Changing Airport Economics

May 22, 2009
ACI-NA president on the stimulus, AMT, financial reserves, and a changing model.

At the Airports Council International-North America’s recent finance conference in Seattle (see page 10), much of the discussion centered around airport/airline economics, the recent federal stimulus package, and funding future improvements in a tight credit environment. Following the meeting, AIRPORT BUSINESS conducted a follow-up interview with ACI-NA president Greg Principato for his thoughts on the economics of the U.S. airport system today. Following are edited excerpts ...

AIRPORT BUSINESS: What are your thoughts on the impact of the federal stimulus package on airports?

Principato: We’re pleased that the stimulus included $1.1 billion in AIP [Airport Improvement Program] money -— a lot of that has already been allocated. It’s out there being put to work, creating jobs. Somebody just told me that the project in Tampa that’s being funded by that is creating 300 jobs. I think it’s having the desired effect. The airports office over there [at FAA] is really good at getting that money out the door.

As you know, we’re part of a worldwide organization, and a number of our counterparts in other parts of world are very impressed that the U.S. Congress and Administration included airports in the stimulus. They’re having a little tougher time getting their governments interested in money for airports.

The other billion dollars for buying the security equipment is going to have a big impact.

The overlooked part of it, which shouldn’t be overlooked, is the alternative minimum tax [AMT]. ACI worked really hard on that — for years. The Metropolitan Washington Airports Authority, Nashville, Philadelphia, have all been able to go to market and get some things financed that they hadn’t been able to before. That’s really huge.

AB: Can you expand on how much that AMT provision means for airports?

Principato: Airports of all sizes, really, are looking to use that provision to go to market, where they weren’t able to get it done before because of the AMT provision. The problem we had, especially the second half of last year, was the market cratered. You could sell stuff, but it couldn’t be encumbered by anything, and you’d have to pay a pretty high rate. Something like the AMT being attached just made it seem a little too complicated and risky at the time.

Getting that label removed has made a big difference in thawing out the credit markets to some degree. There’s still a way to go, obviously; there are things impacting the credit markets and the economy that go way beyond anything that happens at airports. But it has made a difference.

AB: At the recent ACI-NA economics and finance conference in Seattle, two top officials from Alaska Airlines were commenting on how the cost per enplanement at U.S. airports has jumped more than 40 percent since 2002. They suggest that airports aren’t controlling their costs as much as the airlines. Your reaction?

Principato: I think that’s largely creative accounting; obviously, when your passenger levels go down, your cost per enplanement is going to go up. There are airports around the country laying people off. I haven’t talked to a single airport that’s not cutting its budget. Everything from layoffs to cutting budgets, they’re cancelling or postponing projects. It might be a nice propaganda point for them but it doesn’t really hold up.

AB: A rep from Delta stated that U.S. ‘airports have accumulated significant, unrestricted financial assets in 2007 totaling $27 billion, up from $23 billion in 2001.’ How important is it that airports maintain such reserves?

Principato: A couple of thoughts: Well-run organizations have cash, which may be one reason the airlines don’t recognize it. Number two, a lot of times those reserves are held because they know it will result in a better bond rating for bond agreements. If you have cash reserves, you can get a better cost of capital, which lowers the cost to the airlines, by the way.

I was talking with a director at one small airport and he was telling me that when he first came in, his airport didn’t have any reserves at all. He built a $1 million reserve — it’s small; that million is part of that number that the airlines throw out there.

But this airport director was telling me that his predecessor didn’t have a reserve; there was pressure from the airline not to have one. If you run a real business, having a reserve, some cash, is often the result of a well-run business. So, the small airport has a million dollars, and the airline complains about it.

I always remind people that an airline can take a main asset and fly away from a community at 500 miles an hour. The airport’s there. Having cash on hand is a good thing. It helps hold down cost of capital when you’re in the capital market. It’s important for smaller airports when they start losing service and have to try and keep things going. No matter how many takeoffs and landings you have, you still have to secure the perimeter; you still have to maintain the airfield. You can’t just say, I’m only going to secure half the perimeter.

AB: What about the concept of a changing airport economic model? Airlines say it’s needed; ACI’s Angela Gittens says it’s coming.

Principato: I would agree with the basic premise to take a look at the model and change it. I’ve told some airline guys, we can fight every four or eight years about a PFC [passenger facility charge] increase or about AIP or anything else, but that’s not really the best way to go long term. We ought to come up with something else.

Around the world there are a whole variety of different things that are tried. Even in the U.S., while we have a public ownership model, we have a variety of different things that are done.
Probably more evolutionary than revolutionary, but it’s definitely something that we have in mind here. See where we can make some changes in the model, because I don’t think anybody thinks it’s totally satisfactory.

AB: Is one potential answer for airports to get into providing airline ground and terminal services?

Principato: A number of other airports are looking at it. It’s a way to hold down costs for the airlines. I think those kind of things are happening and are going to continue to happen.

It all comes down to service — are you going to have air service in your community? Whether it’s holding down the direct costs to the airlines or whether you provide that service in order to entice more air service to your community, it all comes down to the same thing: airports trying to ensure that their communities have service and have choice of service, and competitive service.

AB: How confident are you that the industry will see a PFC increase in the FAA reauthorization legislation, should Congress ever pass a bill?

Principato: We are very hopeful; there’s a lot of need out there. You know, the PFC has no federal budget impact; it’s a local user fee. Actually, the airlines make $87 million a year collecting it; they get eleven cents from each one. I don’t think any other [fee] works that way.

The thing that’s great about it, besides not having any federal budget impact, is it’s project-based — it goes right to the project. We think the arguments are compelling. The House Transportation Committee agrees; we hope the full House will agree. We’re continuing to make the case that $7 is not sufficient. Construction costs, inflation, have driven that number well over $8. We’re asking for at least $7.50. We think it ought to be indexed [for inflation].

AB: One thing that seems to be occurring in the marketplace is the cost of commodities is going down, after several years of dramatic price hikes. Is this having a significant impact on bids for construction projects?

Principato: There’s no question that some of that is happening; those costs are coming back more to earth. But even if you assume a fairly significant adjustment in those costs, the PFC is still way behind on inflation-adjusted basis. There’s no question that that trend has turned some; but when the economy gets going, I don’t think those prices will stay where they are now; they’re going to go back up. For now, things have come back to earth a little bit more.

There are some airports, because of the cost of construction being lower, who are looking at projects. There are things like runway rehab that you will have to do at some point. A number of airports are saying, we ought to go ahead and do that now because the economics of it aren’t going to be better a year from now than they are now.