The RDU Experience

RDU AIRPORT, NC — In October 2008 the Raleigh-Durham International Airport (RDU) opened Phase 1 of its terminal overhaul, bringing with it a state of the art centrally driven kiosk-dominated common use lobby and in-line baggage screening system. It is a very welcoming, naturally lighted facility. Phase 2 is now well underway and slated to open in early 2011. Along the way, the airport has maintained its pragmatic approach with dealing with the air carriers, as well as how it manages its finances. It has also learned some lessons along the way which may be of value to others embarking on major construction projects.

The Phase 2 project, which will bring all airlines under an expanded Terminal 1/2 complex, was originally projected to open February 27, 2011. It’s been moved up a month.
Explains RDU airport director John Brantley, “The commissioner of the National Hockey League came to town early last week and said, ‘Guess what, guys? We’re going to hold the NHL All-Star Game in Raleigh on January 30, 2011. And one of the reasons that we’ve agreed to do that is that new terminal at RDU.’

“And we said, we don’t want that thing to be unfinished when they have that All-Star Game. We know we’re going to see lots of people from lots of places.”

Brantley says he doesn’t see any particular obstacles to opening Phase 2 early, though it could cost more money. Speaking with him, one gets the sense that this is a man who doesn’t get rattled easily, and is methodical. “We’ve been down that road before,” he says.

The director has been at Raleigh-Durham since 1977, when the civil engineer was sent by the city to oversee a runway development project.

Relates Brantley, “They had twice tried and twice failed. The FAA encouraged them to start over and not make the decision at the start of the process, but make the decision at the end of the process. I was asked to come and manage that. I figured a couple of years and we’ll get this done and I’ll be on my way.

“We were successful in getting everybody behind a plan. We put out all the alternatives and didn’t make a decision until everybody had spoken. It turned out that there really was a consensus that just had never been allowed to develop previously.

“That runway that we wound up building from ’82 to ’86 became the catalyst for really everything that’s come after it. The airport was pretty much in the late ‘70s largely the airport that was built here in World War II. As a consequence, it was pretty out-moded and needed a lot of improvement. When you break the logjam and get pointed in the direction of ‘let’s make things better’, they tend to decide that this feels and looks pretty good — let’s keep going.”

That step-by-step approach, along with a philosophy of up-front financing, has become a trademark of how the airport operates, according to Brantley.

Straddled with a hub
A central component of Raleigh-Durham International’s terminal expansion plan centered around a hub terminal which had been built for American Airlines in 1985-87. The carrier operated a hub at RDU through 1995. The carrier dehubbed, while at the same time traffic at the airport continued to grow up until the system-wide capacity crunch of 2000, when a major initiative was undertaken to transform the terminal complex.

“That terminal was designed and built as a hub terminal,” relates Brantley, “thus, while it had plenty of gates and a relatively nice concourse, the main processor with ticketing and bag claim was very, very small. American’s plan was that 80 percent of the people would be connecting.

“It turned out they were wrong in that regard; it actually was toward the end of their hubbing operation more like a two-thirds/one-third. So there were already problems with the processing.

“Once the hub went away it became all O&D [origination and destination]; about the only connecting that takes place here is Southwest, and they’ll tell you that they don’t connect passengers. We all know that they do.

“It wasn’t suited to be an O&D terminal at all.”

RDU officials subsequently negotiated with American to purchase the facility, which it had backed with special facility bonds, for $27 million and a reduction of its 40-year lease to 15 years, effectively cutting the term by ten years, according to Brantley.

“The other thing that we got was, because American was in effect paying the bonds off, all they were paying were ground rent and landing fees,” says Brantley. “They agreed they would pay the same rent as everybody else; they would pay the same charges.

“The lease they got isn’t materially any different than the month to month deals that every other carrier has.”

In fact, RDU has maintained month-to-month leases with all its carriers (except American) since 1977, a somewhat leading edge approach, Brantley admits, to a practice that is becoming more commonplace.

He explains, “The only reason there’s a lease with American is because when the facilities were built for their hub; they were built with what was then the debt of choice, which was special facility revenue bonds. That required there be agreements in place.

“The truth is, all of our rates and charges are essentially done by ordinance. We keep them low intentionally. Our cost per enplaned passenger here is about $5.50 at the present time, and it isn’t going to change much even with the completion of the terminal. And that’s pretty much at the low end of the spectrum for medium hub airports.

“So we don’t get much discussion with the airlines. I couldn’t even tell you when the last airline affairs committee meeting was here. It’s been years ago.

“Because neither party is standing there with a piece of paper waving it in the face of the other, we tend to get along pretty good. Actually, I think it’s the right way to run an airport or to run a business.”

The American terminal encompassed some 350,000 square feet; the new terminal will have a footprint of 900,000 square feet.

The $570 million terminal overhaul will bring the airport’s total debt to $700 million. The debt load, while necessary, runs counter to RDU’s philosophy of banking the money first prior to construction, says Brantley. Some 75 percent of the debt will be repaid via passenger facility charges.

“The great majority of what has been done out here preceding the Terminal 2 project was financed by a pay-as-you-go basis,” says Brantley. “My dad taught me a long time ago that if I didn’t have it, I couldn’t spend it. We sort of operated on that basis. We’d make it first and then used it to create the things that needed to be created.

“And the other thing that we did over the years is we never really tried to undertake capital improvements of an overwhelming breadth at anytime. We’ve sort of taken this airport and said, OK, there are different parts of it. So let’s take a part and fix it. We get through with that part and go to the next part. And you can do that and finance, pay as you go.

“When you get to a major facility like that terminal, a $570 million undertaking, it takes a long, long time to be able to accrue the funding. That’s when we started using debt. Our overall debt today is not bad at all for an airport for our size.

“There are a lot of others out there our size that have got a lot more debt than I would care to be saying grace over.”

Lessons learned
When in the late 1990s officials here recognized that terminal expansion would need to be addressed, they hired Jacobs Consulting and other consultants to perform a project definition study to determine what was needed and the cost, relates Brantley.

“We wanted to figure out exactly what we want; exactly how it goes together and fits with everything else; exactly what the specifications for it are; and then we’ll go hire an architect and say, ‘Here’s the plan’, explains Brantley. “In effect, design an envelope to go around what we’ve given you and put together the finishes — that’s your role.

“Once we had all that figured out we did architectural interviews and engaged Curt Fentress. We showed them the project definition report and said this is what we want and how we want it put together. We want you to design the cover that goes on it.

“That worked out very well, and it has saved us time, money, and effort throughout the process. That’s one thing I would recommend to anyone engaging in a major project. If you haven’t figured out what you want, the other guy isn’t going to figure it out for you.

“Project definition is clearly a great asset.”

The other ‘lesson learned’ was one the airport already knew, according to Brantley. That is, don’t let the air carriers dictate what happens at the local airport. “We don’t tend to ask the airlines what their opinion is of what we want to do, and then let them control the process,” says Brantley. “Our approach has always been to say, here’s what we’re going to do; here’s how we’re going to do it; here’s when; and we want you to know that. However, you are not going to be the controlling facet in that process. It’s not a negotiation.

“We’re telling you what we’re doing just like you’re telling us what flights you’re going to operate and what markets you’re going to serve.”

Brantley says that some 70 percent of RDU revenue comes from non-airline sources. “You can’t run the thing on the backs of one group of tenants,” he comments.

Over time, he adds, that approach has earned credibility from the air carriers.