UPDATE 2-Chicago taps winning bidder for big airport lease

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By Karen Pierog

CHICAGO, Sept 30 (Reuters) - Chicago will lease its Midway Airport to private operators for $2.52 billion in a deal that would mark the first privatization of a major U.S. airport, Mayor Richard Daley said on Tuesday.

"We believe this a very good return given the current stress in the credit markets," Daley told a news conference.

The members of the Midway Investment and Development Corp consortium that submitted the winning bid for the the lease are Citigroup (C.N) unit Citi Infrastructure Investors, YVR Airport Services Ltd, which owns and operates 18 airports in seven countries, and John Hancock Life Insurance Company.

That group was among six teams the city qualified this year to submit bids.

The 99-year lease deal must be approved by the Federal Aviation Authority, the U.S. Transportation Security Administration and the Chicago City Council.

The city council was expected to take up the lease Oct. 8, according to Paul Volpe, Chicago's chief financial officer, who added the deal should close in the first quarter of 2009.

Under the deal, the airport operator will be required to assume new 25-year use agreements with airlines at Midway that cap rates and charges below current levels for six years. Fee increases after that time and for the remainder of the 25-year term would be tied to an inflation index.

Some of the proceeds from the upfront lease payment will be used to retire $1.3 billion of outstanding Midway debt, Volpe said.

The lease deal comes as Chicago faces a $420 million shortfall in its current and upcoming budgets. Daley noted that an Illinois law that authorized an airport lease requires 90 percent of the net proceeds to be used for infrastructure improvements and city pension funds. That would leave the city with about $100 million of unencumbered funds.

Daley, who is scheduled to announce a budget balancing plan next month, said it would be irresponsible for Chicago to use all of that money to balance the budgets.

"It would only make our financial problems worse and I would not do that," he said.

The FAA in 2006 accepted Chicago's application for a Midway Airport lease under a pilot program allowing five U.S. airports to be leased to private operators. In February, the city secured initial agreements with the majority of the airlines operating at Midway, including Southwest Airlines (LUV.N), the biggest carrier there.

Midway, which is served by six airlines, handled nearly 304,000 flights and more than 19 million passengers in 2007, according to the city.

Chicago has already netted more than $2 billion in upfront payments from leasing its Chicago Skyway toll bridge and parking garages. (Reporting by Karen Pierog; Editing by James Dalgleish)