Chicago, airlines nearing $8.5B deal to dramatically expand O’Hare

CHICAGO >> Mayor Rahm Emanuel and Chicago’s airline carriers are in the final stages of negotiating a blockbuster $8.5 billion deal to dramatically expand O’Hare International Airport with a state-of-the-art global terminal, dozens of new gates and several additional concourses, the Chicago Tribune has learned.

The eight-year plan would be the single largest and most expensive terminal revamp in O’Hare’s 73-year history. The goal is to vault the airline hub long known for its gridlock and delays into the 21st century by growing its sluggish number of international flights and creating more room for its domestic carriers.

Emanuel is seeking to leverage the May expiration date of the airlines’ 35-year lease to secure higher fees and charges from the carriers that would help bankroll the ambitious project. The Aviation Department would borrow against the future airline fees to pay for the construction, which city officials said would not require taxpayer dollars.

The 55-year-old Terminal 2 would be torn down to make way for a new “Global Terminal” with wider concourses and gates to accommodate the larger aircraft that embark on international flights to places like Hong Kong and Dubai. Terminals 1, 3 and 5 would be renovated, while two new satellite concourses would be constructed to the west of the existing terminals and connected to the new Global Terminal by an underground pedestrian tunnel.

All told, more than 3.1 million square feet of terminal space would be added — a 72 percent increase over the current 4.3 million square feet.

The amount of space for planes to park at airline gates would increase by 25 percent, and the total number of gates would jump from 185 today to roughly 220 upon the project’s completion in 2026, Aviation Commissioner Ginger Evans confirmed in an exclusive interview with the Tribune.

“There comes a time where you just can’t live in your grandmother’s terminal anymore, and truthfully, we’re living in our grandmother’s terminal,” Evans said. “You snooze, you lose in this business. Our competitors are out there investing, adding capacity, and we have got to do the same.”

While O’Hare consistently is listed as one of the world’s best-connected and busiest airports, Evans said those rankings lean heavily on Chicago’s large number of regional jets and have provided the city with a false sense of security. She said Chicago’s failure to add gates at O’Hare during the last quarter century has left it vulnerable to competition, noting that Los Angeles International Airport passed O’Hare last year in the number of passengers, moving into the No. 2 spot behind Hartsfield-Jackson Atlanta International Airport.

In the coveted category of international passengers, Chicago lags even further behind.

“When you look at the international numbers, you say, ‘Wait a minute. We have half the international passengers that Miami and LAX do? We have a third the number of JFK?’ ” Evans said of New York’s largest airport. “We have more industry, more global trade, more imports from China than LA and Miami, why should Chicago be half? We’re at 10 or 11 million international passengers and they’re at 21 or 22 million. Really? Come on.”

Emanuel declined an interview for this story. Privately, however, he has told business leaders and confidants that the O’Hare overhaul would be a “game changer” for Chicago, a move he has predicted could become one of his top achievements as mayor.

A project of this scale also could be a reputation changer for O’Hare, which for years ranked among the worst for on-time arrivals and departures, leaving thousands of travelers with their own unique tales of lengthy Chicago delays and canceled flights.

“Given O’Hare’s place in the airport system — and their place is an enormous one — the fact they haven’t been able to increase their gates in 24 years has been important,” said Kevin M. Burke, president and CEO of the Airports Council International North America, an organization that represents airport governing bodies.

“People know from traveling around the country, if Chicago is clogged, the rest of the country gets clogged. If they don’t have enough gates for aircraft, the rest of the country suffers for it,” Burke said. “So, when I see a project like this going off at O’Hare, it is good for the entire U.S. airport system.”

The deal would cover $8.5 billion worth of improvements at O’Hare, according to sources familiar with the project’s details who were not authorized to speak publicly. Once finalized, Emanuel is expected to introduce the agreement at Wednesday’s City Council meeting.

For more than a year, Evans and her team have been at the negotiating table trying to strike a deal that finally would substantially boost O’Hare’s gates. Evans and Emanuel’s office declined to discuss specifics of the talks, including how much the airlines are willing to pay for the improvements. But a memo from airline negotiators to city officials obtained by the Tribune through an open records request shows that airline executives have signed off on a price tag between $6 billion and $8 billion.

Representatives for United and American declined to comment Sunday on the project’s price, scope or details, citing ongoing negotiations between the carriers and the city.

The airlines’ incentive for the big spending? More business and better customer service.

