Keeping Vegas on an Even Keel

April 21, 2010
One on one: Randy Walker on challenges, maintaining direction through turmoil

LAS VEGAS — Two years ago director Randall H. ‘Randy’ Walker and his staff at the Clark County Airport System were scrambling to keep pace with dramatic growth, brought on by a tourism boom and local economic development. Then the economic world turned upside down, particularly for this community. Meanwhile, Clark County has moved ahead with much of its capital development program, including a $2.4 billion Terminal 3 that is some 60 percent complete. Walker recently sat with AIRPORT BUSINESS to discuss the financial outlook for his airport system, which includes McCarran International and four general aviation airfields. Here are edited excerpts ...

AIRPORT BUSINESS: Can you talk broadbrush how the economic downturn is impacting your efforts?

Walker: There are two issues in Las Vegas. There’s the local economy, with the burst of the bubble in the housing market which is affecting a lot of local people. You have to separate the housing market in Las Vegas from the airport itself. Most of our traffic is not local; we’re around 12 percent local. What affects us primarily is the arriving passenger, who is not affected by our local market.

The reductions in our traffic is generated by people who might be having their own financial issues or the economy is worrisome to them and they are hunkering down and don’t want to travel. We’re much more concerned about that.

The year 2007 was our peak, and we handled around 48 million passengers. In 2009, we did around 40 million, which is about 17 percent down over our peak. That’s significant. We’re pretty much back to 2005 levels.

I don’t see anything on the horizon this year that’s going to change that. It’s a different environment. After 9/11 there was lots of capacity; people were looking for where to put their capacity. They had new planes coming online.

Today, for all of us it’s a different environment. Now if you go talk with a carrier about a route that you thought was being underserved, it’s a little tougher. You have to convince them to take that capacity out of some other marketplace. That’s a more difficult conversation. Before they had new capacity coming online and were looking for opportunities.

AB: How does a 17 percent downturn impact the airport budget and operations?

Walker: For the airlines less landing weight and thus less landing fees; and they don’t want as much space. Most carriers here used to lease a base number of gates and, if needed, they would spill over into county-controlled gates and pay a per-turn charge. There’s less ad hoc use of the county gates.

And with fewer passengers comes fewer concession dollars. Interestingly, our revenue per passenger has actually gone up, but not up as much as our reduction in passengers so we do see a reduction in revenue.

At the same time all this happened we were building quite a bit of space. We had the last of the D gates under construction; we had a new C-gate annex checkpoint which services Southwest; and we also built a bridge between that new connector and the B gates to allow a post-security connection. We got it online just in time for the reduction in passengers.

AB: How much of an impact has there been on the Terminal 3 project?

Walker: Terminal 3 was an interesting dilemma for our board. We’d already spent a significant amount of money on the project – we relocated a road and utilities; put in all of the initial civil infrastructure. We spent probably $500 million before they had to make this decision. But it’s not scheduled to open until mid-2012.

So, do you put the project on hold and then when you want to gear up again you have a three-year timeframe before you can bring it online? The worry is, do you then become the impediment to the recovery of the community? If there’s a demand to fill the hotel rooms and we don’t have the capacity to process those passengers, then we become the impediment.

The other dilemma is, you build it and you don’t need it. One of those two is the right decision but you don’t know that when you’re making the decision three years in advance.

We recommended to the board that they should take the risk on the community. It’s the option that the board chose. It was widely accepted locally as the right choice – the hotels; the newspapers.

AB: And you had also gotten to the point of locating a site for a new commercial airport. What’s the status of the Ivanpah Airport site?

Walker: We have an EIS [environmental impact statement] going on for another airport, and an EIS is not cheap. That was another decision; do we cancel that process? Initially we had projected that we couldn’t bring the airport online until 2017; everybody said that’s not soon enough.

Three years ago when I went around the community that was the first question I’d be asked. Nobody asks me that question anymore.

The decision was to proceed with the EIS and preserve the right to make the decision in 2013.

AB: What are the issues related to budget reductions while maintaining the capital development program?

Walker: You have two issues. The costs of the capital program don’t come online and go into the airlines’ rate base until they’re available for use. The expenditures we have for T-3 now aren’t in the base. The real challenge there is, do we have the wherewithal to borrow the money necessary to build the project?

We put a very conservative financial plan together, looking at very little growth. We then hired an independent consultant, Intervistas, who did a passenger projection for us. Their’s was much more aggressive. We chose to use our model because it was the more conservative but we did share the study with the ratings agencies.

We showed that our rates would go up but not to the point of being unreasonable, relative to other airports where our carriers serve today, particularly Southwest. We’ll actually see the costs come down because we’ve been able to borrow cheaper than what’s in our model. We projected the overall cost of money at about 6 percent, and it’s coming in at more like 4.5 percent.

And our bids are coming in below engineer estimates; that’s part of it.

Starting about 18 months ago we started to get very aggressive on reducing our operating costs. We’ve been able to take our non-salaried costs down about 20 percent, which is slightly more than our drop in passengers has been.

We were doing things like having a goal that a customer would never show up to a paper towel dispenser and have it be empty. If the roll was down to its last 20 percent we replaced it. Well, that means you’re throwing 20 percent away. Now we don’t replace them until they’re empty. We saved several hundred thousand dollars in paper costs just by doing that alone.

It’s much more difficult to manage in these times as it is in the good times. They both have their challenges; I like the other one better. It was challenging to keep ahead of the curve and pull rabbits out of our hat. This challenge means difficult choices to cancel contracts, which means somebody gets laid off, or to do things that might affect our customer service.

During peak times we had a contractor at the checkpoint who were what we called our front-end loaders – people who would help and encourage people to be ready to go through the checkpoint. We eliminated that contract.

We get a customer service report every quarter, and our ratings have stayed the same or increased. When we were doing 48 million passengers we were packing them in like sardines; now we’re not.

AB: Where do you focus your air service development efforts?

Walker: We found that our opportunities are much greater going to international carriers and pitching where the numbers justify direct flights to Las Vegas. Typically they start off slow; two flights a week. British Airways recently started their flights from Heathrow daily from the get-go, which was the first time we’d had over the ocean direct service start up on a daily basis.

Our selling point was to look at Las Vegas as a spoke in their Heathrow hub. We were hoping they wouldn’t just start competing for the same customers that Virgin was already bringing out of Gatwick; it appears that most of the traffic that BA is bringing is flowing through Heathrow.