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Outdated contract with airlines squelched airport improvements

By Eli Segall

A 30-year-old deal between Norman Y. Mineta San Jose International Airport and major carriers Delta, United and American, which gave the airlines veto power over capital improvement projects, is set to expire this fall. And when it does, the airlines may not be flying so high.

The outdated law was created when the airport was a mere shadow of its present self and struggling to attract carriers to its city. The clause was offered in exchange for guaranteed flights in and out of the city, but airport officials say this deal has resulted in lost airport revenues and delays in capital improvement projects.

Last year airport officials began talks with the airlines in an effort to update the agreement and bring the airport under city control. An agreement was reached last month.

On March 27, the San Jose City Council will vote to approve a new five-year month-to-month contract, with a five-year extension option. Veto power has been replaced by airline input on projects valued at $5 million or more; if the airlines raise concerns over a project, the city can defer the project for a year but can later proceed despite objections.

"This is the best thing the city could do," said Ralph Tonseth, who served as San Jose aviation director from 1990 to 2005. "The original deal was bondage; it was an awful, awful agreement."

The deal was signed in 1978 when the federal government still controlled flight routes, passenger fares and the number of airlines in operation. This lack of competition resulted in a "heyday" for airlines, which had guaranteed flights, while airports found themselves in a weak position, having to rely on the airlines to chose their facilities, Tonseth said.

Few incentives existed for airlines to choose San Jose. The city had one-third fewer residents than today's population of 950,000, and the tech industry was in its infancy. Business travel in and out of San Jose was minimal.

"It was always tough to get airlines to San Jose," said Frank Sweeney, a retired San Jose Mercury News reporter who covered the airport for more than 30 years. "It was a much smaller city then, and a much smaller market."

As a result, San Jose offered a lengthy guaranteed contract to airlines that committed to a minimum number of weekly flights, thereby guaranteeing airport revenues. The contract also included veto power over capital projects. Tonseth estimated United, Delta and American rejected "dozens" of projects over the years.

Airline-generated revenues come through lease agreements for ticketing desks and terminal gates, as well as flying and landing fees. These revenues, however, could be higher. San Jose has kept its fees lower than most airports to attract airlines, said airport spokesman Rich Dressler. Airport access fees, known as enplanement fees, were $4.60 per passenger last year. The new contract will almost double that, Dressler said.

The airlines contract was affected greatly after Sept. 11, which resulted in heightened security, fewer passengers and a rash of airline bankruptcies. The dot-com bust, which occurred shortly before Sept. 11, had already caused a 15 percent drop in business travelers, Dressler said.

In 2000, at the height of the dot-com craze, the airport handled 14.1 million passengers; last year there were 10.9 million passengers, according to airport figures.

"A lot of airports have recovered, if not surpassed pre-9-11 totals," Dressler said. "We're still working our way back."

As part of this comeback, a $1.5 billion airport overhaul is on the horizon. Phase I of the project, which will cost $663 million, has already been approved by United, Delta and American; it will improve roadways through the airport, start construction on a new Terminal B and modify existing Terminal A.

The new contract, if approved, will take effect July 1.