BY MICHAEL WHITELEY
ARKANSAS DEMOCRAT-GAZETTE, July 12, 1998

FAYETTEVILLE -- With a little help from its friends, the Northwest Arkansas Regional Airport seems poised to replace Drake Field as the area's center for commercial passenger aviation.

Help has come in the form of exceptions to federal rules and laws granted by regulators and Congress -- most recently the Federal Aviation Administration's agreement to lift a statutory restriction allowing only existing airports to apply for a special $3 per-passenger fee to defray construction costs.

Help has come from Wal-Mart Stores Inc., Tyson Foods Inc. and J.B. Hunt Transport Inc. --regionally based Fortune 500 companies that are encouraging four reluctant commuter airlines to follow the lead of American Eagle and abandon Fayetteville's Drake Field for the new airport near Highfill 30 miles to the north.

The rural, $107-million airport is to open about Nov. 1.

But the linchpin to the airport's success is a contract signed with American Eagle on May 26 that includes provisions unheard of in the industry.

Officials of the airline and the airport say the five-year contract was framed by American Eagle and sweetened by innovations suggested by the staff of the Northwest Arkansas Regional Airport Authority.

The document attacks what has been the airport's major roadblock -- cost per enplanement. That is the amount each airline pays to board a passenger and is a key figure in determining an airline's profitability.

Gary Foss, planning director for American Eagle, a subsidiary of American Airlines, said his company's cost at the new airport will rival what it pays per passenger at Drake Field, a little less than $2. As recently as last year, airport consultants projected the fee at $9.96.

Foss said American Eagle's replacement of turboprop aircraft with regional jets was the deciding factor in moving. But, once that decision was made, American Eagle challenged the airport authority to come up with a deal the airline couldn't refuse.

"We said, 'We'll move if you basically can give us the cost structure we have over at Drake Field. We don't want our costs to skyrocket' They came to some creative solutions, add we created solutions, recognizing we were the anchor tenants."

In studies disputed by Drake Field, the airline concluded that its new 50-passenger jet, the Embraer 145, would not be able to take off from Drake Field's 6,006- foot runway with a full load when temperatures rise to 85 degrees. Airplanes need extra runway to take off on hot days because heated air expands and provides less lift.

Foss said the airline plans to offer jet service from Dallas/Fort Worth International Airport and Chicago O'Hare International Airport to the Highfill airport, where an 8,800 foot runway allows hot-weather takeoffs.

The Arkansas Democrat Gazette has reviewed airline contracts, analyzed documents used to sell $79.5 million in airport revenue bonds, checked federal transportation laws, and interviewed local and national industry officials.

During those interviews, a high-ranking official of one of the four airlines serving Drake Field said his company will eventually move to the new airport. An executive for another Drake Field carrier conceded, "Ultimately, we're going to follow the market."

"We're getting a large amount of pressure from some of the businesses in Northwest Arkansas," the second executive said. "I'm not going to say that they're saying they're going to pull their business, but they are trying to pull the other carriers out of [Drake Field]"

American Eagle is Drake Field's most important tenant, logging 44 percent of boardings there during the first quarter of this year. If a second airline moves to the Highfill airport, Drake Field will have lost more than half its passengers.

Dale Frederick, Drake Field's manager, said the news that a second airline will move is distressing. He conceded that if the Highfill airport gets a majority of Northwest Arkansas' boardings, the other airlines will follow.

Frederick attributes 100,000 of Drake Field's 261,054 boardings last year to Wal-Mart, the world's largest retailer, and Tyson Foods, the world's largest poultry processor. Those passengers will probably end up at the new airport.

But Frederick and Rudy Furr, Drake Field's development director, vow to maintain the 63-year-old airport as a commercial passenger facility, in keeping with a 1994 resolution by the Fayetteville City Council to that effect.

"I don't know what the hell is going to happen," Frederick said. "But we're going to put passengers back into this airport, and that's the other end of things."

