Thank you, Councilman. Mr. Isdell, there have been several informational requests from Councilman Nutter and Councilman DiCicco to be forwarded to the Chair. I prefer it electronically, if possible. Thank you for your time and testimony. Is there anyone else to testify on behalf of this bill? (No response.)
This bill is being held in Committee at the request of the sponsor. This hearing is recessed until the 92 5/11/05 - Bill 050133 - Commerce call of the Chair.
Thank you very much, Mr. Chairman. (Commerce and Economic Development Committee hearing adjourned at 12:00 p.m.) - - - 93 CERTIFICATE I HEREBY CERTIFY that the proceedings, evidence and objections are contained fully and accurately in the stenographic notes taken by me upon the foregoing matter on May 11, 2005, and that this is a true and correct transcript of same. ______________________________ MICHELE L. MURPHY RPR-Notary Public (The foregoing certification of this transcript does not apply to any reproduction of the same by any means, unless under the direct control and/or supervision of the certifying reporter.)