Airlines have rebounded, but airports still mired in slump

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The Airport Squeeze graphicWhile airlines have navigated back to profitability, airports continue to suffer from the effects of the recession, and their struggle to find revenue is increasingly putting them at odds with the carriers they serve.

Airlines balk at the airports’ plans to raise landing fees and passenger taxes just as the industry is starting to make money again after a year and a half of losses.

For the second quarter this year, the nine largest U.S. airlines reported a combined $1.86 billion in profits on revenues of $31.7 billion, just shy of their second-quarter record of $33.3 billion in 2008.

Airline executives say they are now seeing the fruits of the capacity cuts they instituted to deal with the 2008 fuel-price hikes and subsequent recession.

With fewer and smaller-gauge flights, carriers have been able to raise airfares and more successfully rebundle flight packages to collect ancillary fees and build their revenue base.

Moreover, the carriers have kept their capacities in check through the first half of this year as passenger counts linger below the levels of two years ago.

For airports, though, fewer flights and passengers means less business and less revenue.

Not only do the airports see drops in direct revenue streams such as concessions and parking, they also come up short in indirect revenue sources because as passenger numbers drop, so do FAA and Transportation Department tax collections from those sources.

The result is a drying up of federal money available to airports through the Airport and Airway Trust Fund, more specifically Airport Improvement Program grants, which airports rely on to fund capital projects.

The U.S. Government Accountability Office reported last year that over the past decade, trust fund revenue fell by about 80%.

As a result, the GAO said, the FAA has had to raid the trust fund’s surplus account, accrued since 1970, to cover commitments airports have made using trust fund money to guarantee financing of their projects.

Airports received $42.1 billion from Airport Improvement Program funds between 1992 and 1998 alone, the DOT’s inspector general reported.

The Congressional Budget Office now forecasts about $18 billion less in trust fund revenue from 2009 through 2017 than it originally forecast in 2007 for that same time period.

That’s chilling news for airports.

To cut costs, they can, and have, reduced operations and workforce numbers and have deferred some improvements. But airports must remain open for business, maintain their runways and run their facilities on a daily basis, and they also need to make basic runway and other upgrades to ensure operational safety.

The FAA has estimated that the nation’s airports will need about $50 billion for various projects between the last fiscal year and fiscal 2013.

But the Airports Council International-North America estimates that airports will need $94.3 billion over that time period for those projects.

The FAA’s figures are off-base, the council says, because they fail to include certain improvements required to conform with security mandates.

Leveraging the future

Click on image for larger view.The airports get financing for their capital and other projects from a variety of sources, including fees they charge airlines, passenger taxes and federal grants. Airport operators, stuck with trying to maintain and upgrade their facilities as funds shrink, have been supplementing costs by issuing revenue bonds. (Click on image at right for a larger view of terminal costs and nonterminal costs for airports.)

The bonds currently account for a bit more than half of all capital funding, according to an airport council estimate. Fees raised by federally sanctioned passenger facility charges, a separate airport tax charged to passengers for each flight segment, account for about 12%.

But Robert Poole, transportation policy director for the Reason Foundation, said that PFC funding is even more crucial than that percentage suggests.

"Revenue bonds have to be backed by some source of revenue," Poole said. "And about one-third of the revenue bonds were backed by other PFC revenue."

That’s one reason the drop in passengers has hit airports so hard financially.

The recession made the bonds more difficult to secure as airports found it harder to attract investors. "The unstable financial markets have made it difficult for airports to issue airport bonds," the DOT inspector general said last year.

To compensate, the airports have been postponing projects or hunting for help and money wherever they can find it. While they lobby to raise the PFC tax cap, airport managers are trying to get even more federal funding.

Among other things, they are asking for more Airport Improvement Program discretionary funds before the well runs dry. Eligible airports are looking to better exploit DOT and FAA funding sources guaranteed by such programs as the Essential Air Service program, Small Community Air Service and the American Recovery and Reinvestment Act.

From last fall through July, airports received about $1.8 billion from the Airport Improvement Program. In all, airports have received about $5.5 billion from federally sanctioned programs in the past 18 months.

More airports also have been hitting up the airlines for more money, raising landing fees and facility rentals. American reported a 4.2% increase in rentals and landing fees for 2009. United’s landing fees rose 5% for the year.

At some of the country’s busiest airports, those fees are going to rise even more. The U.S. Court of Appeals for the District of Columbia Circuit ruled last month that airports can charge higher landing fees during peak runway hours.

In the three-judge panel’s ruling, Judge Douglas Ginsburg applauded the airports’ congestion-pricing plan, declaring, "Its creativity should be welcomed on its merits, not spurned for its novelty."

Dismissing objections raised by the Airline Transport Association, Ginsburg found that the airports had one of two choices: decrease takeoff and landing slots or charge more at peak hours.

As the nation’s biggest airline in number of passengers, Southwest keeps a close eye on its airport costs. "Our landing fees and other rentals unit costs increased 15.7% year over year, primarily due to airport rate increases," CFO Laura Wright told analysts last month.

Gary KellyIndeed, Southwest CEO Gary Kelly has wondered publicly if airports should control their spending more these days, given the economic climate.

"We agree with Kelly," said David Vossbrink, a spokesman for Mineta San Jose Airport in California. "The original vision for the improvements was a $4.5 billion program, and we brought that down to approximately $1.5 billion."

He added, "One thing we cannot and will not do is raise rents and fees to airlines beyond what we’ve already promised to our carriers. It’s a competitive world out there as airports duke it out for air service, so we are committed to keeping our cost per enplaned passenger competitive. We also can’t hike other customer fees such as parking, because we are in the same market for passengers [as] San Francisco and Oakland."

