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Midway Airport Financing Confirms Public-Private Partnerships Politically Viable Countrywide

The city of Chicago recently announced a landmark plan to privatize the Midway Airport, which is a medium-size hub airport on the South Side, anchored by Southwest Airlines. The first privatization of its kind, a consortium of investors and the city set up a deal enabled by federal legislation that features the mutual benefits of public-private partnership. To detail this landmark deal, TPR/MIR was pleased to speak with David Narefsky, partner at Mayer Brown, who also helped close the Chicago Skyway deal, which has been given credit for paving the way for large-scale public-private partnership’s around the country.

Published Tuesday November 25, 2008

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David Narefsky

This article was featured in the November 2008 issue of TPR/MIR.

When TPR/MIR last interviewed you, we talked about the prospects for more public-private infrastructure partnerships in the United States. This fall, Chicago announced it had just negotiated the privatization of the Midway Airport on the south side of Chicago, priced at $2.5 billion, with $1 billion going to the city. What was the rationale for this public-private transaction? Is it perceived as a good deal?

First, I’d like to give some context and sense of timing of the transaction. The $2.5 billion winning bid to which you referred was submitted at the end of September by a consortium called MIDCo. It is a consortium comprised of three members: Vancouver Airport Services (whose parent owns and operates the Vancouver International Airport and about sixteen other airports around the world); Citi Infrastructure Partners, which is a major international infrastructure fund; and the John Hancock Life Insurance Company. The Chicago City Council approved the transaction in early October, by a 49-0 vote. The city then submitted a required final application to the Federal Aviation Administration. The approval of that application is expected in the early part of 2009; with the city and MIDCo proceeding to closing shortly thereafter.

After the city’s successful closing of the Chicago Skyway transaction, the city looked at what other assets might be appropriate for a public-private partnership under a concession lease structure like the Skyway transaction. Midway was attractive for a couple of reasons. One, it is regarded as a very well run airport. It had recently completed a new terminal—the project was a combination of a reconfiguration of an existing terminal and an expansion, so it’s fair to think of it as a new terminal. Southwest Airlines is the major tenant at Midway. When we started the transaction, Southwest controlled about 65 percent to 70 percent of traffic. Now it’s well over 75 percent—it may even be over 80 percent. Southwest is an attractive anchor tenant because it’s the only American airline that has been consistently profitable.

A series of regulatory aspects also made it attractive. U.S. airports can be privatized under a public-private partnership structure established by a federal pilot privatization statute passed by Congress in 1996. The statute had received fairly limited attention until the Midway project. The only airport that had been privatized was Stewart Airport, about 60 miles from midtown Manhattan in Newburgh, New York. It’s a small airport with less than a half-million passengers a year.

Under the federal airport privatization statute, only five airports can be privatized. Only one opportunity is reserved for an airport the size of Midway, a large or medium “hub” airport. The city saw all of this as an interesting opportunity to pursue, with Midway qualifying for the one spot for an airport the size of Midway.

Another fact that makes Midway a privatization candidate is that under the federal pilot program, an exception can be granted by the FAA from the general requirement that airport revenues are required to remain “on airport.” Under the federal pilot program, and with FAA approval, the revenues derived from the privatization can be used for non-airport purposes. That was attractive to the city in that it could capture and benefit from the asset value of Midway.