Following Investigation, DOT Commits to Auctioning All Future Airport Leases

posted in: Board Talk, Land Use, September 2020 | 0

Over the past several years, members of the state Board of Land and Natural Resources have questioned Ross Smith of the Department of Transportation’s Airports Division about some of his requests for board approval of direct leases. 

Why, they wondered, wasn’t the department holding a public auction, instead, to be fair to potential bidders and perhaps get a higher rent for the state?

Smith would often claim the request was in accordance with Federal Aviation Administration (FAA) regulations. But that answer never really satisfied the board.

Finally, a request earlier this year to directly issue a 30-year, fixed-base operator (FBO) lease to Kauaʻi helicopter company Airborne Aviation brought the issue to a head. The matter came to the board on February 14, but was withdrawn. Although the board did not discuss why the matter was withdrawn, it had received a letter from the owners of Island Helicopters Kauaʻi objecting to the DOT’s general practice of issuing direct leases to companies purporting to be FBOs, which are supposed to provide aeronautical services, such as fueling, flight instruction, and aircraft maintenance and rental, among other things.

A helicopter takes off at the Lihuʻe Airport.

In their letter, Bonnie and Curtis Lofstedt complained that a couple of helicopter companies that had obtained FBO leases at the Lihuʻe Airport paid much lower rents and had longer lease terms than those — including Island Helicopters — that did not.

“Island Helicopters pays as much as $2.24 versus their $0.19 per square foot,” they wrote. To receive the lower rent, the FBO companies must provide services to other companies or entities in the industry, but they do not, the couple alleged.

“They do not sell or provide any service to the industry and are not in business to provide any level of service at [Lihuʻe Airport] other than tours and charters for their specific business. This is a guise for cheaper rent and longer leases and is a possible violation of FAA Grant Assurances No. 22c, which states each FBO operator at the airport shall be subject to the same or similar uses of such airport to serve ANY air carrier at such airport,” they wrote.

They stated that they did not object to issuing a lease to Airborne Aviation, but just wanted all of the leases treated equally. 

“It is more than time for the BLNR to see the disparity and discrimination. … The state knows (and the proof would be in the excise tax forms of these companies) that these companies are not by definition FBO operators and are actually helicopter tour and charter companies receiving a benefit in reduced rent and space not provided to similar or equal operators with the same respect,” they wrote.

On March 13, the lease request returned to the Land Board and Island Helicopters re-submitted their testimony from February. Oddly, the DOT’s report to the board supporting the request cites the same FAA Grant Assurances language cited by Island Helicopters as justification to NOT sell the lease at public auction. An auction, Smith told the board, would “likely cause disparate rental rates.”

Before addressing the lease request, board member Chris Yuen asked Smith which FBO company or companies at the Lihuʻe Airport were providing repairs and maintenance of aircraft.

Smith replied that he had not gone through his list of things at Lihuʻe and did not have the names.

“You don’t know who the two are?” Yuen asked.

“Not off the top of my head. I would be happy to get that to you as soon as I get back to the office,” Smith replied.

Brandon and Delzelle Miranda from Airborne Aviation testified to the Land Board that they are mainly a utility company, not a tour company. With regard to their qualifications to be an FBO, they pointed out that the company has a contract with Kauaʻi County to fix county aircraft.

Based on the Mirandas’ testimony, the board approved the lease. (Board chair and Department of Land and Natural Resources director Suzanne Case recused herself because the company sometimes works for the department.) 

Given the concerns raised by Island Helicopters, the board also asked Smith to provide within 60 days a report on FBO operators at the Lihuʻe airport and provide evidence that they qualified for their leases.

As Kauaʻi Land Board member Tommy Oi said earlier in the meeting, there is tremendous competition on Kauaʻi among tour helicopter companies. “It’s dog eat dog,” he said.

‘A Big Loophole’

That report did not come until the board’s August 14 meeting and it did not come from Smith. No written submittal was made available on the DLNR’s website. But during the DOT staff’s presentation, despite Zoom feedback echoes and muffling facemasks, it became clear that their internal investigation uncovered problems with the FBO leases.

The DOT property manager Ethan Tomokio, who said he had been asked in July to complete the investigation, reported that there are three FBO leases at Lihuʻe Airport. The first was issued in 2007 to Blue Hawaiian Holdings, LLC, known as Blue Hawaiian Helicopters. The company was issued a 30-year lease. 

“The master file that we have here lacks evidence that it qualified as an FBO,” Tomokio said.

The second FBO lease, also for 30 years, was issued in 2012 to Air Service Hawaiʻi Inc. “Again, the master file lacks evidence that it qualified as an FBO at the time,” Tomokio continued.

The third FBO lease, for 15 years, was issued to Jack Harter Helicopters in 2016. 

For that lease, Tomokio said, there was evidence in the master file that it qualified as an FBO. He held up two binders, each containing about 300 pages of supporting information. 

“It’s an application every FBO operator must complete before the airport approves it,” he said. 

Given that only one of the three current FBO lessees provided evidence in their applications that they were going to actually be FBOs, Yuen asked, what was the DOT planning to do about it?

The DOT’s Mike Auerbach answered that in the future, all FBO lease applicants will go through a qualification process. But as far as the existing FBOs were concerned, “I’m not sure there are many options at this point,” he said.

Tomokio explained that the way the DOT’s FBO leases were written, the lessees are given the right to perform FBO services, but the leases don’t say that if the lessees don’t perform those services, they can lose their lease. 

“That seems like a big loophole to me, though,” said board chair Suzanne Case. “If you say you’re an FBO and you get a lease on that basis and you’re not an FBO, you just skipped over a whole step that is all about competitive availability of spaces. … People felt like there was favorable treatment [to FBOs],” she said.

Tomokio agreed and said that, going forward, the DOT will require the application process to be performed. “We are very careful about issuing any type of lease — FBO, hangar, fueling — because the application has to reflect what they intend to do,” he said.

Both Auerbach and a number of board members suggested that the Department of the Attorney General review the Lihuʻe FBO leases and applications to determine whether the current lessees qualified and still qualify. 

Tomokio noted that the FBO lease the Land Board had recently approved for Airborne Aviation had not been executed yet, and “we can absolutely request to add language that they have to perform these services.”

Despite what was found or not found in the DOT’s files, Yuen suggested that the agency investigate whether any of the three FBO lessees that were part of the report are performing FBO services. “Maybe they are. I’m not going to jump to conclusions. Let’s hope that they are, in fact, operating as FBOs. I do not believe the language of the lease restricts the ability of the DOT from continuing to insist that if you get a direct lease as an FBO that you’re supposed to be an FBO. I cannot believe the FAA would be very happy. The FAA requires all FBOs be treated the same. That’s the DOT’s rationale for not going to public auction,” Yuen said.

In reply, Tomokio revealed, “Every lease from now on that the DOT is going to enter into, FBO or not, is going to come to the Land Board as a public auction request. FBO or not … rather than a direct lease. This is a directive from our management here at the airports.”

Yuen said he was impressed. “I’ve been concerned in the past that DOT took too broad a reading of what qualifies for not going to public auction. … I do wonder though about the FBOs, because DOT has said for several years that they cannot go to public auction [because] they would violate FAA’s guidelines.”

Tomokio and Auerbach replied with a long silence.

The board ultimately voted to require the DOT to investigate whether the FBO lessees at Lihuʻe were, in fact, providing FBO services. It also voted to have the attorney general’s office review the leases and the circumstances of their applications and approval and determine whether something needs to be done. The board asked that the results of those investigations be brought to the board in 90 days.

— Teresa Dawson

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