The Cities of Los Angeles and Ontario are butting heads in court over Ontario’s effort to purchase the under-performing Ontario International Airport at a reasonable price.

Ontario International is situated on 1,700 acres in the heart of the distribution hub of Southern California, 50 miles east of LAX on the 10 Freeway and several miles west of the I-15, a major north south interstate.  This strategically located airport serves a population base of more than 4 million people.  This is slightly larger than the Phoenix metropolitan area.

Importantly, Ontario International has two world class parallel runways with lengths of 10,200 feet and 12,200 feet.  This compares to LAX’s longest runway of 12,091 feet. 

Ontario maintains that Los Angeles World Airways (“LAWA”), one of the City’s three proprietary departments along with Water and Power and the Port of Los Angeles, has done a very poor of managing Ontario International as the 2014 passenger count of 4 million is off by over 40% from its peak (7.2 million) in 2005.

Meanwhile, Mayor Eric Garcetti was crowing about the record 70 million passengers who travelled through Los Angeles International Airport (“LAX”) in 2014.

Ontario and other Inland Empire cities and businesses rightfully claim that LAWA’s neglect and poor management of this centrally located airport has damaged their economy by many billions over the past decade.   They also believe that LAWA has failed to live up to its obligation to develop a regional network of airports that would help relieve the congestion at LAX and the surrounding neighborhoods.

The failure of LAWA management has resulted in Moody’s downgrading the rating on Ontario International’s outstanding bonds. Fitch Ratings  changed the outlook from stable to negative as the airport is transitioned from a “strategic reliever airport” serving the greater Los Angeles area into a “more limited service, regional hub airport as reflected by continuing declines to its primary origination and destination base.”

This has also resulted in an unhealthy concentration of revenue with Southwest Airlines accounting for 57% of the passengers and United Parcel dominating the air freight business with a market share in excess of 70%.

Passenger fees have also increased to non-competitive levels as the fixed costs are spread over a lower passenger count.

To date, Los Angeles has rebuffed Ontario’s efforts by establishing an asking price essentially equal to its book value on its audited financial statements of almost $400 million.  Ontario would also be responsible for repaying the airport’s $60 million of debt.

However, this value is inflated because it includes proceeds of an estimated $200 million from federal grants and passenger and customer facility charges, which according to the Federal Aviation Administration, stays with Ontario International and is not an investment by LAWA.

Interestingly, the FAA requires that the proceeds from the sale of Ontario International be retained by LAWA, much to the dismay of City Hall.

The City of Los Angeles and the politically appointed Board of Airport Commissioners would be wise to lower their unrealistic expectations of value and sell Ontario International Airport for $200 million, an amount that reflects the deduction of the proceeds from grants and passenger and customer facility charges.

There are many benefits for divesting Ontario International.

It would end the litigation and the bad blood between LA and Ontario.  Unfortunately, all the dueling lawyers and consultants who are chewing up millions in fees would have to find other clients.

Furthermore, the new management of Ontario International would be motivated to grow the economy of the Inland Empire by improving its service levels.  This would also benefit the regional economy and alleviate some of the stress on LAX and the surrounding communities of Westchester, Inglewood, El Segundo, and Culver City.

Most importantly, however, LAWA management would not be distracted by the operations of Ontario International that represent less than 6% of LAWA’s revenue of over $1 billion.  Rather, management can focus on its multibillion expansion plans, including the LAX’s $4 billion “Landside Access Modernization Program” involving the LAX Train and Rent-A-Car Center and its multibillion expansion and improvement of its terminals and landing gates.

While a $200 million deduction in the sale price is a considerable sum, it is money that LAWA never invested in Ontario International.  It also represents only 2% of the $9.5 billion in assets of LAWA.  By eliminating the distractions associated with Ontario International and focusing on the day to day operations at LAX and its massive capital expenditure program, LAWA will achieve benefits far in excess of the perceived loss.

Cross-posted City Watch LA