Projects at airports from Atlanta to San Luis Obispo, Calif., have had to be put on hold over the past two years.

Michael Conway, a spokesman for Detroit Metropolitan Wayne County Airport, said, "Fewer passengers means less PFC revenue," which backs the airport’s bonds. "Fewer passengers also means less revenue from concessions, parking, etc. The airport authority has deferred a lot of maintenance trying to keep costs low to the airlines."

The airport also delayed purchases of snow-removal, police and maintenance equipment and cut its workforce by 15% last year. It dropped the daily rate in one of its lots to $10 from $16 to attract bargain-hunting travelers.

But officials at other airports said they had no choice but to stay on track with project plans.

"When the economic crisis hit, we were at a point in the capital improvement program in which quitting, cutting back or reducing manpower on the job would have been more expensive than simply completing it," said Marc Henderson, a spokesman for Miami Airport. "We have relied on our financial advisers to help us steer our bond issues through the credit markets in these difficult times."

The airport’s $6.5 billion capital improvement plan includes a fourth runway; new north and south terminals; other terminal projects; roadway improvements; aircraft maintenance buildings; improvements to general aviation airports; and a new monorail, the MIA Mover, connecting the terminal with the new car rental center.

To fund the projects, the airport is relying on a mix of federal, state and other sources, including about $336.2 million in Airport Improvement Program grants, $169.5 million in PFC revenue and $5.5 billion from bond sales.

Another $1.3 billion in PFC revenue has been earmarked to repay some of the bonds.

On the other side of the country, Southern California’s John Wayne Airport in Orange County was able to secure the majority of its funding for $543.1 million in capital improvements by enacting its first PFC of $4.50 per passenger and finding bond buyers despite the tough market.

An airport spokeswoman, Jenny Wedge, said, "During the past few years, with a downturn in the economy affecting all angles of business, including aviation, John Wayne Airport was able to work through the decline and continue plans for capital improvements."

The airport, she said, had set aside reserves and banked on $200 million in existing airport revenue to help finish the projects.

Chicago O’Hare is planning to use about $1.4 billion in future PFC revenue to build three runways and several taxiways as part of its plan to modernize the airport.

Rising passenger facility charges

Click on image for larger view.Airports have long relied on PFC funding. Between 1992 and 2009, the FAA approved the collection of $76.7 billion in PFCs. The approved collection estimates are based on the number of passengers an airport expects to serve. Airports collected about 39% of those anticipated fees through the years. (Click on image at right for a larger view of charges collected from 1992-2009.)

Greg Principato, president of the Airports Council, said, "The PFCs are going for projects that are already under way, and the fees are a critical part of capital programs. If you had a blank piece of paper and you wanted to charge a user fee that was project-based, required multiple layers of approval and had an ending date, I’ve just described a PFC."

That doesn’t mean that airports would be able to raise their PFCs overnight, he said. Any airport increase, he points out, would still have to be federally approved.

Like the Airport Improvement Program funds, the PFCs are being stretched thin.

"A large fraction of existing PFC revenues are already pledged to various bond issues," the Reason Institute’s Poole said.

Lawmakers have been debating the increase as a part of the FAA reauthorization package, although airlines have fought the measure because they say they don’t think more taxes are warranted.

"A possible compromise was put forward a few weeks ago by Senate negotiators of a $1 increase," Poole said earlier this month. "But the airlines lobbied against even that, and it’s not clear what will happen when Congress returns in September and, we hope, resumes work on the bill."

The PFCs are meant to supplement the Airport Improvement Program fund, which is not supposed to be used for operating expenses or bond repayment.

Moreover, airport managers wonder how long they can count on Airport Improvement Program funds. "The uncertainty of future AIP grant authority makes it difficult for the nation’s airports to determine when or if they will receive their AIP grants," the inspector general said.

Airports are looking for other federal funding streams.

Facilities in rural areas are trying to tap into the $200 million the DOT has set aside for its Essential Air Service program to subsidize airlift in more isolated communities.

Another increasingly popular and relatively new source of money is the American Recovery and Reinvestment Act, which makes grants available to create jobs and spur economic development.

Last year, airports received about $1.1 billion in recovery act grants for 360 projects. Transportation Secretary Ray LaHood stated that "recovery act dollars are helping to make needed safety enhancements and upgrades at airports all across the country."

Tennessee’s Chattanooga Metropolitan Airport used $3 million in recovery act funds to build a new parking lot, which it opened late last month. San Jose Airport used about $41 million from recovery act and Transportation Security Administration funding to pay for a new baggage-handling system.

Another federal funding source airports have been tapping more frequently of late is the Small Community Air Service program, which has been controversial with some carriers.

Compared with other programs, the pot of money is rather small. The DOT received 84 grant applications last year from communities in 38 states seeking about $39 million, and the agency approved 19 grants totaling about $6.9 million.

Seven of those grants went to communities too large to qualify for Essential Air Service program funds: San Luis Obispo, Calif.; Huntsville, Ala.; Rockford, Ill.; Traverse City, Mich.; Butte, Mont.; Binghamton, N.Y.; and Knoxville, Tenn. The airports wanted to use the money for revenue guarantees and marketing support to attract new carriers, combat higher-than-average airfares or provide air travelers with access to additional markets.

United complained that the grants could be used to subsidize lower-fare competition in places like Huntsville and Knoxville.

The Airports Council and its allies argue that it’s time to move away from the "airline-centered" era that’s dominated the industry since deregulation in 1978, break the grip that network carriers have held over services and gates and open the airports to more autonomy, which could lead to more competition and choices for passengers.

More competitive service out of places like Huntsville, they say, would be a good thing, and it would provide the airport with a much more reliable revenue stream than federal funding: more paying passengers.

This report appeared in the Aug. 16 issue of Travel Weekly.

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