United and American, for example, would be located in the Global Terminal with major international partners Lufthansa, All Nippon Airways, British Airways and Japan Airlines. Some “spoke” carriers like Delta, for example, would relocate to what’s now international Terminal 5, where customers easily could connect to KLM, Air France, Korean Air and Aeromexico.

“The non-hub airlines get their own space in Terminal 5, their own entrance, their own hotel, more club room, more paid space, they will be closer to the city. They love that,” said a source familiar with the negotiations who was not authorized to speak about them publicly. “And American and United essentially get a better internationally connecting complex, because to send passengers over to or from Terminal 5 is a pain in the ass. Nobody likes that.

“So, in the end, American, United and the other non-hub airlines all agreed,” the source said. “It gives everyone sort of what they want.”

LONG ON THE RUNWAY

If the airlines sign off, the deal would represent a landmark breakthrough at O’Hare, where American and United long have held great control over the airport’s operations, often refusing to go along with much-hyped plans for additional gates, concourses or a new terminal. The two industry giants viewed those projects as the city charging them to pay for changes that largely would benefit their smaller competitors.

Adding new gates at O’Hare to expand the airport’s passenger capacity has been bandied about City Hall for at least two decades. For much of that time, it didn’t amount to much more than talk. The airport had been hamstrung by its archaic layout of six intersecting runways. Even if O’Hare added gates, the airfield and runways couldn’t handle the increase in flights because of the timing delays involved with alternating takeoffs and landings on the crisscrossing runways.

So in 2001, then-Mayor Richard M. Daley embarked on what became known as the O’Hare Modernization Program. The effort included using eminent domain to acquire 400 acres while razing more than 500 homes and commercial buildings and forcing the relocation of a Bensenville cemetery.

The city spent nearly $10 billion (including $1.1 billion from the federal government) to seize the land and build three new parallel east-west runways and extend a fourth existing one, bringing the number of east-west runways to five. The last of those runways was only built after then-President Barack Obama’s administration ponied up an extra $155 million and, along with City Hall, convinced United and American to drop a lawsuit that sought to block Daley from borrowing for further construction.

In January 2016, Emanuel rebooted the airport expansion plans with a program he dubbed “O’Hare 21.” His first announcement was a $1.3 billion deal to build O’Hare’s sixth and final east-west runway, de-icing pads to allow planes to take off more quickly and new taxiways to speed up the pace of planes going to and from far-flung gates. The new runway is expected to open in 2020 while the de-icing pads will go into operation this year, city officials said.

Emanuel secured $345 million from the Obama administration for the runway, which Evans said was a critical step toward the multibillion-dollar O’Hare expansion now being finalized. The sixth east-west runway allows O’Hare to shut down a second diagonal runway on the airfield’s west end, clearing room for construction of the larger global terminal and two satellite concourses, Evans said.

“That old runway blocked off acres of valuable real estate that we couldn’t use,” Evans said, pointing to one of several maps spread out on a conference room table in her 17th floor Loop office. “Now, when we get rid of it, we have something that no other airport in North America has: more than 400 acres of developable land.”

‘SELL THE HECK OUT OF IT’

When the airfield construction is completed, O’Hare will operate six east-west runways and two diagonal runways. As the added runway capacity ramps up, dozens of new gates will come online over the next eight years, according to the city’s latest plans.

Some already are in the works.

United will add one gate to an existing concourse later this year. American will open five more gates on Terminal 3’s L concourse. A $300 million Terminal 5 extension is underway, with nine new gates planned in addition to the current 25.

Under the potential deal with the airlines, one of the major steps would be to build an expensive pedestrian tunnel westward from what’s now Terminal 2. Evans declined to offer a cost estimate for that work.

Two new concourses — currently dubbed Satellite 1 and Satellite 2 — also would be built. Satellite 1 would connect to Terminal 1, while Satellite 2 would be built farther west, according to city plans provided to the Tribune.

As the new concourses and gates are built, flights that arrive and depart from Terminal 2 would be relocated to the satellite concourses and an expanded Terminal 5. That would clear the way to tear down the aging Terminal 2 without hindering the airport’s overall capacity and operations, Evans said. The details of exactly which airlines move, in what order and to where is still the subject of intense negotiations, city officials said.

Beyond the 35 additional gates, 40 other gates in Terminal 2 would be torn down and replaced with new ones.

While United and American have declined to discuss the project’s cost, the two airlines sent an August memo to Evans indicating they backed the city spending up to $8 billion on the O’Hare overhaul. The Tribune obtained the memo through a Freedom of Information Act request.

