ST. CROIX — Airline representatives have voiced concerns that plans by the Virgin Islands Port Authority to increase user fees to fund expansion projects at both of the territory’s airports will raise airfares and force airlines to decide whether they can continue operating in the territory.
The Port Authority held public hearings across the territory during the last week in July to discuss the planned development projects and proposed new aviation tariff methodology with representatives from the airlines and residents.
New tariff:
The proposed methodology will use cost-recovery formulas like those utilized at other U.S. airports to establish updated airfield and terminal tariff rates to become effective November 1, pending approval by VIPA’s governing board.
Willard John, VIPA Board chair, said the Board must consider the impact on the airlines and their ability to pay as well as whether airfares would increase as a result. On the other hand, he said the Board must ensure that improvements are made to the territory’s airports to remain competitive with other Caribbean destinations that have more advanced airports than the Virgin Islands.
“We are way behind,” John said. “So, we have to consider what does it take to improve our airports.”
Airline charges would be recalculated every year based on actual airport operating costs and traffic levels rather than remaining fixed or using the previous methodology, according to a VIPA press release.
“A large share of the cost of operating the airports is derived from user fees VIPA charges to airlines under the Authority’s aviation tariff,” VIPA Interim Executive Director Ava Penn said during the first public hearing on July 27 at the University of the Virgin Islands on St. Croix. “Under the new tariff methodology, capital, operating, and maintenance costs will continue to be paid for by the primary users of the airports — the airlines. The new tariff is not a tax on passengers.”
Penn said the proposed new tariff methodology sets forth the initial framework proposed by VIPA for the public-private partnership (P3) development of the airports. She noted VIPA is the airport sponsor, with SkyCity as the nominated operator under the transition agreement.
SkyCity is a special-purpose consortium of local and international partners selected to deliver revamped facilities, operations, and commercial services under a P3 framework. While VIPA is the project sponsor, the North American construction and infrastructure development company Aecon is the development lead, contractor, and equity partner. J. Benton Construction, in partnership with Boston-based Consigli, is the local contractor. Tikehau Star Infra, a New-York based global alternative asset management group, is an equity partner. Avports, the leader in the development, operation, and investment of small- and mid-sized airports and military bases, is the airport operator.
As VIPA’s representative, SkyCity developed the methodology, presented it at the public hearings in an advisory capacity, and answered questions about the proposed rates and charges.
Airlines push back:
Lorin Carr, American Airlines senior manager of corporate real estate and airport affairs, spoke on behalf of all the airlines at VIPA’s public hearings.
“The tariff changes presented this evening are being used to compel acceptance of a capital program that airlines have repeatedly opposed,” he said during the July 27 hearing. “Imposing higher tariffs to front a disputed project is not meaningful engagement. It is forcing costs onto airlines and the traveling public with dire consequences.”
Carr, who also chairs the Virgin Islands Airlines Airport Affairs Committee, which represents airlines serving the territory, agreed with Penn’s statement that the proposed tariff methodology is not a tax on passengers.
“That is technically correct,” he said. “But if you think costs don’t get passed on to you, you are naive.”
During the hearing, Carr pointed out that the airlines have consistently supported the need for modern, safer, and reliable airport facilities.
“But supporting that modernization does not mean supporting any project at any cost,” he said. “A plan must remain economically viable for travelers and airlines alike.”
Since Carr said the airlines would have to increase their fares to make up for the additional fees, John said that is a consideration the board must take seriously.
“There will be some kind of increase,” he said, adding that the question is what the extent of those increases is. “Those are the things that we have to get a handle on before we make these important decisions.”
Numbers behind the dispute:
Carr further discussed the concerns the air carriers have during an interview with WTJX. He was joined by Sandra Cisneros, an airline liaison officer who operates as the airline consultant on behalf of the AAAC.
Carr said the proposed tariff methodology shared with the airlines will result in an initial 100% fee increase that will continue rising over the next five years, and that the airlines must decide whether they will continue operating in the territory.
“On average, an air carrier pays around $25 per person,” he said. “That’ll go up to well over $126 per person when they finish their program.”
Carr used an analogy to show how the airlines are going to be affected by the proposed tariff increases, noting that some carriers have called the territory’s airports home for more than 50 years.
“If your landlord or your mortgage bank came to you and said, ‘we’re going to increase your cost of living in your home by 100% in November and over the next few years by 500%,’ would you be able to stay in your home?” Carr asked. “That’s what we are facing, and that’s the decisions that we will have to base our planning and capacity decisions on.”
John said he is not sure whether the proposed methodology would increase the tariffs as much as the airlines indicated.
“I think a deeper analysis on what the impact would be is very, very important,” he said.
John pointed out that St. Thomas is a popular tourist destination.
“They’re going to get their passengers,” he said.
John agreed the tariffs must increase. He said the real question is to what extent.
Cisneros said the $126 figure is not a static number.
“That number keeps climbing for several decades more as the airlines are responsible for paying the debt on that program, so that’s just a starting point,” she said. “The numbers climb and keep climbing, and the numbers would go up exponentially if airlines reduce their traffic to these islands, and that’s something that has not been discussed or modeled, and it should be.”
