San Francisco International's Business Still Turbulent

The Sept. 11, 2001, terrorist attacks took place 3,000 miles away, but the effect is still being felt at a decidedly changed San Francisco International Airport.

Like all airports in North America, SFO was closed to commercial aviation for several days after Sept. 11. When the planes started flying again, it reopened to a very different aviation environment.

Five years after the attacks, SFO -- Northern California's busiest airport and one of the nation's major gateways to Asia -- is home to fewer airlines, fewer passengers and fewer flights than before Sept. 11. Forced to operate with suddenly reduced revenue, SFO put several major construction projects on hold and cut its staff by a third.

And SFO, like other American airports, bristles with stricter security than it did before the attacks. All told, SFO spent $150 million to beef up security, with the federal government reimbursing about $50 million.

Over the past two years, SFO has gradually been recovering, according to spokesman Michael McCarron, although the initial shock was severe.

"Our business was down dramatically,'' McCarron recalled, saying the falloff began before Sept. 11. "Six months prior to that, the dot-com boom collapsed, and that summer of 2001, business was down. Then came Sept. 11.''

From handling 41 million passengers in 2000, when it was one of the world's 10 busiest airports, SFO plummeted to 29 million passengers in 2001.

Shortly afterward, the SARS outbreak in Asia and Toronto, the Iraq war and avian flu further hampered business. But, buoyed by a surprisingly strong global economy and pent-up demand for travel, civil aviation gradually began to recover.

This year, driven by surging demand for international travel, SFO officials expect nearly 37 million passengers. International traffic is growing by about 4 percent a year, according to McCarron, though domestic demand is still flat. Free-spending international fliers account for 25 percent of SFO passengers and generate 42 percent of its passenger revenue.

SFO, like most U.S. airports, has not fully recaptured the lucrative business traveler, who typically books flights at the last minute and pays a high fare. Such travelers now often drive to their destinations or use e-mail or videoconferencing instead of flying, said Kevin Mitchell, head of the Business Travel Coalition, a trade organization for corporate travel planners.

Nationwide, "the high-yield business traveler traffic is approximately 50 percent of what it was prior to 9/11,'' according to a coalition report released Sept. 1.

Still, travelers are learning to live with a certain amount of risk, and many people have to fly, especially if they are going overseas for business or leisure. Even the high oil prices of the past few years -- which drive up airlines' operating expenses and raise air fares -- have not stopped the recovery, though they may be slowing the pace.

The devastating confluence of Sept. 11 and the dot-com bust came just after SFO had taken on substantial bond debt to finance a just-completed $1 billion international terminal -- the biggest terminal in the United States at 2.5 million square feet -- and was ramping up to build a new airport hotel, renovate the former international terminal for domestic use and reconfigure runways to handle traffic that had mushroomed in the late 1990s.

The sky was the limit -- or so it seemed. The dot-com collapse and the terrorist attacks changed all that.

Like other U.S. airports, SFO's post-Sept. 11 credit rating suffered. Standard & Poor's, for example, dropped SFO's credit rating from A+ with a stable outlook to A with a negative outlook in September 2001, according to S&P analyst Kurt Forsgren.

The weak Bay Area economy, SFO's paucity of thriving low-cost carriers that provide consumer choice and its reliance on ailing United Airlines, which handles about half of all passengers and flights at the airport, drove the S&P downgrade, Forsgren said.

"We had a large mortgage on a home no one was coming to live in, basically,'' McCarron said of the dark days right after Sept. 11.

SFO, accordingly, put the terminal renovation -- expected to cost $150 million to $160 million -- on hold. It also set aside plans for the hotel, and reduced staff from 1,800 employees to below 1,200.

Additionally, SFO lowered landing fees for airlines and reduced rents for airport retailers and restaurateurs struggling during the downturn. "It would do us no good to have them go out of business,'' McCarron said, adding that their rents have returned to normal in the past year.

But SFO's efforts to lure low-fare airlines, which have grabbed increasing market share from traditional carriers such as United in recent years, have been spotty.

United rolled out its own low-fare unit Ted at SFO in 2004, but discount leader Southwest Airlines pulled out of SFO, fledgling discount carrier Independence Air stayed aloft for less than a year and discounter ATA decamped from SFO to Oakland -- a growing rival ruled chiefly by such low-cost carriers as Southwest and JetBlue Airways.

Meanwhile, Virgin America, a planned low-fare airline that announced SFO will be its headquarters back in June 2004, has yet to win the Federal Aviation Administration's certification to fly.

