TO: Mayor and City Council
THROUGH: Krishna Namburi, Interim City Manager
FROM: Dan Atchison, City Attorney
SUBJECT:
title
Airline Operations Agreement
Ward(s): 2
Councilor(s): Nishioka
Neighborhood(s): SEMCA
Result Area(s): Good Governance.
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SUMMARY:
summary
The City Council has received public comments urging the City to terminate its agreements with Avelo Airlines due to Avelo’s agreement with the federal government to conduct deportation flights from Arizona. This report reviews the legal landscape concerning the City’s agreements with Avelo and the potential outcomes if the City elected to terminate those agreements. Summarizing this report, if the City were to terminate one or both agreements, the City would likely owe damages to the airline and would be required to repay an $850,000 grant from the Federal Aviation Administration, and potentially a $350,000 contribution from Salem area residents and businesses to fund a minimum revenue guarantee for the airline. Even if the agreements are terminated, the airline would continue to have the right to operate flights from the Salem-Willamette Valley Airport.
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ISSUE:
Information only.
RECOMMENDATION:
recommendation
Information only.
body
FACTS AND FINDINGS:
The City has two agreements with Avelo Airlines. One agreement is a minimum revenue guarantee (“MRG”) and utilizes $850,000 of federal grant funds through the Federal Aviation Administration (“FAA”) and $350,000 in contributions Salem area residents and business. The MRG expires in October 2025. The other agreement is an Air Carrier Operating Agreement (“Operating Agreement”).
The Operating Agreement memorializes the airline’s right to use the airport, in common with other airport users, for commercial flights and public and private charter flights, subject to the City’s regulations for the airport. The agreement also requires the airline to comply with all federal, state, and local laws and regulations that are applicable to the airline’s operations or the airport.
The initial term of the agreement is ten years and may be extended for an additional five years. The initial term expires in 2032.
The agreement gives the airline preferential use of certain facilities at the airport and obligates the City to provide or allow other activities or facilities at the airport to facilitate commercial air service (such as TSA security, airline maintenance and fueling activities and infrastructure). The airline receives a discount on various fees at the airport. The fees are subject to gradual increase through the term of the agreement.
As relevant here, the City may only terminate the agreement in the event the airline defaults, which is defined as a failure by the airline to perform any of its obligations under the agreement and such failure is not cured by the airline with 15 days after notice by the City of such default. As noted above, one such obligation is to comply with applicable laws and regulations. In this instance, it is doubtful that a violation of law in the airline’s operations outside of Oregon and not connected to its flights based in Salem or Oregon would be grounds for terminating the agreement.
Due to the confidential nature of the legal advice and analysis concerning this issue, this report will not disclose specific analysis of whether the City would breach its agreements with the airline or FAA in the event it terminates the agreements due to the airline conducting deportation flights outside of Oregon. However, if the City were to terminate those agreements, several things remain true regardless of any legal action the airline might take in response;
1) The airline would have the right to continue to conduct flights from the Salem-Willamette Valley Airport.
The City is obligated by federal law and FAA grant assurances to allow use of the airport for aviation related uses subject only to the airport regulations. Even without the Operations Agreement, the airline would be allowed to continue to conduct flights at the airport. Under this scenario, the City would charge undiscounted fees for the airline activities, but the airline could continue to operate at the airport.
2) The FAA would demand repayment of the $850,000 federal grant for the MRG.
The City’s grant agreement with the FAA imposes a number of obligations on the City’s performance under the grant. In the event that the City were to terminate the MRG or Operations Agreement with the airline, it is very likely that the Trump administration would demand that the City return the $850,000 in federal money to the FAA.
3) The City would likely be ineligible for future FAA grants for a new MRG and potentially for any FAA grants.
Federal grant recipients that violate grant requirements may be ineligible to receive federal grants in the future. It is likely that the Trump administration would pursue all potential remedies and penalties against the City, including determining the City is ineligible for federal grants. The City relies on federal grants for maintenance and capital projects at the airport. If the City were unable to receive federal grants for these purposes, those activities would be in jeopardy until the City found a different funding source.
4) The City would be unlikely to attract new airlines in the future.
Without the ability to receive new federal grants for a new MRG, the City would be unlikely to attract new airlines in the future.
BACKGROUND:
The City Council authorized the Operations Agreement and Minimum Revenue Guarantee Agreement in 2023 - CITY OF SALEM - File #: 23-136 <https://salem.legistar.com/LegislationDetail.aspx?ID=6122396&GUID=28B7F216-ECA2-4EAA-A8D1-DF90F10C410B>.
Dan Atchison
City Attorney
Attachments:
None