Frederick and Furr said they have had encouraging talks with officials from Continental Airlines and Delta Airlines about replacing airlines that move to the new airport.

Frederick contends that the FAA made its decision, on the basis of a false assumption, to provide federal construction money for the new airport. The assumption was that Northwest Arkansas Regional Airport was a replacement for Drake Field.

The General Accounting Office, Congress' investigative arm, has made the same criticism.

Frederick and Furr point to studies in 1996 and 1997 by two University of Arkansas professors and commissioned by Fayetteville that 62 percent of Northwest Arkansas' passengers will use both airports. Of those surveyed, 43 percent preferred Drake Field, 38 percent preferred the new airport.

MAKING ITS OWN DEAL

Staff members of the new airport and the airport's first airline agree: American Eagle was allowed to craft its own deal in Northwest Arkansas.

The airport set national precedent by altering the way it divides the rent it charges for common-use space for such things as baggage handling and security.

Across the nation, airports require airlines to pay 80 percent of that cost in proportion to their share of boardings. The remaining 20 percent is divided equally among all of the airlines using the airport. Nearly the reverse will be true at the new airport.

Seventy percent of the common-use rental charge will be divided equally among the airlines, and the contract assumes that there will be a minimum of five airlines. Even if American Eagle served the airport alone, it would never pay more than one-fifth of that share.

The remaining 30 percent is based on boardings, with the assumption that American Eagle will provide an average of 42 percent of the passengers in Northwest Arkansas. The airport authority made other concessions.

During the first full year of the contract, the airport authority will repay American Eagle $142,300 of the advertising money the airline spends to promote the airport. And airport authority agreed to spend another $281,060 to move the airline from Drake Field and to buy American Eagle new furniture and equipment.

American Eagle's computers say those numbers will work for the company. And if they don't, another unusual clause in the contract offers an easy way out. If the airline loses money for three consecutive months, it can cancel the contract with 90 days notice.

Analysts at some of Drake Field's other airlines, reviewing the American Eagle contract, say the payments are disguised methods of giving back American Eagle's rental fees and landing costs -- the usual means by which an airline pays for the right to use an airport.

American Eagle's Foss said it was only right that his company get the best deal because it was first commit to the new airport.

His airline's contracts with airports in Little Rock, Tulsa and Fort Smith contain the 80-20 rental provision. A spokesman for the American Association of Airport Executives confirmed that the ratio is standard throughout the nation.

None of those contracts contained the "90-day-and-out" provision, although some contracts do allow airlines to operate on a year-to-year basis. In Fayetteville, where the City Council agreed not to block efforts to establish a new airport, Drake Field's airlines can move to the new airport at any time, Frederick said.

But while American Eagle's contract is filled with incentives, it is loaded with increased costs when it comes up for renewal in late 2003. On the basis of contract projections, airlines' share of the airport's costs will increase 39 percent between 2003 and 2008.

Uvalde Lindsey and Scott Van Laningham, who provide staff services for the new airport through Ozark International Consultants, say it's fair to expect the airlines to share the bounty they receive from the new airport's success.

They also concede that extra airline money will be needed to pay off the increasing debt service on the $79.5 million in revenue bonds sold last August.

The money is to come from still a other unusual contract provision -- -a "rental surcharge" on space used by the airlines. The fee is assessed when an airline books passengers above a certain number set by the contract, at a rate that is tied to inflation and increases steadily. The contract sets out minimum and maximum rates during the second five years and says the rates are subject to re-negotiation.

During the 59 months of the first contract, American Eagle would pay $7.68 for every passenger it boards over 117,670 each year. Its base would increase to 124,728 boardings in 2004.

But the contract projects that total passengers boarded at Northwest Arkansas Regional Airport will increase to 395,400 in 2004 and to 444,700 by 2007.

If American Eagle retains its 42 percent share of the market, it would board 62,046 passengers above its base line by 2007. The projected surcharge would be a minimum of $709,806 for that year.

