A Need To Differentiate

Jan. 2, 2008
One on one with Jim Smith on Austin’s initiative to attract an ultra-low cost carrier.

AUSTIN — The city of Austin, located in the Hill Country of South Central Texas, prides itself on the fact that when it needed to build a new commercial airport, it became the first community in the U.S. since World War II to convert a former military base, Bergstrom Air Force Base, into a commercial-use facility. Now, executive director Jim Smith and his team are entering a new arena — how to attract the ultra-low cost carriers that are emerging, particularly internationally. Smith recently sat with AIRPORT BUSINESS to discuss the airport’s initiative, which is focused on getting its first such carrier, vivaAerobus, for service to Mexico by way of a partnership with General Electric Commercial Aviation Services (GECAS).

Austin-Bergstrom International Airport, which officially opened in May, 1999, serves more than eight million passengers annually. It has a metro population base of over 1.3 million, and is located just an hour’s drive from San Antonio to the south and two and a half hours from Houston to the east.

Smith has served as the AUS executive director for seven years, having served as assistant city manager before then. Following are edited excerpts of our interview ...

AIRPORT BUSINESS: How is it that you began considering getting into the ultra-low cost arena?

Smith: We began looking at it because we were paying attention to what’s been going on in Europe, Asia, and Mexico in the last two years. There’s been a number of airlines looking to find market niches to differentiate their products. It started out with the ultra low-cost carriers, like Ryanair and EasyJet and AirAsia; now it’s gone to the upscale side with all business class. We saw how the market was differentiated ... and figured it was just a matter of time before it got to the U.S.

We made a contact with vivaAerobus in Mexico; it’s a new ultra low-cost carrier out of Mexico, kind of a merger of Ryanair and a bus company. They had made it known that they wanted to start flying into the U.S.

Their business model is, they fly into one location and then encourage people to drive what we would consider significant distances in order to get the much cheaper airfare. Basically, we were competing with Houston and San Antonio to see who was going to get the Central Texas market.

Once we started getting into negotiations with vivaAerobus it became clear to us that to compete successfully we needed to differentiate our product. In addition to having the main terminal here, we needed to have the type of facility that was more suited to the business model of these carriers.

AB: How it is that GECAS got involved?

Smith: We approached it knowing that these carriers are high-risk. The business model has not been tried in the U.S. So we were looking for a partner to share the risk, rather than the airport jumping in and assuming it all itself.

General Electric Commercial Aviation Services had just bought out one of our cargo operators and moved their U.S. headquarters to our airport. So we had a chat with them regarding their level of interest, knowing that GE was essentially doing this in Europe.

They were extremely interested, so we jointly put a proposal for vivaAerobus where we would lease land to GE and they would build and operate a low-cost terminal facility.

The goal, obviously, was to land vivaAerobus; but more importantly, it was to have that type of facility to market to other carriers who wanted to follow that particular business model — no loading bridges; no fancy facilities; a single-story structure. Keep the cost of the facility down and the rent as low as possible.

AB: Why not just extend the existing terminal?

Smith: Part of the reason that we felt we had to do this was that, being effectively a new airport, we’re still carrying a lot of debt. We’re only nine years old. That makes us a relatively expensive airport for cost per enplaned passenger. Our cost structure at this airport was not going to allow us to be competitive unless we came up with a differentiated product. To get into the game we had to come up with a different type of facility. That’s what GE is helping us do.

AB: What’s the status with GE?

Smith: We have not closed the deal with GE, so technically this is all preliminary. We’re in final lease negotiations.

AB: Any particular hiccups?

Smith: It’s more legal. The bottom line is, everybody recognizes it’s a risky venture, so the lawyers are busy pushing the risk back and forth across the table. We’re trying to minimize our risk and so are they. That usually involves a lot of negotiation.

AB: Are there any particular incentives you’re offering?

Smith: The airfield charges will be the same for any carrier who flies on our airfield. The only thing that we’re offering them is a reduced rental rate for the facility. Roughly, we’re estimating it will be half of what it is in the main terminal. In addition, there’s some level of incentives to land a new international carrier with new routes. The combination of the incentives and the lower rent structure balances off our relatively high landing fee that we have.

AB: What is the arrangement you’re seeking with GECAS?

Smith: The deal we’re talking about would be 30 years; it’s a typical airport lease.
This business model revolves around not charging the airlines a lot of money. They’re bringing you volume, and you have to make your money off of that volume.

We’ll be trying to maximize the commercial value of every passenger that comes through that facility by trying to sell them concessions, retail, rental cars.

We’re leasing them roughly 40 acres. Within that 40 acres they’re responsible for parking, the rental car operation, as well as running the terminal. If it’s inside the terminal, it’s theirs. It’s their revenue; we get a cut through the percentage rent.

We run the airfield and security, but they would be the operators.

AB: What do you say to other airports considering such a move?

Smith: To me, the writing was on the wall for a major commercial airport. There are alternatives to fly to besides coming to this airport.
So if we want this type of traffic and want to make it convenient for our citizens to have access to this type of traffic, we have to do something differently.