Regaining stability

MIAMI — The Airports Council International- North America (ACI-NA) Economics and Finance Conference held here in May provided an opportunity for airport professionals to discuss the financial state of the industry. Hot topics included addressing increased pressure from the airline industry to reduce airport charges and delay capital programs; identifying where markets stand after the recent financial and credit crisis; and developing incentive strategies for attracting and retaining passenger air service. Also — below, an airline/airport debate.

“Airports are still addressing capital structure issues, but the market is more stable,” relates Seth Lehman, senior director for Fitch Ratings. “The AMT (alternative minimum tax) holiday and Build America Bonds have helped airports on many debt issues.”

While until 2008, according to Lehman, airports enjoyed low-cost financing of GARBS (general airport revenue bonds) and narrow revenue stream credits secured by PFCs (passenger facility charges), CFCs (customer facility charges), parking, fuel consortiums, and single-term projects, between ‘08 and ‘10 airports faced questionable values of reserve sureties and a shutdown of the ARS (auction rate securities) market.

What this means, he says, is despite headwinds, the U.S. airport sector performs well. “Airports should continue to have strong access to capital markets,” comments Lehman. “[Airport] management needs to be responsive given probable airline consolidation; a growing reliance on volume-sensitive revenues; leverage growth exceeding passenger growth; and airline costs trending upwards.”

Regarding the airline industry in particular, Lehman says airlines were successful in raising capital for liquidity needs, and he expects sustained capacity discipline by all domestic carriers. “Additional legacy carrier mergers are likely and essential for the industry,” he adds. In terms of traffic performance by airport type, Lehman relates that in the 4th quarter of ‘09, airline traffic at hub airports declined 1.3 percent; hub airport traffic declined 7.5 percent in ‘08 and ‘09 combined.

Air Service Incentives

ACI-NA’s Monica Hargrove began her presentation by citing a recent GAO (Government Accountability Office) study indicating that from Q4 of ‘07 to Q4 of ‘08, 38 airports lost all scheduled service. “Airline/airport agreements may help an airport attract new service providers or encourage existing providers to add new destinations,” says Hargrove. “However, there are regulatory constraints on the structure of an incentive agreement.”

The principal constraints for offering incentives from an FAA regulatory standpoint include revenue diversion prohibition, the self-sustaining requirement, unjust discrimination prohibition, contractual or state and local law issues, and restrictions on the airport sponsor’s use of non-airport revenues, relates Hargrove.

The ACI-NA airport incentives survey, launched in April of 2009 and receiving response from 52 airports, indicates that airports need to have something in mind with respect to why it is entering into an incentive agreement and what the goals are … in order to evaluate whether the incentive agreement was successful, says Hargrove. “We had different responses from airports of different sizes … 13 large hubs, 18 medium hubs, 14 small hubs, and six non-hubs; 33 airports had incentive agreements involving domestic programs, and 23 airports had incentive agreements with international programs,” explains Hargrove.

Thirty respondents said an incentive agreement filled the airport’s purpose, eight said it did not, and 14 provided no response. “You have to have a way of measuring whether your program worked or not,” remarks Hargrove.

Michael Audino, senior researcher for the Center for Urban Transportation Research (CUTR) at the University of Southern Florida, also presented on findings related to utilizing incentive programs to enhance air service. Citing ACRP’s (Airport Cooperative Research Program) Research Report- 18: Passenger Air Service Development Techniques, key issues in terms of enhancing air service are: fares are too high, unreliable service, and difficult connections, relates Audino.

Why offer incentives he asks? “Except in unusual circumstances, all communities will need to provide some sort of risk mitigation to attract new or enhanced service,” comments Audino.

ACRP’s research report identified four primary air service development or incentive options ranging from revenue guarantees; travel banks; fee waivers; and marketing and advertising activities.

Echoing Hargrove’s remarks, “From a strategic perspective, it’s important for airports to develop air service development goals, and then be able to line up the appropriate incentive programs behind those goals,” says Audino. “As a community, each risk mitigation technique utilized has risks unto themselves.

“Advertising and marketing assistance involves relatively low risk as a community because it does not require a significant amount of investment. Revenue guarantees on the other hand, involve greater risk.

“I think this whole issue of airline incentives and mitigating risk … framing it as a risk mitigation technique ... is a classic example of how public/private partnerships have worked, and continue to work.”

The research clearly shows that air service incentives work … it’s important for airports to ensure that incentives are aligned with the goals for the air service it is seeking, stresses Audino. “Incentives are not a silver bullet; they are one way to help elevate and enhance air service to communities.”

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