New York’s LaGuardia, Long in Tatters, Borrows Big for Faceliftby
Port Authority has businesses share risk of $4 billion project
Private consortium issues $2.4 billion of municipal bonds
New York is about to find out whether it’s possible to build a 35-gate terminal at LaGuardia Airport around the existing one without disrupting operations or becoming plagued by cost overruns and delays.
To finance construction at the airport in Queens, a group created by Swedish construction company Skanska AB, Canadian airport operator Vantage Airport Group and France’s Meridiam sold $2.4 billion of debt Tuesday in the biggest offering of municipal bonds since March. The group, which has put up $200 million in equity for the $4 billion project, has guaranteed it will be finished on-budget in six years.
“The fact that the consortium has $200 million at risk is 200 million reasons why they’re going to be focused on getting this done,” said Patrick Foye, executive director of the Port Authority of New York and New Jersey, which owns and operates the current 52-year-old central terminal. “If there are delays or overruns, those are for the account of the construction joint venture and not on the account of the Port Authority.”
The agency is relying on the consortium to design, build, finance and operate the new terminal, seeking to avoid the type of cost-overruns that dogged the rebuilding of the World Trade Center by transferring some of the risk to the businesses. The project will revamp an airport that Vice President Joe Biden famously likened to one in a third-world country and is consistently ranked among the worst in the U.S. in terms of flight delays and cleanliness.
Investors are snapping up debt for lower-rated projects to boost returns as municipal bonds yield the least since the 1960s. Moody’s Investors Service, which called the construction project among the most complex it has evaluated, ranks the bonds Baa3, one step above junk. Fitch Ratings grades them BBB, one level higher.
Citigroup Inc., which managed the LaGuardia deal, priced 5 percent coupon bonds maturing in 30 years at 3.27 percent, after earlier marketing the securities for 3.52 percent.
The debt will be repaid with fees from airlines and concession revenue. According to the official statement for the offering, when the new terminal is fully operational airline-generated revenue and charges alone will be enough to cover debt service on the bonds.
“It’s going to be an expensive terminal, no doubt, but it’s not out of whack with what airlines expect to spend in New York,” said Moody’s analyst Earl Heffintrayer. “In theory, if no one ever bought a sandwich or a beer or a sweatshirt in the terminal, the bondholders would get paid so long as an airline show up.”
The Port Authority is contributing $1 billion to the project and spending another $1.2 billion for roads, parking and a “Central Hall” to connect the new terminal to those serving Delta Air Lines Inc.
The project has a little bit of everything that makes construction difficult, Heffintrayer said.
The primary access road to the airport, the Grand Central Parkway, prohibits trucks, so they’ll have to use congested local streets, according to Moody’s. Fuel-tank contamination and asbestos at the existing terminal will need remediation. Pile driving may take more time than expected because of boulders in glacial soil. And Delta may be overhauling its existing terminals at the same time, which could cause delays to the whole project.
Port Authority spokeswoman Cheryl Albiez said the agency has developed a construction bypass road so that local traffic and neighborhoods won’t be disrupted. All construction vehicles will use New York City Department of Transportation designated truck routes.
Both Moody’s and Fitch said they took comfort in the selection of Skanska, which designed and built the AirTrain for John F. Kennedy International Airport, and its partner Walsh Group, which expanded the international terminal at Los Angeles International Airport.
The new terminal will be 64 percent bigger than the current one and have more restaurants, lounges, stores, larger areas around the gates and improved passenger and baggage screening. The current terminal is home to American Airlines, Southwest Airlines, United Airlines and five smaller carriers.
A key element in the rebuilding is the demolition and relocation of a parking garage in front of the current terminal, where a new check-in and security area will be built. New pedestrian bridges, to be built over top of the current entrance way, will connect to new concourses. The project is slated to be completed by July 2022.
If Skanska and Walsh Group fail to meet certain construction milestones, they’re responsible for paying damages of up to about $300 million. They’re also liable for costs, including the repair of faulty work, if aspects of the contract go awry.
Eighty percent of the revenue generated by the new terminal will come from the airlines and another 20 percent will come from revenue generated by concessions. LaGuardia Gateway Partners, as the consortium is known, will negotiate leases with the airlines.
As the closest airport to Manhattan, chances are the airlines will be willing to raise charges to keep their gates at the terminal. The New York market has about 21 million people and the world’s second-highest gross regional product after Tokyo, according to the Brookings Institution. Almost 60 million tourists visited the city in 2015.
Costs per passenger at the new terminal will rise to almost $30 in 2020 from about $4 today, a more than seven-fold increase, before being cut back to about $27.50 by 2025.
“We’re comfortable that the carriers won’t be scared away by a slightly higher per-enplanement fee to pass onto the customer,” said Fitch analyst Emma Griffith.