Airports and Economics

SEATTLE — This year’s Airport Economics & Finance Conference hosted by Airports Council International-North America reflected the concerns of the nation regarding an economy in recession and tight credit markets. Airports are focused today on reducing costs; finding new efficiencies; reconsidering or holding off major infrastructure projects; and rethinking the airline/airport economic model, which continues to evolve as the air carrier industry has its ongoing struggle with making a profit.

Airports have been hard hit by the paralysis that has occurred within the banking community over the past six months. David Spirakis, managing director for public finance with Bank of America, a leading airport financing player, says there is uncertainty as to which companies will still be players in the airport arena once the dust settles from the economic fallout. There is no longer a “huge oversupply” of banks interested in backing municipal bonds — a factor that is impacting interest rates. In fact, the role of banks has been substantially diminished and Spirakis expects that only the top (and diversified) banks will remain in the fray.

Spirakis says that the municipal bond market today is in a period of contraction. In the American Recovery & Reinvestment Act passed in February, the Administration moved to offset this trend by implementing a two-year pause of the alternative minimum tax for airport-related bonds.

David Wyss, a chief economist at Standard & Poor’s, predicts that the current downward spiral of the stock market is coming to an end. Yet, he cautions that average Americans are currently saving at an annual rate of 6 percent, up from 1 percent a year ago. With that trend, he sees consumers “permanently rationing down” their travel budgets, and says that some airports might reconsider their long-term passenger projections as a result.

William Swelbar, a research engineer at the Massachusetts Institute of Technology, says of the U.S. airline industry, “We have too many seats at too high a cost” for the airlines. Barriers to new entrants are being erected, he says – unstable oil prices; the credit markets; and, a decreased demand which is expected to continue. Swelbar says that the time is here for the airlines to rethink their business model. “The credit issue is going to force the change,” he comments. Efforts in the past year by carriers to cut capacity and increase unit revenues were working, he adds, until recently, when new fare wars arose.

“Decreasing real air fares became the great enabler,” comments Swelbar. “I fear the industry is near the end of the rabbits in the hat.”

Swelbar also notes that the success some U.S. carriers have had in recent times pursuing more international traffic has abated, to the point that the airlines are rethinking that strategy.

The carriers speak
A core component of the annual finance and economics conference is hearing the airline side of the airport equation. In sum, airline executives question why airports aren’t cutting back more; why they have large amounts of cash in reserve; and why the cost per enplanement (CPE) has continued to rise during the past decade.

Bill Ayer, president and CEO of Alaska Airlines, says that for air carriers the costs of operating at airports remain a top concern. An airport that holds down its costs, he says, puts itself in a better position to capitalize on air service opportunities in the future.

Regarding the overall airport/airline economic relationship Ayer says, “I think it’s time we rethink this relationship.” He stresses that the cost per enplanement is “potentially core-critical” when an airline is considering service to a market. “What you’re really betting on is the leadership at that airport,” he says.

Ed White, vice president of real estate for Alaska Airlines, adds that the particular airline/airport agreement — be it residual, compensatory, or a hybrid — isn’t as important as how a specific agreement works in a particular market. “We need one that brings a downward pressure on CPE,” he says.

White also tells airports that before they plan infrastructure expansion such as a new concourse, that they should first consider what the tenant airlines can afford. Then work together toward determining what’s appropriate to build, says White, and not first decide on a facility and then consider the costs to the airlines.

James Masoero, general manager of corporate real estate for Delta Air Lines, questions why the U.S. airport industry has accumulated some $27 billion in cash reserves, up from $21 billion in 2001, during a period when he says cost per enplanement has risen 49 percent. [For more on this topic, see “Inside the Industry,”]

Masoero offers up some specific rates and charges topics for consideration by airports:

  • competitively bid outside contracting for services and use the airport’s purchasing power as a tool;
  • review refinancing opportunities on current debt service;
  • review the airport’s cash reserves and assess if adequate/justifiable;
  • “value engineer” projects;
  • consider the potential to moth ball facilities that are currently being underutilized;
  • consider deferring any scheduled rate increases to tenants; and
  • implement landing fees for general aviation where feasible.