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Newport News Now is a daily e-newsletter that launched in March 2016. Articles that ran in our newsletter between March 2016 and March 2018 are available on these pages. Newsletters produced beginning in April 2018 can be viewed on our new daily newsletter page.

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Feb 01

Report from City Manager Jim Bourey Regarding People Express

Posted on February 1, 2017 at 1:23 PM by Communications Department

Bourey,_J_2_SCGiven my role as a City Council appointee to the Peninsula Airport Commission as well as the Newport News City Manager, I feel that it is critical for me to provide a detailed report to the City Council and the citizens of our city on the People Express loan guarantee. I want to be sure that the City Council and the public have an accurate and full accounting of the circumstances and transactions of the Commission. This also involved funds provided by the Regional Air Service Enhancement group, known as RAISE, which consists of representation from seven cities and counties that provide funding to support air service development projects. People Express efforts to provide air service based at Newport News/Williamsburg International Airport started well before I assumed my position as City Manager and subsequently as a Commission board member. However, the issues that have recently been raised surrounding the airport’s guarantee of a loan to People Express date more specifically to events beginning in 2014. While the loan guarantee did not involve any City Council action or any City funds directly, there were funds previously provided to RAISE by the participating local jurisdictions.

In 2014, People Express had a plan in place to provide commercial air service based at Newport News/Williamsburg International Airport. They planned to contract with Vision Air to provide flights with the People Express brand. This is fairly common in commercial air service. While they had raised significant capital to begin operations, they had not raised sufficient operating funds to sustain their operations until they could show a profit, which was projected to occur in a relatively short time. Raising initial capital for a start-up airline is very difficult. Without a track record, lending institutions are not willing to provide the upfront funding. The airport was very interested in replacing the air service lost when Air Tran left. Their departure resulted in a loss of 50% of the airport’s capacity and a projected negative economic loss of approximately $175 million (based on a Commonwealth economic impact study) to the community. In order to facilitate a loan for People Express, the airport backed a loan of $5 million from Towne Bank with a guarantee. This was a recommendation of the airport Executive Director and supported by legal counsel and the Commission. The loan guarantee was to be backed by funds provided by a U.S. Department of Transportation grant of $950,000 with a matching contribution of $700,650 from RAISE and Virginia State entitlement funds of approximately $3.5 million. The airport attorney provided an opinion to the Commission that such a guarantee was entirely legal and proper.

As the airport carefully evaluated this plan, it was evident there was a high likelihood of success. The market clearly demonstrated and projections showed a fairly quick progression to profitability. Please bear in mind the tremendous upside to the community of replacing the service lost with the departure of AirTran. This offered the chance to entirely replace that service and the economic loss and meet a community need. Were there risks? Absolutely, there were. Did the Commission have concerns about many factors? Yes, we did. But in weighing the benefits and the risks, the Commission felt that the risks were worth the reward for the community.
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In the final analysis, the service from People Express generated a lot of usage and clearly proved the demand for the service. What ultimately led to the failure of the airline was not a lack of passengers or a deficiency in their operations, but fewer planes being provided by Vision than originally agreed upon. Thus, any mechanical difficulty with the airplanes was a significant event. However, the ultimate demise was caused by a fluke event when an unauthorized individual with the company contracted by People Express to service the airplanes, drove a vehicle into one of the planes, damaging it and putting it out of service. This led to Vision not being able to provide service and resulted in the suspension of air service.

Members of the Commission have been asked if the loan guarantee was a prudent decision. That is certainly a fair question. At the time, as it is today, this community is underserved by low fare airlines and non-stop service is limited. Non-stop service to many popular cities, such as New York, does not exist. The upside was huge and the Commission felt the measured risk was worth taking. For members of the public that disagree with this assessment, I respect and value those viewpoints.

There have been a number of questions raised about the transaction itself. First, I would like to address the issue of disclosure. It is troubling that the reporting on this issue has been so misrepresented. All actions by the Commission were entirely in open meetings. Of course, those actions will not be reported if no one from the media shows up to the Commission meeting or follows up to actions taken. Since January of 2014, media has only been present at less than half of the Commission meetings. The loan and subsequent payment of the guarantee were reported in financial statements by the Commission’s independent auditors. The loan was described in the 2013-14 audit and the loan and subsequent repayment are described in detail in almost an entire page in the 2014-2015 audit. (See “Guarantee of Debt” section here.)The audit was presented in public at a Commission meeting and adopted, again in public, at a subsequent Commission meeting. Again, no media showed up at either meeting or followed up to inquire about actions taken at those meetings. Furthermore, documents were provided to the media in 2014 which disclosed the loan guarantee.

A second issue raised is the use of the state entitlement funds to pay back most of the loan guarantee. The comments from Commonwealth representatives are entirely inconsistent with the state’s policy. Policy specifies what are considered “eligible” expenditures, and is very clear how expenditures that are not “eligible” are handled. This is described in the provision below:

3.1.1.3.2 Projects Outside of Normal Expenditures - Certain projects not listed or generally described in this manual have been determined to be outside of normal project expenditures. If the sponsor of an air carrier airport uses state entitlement funds for such a project, the state’s share of the project cost will be counted against new requests for state discretionary funding. DOAV will maintain an accounting of project activity outside of normal project expenditures. When a sponsor for an air carrier airport requests state discretionary spending, the balance in the accounting will be deducted from the state’s share of the requested project.

Projects will be retained in the accounting until they are deducted from a state discretionary project request or they have been on record for six fiscal years, at which time the projects will be removed from the accounting. Projects that are considered outside of normal project expenditures include, but are not limited to: • aviation promotion projects • air service development projects • landside passenger shuttles • recurring operational costs • airport personnel salaries and benefits.

This makes it very clear how expenditures that are not specifically authorized will be handled. Air service development projects are included in that category. Airports throughout the State commonly use their funds for expenditures that are considered not “eligible.” The airport administration reported the expenditure of approximately $3.5 million to the State for air service development and in a more detailed answer, as a payment for a loan guarantee. The State responded to the airport in an email that the funds expended for air service development would be counted against future discretionary requests. This was known prior to the recent newspaper articles. It is quite clear from this reading of the policy, that the use of this funding was not prohibited or unauthorized. It is also clear that this is a very poorly structured policy, and we support a change as the Secretary of Transportation is advocating. We would be happy to work with him on the best approach to revise this.

When People Express was unable to continue the service due to the lack of aircraft provided by Vision Air, they defaulted on the loan. The Airport then was required to pay the balance of the loan which was approximately $4.5 million. This was repaid with $300,000 from the U.S. Department of Transportation grant, $700,000 from the RAISE funds and $3.5 million from State Entitlement funds. This did not involve any further action by the Commission as the attorneys advised this was something that was required by the guarantee and should be paid by the Airport Administration.

I hope this answers most of the questions regarding this issue, and I would be pleased to provide additional information.

Jim Bourey
Newport News City Manager
Peninsula Airport Commissioner