Making the Most of a Downturn

April 15, 2009
On tap at Orlando: efficiency; new ideas; and weathering the financial storm

ORLANDO — The annual Airport Revenue News (ARN) Conference held in mid-February saw an expected drop in attendance from recent years, yet the conversation proved robust as airports discussed the challenges of operating during a recession. Also, an economist from the Brookings Institute shared his thoughts on increasing operational efficiency, and ‘urban theorist’ Richard Florida shared retail strategies and how to embrace his concept of the creative class.

Chairman of Armbrust Aviation Group, John Armbrust, compares the current economic struggles with the recession of 30 years ago, a time when the housing market was overheated and unemployment rates rose above 11 percent. “In a similar time like this, what did business do?” asks Armbrust. “What did individuals do?”

Armbrust cites early 80’s entrepreneurs like Bill Gates, Louis Cane, and Steve Jobs as examples of leaders who provided the innovation needed to climb out of a volatile economic environment. During the current period of indecision and insecurity about the future of business, Armbrust calls for a renewed drive for leadership in the aviation industry; a drive illustrated by current leaders of airports across the nation.

New York Area Airports
With the largest origin and destination point of sale market in the world, New York has been lucky, says director of aviation for the New York and New Jersey Port Authority Bill DeCota. “We were adding what I like to characterize as a new Albany Airport of traffic every nine months, because we were adding about four million passengers every year since 9/11.”

With some 110 million passengers in 2007, last year’s enplanements fell back to nearly 107 million, and the authority is projecting 104 million for 2009. New York was hit hard by the financial services sector making this year a “tough challenge,” explains DeCota, yet the New York market has proven to be resilient. International traffic remained strong, sustaining the growth of airport revenue, some $2 billion in ‘08, yet there have been steady declines in activity, such as parking.

There is also an enormous number of projects the airports need to undertake, says DeCota. “Our capital capacity has been challenged: revenues from all of our facilities are down, the money we were earning on our reserves are down, and the cost of money, if we can get access to the market, has gone up.”

DeCota is currently at work trying to get a new terminal for Delta at JFK underway while also replacing the 44-year old LaGuardia terminal building. The authority has plans to replace and expand Newark’s terminal A, built in 1973, and to completely redevelop terminal B. Along with a $372 million bay runway project at JFK, the authority is also in the process of taking over a hotel at the airport and finishing a perimeter intrusion detection system.

Aviation general manager for Atlanta, Ben DeCosta, says that while it has been a tough year for airports across the nation, Hartsfield-Jackson Atlanta International Airport saw a record 90 million passengers in 2008. International traffic grew 3 percent, and growth is expected to continue with the Delta/Northwest merger. Domestic traffic was up just under 1 percent, and officials have forecast this year’s gross revenue to be $402 million, $21 million less than what was forecast prior to the first quarter.

Hartsfield cut its operating budget by $10 million last year when fuel prices shot up and carriers raised fares to adjust. Despite the budget cuts, furloughs and layoffs have been avoided at the airport, says DeCosta. “Our team is together, and that’s the important thing for our future.”

The airport has an active capital program and has recently completed a $650 million rental car facility. Officials are also designing a new $1.3 billion international terminal. “Unfortunately if we don’t get into the credit markets in the next couple of months, all construction is going to stop,” says DeCosta. “More than 300 workers would be sent home and 3000 jobs that the terminal construction would have provided will be lost.

DeCosta predicts the recession will bottom out by the fall of 2010, but if the credit markets remain frozen, he says Hartsfield will have to cut its capital plan by $250 million, and “all of us will have trouble.”

“We build things with borrowed money,” says DeCosta. “The markets are our number one issue for this year and next; we can generate jobs.”

Fort Lauderdale/ Hollywood international
Kent George, aviation director at Fort Lauderdale, says his airport has been somewhat of an anomaly amidst many that are struggling during the down economy.

Throughout the last ten to 12 years, the airport saw phenomenal growth, from 8.5 million passengers to some 23 million. When the fiscal year ended last October, passenger numbers were up 4.5 percent, yet numbers for the 2008 calendar year were flat (down .3 percent). George predicts an 8-10 percent decline in traffic for 2009 based on the number of seats available and the average load factor on facilities. Revenues at Fort Lauderdale are up 9.3 percent due to changes in concession programs and the strength of its origin and destination market, says George.

The airport will be embarking on a five- to seven-year $1.3 billion capital program which will include a new runway at a cost of $800 million. George relates that many people are questioning the move to an aggressive capital program during the downturn asking, ‘Why don’t you wait and see what happens with the economy?’

“That’s the worst thing you can do,” says George. “We needed a new runway ten years ago; we average delays of six minutes per flight and much longer during peak times.”

George says they have money set aside and will not need to access the market for 18 months to two years. Additional airport initiatives include terminal improvement projects and a relocation of as many concessions in its older terminals to post-security locations. “We generate five times as much in retail revenue and three times as much in food revenue in post-security as we do in pre-security,” says George.

