The Port Authority of New York and New Jersey aims to seal its position as a frontrunner in U.S. airport public-private partnerships as it embarks on its latest and largest P3, a high-profile revamp of an international terminal at the John F. Kennedy International Airport.
The $9.5 billion redevelopment of Terminal 1 is the most closely watched of the four public-private partnerships — totaling more than $15 billion — that the authority has launched at JFK, one of the nation’s busiest airports and the top international gateway to the U.S.
The projects come as passenger traffic continues to recover from pandemic lows and the bistate agency, one of the largest municipal issuers in the country, sees revenues begin to stabilize.
Port Authority of New York and New Jersey
Construction on two of the smaller P3 projects — Terminals 8 and 4 — is already underway, PANYNJ executive director Rick Cook said Thursday after the agency’s first in-person board meeting since the pandemic. Cook said the authority is working “very very intensely” on advancing the remaining two, Terminals 1 and 6.
“We’re committed to transforming the airport,” Cook said. “The precise timeframe in terms of both financial close and construction would hopefully be in the next few months, but we’re trying to beat that framework.”
With U.S. airports facing an estimated $115 billion in infrastructure needs over the next five years, per the Airports Council International-North America, P3 market participants hope that alternative delivery models will become a more common piece of the airport financing puzzle.
The use of P3s in the U.S. airport sector remains rare compared to other areas in the world, experts say. The PANYNJ is considered a leader in the space, as it has terminals already operated by private entities and it has entered into major design-build-finance-operate-maintain deals for many of its assets.
The U.S. also lags globally when it comes to the privatization or long-term lease of an entire airport. There is only one full airport lease, the Luis Munoz Marin International Airport in San Juan, Puerto Rico. The 40-year concession with Aerostar Airport Holdings, entered into in 2013, was valued at $2.6 billion over the length of the lease.
Both Chicago and St. Louis pulled the plug on plans to privatize their airports, illustrating obstacles presented by market conditions and political unpopularity.
Denver International Airport in 2019 terminated a P3 to renovate its main terminal, a move that cost the airport up to $210 million in penalties.
Investors would like to see more P3s in the airport space.
“These are often big chunky assets that attract a lot of investor attention,” said IFM Investors Executive Director Tom Osborne. “St. Louis in their preliminary request for qualifications attracted 18 different bidders globally, so that’s an indicator of the very broad and deep interest in US airport concessions that exists.”
The port authority’s JFK projects come on the heels of its successful use of the DBFOM structure at LaGuardia, a deal that, when inked in 2016 marked the largest P3 to date, as well as a parking and rental car project at Newark. The LaGuardia project, much of it already operational, will be substantially complete this year, the port authority says.
“It’s trailblazing for the U.S., but the port authority has been doing it for a long time, and it’s worked at LaGuardia,” said Fitch airport analyst Seth Lehman. “In the U.S., most airports are run by cities or counties and they feel they’re able to manage these facilities well and keep their relatively high ratings.” Airlines, which already operate as a kind of private partner to the airport, may also resist the idea of paying profits to other private entities, he added.
With nearly $28 billion of debt and a $32 billion, five-year capital plan, the port authority can only take on so much debt, Lehman said.
“They only have so much capacity, so it’s in their benefit to work with the private entities,” Lehman said. “They allow the private sector to manage and finance the projects, and the port authority in return gets a portion of the cash flows, so if the projects are successful, they’re getting a cut of the money.”
The projects
JFK’s four P3 terminal developments are expected to total around $15.4 billion in a combination of private debt and equity.
The port authority’s capital plan also sets aside $2.9 billion for the overall JFK redevelopment program.
The deals, all substantially negotiated before the pandemic, were restructured to various degrees as the impact COVID-19 would have on airline traffic became clear. Among other things, the leases for terminals 1 and 6 were extended 10 years to 2060 to give the private entities more time to generate returns.
The port authority in December 2021 signed off on a revised $9.5 billion terminal one project, also known as The New Terminal One. The 2.4 million square foot terminal, which will be built on top of present-day terminals 1 and 2 and the demolished Terminal 3, will feature 23 gates, retail, lounge and dining space and will be JFK’s largest international terminal. It will take eight years to build and will require new roads, parking and an electrical substation.
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The New Terminal One Group includes financial partners Carlyle Group, JLC Infrastructure — a minority-owned joint venture formed in 2015 by Loop Capital Markets and Magic Johnson Enterprises — and Ullico. A joint venture of Munich Airport International and CAG Holdings is the operating and technical services partner to the consortium.
In February, a new investor entered the picture when Spanish firm Ferrovial SA, which operates London’s Heathrow Airport and was the original partner on the failed Denver P3, announced it had reached a deal with Carlyle to transfer 96% of Carlyle’s stake in New Terminal One. Carlyle holds a 51% stake in NTO.
That move is subject to the port authority’s approval. At Thursday’s meeting, Cook said the board is still receiving and reviewing information from the firms and an approval could come within the next few months or sooner.
NTO is expected to be built in three stages and includes $7.2 billion for design and construction and $2.3 billion in private investment for financial and other costs, according to a December 2021 PANYNJ official statement. The mix of equity and debt, and whether it will be issued as private activity bonds or with another structure, remains unknown.
Under lease terms, the consortium would make monthly payments of fixed rents to the port authority and the authority would receive a portion of all concessions revenues subject to certain deferral rights through 2033. Roughly one-third of fixed rents and the concession share may be deferred during the ramp-up period from 2026 to 2033, with 7.5% interest accrued and full repayment of any deferrals by 2038.
Terminal 6, with an expected cost of $3.9 billion, is led by JFK Millennium Partners, which includes JetBlue Airways, and will involve the demolition of Terminal 7 and a connection to JetBlue’s existing Terminal 5. The project includes $130 million of port authority investment and, if construction begins this year, would be scheduled to open in 2025.
The port authority and Delta Air Lines broke ground in December 2021 on the $1.5 billion expansion and modernization of Terminal 4. In December 2019, the agency broke ground on Terminal 8, a $439 million project led by American Airlines Inc. that’s expected to be finished next year.
Recovery
After suffering a near collapse of air travel in 2020, revenues stabilized last year, authority CFO Libby McCarthy said at Thursday’s board meeting. Net operating revenues in fiscal 2021, which ended December 31, were up nearly $1 billion from 2020 and only $73 million below 2019.
But aviation volume across the agency’s airports was down 46% in 2021 compared to 2019 and JFK volume was down 51% compared to its 2019 total.
Revenues have fallen $3 billion below what was assumed in the authority’s 2017-2026 capital plan, according to Cook. “We continue to work through the impact of that, but the agency’s finances are in good health and that’s very satisfying,” Cook said after the board meeting.
Also at the meeting, the board authorized the issuance of $3 billion of consolidated bonds in 2022. That includes $1.4 billion of new money and $1.6 billion in refunding for savings.
In 2018, the board approved $8 billion of bonds, and the authority has tapped $7.4 billion of that, McCarthy said. “That doesn’t leave us with sufficient authority to fund the capital plan for the remainder of the year or cover any refunding for potential savings,” she said.
The PANYNJ receives no tax revenue from either state or New York City, and raises its necessary funds primarily on its own credit. It won an outlook boost to stable from negative from Moody’s Investors Service in December 2021, with an affirmation of the Aa3 rating on its senior lien consolidated revenue bonds.
Its holdings include the World Trade Center, the four New York area airports, six bridges and tunnels between New Jersey and New York, the Port Authority Bus Terminal and the Port Authority Trans Hudson, or PATH, rail system.
The authority’s region consists of nine counties each in New Jersey and New York, including the city’s five boroughs.