Foss said that, after 59 months, American Eagle has the option of requesting lower rates than those projected for the second five years or can return to Drake Field.

"We, the carrier, see this as an option. It was established as a ceiling. We were trying to lock in Drake Field's cost for some period to give us a running start at the new airport," he said.

ASSESSING THE COSTS

Drake Field's other carriers are studying the numbers.

Sam Watts, vice president of sales and corporate communications for Atlantic Southeast Airlines, which is partly owned by Delta, agreed that reversal of the 80-20 split on common-use rents breaks national standards.

"If [the contract] specifically allots those costs at 70 percent equally as opposed to 20 percent, that would be one of the more expensive costs we'll have to look at," he said.

Compared to what American Eagle pays, his company's share of common-use rent would increase if it moved to the new airport from Drake Field, where Atlantic Southeast logged 13 percent of the boardings during the first three months of 1998.

U.S. Airways Express is also looking at what it may cost to leave Drake Field.

Tom Glore, vice president of station operations for the Wichita, Kan., airline, says Drake Field has proved to be a good, inexpensive connection, despite insistence by the FAA and staff members at the new airport that it is prone to weather problems.

He and representatives of the other three remaining airlines say Drake Field has had no more weather-related cancellations than their other airports.

"Drake Field sits somewhat in a bowl," said Philip Reed, vice president of marketing for Northwest Airlink. "But if you want to see weather, go to Atlanta. I would not feel compelled to change because of the weather issue."

Reed said his airline is months away from deciding about moving, despite encouragement from officials at Wal-Mart, Tyson and J.B. Hunt, which account for a healthy share of Northwest Airlink's local traffic. But, ultimately, his customers will determine where he sells tickets in Northwest Arkansas.

"I'm in a customer-driven market. Commercial viability is the most critical thing in running an airline. If the time was appropriate for me to move, I would move," Reed said.

Customers have been speaking out. The airlines have received letters from Wal-Mart and Tyson encouraging the move and have talked to J.B. Hunt. The three mega-corporations were among 60 businesses that signed a letter of support circulated by the airport authority.

But spokesmen for Wal-Mart and Tyson say that while there's no question they back the new airport, their companies haven't been lobbying. Representatives for J.B. Hunt did not return phone calls.

"We're supportive of anything that is going to make air travel more efficient and dependable," Tyson spokesman Ed Nicholson said. "And we're convinced the new airport will accomplish that."

Bill Mishk of Trans World Express, the other Drake Field airline, said he's aware of contacts by the airline's Northwest Arkansas customers and that he's studying the American Eagle contract. But he doesn't share American Eagle's concern about Drake Field's ability to handle regional jets.

His company has not committed to flying its Embraer 145s from Drake Field, but "the manufacturer's specifications give us a good comfort level" if the company decides to do so.

Frederick, Drake Field's manager, last week provided an analysis tracking the ability of the Embraer 145 and Canadair's 50-seat regional jets to take off in temperatures from 87 degrees to 90 degrees on wet and dry runways. He shows that both planes, fully loaded, can take off from Drake Field for flights to Chicago, Dallas/Fort Worth and six other major airports.

American Eagle's Foss said the analysis is based on information provided by aircraft salesmen and doesn't reflect the optional equipment his airline has purchased for its new jets.

"It's nobody's fault. It's not Drake Field's fault," said another American Eagle official. "But once the temperature reaches 80 degrees, we would have to start throwing off passengers and luggage."

Another industry official says debate about aircraft specifications, runway lengths and passenger costs is irrelevant in light of American Eagle's agreement to move.

Richard White, who negotiates contracts for Memphis International Airport and worked for 18 years as Delta Airlines' liaison with airports, said the numbers are merely bargaining chips in a poker game among players who have a knack for the bluff.

"American Eagle is the first one out of the block to serve that airport. The guy who's taking the biggest risk is going to get the best deal," White said.

And the new airport, he said, has the best hole card in the poker game -- market demand that American Eagle's move helps establish.

