Growing the Bottom Line

April 3, 2006
Report from this year’s annual finance symposium, hosted in New York by ACI-NA.

NEW YORK — The ACI-NA 2006 Airport Finance Symposium “Airport Finance — Managing in a Dynamic Industry,” held here in mid-February, focused on the health of airports and their main tenants, airlines, while exploring ideas for new revenue generation.

In a session entitled “Revenue Enhancements,” John Clark, executive director of the Jacksonville Aviation Authority, said the airport is not only looking at parking and concessions to increase revenue, but also at “more entrepreneurial ventures.”

Under a 60-year development lease with a realty firm, the airport expects to receive $1.6 billion. The airport created what Clark calls a participative management lease agreement in which the airport shares in the net proceeds of revenue flow on leased buildings. (This arrangement is currently facing a lawsuit which charges that the airport should have put the project out to competitive bid.)

In another creative venture, Jacksonville has an agreement with German-based Fraport for ground handling services. “We’re going into the airline handling business,” says Clark. The airport is also taking on management of the Crown Rooms at Jacksonville, a move that Clark says will save the airlines money because the cost will be spread over all the participating airlines.

Part of the airport’s goal in looking for alternative revenue sources is to get away from dependence on the airlines. Clark says he would like to see airlines responsible for less than 30 percent of the airport’s revenue. “In order to grow revenue, you have to be willing to take risks,” says Clark. “The greatest challenge is your ability to take risks.”

Creating an entirely new airport business model, or way of operating was also explored during the three-day finance conference. John Stent, division director of Macquarie Bank Limited, says his company hopes to invest in airports in North America soon. Currently the investment company’s airports fund invests in five airports around the world: Sydney, Brussels, Rome, Birmingham, and Bristol.

Stent says the company generally keeps a local management team on staff at each of its airports, but gives them additional support and guidance “to make the airport a success.” He adds that since 2001, Macquarie has conducted airport-related financings totaling more than €6 billion. And, some of its attractive qualities include a unique and mature operating model as well as “access to almost unlimited capital at this point in time.”

Rising Construction Costs a Concern

As airports continue to invest in infrastructure to meet the demands of increasing passenger numbers, estimating construction costs of capital improvement projects isn’t as easy as it used to be, according to Leigh Fisher Associates’ director, Warren Adams. Today, panic buying, the cost of oil, and labor costs continue to be factors in the increased cost of construction.

A near-term risk for airports, says Adams, is what he terms vacancy risk. “How do you properly size a facility? Because you don’t know who’s (i.e., airlines) going to be around.”

Advice For Dealing With Bankrupt Airlines

Bankrupt airlines have become a regular part of the landscape for airport operators today. Several speakers offer some tips for airports to protect themselves from additional hassles when dealing with a bankrupt airline.

  • Engaging in bankruptcy risk management early in the game is necessary for an airport.
  • Get in on the bankruptcy negotiations as early as possible.
  • Airlines in bankruptcy are trying to rewrite agreements, which goes against bankruptcy code.
  • Airlines are asking airports to reject old leases and then enter into new agreements. This can open the airport up to liability.
  • Streamline the accounting system for ready access to real numbers.
  • The debtor has 120 days (plus one 90-day extension) whether to assume or reject your leases.
  • Airlines have to make their monthly rent payments while in bankruptcy protection. If they don’t, speak up in court.
  • Specialty facility bonds are “deader than a door nail,” according to Doug Jessop, president, Jessop & Company.

Airline Health; One LCC Example

Discussing the current state of the industry, Glenn Engel, global equity research for Goldman, Sachs & Company, offers the following assessments:

  • The problem since 2000 is there are not enough suits (business travelers) flying. However, the business traveler has started to come back in the last year.
  • Capacity today is only 2 percent higher than it was in 2000 — too much capacity is not the problem.
  • For 2006, the number of regional jets in fleets will not really increase. “RJ growth has petered out.”
  • We’re probably at a maximum leverage with ticket price increases. He suggests we won’t see as much pricing power in 2007 as we’re seeing in 2006.

According to Kevin Healy, VP planning for AirTran Airways, the “real issue” facing the industry is the cost of fuel. In the ‘90s, says Healy, airlines were purchasing fuel for $20 per barrel; today, it’s $55 to $68 per barrel. If fuel stays at or above this level, he expects it will force capacity decisions in the middle to latter part of 2006. He adds that Southwest Airlines has a fuel advantage for at least another year due to its success in hedging.

Embracing the Internet and sales of tickets online, says Healy, has allowed the airline to go directly to the customer and has been a tremendous benefit for AirTran. “Selling is integral to everything we do,” he says. More than 70 percent of the airline’s sales are directly through AirTran, not a middleman.

Healy says AirTran has been successful because of its effort to manage the company like a business, not an airline. He says AirTran: doesn’t care about market share; doesn’t chase every industry fad; is not afraid to admit mistakes; and, responds early to key issues/crises. Also, says Healy, AirTran tries to avoid traditional airline thinking, such as:

  • Making massive capital expenditures (If you can’t pay for something, don’t buy it);
  • Strategies driven on market share, not profit;
  • There’s no shame in filing for bankruptcy protection; and,
  • It’s always somebody else’s fault.
  • AirTran’s success can also be attributed, says Healy, to its productive workforce; young, simplified fleet; efficient use of facilities; and competition for heavy maintenance contracts.