OPINION: Consultant For Kansas City International Airport Challenges Airlines About New Terminal

Feb. 04--The consultant hired by a citizens group to help it determine how to improve Kansas City International Airport showed recently it's not afraid to challenge how the airlines view the terminals there.

In a new report, the consultant -- Frasca & Associates -- says just because the airlines are mostly happy with the current terminals, that doesn't mean the status quo is good for Kansas City's future.

Put another way: The consultant could be leaning in favor of some major changes at KCI when it comes to parking, security, baggage handling and a host of other factors that go into airline travel.

We'll hear more on Feb. 11, when the consultant makes a full report to the Airport Terminal Advisory Group.

Big changes likely could irritate a lot of Kansas Citians who pretty much want to keep things as they are.

However, this kind of fresh view of KCI would please many business leaders and others who think it's time to make some major alterations at KCI -- up to building a brand new terminal and shutting down the current ones.

The consultant's report makes for some pretty in-depth reading on the situation at KCI. It was prepared for the citizens panel in late January.

That was a few days after representatives for Southwest Airlines and other airlines that use KCI came in and told the citizens group that the current airport pretty much served their needs, and spending a lot of money to improve it might not bring more flights there.

The airlines' testimony was seen as a vote for the status quo.

Here's the full consultant's report, which challenges that viewpoint on several major issues:

To: David Fowler, ATAG Co-Chair

Bob Berkebile, ATAG Co-Chair

ATAG Committee Members

From: Frasca & Associates, LLC

Subject: Discussion of Airline Comments Received at the January 14, 2014 ATAG

Date: January 27, 2014

This memo summarizes the key comments and concerns raised by representatives of Southwest Airlines (Ron Ricks and Bob Montgomery) at the January 14, Advisory Group (ATAG) meeting. Mr. Ricks and Mr. Montgomery were asked to provide their comments and input regarding the future of the terminal facilities on behalf of all of the airlines currently serving the Kansas City International Airport (MCI).

The following points summarize the key points Mr. Ricks and Mr. Montgomery presented at the ATAG meeting and provides further context regarding each of their comments.

-- Airline Bankruptcies and Financial Stress -- As stated by Southwest, the airlines have experienced considerable financial stress as a result of 9/11 and the financial recession that started in 2008. As a result, over the last several years, the airlines have become much more disciplined at managing their seat capacity in order to maintain high load factors. They have also shifted their aircraft assets to serve more profitable routes.

Further Context: The airline industry's seat capacity and profitability discipline is evidenced in the rise of average airfares in the U.S. from 2009 to 2013, when they grew from $174 to $203, (nearly 4 percent per annum). This excludes the new charges many airlines have instituted for checked baggage1, preferred seating, inflight WiFi and entertainment, express security lanes, and inflight food. In fact, the airlines are now experiencing record profits. In the third quarter of 2013, the industry earned roughly $3.2 billion, an increase of $1.4 billion over the third quarter of 2012.

--Terminal Impacts on New Air Service -- Southwest stated that airline route decisions are based solely on: (1) passenger demand; (2) the availability of aircraft gates; and, (3) profitability.

Further Context: On a macro level, new service at an airport is dictated by regional economic factors such as population growth, income levels, and gross domestic product that drive demand in the region. Air service at an airport can also be dictated by competition from nearby competing commercial service airports within the region it serves. In MCI's case, the Airport's nearest competing airports are nearly 3 hours driving time away, which minimizes the amount of air passenger leakage to airports outside the Kansas City market area. While an airport's terminal building by itself does not attract new air service, a new or expanded terminal can address certain deficiencies and open up new air service opportunities that may otherwise not be accommodated today. For example, the lack of international gate capacity and/or passenger inspection facilities necessary for international flights or larger domestic aircraft flights could conceivably limit the ability of an airport to attract new flights in the future and thereby limit the airport's ability to continue to grow.

Note: Southwest is one of the few airlines that does not charge for checked baggage (up to 2 bags).

-- Future Passenger Growth and Increased Nonstop Flights -- As noted by Southwest, the primary area for growth by U.S. carriers over the last few years has been, and will continue to be, in international service. Future passenger growth at MCI is expected to

be modest and incremental.