"I've made ticket counters out of janitorial closets to get into a market," White said. "If American makes it work, you're not going to put up gates big enough to keep the other people out."

FEDERAL REQUIREMENTS

To help pay for construction and bond costs, federal law allows airports to charge between $1 and $3 for each passenger boarded. Eric Gabler, director of the program for the FAA, said 275 airports impose the charge. All but one assesses the full $3.

To apply to charge the fee, called a passenger facility charge, law requires that an airport be up and running, and have boarded 2,500 passengers. The FAA then has 120 days to act on the application.

Ozark International sent Gabler a copy of its day-old contract with American Eagle on May 27, and Gabler agreed to waive the requirement. He used the passengers American Eagle is boarding at Drake Field to meet the test.

"The truth be told, the statute as it's written is to an established airport," Gabler said. "It wasn't meant to freeze out other viable airports. "In this case we switch from one airport to the others. It's not all that much distance."

His decision could give Northwest Arkansas Regional Airport a four-month jump-start on collecting the fee. Based upon Drake Field's 21,755 boardings a month in 1997, the waiver would mean the airport could collect $261,000 during the time it normally would have been awaiting approval of its application.

Gabler said the FAA also accepted and approved a $3-a-passenger charge at Austin-Bergstrom Airport in Texas, a $585 million facility scheduled to open in May 1999. That airport, at what used to be Bergstrom Air Force Base, is a replacement for Austin's Robert Mueller Airport.

Northwest Arkansas Regional Airport also got more federal highway money than other airports have gotten.

Passengers at the new airport will get there via Arkansas 264 and Arkansas 12, two-lane roads that the Government Accounting Office warned could prove dangerous.

"It appears that better access roads to the new airport are needed, but it may be at least five years before the new airport connector is completed" the General Accounting Office reported in June

1997 after a special investigation requested by Sen. John McCain, R-Ariz.

"The traffic levels now exceed the roads' design capacity, the accident rates already exceed those on comparable roads in the state, sharp curves exist, and the roads have narrower than acceptable shoulders," the report said.

Noting that federal law allows 90 percent funding for interstate highways and 80 percent funding for others, the General Accounting Office said that special language had been inserted into the National Highway Designation Act of 1995 to fund the proposed airport connector at 95 percent.

The General Accounting Office said it checked 15 airport connectors funded as demonstration projects and found that all of them had been funded at the 80 percent level.

Ozark International's president, Carol Lindsey, said the airport lobbied for 95 percent funding of its connector after realizing that all of U.S. 71 was built with 95 percent federal money. She said Sen. Dale Bumpers, D-Ark., added three lines to the 1995 highway act designating the airport road as an intermodal connector for U.S. 71 and guaranteeing it would be funded at the higher level.

Bumpers, Rep. Asa Hutchinson and Hutchinson's brother and fellow Republican Sen. Tim Hutchinson of Arkansas finished the slam-dunk on the 95 percent formula by getting $16 million for the connector included in the federal highway bill signed by President Clinton this year.

Asa Hutchinson is a member of the House Transportation and Infrastructure Committee. Tim Hutchinson sat on the House-Senate conference committee reviewing the highway bill.

One problem: The airport connector is not included in the 15-year highway plan adopted by the Arkansas Legislature, so the state hasn't budgeted its share of money.

Officials at the Arkansas Highway and Transportation Department have asked to sit down with the airport staff to fix the problem. But, at this point, the only solution mentioned is another bond issue to be repaid when the state can get the connector put into its highway plan.

Ozark International's Lindsey credits the airport's successful navigation of regulatory obstacles to Bumpers and the Hutchinsons, and especially to John Paul Hammerschmidt, the former congressman from Harrison who was the ranking Republican on the House Transportation Committee. Hammerschmidt is a close friend of former President Bush's.

Uvalde Lindsey says the airport has fared well in the Bush and Clinton administrations. Under Clinton, Arkansan Rodney Slater heads the Department of Transportation, which oversees aviation.

