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Aviation turmoil threatens O’Hare improvements

The $8.7 billion expansion project needs revenue from airlines now struggling to survive.

A rendering of the planned new Terminal 2, the “global terminal,” at O’Hare Airport.
A rendering of the planned new Terminal 2, the “global terminal,” at O’Hare Airport.
Studio Gang

Chicago’s “Taj Mahal” of an O’Hare Airport expansion project will be delayed and could be dramatically scaled back because airlines decimated by the coronavirus can’t afford their share of the $8.7 billion worth of improvements, according to travel industry analysts.

The “survival mode” airlines are in was evident in the losses reported Thursday by United and American Airlines, O’Hare’s two largest carriers. American reported a loss of $2.24 billion for the first quarter, which registered just the early effects of the pandemic on domestic air travel. Chicago-based United said it lost $1.7 billion in the first quarter.

Industry-wide, revenue has fallen about 95% from last April, American Chairman Doug Parker said on a call with analysts. “And while no one has a perfect crystal ball, I think we all expect that recovery will be slow and demand for air travel will be suppressed for quite some time,” he said.

To aviation experts, that translates into perhaps two to five years before demand returns to pre-pandemic levels and airport revenues can again support ambitious improvements at O’Hare. But they said the project, dubbed O’Hare 21, should continue in some fashion because eventually the airport will need more gates.

Henry Harteveldt, a travel industry analyst for San Francisco-based Atmosphere Research Group, said the O’Hare work needs to be scaled back, delayed, and possibly completed “in stages.” He also said the city may have to renegotiate airline use and lease agreements —with higher terminal rents and landing fees baked in — that bankrolled the $4 billion in general airport revenue and passenger facility charge bonds authorized by the City Council to get the project started.

“This isn’t the time to build a Taj Mahal. … If any airline reaches even half the level of passengers and half the level of revenue that it had before the pandemic by the end of this year, it would be a miracle,” Harteveldt said.

“Taj Mahal” is a term some in the industry have used to describe the city’s plans regarding Terminal 2, which would be greatly enlarged to allow United and American to combine domestic and international flights in the same place. City officials take issue with that description.

Mark Ahasic, president of Ahasic Aviation Advisors, also said design modifications are likely. “It won’t be over-the-top Taj Mahal style,” he said. Ahasic also said delays and revisions are nothing new in long-term airport projects and that demand for slots at O’Hare is intense.

He was an executive at JetBlue Airways during and after the 9-11 attacks. Ahasic said it took nearly six years for the discount carrier to get a single gate at O’Hare.

City officials said O’Hare 21’s design isn’t lavish, but an attempt to address overdue needs. Matt McGrath, deputy commissioner at the city’s Aviation Department, said in a statement, “The Terminal Area Plan, the centerpiece of the capital program, is still in the planning and design phase and is continuing. Even before the COVID-19 pandemic, CDA worked continuously to evaluate and prioritize O’Hare’s near- and long-term needs, maximize its competitive position, and evaluate the timing of investments within the broader economic landscape. We plan to move forward with these important investments to secure O’Hare’s future in a fiscally sustainable and responsible manner.”

Harteveldt said there is “no question” that new facilities are needed at O’Hare. Parts of the airport — including Terminal 2 —“date back to the original opening in the 1960s.” But he argued that the new terminal “may not be needed for several years.”

He advised the city and major airlines to “sit down with the architect and the contractors and re-think” the entire project. Consider holding off for “at least a year or two,” then building it in stages, so they’re not “over-building” at a time when airlines finances are weak.

And, above all, find a way to “re-think the rent or lease obligations” to recognize the “much weaker financial condition” the airlines will be in “for the next two-to-three years at least,” Harteveldt said.

“If the city proceeds with this without consulting with the airlines, it’s very possible the airlines will simply say, ‘We’re reneging on this new terminal. We can’t afford it. Forecasts say we no longer need it. And we don’t support it,’” Harteveldt said.

To William Swelbar, analyst at Delta Airport Consultants, O’Hare’s principal issue is the lack of capacity and the likelihood that, post-pandemic, aircraft will be at the gates longer for cleaning. “O’Hare has needed gates for so long, and now it won’t be able to use them as efficiently,” he said.

Regarding industry demand, Swelbar said, “The overarching issue is if it’s business travel or leisure travel that returns first. We know United and American in the business traffic. That’s their model.”

The city hired a team led by renowned architect Jeanne Gang to design the new Terminal 2. Sources described the Gang-designed terminal as over-budget, paving the way for airlines to get out of the agreement.

But some experts said the city and airlines could revise their agreement without hardball negotiations, “Airlines are particularly protective of their large hubs,” said Seth Lehman, senior director at Fitch Ratings, which analyzes O’Hare bonds. “Chicago is one of the strongest markets and carriers don’t want to give up gate access.”

About $2 billion in bonds to support the project, half the authorized total, have been sold. At completion, O’Hare 21 would expand gate capacity by 25%, add capacity for security screenings and speed baggage handling.

Now those goals are colliding with an industry in turmoil, with data from security screenings showing passenger traffic is down 95% from a year ago. The trade group Airlines for America reports that more than 3,000 aircraft, about 50% of the fleet, are idle.

American has said it has applied for $4.75 billion in loans from the Treasury Department. That should keep it flying and avoiding layoffs through October. United said it has applied for up to $9.5 billion in grants or loans, secured by warrants for stock to be issued to the Treasury Department.

The two carriers also said they are reducing their cash burn rates. American said it plans to get it down to $50 million a day in the second quarter from $70 million, and United said it expects a similar reduction to $40 million to $45 million.

American Airlines planes sit idle on a closed taxiway at Pittsburgh International Airport on March 31.
American Airlines planes sit idle on a closed taxiway at Pittsburgh International Airport on March 31.
AP

The $8.7 billion O’Hare expansion was one of former Mayor Rahm Emanuel’s proudest accomplishments.

In a game of musical gates, it would assure Delta Airlines breathing room by shifting its operations from Terminal 2 to the new Terminal 5, where its so-called SkyTeam alliance partners already are located.

Over time, there’ll be a new parking garage, an adjacent hotel and roadway improvements — though none of those projects have been designed or approved by the airlines that pay the bills.

The project still has a targeted completion by 2028 and would make O’Hare the nation’s first “global alliance hub,” with domestic airlines and their international carrier partners all in the same terminal.

At one point, American accused Emanuel of favoring its archrival by awarding hometown United five additional gates.

American was alone among airlines in objecting to a new lease agreement — threatening legal action that could have grounded the project. O’Hare’s second-largest carrier signed on, only after the city made a hazy promise to speed construction of three common-use gates that favor American.

Contributing: AP