Further Context: Nationally, the FAA projects that total passengers are forecast to increase at an average annual rate of 2.1% (although the FAA's recent forecasts have proven to be overly optimistic due to a slower than expected recovery from the economic recession). Domestic passengers are projected to remain steady in 2013 and then grow an average of 1.9% per year over the next 20 years. International enplanements are forecast to increase 0.7% in 2013 and then grow an average of 4.1% per year over the next 20 years. While MCI is not a likely candidate for a significant amount of international service (most international growth is focused on large U.S. international gateway airports such as JFK/EWR, DFW, IAH, MIA, SFO, LAX, ORD, and ATL), the Airport could, in the future, attract new international service to specific markets (likely in Canada, Mexico or the Caribbean). Given MCI's location in the center of the U.S., it is unlikely to serve as an international gateway airport (e.g., a connecting point for international flights) in the future. However, as demand warrants, the Airport can anticipate incremental growth to specific, non-stop, point-to-point international destinations, either on an annual or seasonal basis. For example, certain airports with a similar profile to MCI have been successful in securing flights to certain international markets where need and demand were demonstrated, such as Cincinnati and Pittsburgh to Paris, Austin to London (to be initiated in March 2014), San Jose to Tokyo, and Portland to Amsterdam and Tokyo. Southwest recently has begun providing international service to certain locations in Mexico and the Caribbean via their acquisition of AirTran.

-- Adequacy of Existing Terminal Facilities -- Many of Southwest's comments addressed the adequacy of MCI's existing terminal facilities, including:

-- Need for Terminal Improvements -- Southwest indicated that the need for new or expanded terminal facilities at airports is usually driven by the need to expand capacity, specifically the number of aircraft gates. In its view, nothing is needed at MCI to meet the demand from the standpoint of capacity (i.e., specifically aircraft gates). Southwest also commented that MCI can accommodate everything that the airlines need right now and for the next 10 years. The Southwest representatives conceded that something is likely needed to improve the customer experience at MCI. Further Context: The need for new or renovated terminals often depends on several factors, including the need for additional capacity, customer service enhancements and improvements to the customer experience, new federal regulations, maximizing the utilization or efficiency of existing space or terminal facilities, terminal concession revenue enhancement, or the replacement or improvement of aging infrastructure. In many cases, the need for a new or renovated terminal is attributable to several of these factors rather than just one. At MCI, as a result of its aging facilities and space or systems capacity limitations, many of its existing systems (i.e., electrical systems, water and sewer systems, etc.) have become unreliable and/or lack the redundancy needed in the event that these systems fail. The Airport estimates that several hundred million dollars will be needed over the next few years to rehabilitate aging systems and terminal infrastructure.

As it relates to terminal capacity, while the number of aircraft gates is an important measure, it is not the only one. Terminal capacity is also measured by the sufficiency of other facilities located within the terminal, including the holdroom space, airline ticket counters, baggage makeup and operations space, baggage claim, the number of security checkpoints and checkpoint space, and the amount of public space, including restrooms and public hallways/corridors. Deficiencies in any or several of these areas can dictate the need for renovated or new terminal facilities at MCI in order to allow the airport to continue to meet demand over the next 10 years and beyond. In particular, at MCI, the space within the secured passenger areas of the terminal is very constrained at present and restricts the ability of the Airport to add additional space for passenger seating, restrooms, and/or terminal concessions. Furthermore, options for increasing the secured terminal space in its current configuration are not economically feasible as it would require either: 1) expansion into the aircraft apron area, which would impede the taxing of aircraft on the air-side apron/taxi-lanes required to meet FAA aircraft setback requirements necessary to insure safe movement of aircraft around the terminal and the airfield, or 2) require the closure of the roadway curbside lane adjacent to the terminal, thereby adding congestion to the terminal roadway.

-- Parking -- The airlines stated that parking at the Airport is good for the most part, however, the Terminal B garage, which is located adjacent to the terminal that serves Southwest and Delta can be full during certain periods of the week. They also indicated that there are options for expanding the parking garages.

Further Context: The Airport indicates that while the parking garages can be expanded by adding partial levels, structural and air traffic control tower sightline limitations would only allow for very limited expansion to parking space capacity. Expansion of the existing parking garages would also be very costly and disruptive to parking and roadway traffic during construction.

--Security -- Southwest acknowledged that the security checkpoints at MCI are often criticized, but in its opinion, the security experience was "largely good." Southwest's representatives also indicated that the average wait is usually no more than 10 minutes. While it can sometimes increase to 15 or 30 minutes, or even longer, and this experience is not any different from what occurs at other airports with consolidated checkpoints. The airlines also indicated that the new TSA "Pre-Check" lanes will "change your life" and will increase security efficiency and throughput.

Further Context: Unfortunately, data relative to airport security checkpoint processing times is not readily available to compare. Furthermore, at MCI, TSA Pre-Check service is only offered at a handful of the security checkpoints, primarily in Terminal B. In addition to passenger security wait times, in order to adequately assess the convenience and cost/benefits of multiple checkpoints vs. a consolidated checkpoint, a number of other factors would be ideal to measure, including TSA staffing requirements, the number and availability of checkpoint screening machines and equipment, terminal concession sales impacts, and passenger inconveniences that result from the presence of multiple security checkpoints at the Airport (e.g., passengers having to leave and re-enter security to use restrooms or certain terminal concessions).