"Yes, we have had a little help from our friends," Uvalde Lindsey said. "One of the nice things about it is the strong bipartisan support this project has had."

INVESTIGATORS' CONCERNS

The General Accounting Office report ordered by McCain focused on the FAA's decision to provide federal money to the new airport, even though it fell outside the FAA's priority projects.

Investigators concluded that the FAA had acted within its powers but warned that the agency had sometimes relied solely on consultants paid by the new airport. They concluded:

* The FAA improperly assumed that the new airport would replace Drake Field, although the agency knew that Fayetteville officials had twice passed resolutions keeping the airport open for commercial passenger service. Investigators warned that the government may end up funding two airports within 30 miles of each other.

* The FAA violated its procedures by failing to show that the new airport had met the tests for federal funding. The FAA did not show that the airport enhanced systemwide capacity, and the FAA used unverified, outdated information to match the projects potential benefits against its costs.

* The FAA used unverified and unofficial weather data to conclude that Drake Field was prone to weather delays and ignored the airport's installation of an all-weather instrument-landing system. The FAA failed to explain why thunderstorms could pose a safety hazard at Drake Field and not at a new airport less than 30 miles away.

Because of its mountainous surroundings, FAA officials argued in response that Drake Field does not meet current design standards. They insisted that Drake Field's airlines will move to the new airport.

"In the great scheme of things," Drake Field's Frederick said, "I believe the FAA is ... deciding issues on their belief in the replacement of Drake Field. At some point in time, the whole industry ought to be concerned with what's happening out there."

A BONDS WARNING

Despite the faults it found, the General Accounting Office report cleared the way for further federal funding and allowed the airport authority to move forward during the summer of 1997 with its pitch to about 90 potential bond investors.

Llama Co., the investment banking firm handling the bonds, included a copy of the General Accounting Office report in the bond offering, which came replete with warnings that the airport authority; which had no revenues and a promise but no guarantee of further federal funding, might never be able to pay off the bonds.

The offering warned that the bonds do not constitute a "general or moral obligation" of the state or of any of its counties and cities, even though airport authority members are appointed by the Benton and Washington county governments.

It also warned that airport revenue projections might not prove to be accurate.

The caveats helped scare off most potential investors the airport initially approached. At the heart of their concern was that the bonds had no underwriter.

Another airport friend, Wal-Mart heiress Alice Walton, stepped in.

She and her family had earlier purchased $5 million in airport notes issued in anticipation of the bonds. Last July, she agreed that her investment banking company, Llama, would become the bonds' underwriter, in effect buying the $79.5 million in bonds and reselling them to investors.

As underwriter, the Fayetteville company assumed responsibility for any misinformation contained in the bond offering.

Vic Evans, who bought $1 million in bonds for Peterson Industries of Decatur, said Llama's role reassured him and other investors. "We discussed the fact that we're expected to take a hell of a lot of the risk," he said.

Because of the risk, the bonds offer interest rates that range between 7 percent and 7.625 percent. Tax exemptions will increase the actual return.

Llama found five other investors: three funds managed by Putnam Investments of Boston ($29 million), Starr Securities of New York ($24.5 million), two funds managed by Strong Capital Management Co, of Menomonee, Wis., ($10 million), three funds managed by Eaton Vance Management Inc. of Boston ($7 million) and the investment arm of Prudential Insurance Co. of Newark, N.J., (7 million).

At the last minute, John Hancock Insurance Co.'s investment firm dropped out, and Alice Walton bought $1 million in bonds, Uvalde Lindsey said.

Most of the investors did not return phone calls. One who did, but asked not to be named, said he was persuaded to buy the bonds because Drake Field did not offer adequate service or the image Northwest Arkansas deserves as a global business center.

He and Evans said the American Eagle contract and growing faith in the new airport have prompted offers for resales and increased the value of the bonds.

"I'm very comfortable with the bonds," Evans said. "I guarantee you I could sell them at a premium before the sun goes now."