Jacksonville international
The 2007 fiscal year recorded just under 6.5 million passengers, the highest traffic in Jacksonville’s history, according to aviation authority executive director John Clark [who will leave this position in April to become executive director at Indianapolis International Airport]. In calendar year 2008, passenger traffic fell 8 percent, and like Fort Lauderdale, Clark projects an 8-10 percent decline in traffic in 2009, down to some six million passengers. “We have chosen to deal with the uncertainty in the economy by looking at it as a strategic opportunity,” says Clark.

He relates that during good economic periods, businesses tend to take more entrepreneurial risks, and during bad economic periods, businesses are forced to look inward and really start reflecting on the operation itself. “We have determined we are going to take this opportunity to clean some things up,” says Clark.

In recognizing the economic uncertainty, the authority is focusing on examining the airport’s internal structure, looking for areas in which to gain efficiency, and how to best position the airport as a business. The authority has chosen to lay off some employees in an effort to gain operational efficiency.

Clark explains three business principles employed by the authority to ensure the financial health of the airport system: (1) the authority will do what it takes to sustain eight months of unrestricted cash, (2) it will always exceed its bond cover ratio by setting a threshold and not going below 1.38 percent, (3) and it will always operate at no less than a 30 percent operating margin. These principles allow the authority to be flexible when things are not going right, says Clark. “Our organization is focused on becoming more strategic.

“Several years ago we looked at trying to position the airport authority so that it wouldn’t be reliant on airline-related revenues, including concessions.

“We spent much effort looking at non-aviation and non-aeronautical revenue sources, such as the development of land outside of the airport.”

Clark relates that the airport is in the beginning stages of a $380 million terminal program, which is projected to be completed in April.

Operational Efficiency; privatization
Microeconomist from the Brookings Institute, Clifford Winston, began presenting on airlines, airports, and the economy by stating, “There are important things to learn from the economic crisis in terms of characterizing the role of public policy.

“My main point is to stress that competition and cooperation are important in times of crisis.

“Competition is still the critical driving force of efficiency; ultimately it’s what spurs growth because it facilitates innovation and technical change,” he says.

In terms of the airlines, Winston relates that the fundamental problems are matching capacity with demand, and being able to forecast demand in order to commit to capacity in advance. A poor match leads to excess capacity and fare wars, says Winston, while insufficient capacity leads to the loss of market share.

According to Winston, the airline industry’s adjustments to the current economic shocks have made operations more efficient. Re-regulation would only limit the industry’s flexibility and, in turn, limit its ability to adjust to the shocks.

“If anything, we need to open up the playing field,” says Winston. “More deregulation of international operations would allow airlines to run with a more diversified portfolio.”

“We are starting to see a bit of this with Open Skies; but we can see a lot more, and I think that would lead to much more efficiency and benefits to consumers,” he says.

Considering airports, Winston says because almost all U.S. airports are publicly owned and managed, airports are more insulated than airlines from erratic economic shocks because they have more diverse public and private revenue sources.

Among the current economic issues airports face, the most critical concern reductions in airline operations causing potential revenue shortfalls, and changing patterns of airline service that may affect airports in low-density areas of the country, says Winston. Efficiency can be gained, he relates, by appropriate investment in infrastructure and a conscious move toward the privatization of both airports and the air traffic control system.

“The nightmare with air traffic control is that billions of dollars are spent on things that are decades late, over-budget, and by the time they are completed, the technology is out of date.

“Markets are not the end-all and they do not always perform flawlessly; and I don’t want to endorse full-fledged privatization. But we should start thinking about experiments.

“The idea is to encourage explicit competition among airports by playing them off one another in different regions of the country. Airports can also play parts of the airline networks off one another; these are subtle ways competition can develop,” he says.

“Cooperation is also very important. Airports and airlines in the private world that I see, are engaging each other with their mutual interests in mind,” says Winston.

“I am pushing for more deregulation and privatization; we need less rather than more government intervention in the aviation industry.”

Retail Trends
Urban affairs analyst Richard Florida applied his “creative class” concept to retail operations within airports as part of his presentation at ARN ‘09. Florida says that in an airport environment, where options are limited, airports of the future should look less like a mall, and more like a neighborhood.

“What makes a great neighborhood is a mixture of both local and commercial goods to choose from,” says Florida.

Florida cites Austin-Bergstrom Int’l Airport as an example of a neighborhood-like airport which offers incentives for local artists, concessionaires, and musicians. Florida stresses the importance of maintaining an airport as a reflection of the local community, utilizing authenticity as a key marketing tool.

Deputy manager of revenue development at Denver Int’l Airport, Patrick Heck, relates that a successful concessions program will have a distinct vision and goal set. Denver’s primary goal in this arena is to create and maintain a vibrant first-class concession program offering a range of quality food, beverage, and retail services in a branded environment, with a specific emphasis on local, regional, and national brands. By implementing concession design standards to create an engaging environment, Heck says Denver is able to respond to customer needs and provide value and great customer service in everything they do.