“A major capital program is needed to maintain and refresh existing facilities and support growth at ORD,” wrote Michael Minerva, American’s vice president of government and airport affairs. “The hub airlines’ proposal is in line with the city’s stated investment target of $6-8 billion.”

To pay for it, the city would issue bonds backed by future higher fees the airlines will be charged under a new O’Hare lease. Evans said taxpayer money would not be used and travelers should not see an increase in airfare since airlines are global companies that absorb lease increases and other fee changes.

“They price on demand. Fuel prices will have a lot bigger impact on ticket prices than rent,” said Evans, who added that airport costs are about 5 to 6 percent of an airline’s total operating costs.

In addition to the two new satellite concourses and global terminal, the expansion would include a new western parking and security screening facility for airline employees, a Terminal 5 parking garage and three new baggage systems considered key to the airlines’ support of the expansive project.

Not included yet are three new hotel projects at the airport — the renovation of the existing Hilton, along with a new hotel at Terminal 5 and another new hotel to be built at a multimodal facility with rental cars, buses and parking that’s under construction.

Evans said the airlines have agreed in principle to the new hotels, but plans won’t be finalized until later this year when more cost estimates are completed.

If Emanuel’s administration and the airlines ink a deal, the massive expansion will change the look, feel and operations at O’Hare.

New concourses would be 150 feet wide, dramatically larger than current ones. Terminals 1, 3 and 5 would get architectural upgrades. Passenger amenities would get a boost, with United and American opening 50,000-square-foot club lounges in the new Global Terminal.

“Some of the terminals at O’Hare date back to the dawn of the jet age,” said Henry Harteveldt, a San Francisco-based travel industry analyst and president of Atmosphere Research Group. “The concourses choke. Good God. If you’re at O’Hare at rush hour, even on a good day, it resembles one of the circles of hell. The city, the passengers flying to and through O’Hare and the airlines serving the airport all deserve a lot better, and they’re going to get it.”

The biggest operational change: O’Hare no longer will have just a single international terminal.

Terminal 5 would welcome Delta and other “spoke” carriers at O’Hare, and they’ll share the terminal with several international carriers, many of whom have partnerships with Delta. A Delta representative declined to comment Sunday.

Meanwhile, the Global Terminal would be home to the two hub airlines and their international partners. For United, that means being located side by side with its Star Alliance partners, including Lufthansa and All Nippon Airlines. For American, that means easy connections with One World partners British Airways and Japan Airlines.

In the airline industry, having domestic and international airlines in the same terminal is known as a “global alliance hub,” Evans said, pointing to London’s Heathrow Airport and Tokyo’s Narita International Airport as the standard. O’Hare would become the first such global alliance hub in the U.S., Evans said.

“My boss, the mayor, has this thing: ‘I don’t just want O’Hare to be bigger, it has to be the best,’ and this is one of the ways we’re going to leapfrog over the other U.S. international terminals,” Evans said.

Burke, the airports council CEO, said becoming the nation’s first global alliance hub would be a significant coup for O’Hare, especially given that the nation’s domestic travel in recent years has been relatively flat, with much of the growth coming from international flights.

“It’s good to be first when it’s the right thing to do, and this seems to be the right thing to do,” Burke said. “Other airports will be looking at what Chicago is able to accomplish, because if you’re a large airport hub and you want to grow your international traffic, you want to work with your airlines to make sure the customer experience is a great one.”

Plus, it’s a big win for the airlines, which save money with faster connection times and can offer a more seamless travel experience for customers, Evans said. City Hall predicts the moves should drive a steady increase in the city’s total number of passengers, from 78 million in 2016 to around 100 million by 2026.

“My ultimate goal is to get the airlines to rethink Chicago in their system, rethink how they use O’Hare. Quite frankly, we’re after that international service. That’s what we need and that’s what we deserve,” Evans said. “And if we make it really customer friendly, the airlines can sell the heck out of it.”

A United representative would not comment on specifics of the project or the negotiations, but expressed optimism of reaching a final deal with the city.

“We look forward to continuing to work collaboratively in order to finalize an agreement that will mean continued investment at O’Hare and a world-class airport for the traveling public and people of Chicago,” United spokesman Charlie Hobart said.

American spokeswoman Leslie Scott said the airline looked forward “to sharing the details about our opportunities to grow in Chicago once the negotiations are completed.”

‘CHILDISH’ GAMES

Under Emanuel and Evans, the city has changed its approach to adding gates and a new terminal at O’Hare.

