Airports Make Hay from Their Open Land

About a year ago, officials from Houston Bush Intercontinental airport huddled to tackle a persistent conundrum -- how to squeeze more money out of its 12,000 acres of land.

As part of an ongoing effort by the airport to increase non-aviation revenue, officials thought the land, which needed constant maintenance, could be put to more productive use.

From that meeting came Houston's latest money-making idea having nothing to do with airplanes or airline passengers: cutting and baling the grass on airport land and selling it as hay to cattle ranchers.

The city-owned airport formally launched its agricultural program this month by cutting some of the wild grass on its land.

Sales generated a modest $30,000. But the airport will broaden the program by sowing 2,000 acres later this year with Tifton 85 Bermuda, a protein-rich grass favored by livestock growers.

"The general sense in the business is that airlines are going to have ups and downs," says Richard Vacar, director of Houston Airport System. "And we're trying to find other sources of revenue so that we don't fully depend on airlines, particularly in a downturn."

The Houston hay venture typifies a growing trend in airport management: looking beyond traditional aviation-related sources to bolster finances.

After years of operating strictly as public agencies, airports across the USA are becoming more entrepreneurial. They're developing malls, office parks and golf courses. They are also pursuing agricultural projects, marketing consulting services and drilling for gas. In doing so, they're weaning themselves from over-reliance on the shaky finances of a struggling airline industry.

Also, they're improving their competitive positions against neighboring airports by keeping the costs low for airlines and retail tenants, and they're lowering borrowing costs by improving their bond ratings. Dallas/Fort Worth airport, for example, earlier this year trimmed 50 cents from its previous landing fee rate of $4.94 per 1,000 pounds of aircraft weight.

CEO Jeff Fegan says "a fair amount" of the cut was due to the revenue the airport has been able to raise from non-traditional sources.

In 2005, the airport generated $42 million of revenue from non-aviation activities that don't involve the typical airport revenue sources: concessions, retailers, parking and rental cars.

"Every major airport is motivated to drive (up) the revenue," Fegan says. "The cost is a factor for airlines in their choice of airports."

According to the Airports Council International-North America, U.S. commercial airports last year generated about $13 billion in operating revenue, more than half of it from landing fees and various services to airlines. Parking fees as well as rent from retailers and car-rental agencies accounted for a substantial portion, too.

No one has calculated how much comes from non-traditional sources such as farming and real estate development, but Mary Rose Loney, a consultant and former director of Chicago O'Hare and Philadelphia International, says entrepreneurial projects are growing and are "here to stay."

Real estate development

Dallas/Fort Worth and Denver International, two of the USA's largest airports in terms of land holdings, are moving aggressively into energy production and real estate development.

DFW sits on the Barnett Shale, one of the largest natural gas fields in the USA. It recently signed with Oklahoma-based Chesapeake Energy to drill for natural gas. More than 9,000 acres of its land will be available for drilling, which will begin next year. Chesapeake will pay DFW $181 million and a royalty of 25% on gas produced.

DFW -- bigger than the island of Manhattan, with 18,000 acres -- has one of the most ambitious real estate development programs.

In 2001, DFW opened a 400-acre commercial park of warehouses. It generated $3.4 million in rent for the airport last year. Online retailer Amazon became a tenant last year. And DFW has two Hyatt hotels on its property, one of which it owns.

"We were more willing to take a little bit of risk," says DFW's Fegan. "That was a gamble that paid off, and we hope to do more things like that."

A preliminary DFW land-use plan, which has yet to be approved by city officials, calls for a 600-acre mixed-use development that would include retailing and office space. Planned for the airport's property about 2 miles from the nearest terminal, the mall hopes to draw nearby residents as well as 50,000 employees. If approved, the project could open in about three years.

The Denver airport this year made a deal with Canada-based Petro-Canada to drill 20 wells on its land. The airport, which gets a cut of the sales, expects to generate $1.5 million in the first year. Denver International already owns 51 oil and gas wells, which generate about $4 million in annual revenue. The airport gets about $250,000 a year from farmers using its land to grow wheat, sunflowers and other crops.

Denver, which has the largest amount of land among U.S. airports, with 34,000 acres, is also leasing land to developer Landmark for a hotel, retailing and residential complexes and a golf course.

Denver is also planning to lease 15 acres next year to a firm controlled by the family of former tennis pro Michael Chang for a complex of shops, restaurants and offices.

