State of the Industry Report

Almost overnight, the business of airports changed; yet, many past issues linger.

Over A Barrel: Industry In Flux
Almost overnight, the business of airports changed; yet, many past issues linger

It is often said that fuel drives the industry. In 2008, it’s driving the industry into the ground — or at least fueling a revolution in how aviation and airports operate. The U.S. airline industry is in a state of panic; the Federal Aviation Administration is under fire; ‘carbon footprint’ has entered the vernacular; business aviation, having grown into a key transportation alternative, is holding its own, while traditional recreational flyers are leaving their aircraft tied down. And there’s Congress, which continues to prove itself inept when it comes to passing long-term aviation system authorization. It is safe to say, change is here. Following is an analysis of where North American airports and their tenants are today and prospects for the near-term, taken from recent interviews, email requests, and coverage of conferences in Dallas and Denver.

A year ago, the state of the industry was one focused on potential new user fees that would transform how the U.S. aviation system is funded, and on getting long-term authorization passed by Congress. Those issues remain while continuing resolutions have kept the system operating. It is now anticipated, say sources, that an aviation bill will pass after the November elections and will be signed by either President Obama or McCain. It is expected that the bill will call for FAA to revisit contract negotiations with the air traffic controllers union — a provision in the current House bill that President Bush has stated is a deal-killer. Whether or not airports will get the increase in passenger facility charges they seek remains a question.

Meanwhile, the regulators are coming under fire for recent decisions at the U.S. Department of Transportation and FAA. DOT, in an attempt to alleviate congestion in the clog in the system that is New York’s airports, has called for the reintroduction of slot controls at Newark, LaGuardia, and JFK and congestion pricing, opposed by the airlines and the Port Authority of New York & New Jersey.

For its part, FAA has come under the national microscope for its lack of oversight of airlines and maintenance inspections. This became most evident with the grounding this spring of American Airlines’ fleet of MD-80s which, say many, was a knee-jerk reaction by an agency trying to demonstrate that it was doing something. The issue of FAA oversight has filtered down to the FAR Part 135 charter industry. In a recent letter to the FAA Administrator, National Air Transportation Association president James Coyne charged that the agency is demonstrating a lack of consistency between what operators are being told by FAA’s regional offices versus what headquarters is directing.

As important as all of that is, the focus of the industry has turned to the price of fuel. Once projected to have a profitable year in 2008, the U.S. airlines are now scrambling to survive. Only two carriers, Southwest and Allegiant, reported profitable first quarters. The struggle for survival has led to panic among some of the carriers — United Airlines saw its stock value drop 37 percent in one week.

For an instant, it was thought that mergers would be the salvation for some U.S. carriers. That hope has dimmed as merger discussions have come and gone, except Delta/Northwest. In turn, airlines are cutting employees and routes and parking airplanes. Both United and Continental announced major fleet cutbacks as analysis they rethink their business models. They at least continue to operate — this spring saw the collapse of Aloha Airlines, ATA, and the one-year wonder, Skybus.

The impact of all this scrambling has left the airport industry in a field of uncertainty. In particular, smaller communities are seeing their air service disappear. A year ago, the attention was on increasing air service; today’s it is on maintaining what’s in place. It is expected that more air service cuts are on the horizon.

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