Focus on Airport Economics

Annual event highlights rates & charges; volatile construction costs; privatization

PHOENIX — Each spring, the people who manage the purse strings at North American airports meet for the Airport Economics & Finance Conference, hosted by Airports Council International-North America. Also participating are related consulting firms and airline representatives. Among the hot topics at this year’s meeting held here: the recent rates and charges dispute at LAX; escalating construction costs; airline/airport terminal agreements; employee screening; and privatization. Following are highlights from this year’s conference.

The meeting kicked off with a discussion about the state of the North American economy in general. Dr. Mike W. Tretheway, executive VP and chief economist for the consulting firm InterVISTAS, reports that 2007 has seen a “soft landing” after the high growth years between 2003-2006 in the U.S. Tretheway says that he expects fuel prices to stabilize around current levels; however, he projects that long-term per-barrel oil prices could drop as China and India incorporate more efficient ways to operate their industries.

In Canada, the Western provinces are in a high-growth mode, led by oil exploration in Alberta. (Tretheway says Alberta is expected to surpass Saudi Arabia as the world’s major oil exporter by 2015.) In Mexico, he cautions, rising prices for corn could have a destabilizing effect on the overall economy, which in general terms typically tracks with the U.S.

Regarding airline economics, Robert A. Hazel, a managing partner with Eclat Consulting, Inc., says that the carriers are facing weaker demand and are losing pricing power. While yields crept up in the first half of 2006, he says, they dropped off in the last half. The airline industry is at the end of a “very slim recovery,” he comments.

At the same time, Hazel says airlines are running out of ways to cut costs. “There are no easy ways to cut costs anymore,” he says. Yet, start-ups keep coming: Skybus; Virgin America; Express Jet.

An overall impact of the volatile nature of today’s airline economics, says Hazel, is reduced service to smaller commercial airports. He says that on average the smallest U.S. airports in recent years have lost 44 percent of the seats serving their markets.

The airlines’ cost-cutting exercise is leading to more demand on airports to provide amenities and maintenance services (boarding bridges, etc.), explains Hazel. As a result, airports are becoming “key differentiators” in the air travel experience, he says.

‘An unprecedented circumstance’
Among the greatest challenges facing airports today is the ongoing escalation in construction costs, addressed in depth at the conference. Frank Congelio, an economist with the Bureau of Labor Statistics, reports that from 2004 to 2006 concrete prices alone surged more than 40 percent in the U.S., while copper has seen increases of more than 25 percent in the past year. While growth in China is one reason for the jumps, he says that that nation is actually helping abate concrete price spikes because it is now exporting the product to the U.S.

Predicting where the volatile sector is headed is difficult, says Congelio, particularly due to the “interrelationship” in the construction materials market. For example: the price of asphalt can be impacted not only by demand but by decisions made by refineries on which products to produce. Also, a recent dropoff in construction demand in the residential sector has been offset by a corresponding rise in the non-residential sector.

Mike Dell’Isola, senior VP with Faithful+Gould, a consulting firm, terms the current construction situation and its impact on bids “an unprecedented circumstance.” Bids on airport projects are coming in as much as 50 percent over budget — sometimes a much as double original estimates, he says.
“Demand for construction has outstripped supply,” comments Dell’Isola.

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