Burns & McDonnell proposes private financing for new KCI single terminal

Burns & McDonnell, one of Kansas City’s foremost engineering firms, has proposed to privately build and finance a new single terminal at Kansas City International Airport, as a way to finally garner voter approval and get the controversial airport project done.

Burns & McDonnell has quietly floated to city government officials that it would be the lead firm in creating the design and doing the construction work. It says it has committed to using local labor, suppliers, contractors and subcontractors to the extent possible.

The Kansas City-based firm also would come up with the financing for a project that is estimated to cost about $1 billion. It plans to put money into the project itself, attract other investors and line up private lenders to complete the financing.

Such a financing would be unusual for a U.S. airport, as most airport improvements in this country are financed through airport revenue bonds. Some European airports have been privately financed.

The advantage of this plan, according to company representatives and Mayor Sly James, is that Kansas City would issue no bonds and bear no taxpayer risk if the airport failed to generate the revenues needed to pay off the construction and other costs, including overruns.

In a meeting with The Kansas City Star’s editorial board Thursday, James said the city has been trying for five years to come up with an airport improvement plan that voters will support. He said a sticking point has been that city taxpayers think they would be on the hook — even though they wouldn’t be because airport improvements are paid for by airport users.

Private financing, James said, would remove any question of taxpayer risk.

“That’s a Kansas City innovative solution to a Kansas City sticky problem,” James said. “It’s something the airlines are comfortable with. It reduces the risk. It gets our airport built.”

However, even if the city proceeds with this private financing option, James said, it still would have an election in November. The ballot would ask the voters to sign off on this new terminal construction plan. That vote would happen because the City Council promised a vote in response to a 2014 citizens petition requiring a public election on any major KCI improvements.

If voters say no, James acknowledged, “we’re screwed.”

Burns & McDonnell has been quietly discussing its idea with council members for the past week or so, and had hoped to delay a public presentation until late next week. But when details started to leak out, the mayor and company officials provided an overview Thursday to the editorial board. They emphasized that the details are not yet final and that more will become clearer in the coming days.

The mayor and Councilwoman Jolie Justus, chairwoman of the council’s airport committee, said they hoped to introduce a memorandum of understanding at next Thursday’s council meeting with more details. That memorandum of understanding would be subject to public hearings and a council vote.

One key to the proposal for Burns & McDonnell is that it would get an exclusive arrangement with the city to provide the design and come up with a guaranteed maximum price.

Other firms would not have access to make their own offer, nor would the city request bids. James said the city would waive bidding requirements in accepting this plan and that it is legal for the city to do that.

The exclusive arrangement struck Steve McDowell, CEO of architecture firm BNIM in Kansas City, as possibly missing an opportunity given the strength of the city’s architectural design talent pool.

“Some of the best work in the country is coming out of our city, and I’d hate to see that not taken advantage of for the design of our gateway,” McDowell said.

BNIM’s predecessor firm was involved in KCI’s original design, and the firm has partnered with HNTB to work with the city in its efforts to update the airport.

If the city and voters accept Burns & McDonnell’s offer, the company would build the new airport.

Councilwoman Teresa Loar, a Northlander who has been skeptical about a new single terminal for KCI, said Thursday that she thought the no-bid aspect of this idea would be a concern for her and perhaps others as well.

She said she’s eager to learn more about the proposal. But she’s not sure that airport financing is the biggest issue with Kansas City voters.

“I think people love their airport,” she said, noting that many airport users don’t want huge changes to the horseshoe-terminal configuration. Polling in the past has found significant voter opposition to a single-terminal concept. Conversely, many business travelers, and the airlines, have said KCI’s existing cramped terminals need to be replaced.

Several council members said Thursday that they’d had only preliminary meetings with Burns & McDonnell about the plan and were reserving judgment. Others said they had been contacted but had not yet been briefed.

Mayor Pro Tem Scott Wagner said he was familiar with the proposal, which he said comes at a time when the city must make a decision on modernizing the airport.

