Palo Alto braces for financial uncertainty in airport takeover

City hopes to reach deal with county in August over small but busy hub

As Palo Alto prepares to take full control of its namesake airport for the fist time in nearly half a century, city officials are wrestling with gaping uncertainties about how much it will cost to fix up the small but bustling Baylands facility -- and where the money will come from.

The city has been preparing to take over the airport from Santa Clara County for about eight years, a process that is finally expected to be completed later this year. Both the City Council and the county's Board of Supervisors are scheduled to consider in August a transfer agreement for Palo Alto Airport, which hosts about 180,000 landings and takeoffs annually.

Following the operation's transfer, however, the city will still have to navigate its way through bureaucratic obstacles before the airport becomes economically viable, as council members had envisioned when they directed staff in 2010 to negotiate an early termination of the county's 50-year lease.

The county, which runs three airports, has had a hard time making Palo Alto Airport profitable. According to a 2006 business plan, the county's investment in the facility has exceeded revenues by $808,000 in the first 39 years of the lease, which was originally set to expire in 2017.

Even in the best case scenario, the airport's operations will be fueled for at least three years by loans from the city's General Fund. The council agreed last year to loan $325,000 to the newly created Airport Fund. Earlier this month, the council adopted a budget that raises the sum by $235,000 for a total loan amount of $560,000. The airport plans to hire a new management analyst (who will earn a salary of $155,000) and spend close to $300,000 on maintenance work, inspections and ground support for the airport's control towers, according to the budget.

The facility is expected to stay in the red at least until fiscal year 2018.

The city has at least one big reason for optimism, though. In 2010, the council commissioned a business plan to determine whether the airport can be profitable. The plan, produced by Kentucky-based firm R.A. Wiedemann & Associates, was predicated on the city taking over the airport by 2012. It predicted that the airport can generate a cumulative profit of either $13.7 million or $16.2 million by 2037, depending on whether the facility is run in-house or by a third party, respectively.

At the May 27 meeting of the council's Finance Committee, City Manager James Keene cited three glaring issues that the city faces when it comes to the airport takeover. First is the issue of deferred maintenance and how to pay for it.

According to a letter Keene submitted in November to Santa Clara County Executive Jeffrey V. Smith: "The city is ... aware the county has engaged in substantial deferred maintenance at PAO, which has resulted in deterioration of PAO's runway, taxiways and apron. The city hopes the county will have sufficient time to fully address the city's concerns regarding these matters before the transition is completed."

One thing that is clear, Keene told the Weekly, is that the city "is not going to have a fully modern airport turned over to us." The city and the county, he said, are still working out the details of who will pay for the needed repairs.

"There seems to be a reticence for them (the County) to meet us where we believe it should be," Keene said, referring to the level of investment that needs to be made.

A draft transfer agreement calls for the county to make numerous repairs to the airport, including the remediation of contaminated portions of the airport, and to help fund some of the repairs, the November letter stated.

According to a report released by the Public Works Department last week, the county's deferred maintenance "appears to create the potential for safety concerns to arise after the city gains management and control of PAO."

A second issue is the potential pressure to increase services at the airport.

"We've always acknowledged that once Palo Alto takes it over, we'll probably have more demands from folks to do things and feel compelled to be more responsive than the county," Keene said.

Third is the issue of the two fixed-base operators that serve the airport: Roy-Aero Enterprises, which manages offices, hangars and tie-down rentals at the airport; and Rossi Aircraft, which provides fueling and aircraft-maintenance services. Both operators have leases from 1969 that are set to expire in 2017. Once the leases expire, the city is expected to raise rents and bring in more revenue. Exactly how much more money the city could bring in remains unknown. At the May 27 meeting, Councilman Pat Burt asked for a range of potential increases. The city's Airport Manager Andrew Swanson declined to give an estimate, noting that the city is preparing to conduct a "full evaluation" of the airport's condition and that citing specific numbers would be premature. But given the high level of activity at Palo Alto Airport and the high demand for airport services, the increases could be significant. The 2010 Wiedemann report notes that "a minimum 50 percent increase in rents will be assessed" after the leases with the two operators are reappraised.

On the more-immediate revenue front, city officials hope that they will be able to apply for and receive Federal Aviation Administration funding by August. The FAA has encouraged the city to apply for $610,000 in "entitlement funds" that are earmarked for deferred pavement maintenance, with the understanding that if the transfer of airport ownership does not take place in August, the funding request will not be considered.

