Official Statement Airport Commission City and County of San ...

Expiration of the Settlement Agreement and the Lease Agreements
Upon the expiration of Settlement Agreement and the Lease Agreements on June 30, 2011, the
Commission will have various options, including (i) extending the long-term agreements, (ii) negotiating new
long-term agreements, (iii) entering into month-to-month agreements, or (iv) not entering into new agreements and
setting rates and charges by resolution. In any event, the Commission intends to continue to establish rates and
charges that will comply with the requirements of the rate covenant under the 1991 Master Resolution and that will
allow the continued safe and efficient operation of the Airport and additional capital investment. If the Commission
and the airlines do not finalize new long-term agreements by the time the existing Lease Agreements expire, the
Commission intends to set rates and charges by resolution that are consistent with any applicable parameters
established by the FAA and the U.S. DOT or their successors.
The Airport has been engaged in detailed discussions and negotiations with representatives of the principal
airlines serving the Airport over a period of more than 24 months regarding potential new lease and use agreements.
The focus of those negotiations has been on the execution of new multi-year agreements with the airlines that are
substantively similar to the existing Lease Agreements. In particular, such agreements are currently proposed to be
residual rather than compensatory in structure. Although tentative agreement has been reached on many issues, the
proposed form of a potential agreement has not been finalized, the airlines have not formally approved any proposed
terms of a potential agreement, and the form or terms of a potential agreement have not been submitted to the
Commission or to the City's Board of Supervisors for review or approval. Moreover, the Airport cannot provide any
assurance that final terms will be agreed upon, or that any such final terms will be approved by the airlines, the
Commission or the Board. The Airport is expects that new agreements with be finalized before the end of 2010, but
cannot provide any assurance that that will occur.
Surety Bonds under the Lease Agreements
Each Signatory Airline is required to post security with the Commission to guaranty its performance and
payment under its Lease Agreement. Such security may consist of a surety bond, a letter of credit or another form of
security acceptable to the Commission in an amount equal to two months estimated rentals and landing fees for
original Signatory Airlines and in an amount equal to six months estimated rentals and landing fees for other
Signatory Airlines. The Signatory Airlines have elected to post surety bonds or letters of credit to satisfy this
requirement, with the exception of United Airlines, which posted cash to secure its obligations under its Lease
Agreement and other agreements with the Commission following the cancellation of its surety policy by the
provider. The surety bonds or letters of credit delivered by all of the other Signatory Airlines are in full force and
effect. Airlines operating at the Airport pursuant to ground leases or 30-day permits are required to post security
bonds or letters of credit in an amount ranging from two to six months estimated rentals under such agreements.
Potential Effects of an Airline Bankruptcy
In the event a bankruptcy case is filed with respect to an airline operating at the Airport, the lease or permit
governing such airline’s use of Airport space would constitute an executory contract or unexpired lease pursuant to
Section 365 of the United States Bankruptcy Code. In that event, a trustee in bankruptcy or the airline as
debtor-in-possession might reject the agreement, in which case the Commission would regain control of the
applicable facilities (including gates and boarding areas) and could lease or permit them to other airlines. The
Commission’s ability to lease such facilities to other airlines may depend on the state of the airline industry in
general, on the nature and extent of the increased capacity at the Airport resulting from the departure of the bankrupt
airline, and on the need for such facilities. If the bankruptcy trustee or the airline assumes the agreement as part of a
reorganization, including assumption and assignment to another airline, the original or successor airline would
continue to be bound by the terms of the agreement and would be required to cure any defaults or arrearages in
amounts owed. Even if all such amounts owed are eventually paid, the Commission could experience delays of
many months or more in collecting such amounts.
In Chapter 11 cases, the debtor in possession or a trustee, if one is appointed, has until the earlier of the
confirmation of a plan or 120 days (unless extended by court order not to exceed 210 days from the date of filing of
the bankruptcy petition) to decide whether to assume or reject a non-residential lease, such as the Airport’s Lease
Agreements.
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