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.”
Airlines vs. Airports: A Roundtable Discussion
At ACI-NA’s 2010 Airport Economics & Finance Conference, airline and airport representatives hashed out differences with regard to capital programs, a potential PFC increase, and airport liquidity. Following are edited excerpts of the discussion:
Moderator: Borgan Anderson, Seattle-Tacoma International Airport.
Q: To airlines, in this economic environment, what kinds of projects have you been willing to support?
Amanda Zhang (American Airlines): One capital project that we have been approving is infrastructure. Whether you are in a cost situation or not, the buildings, the runways, the ramps; they all have to be maintained, and we continue to approve those projects.
Pete Houghton (Southwest Airlines): I agree. There are some airports that are at the point where they have major infrastructure requirements; you have to maintain that.
Q: To airports, what kind of projects might you be looking to initiate this year?
Maureen Riley (Salt Lake City Airport): We are gearing up for the first phase of probably a 10-to-15 year redevelopment program. That will involve relocating some landside facilities such as rental car facilities and building a new parking garage; most of that will be PFC-supported.
Susan Kopinski (Lambert St. Louis Airport): We have two airfield projects using stimulus money. In addition to that, we have what is called the Airport Experience Program … we have an aging Terminal 1, and we’re refurbishing the concourses and the terminal building itself.
Q: To airlines, what advice do you have for airports in developing a compelling business case, and what do you want to see in order to make the approval process easier?
Laura McKee (Air Transport Associa-tion): The airlines really need to see the cost/benefit and the impact on rates and charges. What they need to see is: here’s the project, here’s the justification, here’s the funding sources, and here’s the impact … including the O&M costs (operations and maintenance).
Kopinski/STL: This is a concern of ours … while I agree that the airlines have a right to know, ten years of data in asking for a forecast of what this is going to cost in terms of a cost/benefit analysis is a bit much. I don’t like writing down numbers unless I’m confident in those numbers; I’m not confident after two years let alone eight, or nine, or ten. The other thing I’m worried about is that the airlines are going to come back and say ‘you told us it would cost this much … and now it’s costing this much …’
Houghton/Southwest: The point on the forward information is, there are a lot of projects that we see that are pretty well justified, but until we see the cost, we don’t know if those costs are reasonable. We need to plan what our costs will be in the future; airlines have to make fleet decisions many years in the future. Airport capital costs are very important to us.
Q: Have airline views on PFCs (passenger facility charges) changed over time?
Houghton:/Southwest Our overall concern is still the level of taxes that passengers have to pay. PFCs have an effect on demand, and secondly, PFCs have an effect on costs because capital costs are funded to some degree by PFCs.
McKee/ATA: The difference from when this was established is that the nature of lease agreements were different. We are now looking at a lot of different types of agreements with hardly any MII (majority-in-interest) rights.
The ATA has been at the center of this debate and from our standpoint, when you’re talking about a blanket increase … it’s like giving a blank check. Maybe on an individual airport basis there is a need, but for us to agree in a macro-concept, that all airports need an increase … that’s a problem for us.
Q: Airlines, you introduced a number of new fees in the past year… does this experience change your views on the possible impact of PFCs from an economic standpoint?
Zhang/American: Take our baggage fee for example, we see fees like that as a way of providing passengers with what they pay for … passengers who do not use certain services don’t have to pay for them; baggage costs a lot of money for airlines, and it costs a lot of money for airports as well. Passengers who choose to use certain services will pay a little extra so that they don’t have to spread costs among all our customers equally. PFCs are a little different; the passenger doesn’t get a vote to say, ‘I don’t necessarily want to pay an extra $5 in order to have a nicer looking terminal …
McKee/ATA: It’s not like the industry is turning a profit; … we’re losing billions of dollars, it’s a razor thin margin.
Houghton/Southwest: The PFC level itself in a way offsets the ability to raise fares, because airline fares are not really cost-based; the market dictates what people will pay to travel.
Kopinski/STL: [Airlines] indicated that the baggage fee is a user fee, and the passenger who uses that service has to pay for it. A PFC is also a user fee, it is not a tax. I think we need to differentiate between the two … passengers are using the facilities, and the PFC goes toward improving those facilities. [Airlines] also said that for both the airlines and the airports, it costs money for baggage; then I think it would be really nice if [airlines] shared part of that fee with the airports.
Q: Airports, what lessons have you learned about the level of cash reserves you think are prudent and reasonable at your airport?
Kopinski/STL: I think the lesson we learned is that an airline can leave anytime it wants, or they can reduce their service ... we have to be fiscally and financially prudent.
McKee/ATA: It’s prudent to have reserves. There’s some reasonable level of reserves — it’s not a defined term in the rates and charges policy; we disagree that it needs to be as high as it is.
Houghton/Southwest: One thing we knew going into this recession was that we were not going to cut our capacity as much as the other carriers, which meant we would be picking up a larger share of airport costs. Our airport costs were up almost 15 percent last year yet our traffic declined and our capacity went down … because the airport agreements simply redistribute the costs over those who are still operating.
Riley/SLC: In our case, we have been accumulating surplus purposely for our long-range capital improvement program, and that surplus will in fact contribute to a rate-based project in the future; I think we have to look at an airport on a case-by-case basis.
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