“You cannot just kind of kick the can forever,” Wagner said. “You’ve got to do something. So this group has come forward to offer an alternative way to getting it done.”

Wagner said this idea does offer taxpayers some assurance that no taxpayer dollars would be diverted to the airport. And in exchange for Burns & McDonnell’s agreeing to assume that risk, the firm gets to do the work.

“From my perspective, if someone wants to step up and accept risk, there’s obviously a price for that risk, which probably means they get to do the project,” Wagner said.

Ray Kowalik, CEO of Burns & McDonnell, said the firm ranks No. 3 in airport design and construction in the country and is currently working on a huge project at LaGuardia Airport in New York City. The company also oversaw the most recent improvements of KCI’s existing terminals, from 2001-2004.

Burns & McDonnell said it would set a guaranteed maximum price for the project, which Kowalik said was critical to getting the private lenders to provide financing. He thinks it will be close to an amount that airlines proposed a year ago, when they publicly advocated a single terminal and said they would finance it. That cost estimate was about $964 million in 2015 dollars.

Kowalik acknowledged that private financing would carry a higher interest rate than if municipal aviation bonds financed the project. Those additional interest costs can be offset, he said, by starting the project sooner and finishing it quicker.

“We’re going to beat 2024 significantly, and that helps with the financing model,” Kowalik said.

Repayment of the financing would come from revenue the airport generates through fees and other collections from the airlines that operate there. Those costs generally are passed along to passengers in ticket prices, much like fuel costs and other expenses. But supporters of the plan point out that tickets would not be expected to rise by more than a few dollars.

If that stream of revenue falls short of what’s needed to cover the private financing, the city wouldn’t be obligated to make up the difference. Airlines would be obligated.

Mike Brown, president of Burns & McDonnell International, said the financing model essentially is the same one that airlines operating at KCI agreed to a year ago, with the difference being that the financing is coming from private sources rather than the aviation revenue bonds.

The airlines, led by Southwest Airlines as the airport’s largest carrier, are set to meet and discuss the proposal Friday. Burns & McDonnell officials said they’ve gotten “nods” of approval from the carriers but are waiting to hear what the group decides at that session.

One risk for Burns & McDonnell is that it is working on the design and pricing without a guarantee that its proposal will win approval either from the City Council or voters in November. Kowalik said the company has 25 employees working full time on the effort and would eat those costs if no deal emerges.

Kowalik said the company made the offer in response to the mayor’s challenge a year ago. At that time, the airlines had announced that they wanted to move forward with a plan to replace the existing terminals with a new single terminal where the shuttered Terminal A is now. They wanted the city to hold an election in which voters would approve airport revenue bonds in August 2016.

James also wanted an election in August, but polling showed the new terminal concept was a nonstarter with voters. So the mayor put airport planning on “pause” last May. He said that if the Kansas City business community wanted a modern, functional airport that could contribute to business growth and economic development, then business executives would have to lead that charge.

Kowalik said his company took the mayor’s plea to heart and started working on this private financing idea in earnest about nine months ago. He said the company also stepped into the process because the airport’s current configuration is bad for business.

Its employees take about 33,000 flights a year at KCI and struggle too often to go where their customers are.

“It’s hard to get places, and we’re losing flights,” Kowalik said.

If voters reject the proposal? “Then we stay a second-class airport city,” Kowalik said.

James said he sees companies set up satellite offices in other markets because they can’t efficiently serve them from Kansas City because of the airport.

He’s also worried that if Kansas City doesn’t upgrade its airport soon, Johnson County could step into the vacuum and build its own airport and rob Kansas City of a vital economic engine.

“If you lose your airport, your businesses follow,” the mayor said. “I’m not going to be part of that.”

Lynn Horsley: 816-226-2058, @LynnHorsley

Mark Davis: 816-234-4372, @mdkcstar

Related stories from Kansas City Star