While the new concourses will march westward from the existing Terminal 2, Daley’s O’Hare Modernization Plan called for the construction of a western terminal on the airfield’s far edge. That required Daley to acquire hundreds of acres of land from suburban Elk Grove Village and Bensenville.

A new western terminal, paired with new western highway access to O’Hare, would generate economic development opportunities for the nearby suburbs, the city argued at that time. The highway portion is still being built, but the lack of a new western terminal means suburban officials aren’t likely to see the type of economic development they hoped for, at least for now.

Evans points to the new western employee garage as a commitment to keep building gates and concourses in that direction. The city’s long-term planning calls for the addition of Satellite 3 and Satellite 4 concourses and the construction of a new western terminal, but those facilities are likely 10 to 15 years off into the future, according to a City Hall source familiar with the plans.

“When people bug me about the western terminal, I say, ‘you don’t build the farthest gates first,’ ” Evans said. “You have to build into it. We’ll get there, and we’ll absolutely need that.”

The 50-gate western terminal Daley proposed was mothballed long before Emanuel took office, thanks to the power of United and American. The two hub airlines opposed the concept, arguing that they paid the majority of the fees at the airport and their money would go to build a terminal that would only benefit their competitors.

One of the reasons they could kill the project: The 35-year lease agreement they’ve been operating under gives the two hub airlines veto power over virtually every decision and project at the airport that isn’t considered vital to safety or security, Evans said.

“It is enormously important not to let this very old lease — which is definitely the strongest airline control lease in the national system — continue,” Evans said. “It just was not in the city’s interest to let that kind of extreme airline control continue. … In 1983, they gave away the store, gave away the farm.”

United and American’s stranglehold over O’Hare — and their frequent infighting — often ground improvements or investments to a halt, city officials have said. One famous example took place eight years ago, Evans said, when a security checkpoint had to be shut down because a roof on United’s terminal was leaking.

Security systems had to be covered with tarps after American repeatedly had shot down requests to repair the roof, arguing United should have to cover the entirety of the expense because of poor architectural design, she said.

“One airline won’t want money they pay to fix something that helps another airline. Even though it’s childish, they play games,” another city official familiar with the airport’s operations said of the two hub airlines. “That has really caused O’Hare to be under-invested in over the course of decades.”

That practice, city officials argue, left O’Hare falling behind nationally.

Over the last two decades, O’Hare has not made any major upgrades to its international terminal while airports in New York, Miami, San Francisco, Los Angeles, Dallas and Atlanta spent a combined $18 billion on international terminals, according to Aviation Department figures. In making the case to the airlines for expansion, Evans pointed to Chicago’s international passenger numbers remaining virtually flat over those 20 years while business at five of those other airports grew by 4 to 5 percent each year.

Harteveldt, the travel analyst, said United and American have enjoyed dominance over the airport, and it will be best for consumers if city airline officials use the expansion as an opportunity to open up more gates for other domestic and international carriers. He noted that Virgin and Spirit airlines both previously have complained about not being able to get more gate access at O’Hare.

“I’m sure United and American are going to try to make a land grab and gobble up as many gates as they can possibly get,” Harteveldt said. “It’s really going to be up to the Chicago Department of Aviation to be the advocate for the non-hub airline, both U.S. and foreign flag, to ensure those carriers have adequate access and adequate number of gates. It’s in the airport’s best interest to limit United and American.”

Under the new lease the city is negotiating, the airlines’ unilateral veto power over projects will disappear, Evans said. So, too, will United and American’s right to so-called exclusive-use gates, which stay in their possession no matter how much they’re using them.

The Federal Aviation Administration now prohibits such arrangements in new leases at airports that receive federal funding, noting that the practice locked up gates and allowed airlines to restrict competition and access to a market by other carriers. Under the new O’Hare lease, which is expected to span 15 years, the city will annually evaluate how often airlines are using gates and reallocate them based on use, Evans said.

While that practice might foster more competition, United and American will remain as the undisputed heavyweights at O’Hare, with plenty of say over the details of how the airport expansion is planned and constructed. As such, the two airlines are receiving preferential treatment and placement at the new facilities included in the plan, city officials stressed. United, Emanuel often notes, is Chicago’s largest private sector employer.

However the individual airlines will benefit, Harteveldt predicted the expansion would be a major driver of new jobs, more flights and increased tourism for years to come.

“This is a very, very big deal and it is a good big deal, not a bad big deal,” Harteveldt said. “This assures Chicago will remain a premier hub in the U.S. This protects that position, and it’s not just about it being a point of pride for Chicago — it really needed to be done.”