Tulsa Int'l Secures Bank Loan to Complete Runway Reconstruction

Author: 
Carroll McCormick
Published in: 
May-June
2013

factsfigures


Project: Bank loan to complete runway reconstruction

Location: Tulsa Int'l Airport

Owner: Tulsa Airport Authority

Budget for Remaining Runway Work:
$30 million

Scope: 7,000 ft. center section; 600 ft. intersection

Maximum Loan: $14.6 million

Lending Institution: Compass Bank

Terms: 4 years; 1.9% annual interest

Additional Funding: $18.5 million FAA Airport Improvement Program entitlement grants; 6-year landing fee increase 

Financial Advisor: FirstSouthwest

Prime Contractor: Interstate Highway Construction

Design Engineer: Atkins

Benefits: Consolidation of construction phases;
lower total cost

Facing the prospect of a protracted runway reconstruction schedule with multi-year FAA funding installments, Tulsa International Airport (TUL) has taken the financing road less traveled by obtaining a $14.6 million bank loan. As a result, it expects to save millions of dollars and compress the schedule for the remaining portions of the project by three to four years.

Design Packages 1 and 2 replaced 1,200 feet of concrete pavement on the south and north ends of Runway 18-36 in 2011 and 2012. The cost to complete the center 7,000 feet of the runway was initially pegged at $34 million, but is now anticipated at $20.8 million - including more than $4 million of additional work not included in the original price estimate.

Due to the pacing and amount of annual FAA funds the airport plans to use for the project, TUL initially faced a six-year or longer construction schedule. "At that time, challenges at the FAA meant that we could not get a letter of intent for this project," says TUL Director Jeff Mulder.
 
With expectations for the airport's match of federal funds rising from 5% to between 20% and 30%, the airport was in a bind. "We were not in a position to do that," Mulder explains.

Enter Mike Newman, the airport's financial advisor and senior vice president of FirstSouthwest. "It is my responsibility (to assist) the airport in achieving their financial objectives," Newman explains. "In this instance, I developed the financing structure to achieve their goals ... without putting pressure on the credit rating assigned to general airport revenue bonds of the airport and keeping costs of issuance of a small transaction down to a minimum."

Mulder relates their objective to the construction process: "We wanted to aggregate enough money to attract contractors and aggregate bid contracts."

Securing Funds

After soliciting proposals from several banks, TUL agreed to a non-revolving advancing term loan with Compass Bank in August 2012. The maximum amount is $14,625,000, at a 1.92% annual interest rate. The airport plans to repay the principal with FAA entitlement funds from 2012 and approximately $18.5 million of future FAA grants. Its final payment is scheduled for August 2015.

While Mulder acknowledges that a bank loan is an unusual form of airport financing, Newman notes that these are unusual times for banks, and TUL was an attractive borrower. "Banks in general have a strong interest in extending credit, through tax-exempt loans or purchase of tax-exempt bonds, to the public sector at the current time," explains Newman. 

He cites three primary points, among others, working in the airport's favor: historically low demand for personal and corporate loans, the important service (air travel) that TUL provides, and the general "high credit quality" of airports as local economic drivers. "This project had a relatively short repayment period, and fit perfectly in the bank's desire for term of exposure," he elaborates.

The airport received the loan on the merits of its own good credit rating, adds Mulder: "The loan was not guaranteed by the FAA. If the government shuts down or if there are budget squabbles, the FAA funds might not show up on the day (we) expect. The banks knew that and accepted this as a reasonable risk, and accepted the airport as an acceptable risk."

Cooperation from Carriers

Buy-in from TUL's tenant airlines was another key aspect to its unconventional financing strategy. Airport officials negotiated a temporary hike in landing fees in exchange for a shorter construction period, fewer runway closures and less negative impact to flight operations. The agreement also ultimately helped secure a lower-than-expected winning bid for the work. Accepting the airport's rationale, the airlines agreed to an increase of six cents per year per 1,000 pounds of landing weight for six years. TUL's current landing fee is $3/1,000 pounds.

"The airport presented us with a pretty compelling business case," explains Mike Wesche, senior principal of real estate for American Airlines. "When the period of construction is on, the runway project presents some impacts on us. The loan allowed the airport to increase the scope of their construction package. This compressed construction schedule reduces the operational impact on the airlines. We also felt that this would keep the overall cost of the construction down. It was a prudent decision to make."

Mulder highlights that not closing the runway for five to six consecutive years will tangibly benefit the airlines. "The saved money on the work also ultimately saves the airlines money," he notes.

With a purse sizeable enough to offer a single construction bid, the initial $34 million estimate turned into a $20.8-million winning bid, and three phases of work were compressed into a single construction season. The savings also provides for enough funds to incorporate two more elements: another 500 feet of runway work for $1.3 million and the installation of two arresting cables for $3 million. 

Phase 3 work began in January and is scheduled to be completed the end of May. Phase 4 intersection work is expected to begin next spring and take 14 weeks to finish.

Looking back at TUL's experience, Mulder offers encouraging words to other airport directors considering similar financing strategies: "The lending institutions assessed the risk and accepted it. We had banks eager for the business. This loan was creative, non-traditional (and) easier to get than you might think."

Subcategory: 
Runway/Ramp

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