-- Holdrooms, Concessions, and Restrooms -- Southwest acknowledged that the secured area that comprises the Airport's holdrooms, post-security concessions, and restrooms is less than ideal and often times is very crowded, particularly in Southwest's holdrooms. They recognized that adding space in the secured areas is unlikely, and that any new space created for one purpose would likely subtract from space available for another. Finally, the Southwest representatives observed that several airline holdroom areas would likely never make sense for additional concessionaires given the level of activity and demand at those gates.

Further Context: In many new or renovated terminals in the U.S. today, the best performing and highest revenue-producing concessions are located in centralized locations immediately following the security checkpoints and are accessible to a majority of the passengers, not just those passengers served by a few selected gates. This configuration not only provides for a better customer experience and concession offerings, but also higher passenger spend rates, producing added revenue that can potentially be used to offset the airlines' terminal costs.

-- Baggage Systems -- Southwest did not comment specifically on the adequacy of terminal systems at MCI other than to say that they currently worked for the airline, and that Southwest operates with different types of systems, business models, and baggage handling approaches at other airports. Of these approaches, its preference is to own and operate the baggage systems directly. They observed that the current trend is passenger "self check-in" of their baggage. Some airports are currently experimenting with this process. Beyond self check-in, the Southwest representatives could not predict what the future might hold for airline baggage systems.

Further Context: Relative to most other airports, MCI currently has two different types of baggage systems that result in different customer experiences depending on which airline they patronize -- one where the Explosive Detection System (EDS) machines are located in the public ticket lobbies (such as those at the Southwest ticket counters) and require the passengers to manually transfer their bags to the EDS machine; and a more seamless and semi-automated "in-line" system where the EDS machines are located in non-public areas of the baggage belt system. At many airport terminals throughout the U.S., the baggage conveyor and screening systems are often consolidated into a single system and are shared among airlines within the terminal. At MCI, the baggage conveyor systems function independently and are separate systems that generally serve each individual airline. Furthermore, given the limited space available and current configuration of the operations space within the terminals at MCI, the bag conveyors and bag screening systems do not have any built in redundancy in the event an airline's baggage system fails (which has occurred in the past). In these cases, airline and/or TSA staff is required to manually transfer and screen baggage to and from the aircraft and the baggage carousels, instead of being able to reroute bags to another operating baggage system. The Airport's current baggage systems were last updated in 2004. As these systems continue to age, they will require additional costs to maintain and/or continue to become less reliable.

-- Relationship Between Airline Costs and Air Fares -- Southwest pointed out that there is not a direct relationship between its costs and fares at an airport. It indicated that higher costs can lead to less profitability, and that fewer profits can lead the potential loss of flights at certain airports. Southwest stated that air fares at an airport are more dependent on demand and competition than on airline or airport costs.

Further Context: The airport benchmarking presentation on February 11th will show this relationship and the impacts to airline costs and airfares before and after new terminal programs at Indianapolis, Ft. Myers, Sacramento, John Wayne (Orange County), and Raleigh Durham. In general, airport costs (i.e., terminal rents and landing fees) comprise roughly 3 to 6 percent of an airline's total costs. As indicated by Southwest, fuel costs make up the largest portion of their operating costs, accounting for nearly 30 percent of their total operating expenses. In addition, an airline's airport fees per enplanement (i.e., cost per enplanement) only measure those airport costs that are directly passed on to the airline through terminal rents, landing and apron fees, etc. It is important to note that while an airline's cost per enplanement would likely increase as a result of building a new or expanded terminal, the airlines could also benefit through other operational efficiencies that are not captured in the traditional airline cost per enplanement metric. For example, as discussed above, the airlines could potentially benefit from more efficient newer automated baggage systems that also provide redundancies in the event of a failure that minimize the amount of delayed or lost baggage, and thereby minimize their cost of operations.

--Terminal Development Best Practices -- Southwest believes the best process to follow in planning, designing and constructing an expanded or new terminal building includes the following:

--A collaborative process between the airport, City, and the airlines.

--An understanding of community and business goals and objectives for the airport.

--An examination of a number of alternatives to meeting demand and community needs.

--Development of a consensus decision that everyone can support.

--The participation of outside experts and facility planning groups to work through the process.

--Negotiations with the airlines as a group with a designated airline chairman on the preferred alternative, affordability, and business model.

--Discussions about financial capacity and what is affordable on the front-end of the process.

--The engagement of designers and architects concurrently with the selection of

the contractor.

Further Context: The best practices described by Southwest are generally followed by most airports as they develop new or expanded terminal programs. It is important for the City to maintain control of the process and the decision-making throughout, and to act in a transparent and open fashion, with input solicited from all of the various stakeholders, including the public, businesses, terminal concessionaires, and the airlines.

To reach Yael T. Abouhalkah, call 816-234-4887 or send email to abouhalkah@kcstar.com. Follow him at Twitter.com/YaelTAbouhalkah.

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