While SFO struggled in a radically changed business environment, it scrambled to keep up with the post-Sept. 11 need for intensified security.

The National Guard, patrolling the airport immediately after Sept. 11, is remembered for an incident in which a guardsman shot himself in the buttocks while holstering his weapon.

When the new Department of Homeland Security put its Transportation Security Administration in charge, SFO had to let go of most of its baggage screeners. Many were Philippine citizens who lacked newly required U.S. citizenship, and some couldn't pass tests for English proficiency, said the TSA's Edward Gomez, federal security director at SFO.

About 150 of the 1,000 baggage screeners at SFO are holdovers, Gomez said, and are employed under TSA guidelines by private contractor Covenant Aviation. SFO is "by far the largest'' of the seven U.S. airports using private screeners, he said. Others use TSA employees.

McCarron said lines to pass through security checkpoints take on average seven or eight minutes -- much less time than at many other U.S. and foreign airports. He also said that private contractors give SFO flexibility in scheduling, which shortens customers' wait times. Gomez agreed, saying the airlines give the TSA daily estimates of how many passengers have booked flights, which allows security officials to schedule baggage screeners accordingly.

On a recent weekday afternoon, United passenger William Hill said he found the wait acceptable at SFO's international terminal, where he planned to board a flight to Beijing. "It's not too bad,'' he said. "At least it's moving, which is more than I can say for Newark (N.J.), where I must have waited for an hour and a half. The people here (screeners) are pretty nice, too. They're usually polite.''

The TSA uses plainclothes air marshals to observe passengers before they board planes, looking for unusual behavior that could betray potential troublemakers, Gomez said. SFO also employs 1,400 closed circuit video cameras, the most of any airport in the country, to monitor people in the terminals, and boasts this country's first explosive detection system for X-raying every checked bag, not just a sampling.

"We have layered security levels,'' Gomez said. "A lot of what we do, the public doesn't see. We need to be unpredictable in what we do.''

New regulations restricting the type of liquids and gels in carry-on luggage -- prompted by the Aug. 10 plot in Britain to blow up U.S.-bound jetliners -- are the latest security wrinkle.

McCarron says the public has largely been cooperative and seems well-informed about the use of liquids in carry-ons, but acknowledged that tighter rules have hurt some SFO retailers who sell liquid products. He cited terminal 3's Body Shop and a wine store as businesses whose trade has been hurt in recent weeks.

But the worst seems to be over for SFO, McCarron said, pointing out that SFO's credit ratings have recently edged upward. Standard & Poor's and Moody's give A ratings with stable outlooks to SFO. Fitch Ratings gives SFO a slightly better A1 with a stable outlook.

When the largest tenant, United, slid into bankruptcy in December 2002, "there were some nail-biting days,'' McCarron said. But United "never fell behind in their payments'' on any rented facilities at SFO, a United creditor that had observer status in Bankruptcy Court. The Chicago airline emerged from Chapter 11 on Feb. 1 and posted its first profit in six years in the second quarter.

Even during its three-year journey through Chapter 11, United began service between SFO and Beijing and between SFO and Ho Chi Minh City via Hong Kong. Next year, it plans to resume service between SFO and Seoul.

All this is in line with broad trends at SFO, where about 45 percent of the airport's 8.2 million international fliers come from or go to Asia -- led by booming China and India and prosperous Japan.

Indeed, international travel is strong worldwide, according to the trade organization Airports Council International, which reported a 5 percent rise in international travel for July 2006 from July 2005. Domestic traffic was flat, the council reported.

With its strong position as an international gateway to Asia and Europe, SFO is well-situated, McCarron said.

And while passenger confidence ebbs and flows with reported security threats such as last month's alleged United Kingdom bombing plot, the slow economic recovery appears to still be on track, McCarron said.

"The latest hiccup didn't have much effect on us after the first 48 hours,'' McCarron said of the bombing plot, which caused chaos at London's Heathrow airport. "Traffic remained strong throughout the rest of the summer. We're seeing the usual post-Labor Day slump, but nothing big. People want to keep moving on with their lives. They don't want to be scared.''

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The impact on SFO

The Sept. 11 terrorist attacks, along with the dot-com bust, caused a drop in passenger traffic from 41 million passengers in 2000 to 29 million passengers a year later.

The airport has had to shelve such projects as a new airport hotel and renovated terminal. Combined with political opposition, unstable finances also stayed a reconfiguration of its runways.

It cut its staff by a third.

It has had to spend $150 million to beef up security; a third of the cost was reimbursed by the federal government.



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