Some other entrepreneurial initiatives:

*Kansas City. Kansas City last month paid $17 million for an office building next to the airport to generate rental income. It hopes to eventually develop 800 acres for office buildings and industrial parks. It will start modestly with one warehouse, to be finished next year.

"The city was sitting on this property and waiting for the golden ring to fall," says Mark VanLoh, the airport director. "We decided we're not going to wait for it."

Local farmers raise cattle, soybeans and corn from about 6,500 acres, and the airport generates rent and royalties from sales. Annual revenue: $300,000.

*Miami. In June, Miami-Dade County Aviation Department shut down its Opa Locka West, a general aviation airport heavily damaged by hurricanes last summer. The property will be mined for limestone rocks. Located northwest of downtown, the area is rich with oolitic rocks, which are heavily in demand from construction companies to stabilize foundations.

Miami officials estimate the rocks could generate $300 million to $600 million for the aviation department. The airport property eventually will revert to a lake.

*Jacksonville. In late 2004, Jacksonville Aviation Authority approved a project to develop 2,500 acres with hotels and an industrial park. It has negotiated six deals so far, including two business hotels and a 328-acre site for distribution centers and warehouses.

*El Paso. El Paso International already runs a 600-acre industrial park, generating $5.7 million in revenue last year. It also receives 5% of the gross revenues from six hotels that it helped develop inside the airport. The hotels brought in $1.6 million for the airport. The airport will open another hotel later this year, a Homewood Suites.

Working with Tom Fazio, a golf course architect, El Paso is also building a resort-style golf course that will open in March, says Patrick Abeln, the airport director. Its preliminary plans call for surrounding the golf course with another full-service hotel and another industrial park.

The airport's "A+" bond rating comes in large measure from the high percentage of revenue it collects from non-aviation sources, Abeln says. El Paso derives 53% from non-aviation sources, vs. 47% for U.S. airports generally.

Peter Stettler of debt agency Fitch Ratings says diversity in revenue sources is a sign of the airport's financial health and is moderately important in boosting the bond rating. A higher bond rating means lower borrowing costs for the airport.

Some airports learned painfully the lesson of not having diversified revenues. Denver had its bond ratings lowered in 2003 by Fitch because of the financial difficulties of United Airlines, which accounted for 60% of its traffic at the time. United exited a three-year run in Chapter 11 earlier this year.

The financial troubles at American Airlines and US Airways also led to lowered ratings for Miami and Pittsburgh, respectively.

Airlines are generally supportive of airports diversifying their revenues because such efforts help lower fees for the airline industry, says Bob Montgomery, an executive at Southwest Airlines.

But Montgomery says airlines draw the line at projects that can transfer some of the costs of airports' entrepreneurship to passengers.

Airports' increasing participation in entrepreneurial activities has raised some questions about how much risk a government should undertake. A failed enterprise by an airport has the potential to backfire on local government. Losses could lead to a lower bond rating or even a bailout.

How much risk is too much?

Houston now has an indirect ownership stake in an airport in Ecuador that came about from its foray into selling consulting services to foreign airports. But officials there took steps to insulate the city from risks associated with the venture.

In 2001, Houston formed an affiliate company, HAS Development, to market the airport's consulting and training services to foreign airports. It brings in about $1 million annually for the Houston Airport System.

The company trains airport managers from developing countries on a wide range of issues, including safety standards, running a fire department and management practices.

One of its early projects was consulting Ecuador's Quito Mariscal Sucre International for its concessions program.

After the government's privatization of the airport, HAS and its financial partners now manage the airport. HAS owns a 25% stake in Mariscal Sucre.

The government is building an airport to replace Mariscal Sucre, to be open in four years. HAS and its partners will continue to operate the new airport. HAS is also looking to buy stakes in other foreign airport complexes.

Houston's Vacar says he doesn't believe the city airport system is taking undue risk by venturing into airports in developing countries.

As a separate non-profit corporate entity, HAS Development shields the airport system and the city from liabilities, he says.

Paula Hochstetler, president of trade group Airport Consultants Council, says assessing risk will be increasingly important as airports begin to broaden their businesses beyond the traditional functions.

As public agencies, airports should stick to businesses that pose little risk to the local governments that own them, she says.

"They have to be deliberate and have good business sense that it doesn't place the airport in jeopardy."