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Like this comment
Posted by senor blogger
a resident of Palo Verde
on Jul 3, 2014 at 1:14 pm

Please, Let me suggest :
The airport should be fully , financially, self supporting.
Any loans should carry a reasonable interest rate, and be publically reviewable. With no other hidden subsidies.
The airport is a business enterprise and should be treated as such.
Very few Palo Alto citizens derive any benefit whatsoever from the airport or its operations.

There is a reason that the County wants to be free of the burden of the airport.

Do any of our Council members know what the actual reasons are?

Like this comment
Posted by resident 1
a resident of Adobe-Meadow
on Jul 3, 2014 at 4:09 pm

I am concerned about the funding from the FAA. What strings are attached concerning who operates at the airport? The San Carlos Airport survives by funding grants from the government that require it to accept any organizations that wants to use the airport - so they say. They are saying that Surf Air can operate out of that airport and they are required to allow that.
I am concerned that the desire to show a profit will drive PAO to allow other small airlines to operate and increase the noise. We have a lot of drama right now concerning both San Jose and SFO planes. Bulking up the "services" is undefined. "High Demand" is undefined.
A further problem is that the flood control effort may possibly truncate the runway - the flood control section is at the end of the runway.
A lot of unknowns.

Like this comment
Posted by Resident 2
a resident of Professorville
on Jul 3, 2014 at 4:57 pm

Airports are necessary infrastructure just as roads and harbors. Just because not everyone uses them directly doesn't mean they are not needed. All the emergency medical evac for entire west bay is based at PAO for example.

The primary reason PAO is in the red at this time is because any and all development was delayed/blocked for years by county. An airport makes money primarily by leasing parking space just like any other parking facility. Yet, they were not alowed to build more hangars (which fetch about 5x to 10x the price of a tiedown for same surface area) and were not allowed to raise parking rates either (which are county wide).

Ownership by county was a management disaster in hindsight. Original intent was to save cost by sharing overhead but the result was just simple neglect. PAO is one of the airports that can be easily and substantilly profitable exactly because of the location and substantial demand. But it still needs maintenance just like a bridge or a road.

Like this comment
Posted by Resident
a resident of Another Palo Alto neighborhood
on Jul 3, 2014 at 5:11 pm

Palo Alto should be promoting the airport as a city and council amenity. It should be using the convenience of the airport as an attraction for local businesses to use air taxi services, etc. On top of that, there should be a move to have supporting infrastructure close to the airport. At present there isn't even a coffee shop anywhere close.

With the Baylands close by infrastructure could be supported by users of both the airport and the Baylands as well as the golf course and athletics center.

City planners should start looking at the East of Embarcadero area and start using some common sense and out of the box innovative ideas to get the best use of this area and get some tax dollars into city coffers from those that use these facilities.

Like this comment
Posted by FBO Lover
a resident of East Palo Alto
on Jul 3, 2014 at 6:34 pm

The Senior Blogger makes good points, but missed one main things...that no resident derives any benefit from the airport...Everything is mobile now and speed is key in mobile world...getting a heart specialist to a senior thru air is a pretty good benefit...getting a person airborne within walking or bicycle distance is a good benefit...helping a person learn to fly is a good benefit, especially for the youth in East Palo Alto...Incorporating micro jets to deliver a person outside first tier radius is a good thing...and lastly in the area of earthquake where the Earth turns to mush, a runway for air resupply is a Tri-City bonus when bridges collapse and roads are clogged...

Like this comment
Posted by Chris
a resident of Community Center
on Jul 3, 2014 at 8:03 pm

Personally I'd love it if new hangars were built there. The current hangars fetch over $1000/month in rent, which is huge compared to the $650/month at San Jose. (San Jose is far from cheap.)

Hard to imagine new hangars operating at a loss -- and they'd stop the nicest (read most profitable to the airport) planes from relocating elsewhere.

Like this comment
Posted by Anonymous
a resident of Another Palo Alto neighborhood
on Jul 3, 2014 at 10:10 pm

Palo Alto isn't going to be making $13.7 Million off this airport. It's going to require cash infusions for years. So what are the terms on the initial $560,000 loan? At what point does Palo Alto even think it is going to break even running this airport?