Comparing costs:
Citing projections that show the future cost per enplanement — the total number of ticketed passengers who get on flights to leave the territory — exceeding $126 per passenger, the AAAC said in a press release that the rate would make St. Thomas and St. Croix the most expensive airports in the U.S. system for airlines to serve. The AAAC noted the projected airport costs would be approximately three to 11 times higher than comparable U.S. and Caribbean airports and significantly above New York City and other major coastal markets. The press release included a graph projecting the cost per enplanement for 2031 at $11.41 on the low end for Luis Muñoz Marín International Airport in San Juan, Puerto Rico, and $46 on the high end for Austin-Bergstrom International Airport in Austin, Texas. Even at that high end, Austin-Bergstrom’s projected rate would be less than half of the territory’s projected $126.32 per passenger.
Carr said he does not support the proposed tariffs, noting the methodology is flawed.
“The problem with rates by ordinance is that it does not allow collaboration between the airports and the air carriers,” he said. “The airport or the operator simply dictates what is going to happen.”
As a result, Carr said the airlines have no commitment to remain in the territory if the costs get “out of control.”
“We can leave on a whim, and that’s not good for stability for the airports,” he said. “So, it’s a lose-lose for everybody. It’s not the way to get this done. The proper way to get this done is to finish a collaborative negotiation that produces a result that everybody can live with.”
However, SkyCity has not been open to negotiating a tariff methodology that would be fair to the airlines and the airports, Carr said.
Development options:
The airlines agree that expansion is necessary at the airports but say it should be phased to match current needs — a less expensive approach that would allow for further expansion later as traffic increases. They argue that SkyCity’s plan, which calls for full build-out now, cannot be financially supported given the current low number of travelers visiting the territory.
“Our plan includes jet bridges at each of the airports, but those jet bridges only have value if airplanes are at the end of them,” Carr said.
Carr said the airlines are in favor of improvements at the airports and agree there is a need for a third-party operator. He said, however, the SkyCity proposal is too costly.
“We’re not against expansion,” he said. “The difference is that our level of expansion matches the current needs, and with the option to go beyond that, should the traffic warrant it. While SkyCity wants to do everything now and impose those costs on a passenger base that cannot support them.”
Cisneros said the demand for flights in the territory does not warrant SkyCity’s proposal for about $690 million to develop both airports, including about $600 million for the St. Thomas airport alone.
“The traffic forecasts are about 1% and stagnant, unfortunately, and so the kind of development they have in mind with that kind of money cannot be supported for what they want to do,” she said.
Cisneros said the airlines have provided a plan for about $390 million worth of improvements at both airports, suggesting additional renovations can commence in the future when air traffic supports that kind of expansion.
“None of that has been entertained in any shape or form,” she said.
If VIPA’s Board does not approve SkyCity’s proposal, the Port Authority would owe a roughly $40 million breakup fee to compensate SkyCity for work already completed, Carr said. He said the airlines have offered to pay the fee so VIPA can end its agreement with SkyCity and move forward with the airlines’ proposal. Carr said the airlines would ultimately pay the amount if SkyCity’s proposal moves forward as well, because the cost would be incorporated into the rates and charges.
“That money is now required no matter what happens,” Carr said.
Senator Kenneth Gittens, acting Senate president, noted in a press release issued Friday that the airline representatives met with senators, VIPA personnel, and SkyCity officials on Tuesday. He said the airlines agreed to submit their proposal in writing, noting that the Legislature expects to receive it by Friday. Carr said the proposal was emailed late Friday afternoon to Senator Kurt Vialet, majority leader. Vialet confirmed he received it, noting he would share it with his colleagues in the Legislature, VIPA, and Government House. Gittens is asking the VIPA Board to delay any final decision regarding the SkyCity P3 agreement until the end of August, giving the Port Authority an opportunity to receive and evaluate the airline industry’s written proposal.
“Our responsibility is to the people of the Virgin Islands,” Gittens said in a statement. “We need modern and properly funded airports, but we also need reliable and affordable airlift. We cannot address one need in a way that creates another problem. We will continue to examine this closely and advocate for what we believe is in the best interest of the entire territory.”
Vialet said in the statement that the Legislature’s objective is to ensure that all viable options are considered.
“This is about doing our due diligence and making sure the best possible option for the Virgin Islands is on the table,” Vialet stated. “The Legislature is not attempting to make VIPA’s decision for the Board. We are asking that the Board take the time to review this alternative proposal before making a decision that could have long-term consequences for our territory.”
On the airlines’ proposal for a phased expansion approach rather than constructing everything at once, John said the board is considering that option. He said, however, many questions remain unanswered. For instance, he questioned how long of a wait between construction phases, as well as how much more waiting would cost.
After including the cost of financing the projects at both airports, the airline representatives said the costs are projected at $1.2 billion for SkyCity’s proposal and $800 million for the airlines’ proposal. They said SkyCity’s proposal for improvements on St. Croix totals about $83 million, while their proposal provides the same scope of work for $50 million.
“We are just executing it differently because we’re staggering the way that it gets implemented, and we are just taking a different approach for cost-savings purposes,” Cisneros said. “So, you get everything that SkyCity has offered at St. Croix, just at a lower price tag.”
John said he would support delaying a vote if additional discussions with the airlines could produce a compromise that protects both the airport finances and the airline service. He said the VIPA Board has not yet scheduled a meeting to consider the proposals.
“We’ve got to look at the whole picture,” he said. “We have to consider all the pros and cons and make a final decision.”
