CPA: Landing fees cut risks bond repayment

The Commonwealth Ports Authority has warned the Legislature against pushing the agency to implement a 50 percent reduction in landing fees saying it would jeopardize the payment of the $53 million revenue bonds.

Amid the continuous plunge of the island’s tourism economy as a result of Asia’s financial crisis, the ports authority would have to increase landing fees to be able to meet debt service, operating expenses and complete capital improvements already in progress, said Carlos H. Salas, executive director of CPA.

“If CPA does not raise fees to meet debt service requirements and expenses, CPA will be in technical default of the bonds inviting a wide range of legal problems,” he said in a letter sent to House Speaker Diego T Benavente.

Acting House Speaker Jesus T. Attao said he understands fully well the financial problems besetting the ports authority and its responsibility to pay its debt. He added that he will seek the support of the House Leadership in a meeting next week concerning the ports authority’s position against the proposal to reduce by 50 percent the landing fee.

“We have to understand the concerns of CPA which were not taken into consideration when we discussed the resolution. We want to help the tourism industry recover from the crisis but definitely, not at the expense of one agency,” said Attao.

The House of Representatives passed a resolution last month urging the ports authority to assist in saving the floundering tourism industry by reducing the landing fee of airlines servicing the CNMI. In helping the CNMI compete with other destinations, the resolution said CPA should grant a 50 percent reduction of landing fee to airlines providing direct service between Asian destinations and the Northern Marianas.

A reduction in the landing fee would have a negative effect on CPA’s efforts to achieve investment grade ratings on its airport and seaport bonds. Salas, who is currently in California to present the financial situation of the ports authority with two rating agencies — Fitch and Standard & Poor’s — said the investment grade ratings would help maintain the current low interest of the bonds.

The ports authority is currently paying a 6.25 percent interest rate for the airport bond and 6.40 for the seaport bond.

“Current bondholders of CPA bonds may view the Legislative resolution as a form of control over CPA’s financial affairs that could suggest a direct conflict with the bond agreements made when the 1998 bonds were sold,” said Salas.

When the ports authority issued the revenue bonds, one of the agreements was that CPA would produce annual net revenues equal to at least 125 percent of its debt service every year.

Likewise, the Federal Aviation Administration would be concerned with CPA’s compliance with the self-sustaining requirements under the agency’s grant assurances. If the reduction of fees would only be given to new routes only, Salas said, this would constitute discrimination in pricing and possibly revenue diversion violations.

“Both violations could jeopardize all future funding and force CPA to return millions of dollars from previous grants,” he added.

A reduction in landing fee may not serve the intended purpose of increasing air service since Honolulu International Airport even lost air service when it implemented the scheme.

Furthermore, this does also result in reduction of airfares. Operating costs such as personnel, fuel, maintenance and ground handling make up a substantially larger portion of the airline budget while landing fees constitute only five to six percent of their operating expenses.

According to Salas, a waiver or reduction in airport fees is basically a form of subsidy from the airport’s cash reserve that will be recovered at a future date. Such recovery usually means increasing the fees at a certain point, he said.

“For CPA to waive or reduce fees, it must find a source of revenue to compensate the difference or to serve a subsidy. If it does not have an alternative source, a subsidy from the Legislature would become necessary,” he said.