Like this comment
Posted by Jetman
a resident of Another Palo Alto neighborhood
on Jul 5, 2014 at 10:29 am

From an environmental point of view, there is little room for PAO to expand. The EPA has been studying lead emissions at general aviation airports, and POA did not fair very well:

0.33 ug/m^3 (San Carlos, CA)
0.17 ug/m^3 (McClelland, CA)
0.12 ug/m^3 (Palo Alto, CA)
0.09 ug/m^3 (Reid-Hillview, CA)
0.07 ug/m^3 (Gillespie, CA)
0.07 ug/m^3 (Merril, AK)
0.06 ug/m^3 (Van Nuys, CA)
0.06 ug/m^3 (Auburn, WA)
0.04 ug/m^3 (Deer Valley, AZ)
0.03 ug/m^3 (Brookhaven, NY)
0.03 ug/m^3 (Stinson, TX)
0.02 ug/m^3 (Harvey, WA)
0.01 ug/m^3 (Republic, NY)

At 0.12 ug/m^3 Palo Alto Airport is only 0.02 below the EPA's limit of 0.15 ug/m^3. Even a small increase in activity at PAO could push PAO over the limit. Even without exceeding the limit, what is Palo Alto's legal liability?

A Duke University study found that children attending schools within one kilometer of an airport, had elevated levels of lead in their blood.

Leaded Fuel Is a Thing of the Past—Unless You Fly a Private Plane
Mother Jones ~ January 3, 2013 Web Link

EPA Airport Lead Monitoring Program Update: Web Link

Like this comment
Posted by where's the sunshine?
a resident of Midtown
on Jul 6, 2014 at 11:30 am

Another reason the airport appears to be in the red is because of the county's (should be criminal) behavior. They run the revenues into the county general fund, then pay for the airport out of the airport fund. Anything would appear to be in the red when you discount the income!!

Like this comment
Posted by resident 1
a resident of Adobe-Meadow
on Jul 6, 2014 at 12:41 pm

Sunshine's comment is relevant to every bond issue we vote on. We authorize funding for a specific purpose, then the funding gets merged into the general fund and is used for other purposes. Jerry Brown is very good at that. Anything you vote for on HSR or the airport will somehow lose it's identity and get spread to other purposes.
Same for social security - it is not an entitlement - it is deducted out of the payroll in the form of FICA taxes which are matched by the employer. If you considered all of the money deducted and matched then listen to them say it is broke - boo hoo. That is what is wrong with government - no accountability.

Like this comment
Posted by Crescent Park Dad
a resident of Crescent Park
on Jul 7, 2014 at 5:55 pm

The problem is that the public didn't get to vote on the airport acquisition by the city from the county. Our wonderful CC decided to do this all on their own. Never mind the red ink...

Like this comment
Posted by curmudgeon
a resident of Downtown North
on Jul 8, 2014 at 10:07 am

"All the emergency medical evac for entire west bay is based at PAO for example."

Emergency medical evac services use helicopters. Helicopters don't need a 2,443-ft runway. Therefore, if we're justifying PAO on this basis, we can close that runway, reserve 5 acres or so for medical evac, and open the remaining 97 acres for public use.

Like this comment
Posted by Jetman
a resident of Another Palo Alto neighborhood
on Jul 8, 2014 at 12:14 pm

Are general aviation airports like PAO really viable businesses, or are they just financial zombies, just barely surviving on the life support of FAA Airport Improvement Program (AIP) funds?

General aviation has been in decline for years. The up and coming generation of potential GA pilots are not even interested in driving, let alone flying. The young Google and Facebook employees with the discretionary income to become aircraft pilots and/or owners, prefer to have their adventures in the safety of the virtual world. The future of PAO seems to be as a hub for a smaller regional carrier (like SurfAir), or as a base for domestic surveillance drones, a business Google and Facebook are eager to enter.

If Palo Alto accepts AIP funds, Palo Alto will lose control of many of the aspects of PAO's operations important to the Palo Alto community. Palo Alto's hands will be tied by an elaborate network of strings which come attached to all FAA AIP funds that are designed to protect the aircraft industry from local governance.

"MacArthur drops noise-surcharge"
AINonline ~ May 27, 2008 Web Link

"Young Americans Lead Trend to Less Driving"
New York Times ~ May 13, 2013 Web Link

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