It's time for MAC to stop coddling Northwest [1]Edit

Real World Economics by Ed Lotterman

A line from Shakespeare's "King Lear" comes to mind in Northwest Airlines' latest legal gambit to stop making lease payments to the Metropolitan Airports Commission: "How sharper than a serpent's tooth it is to have a thankless child.

Some folks at the MAC are likely feeling that kind of bite. On Monday, Eagan-based Northwest said it wanted to cease the lease payments that repay bonds issued under the auspices of the MAC.

Northwest, which filed for bankruptcy last fall, argues that the lease payments are really debt service because they go to bondholders. The MAC has no legal liability to pay these bonds if Northwest does not pay the lease. Northwest claims it did not get anything at the airport as a result of the lease that it did not have before.

If a judge accepts Northwest's argument and classifies the $138 million owed as debt rather than payment for the ongoing use of facilities, this obligation could be discharged through bankruptcy just like any other Northwest debt.

I'm no lawyer. How this case turns out will depend on arguments lawyers make to some judge. Regardless of the outcome, Northwest's stiffing of the MAC offers the commission a golden opportunity to mend its errant ways.

The MAC is a government body charged with administering numerous airports for the good of residents in the Twin Cities metro area. Minneapolis-St. Paul International is by far the largest of the airports, and Northwest Airlines dominates MSP.

In situations where a government agency deals with a single large company, the agency often becomes more solicitous of the needs of its business customer than of the interests of citizens the agency represents.

Economists call such an agency a "captive regulator." Many economics professors in Minnesota use the MAC in their teaching as a classic example of a captive regulator. Over the years the commission has been unduly solicitous of Northwest's needs and often acted to disadvantage Northwest's competitors. Now it is being stiffed out of a large pot of money.

MAC should take the initiative to change how it manages important public assets � landing slots and airport terminal gates. At several busy U.S. airports, landing slots at key rush hours are scarce. At many airports, including MSP, terminal gates also are a very scarce resource. Control of the most convenient gates gives an airline an important advantage over competitors.

A scarce resource has value for its owners. The residents of the metro area own the gates and landing slots at MSP. They should get market prices for access to these key resources. Economists long have argued that auctioning off the rights to gates and landing slots to the highest bidder would improve economic efficiency and reduce congestion delays.

They have not had great success in selling the idea. But MSP is not the only airport that has a cozy relationship with its dominant carrier. Gates have been doled out administratively for decades. The most entrenched airlines historically get the most desirable gates.

In most cases, the airlines have no overt legal right to gates in perpetuity. In practice, control of gates at many airports has become an implicit property right. Control of gates and landing slots is evaluated as an asset when airlines are bought and sold.

Despite that accepted practice, airlines don't actually own the gates. They have no enforceable legal right to continued control of these facilities just as bondholders may have no legal right to repayment if the bankruptcy judge rules in Northwest's favor.

The airports commission can and should start auctioning off fixed-term leases on key facilities or services to the highest bidder. It should stop coddling Northwest by assigning its competitors the least accessible gates or banishing them to the airport's secondary Humphrey Terminal.

Northwest and nearly all legacy airlines are telling workers and creditors that times have changed and old commitments are no longer valid and will not be honored. That is their legal right in bankruptcy proceedings.

Nonetheless, it's a good time for residents and for the airport commissioners who represent them to tell the airlines that yes, times have changed, and the decades of cozy giveaways are over.

From 2006 Edward Lotterman Chanarambie Consulting, Inc.


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