Engaging Economics

July 12, 2005
As the main tenant for many airports, the financial challenges airlines have experienced in recent years have caused airports to reevaluate their business models.

A session covering the state of the industry, airline economics, and airport growth opens this two-day event. David Treitel, chairman and CEO of consulting firm SH&E, Inc., James May, president and CEO, Air Transport Association, along with ACI-NA president David Plavin address the struggles both airlines and airports have faced in recent years.

As the main tenant for many airports, the financial challenges airlines have experienced in recent years have caused airports to reevaluate their business models. And while airlines seek to reduce personnel costs and oil costs continue to climb, Treitel says even with restructuring, "legacy carriers have done virtually nothing to close the cost gap" between them and low-cost carriers. "Restructuring is not effective. Labor costs, even after bankruptcy, are still out of line."

He adds that low-cost carriers are growing, a fact that only highlights the cost differential. "Low-cost carrier penetration will continue because low-cost carriers can buy aircraft, legacies cannot." Treitel expects that "within a few years" low-cost carriers will represent half of the airline industry.

Looking at the finances of some of the major carriers, Treitel says the cost of fuel cannot be blamed entirely for the tough economic times. "It didn't matter at Delta or United and it didn't have an impact on the industry as a whole. [Pension elimination and wage cuts] simply were not enough to create a vibrant industry."

However, James May, president and CEO, Air Transport Association, does not discount the impact of oil prices on the airlines and expects another "one or two bankruptcies in the next year if oil remains high."

What will help the airlines, says Treitel, is deploying their "$50 million assets [planes and pilots] more intensively."

Treitel speculates that upstart Independence Air "is probably not going to make it to the end of the year."

Broken Economic, Security Models

David Plavin, president, ACI-NA, says, "We talk about how the airlines have problems. The truth of the matter is the whole [aviation] system is broken."

Plavin says there is a good deal of talk about partnerships in the industry between security and airports. "I would suggest," he says, "that there hasn't been much partnership, except they'll [TSA] call us before they make a public announcement about something."

He adds that airports are not going to see the federal government "step up to the plate with what they need to do" regarding security.

"The federal government is a bad partner," says Plavin. "They start out by telling you they're in charge, they take over the system, and they don't fund it adequately."

Says Plavin, "The system is remarkable in that it works at all... There's got to be a better way."

Security's Impact on Concessions

Bill Anton, chairman and founder of Anton Airfood, Inc., says the discrepancies in security procedures from airport to airport have been challenging for his business. For example, he says, some airports allow restaurants to supply patrons with knives, others allow knives on chains, and yet others don't allow knives at all.

Varying delivery procedures and inconsistency in badging employees for SIDA (security identification display area) access are also causing hassles for airport retailers. Anton says the time it takes for new employees to receive badges "ranges from right away at some airports to ten to 12 days at others."

The question of whether travelers can leave their bags unattended while serving themselves at restaurant buffets is under review by TSA, he adds.

"It's not all gloom and doom," says Anton. "The TSA workers take a lot of breaks" and frequent his properties.

At Fort Lauderdale-Hollywood International Airport, Bryan Malinowski, airport properties manager of the Broward County Aviation Department, and Brian Bowdish, CA One Services, say even a menial task like taking out the trash is a hassle; airside deliveries can be delayed up to 45 minutes at times. "It all leads to a financial impact on the retail provider," says Bowdish.

Managing Technology and Demand

Las Vegas' McCarran Inter-national has been at the forefront of implementing customer-friendly and revenue-producing technology.

As airports explore offering wireless Internet access in the terminal, there are various business models. Las Vegas is one airport that offers free wi-fi access to travelers. According to Samuel Ingalls, "We feel we'll see more on the revenue side than if we had a fee for service."

The airport generates revenue by charging for advertising on a splash page - the Internet page that pops up when as a wireless-enabled device is within the signal area.

Looking ahead, McCarran hopes to move 10 percent of passenger processing offsite through remote check-in kiosks at hotels and convention centers. Ingalls says there is also a revenue opportunity for selling advertising on the backs of boarding passes.

Boston Logan International Airport is one of the most delayed airports in the nation, says Betsy Taylor, director of finance for the Massachusetts Port Authority. To combat the delays, the airport has developed a comprehensive management plan which includes construction of a new runway, increased use of regional airports, high speed rail to top O&D markets, and demand management.

Taylor says congestion at the airport is most severe in the summer, afternoons, and evenings. An environmental impact study completed for construction of the runway suggests that peak period pricing would have a significant impact on the most congested times.

Immediately following 9/11, delays were not as much of a problem, she explains. However, as capacity returns to the airport and the system, Boston Logan is prepared to implement a peak period pricing formula as part of the comprehensive management plan which officials expect will manage the congestion and delays.

According to Taylor, the airport will monitor airlines' schedules to identify possible overscheduling before it occurs. Carriers will then be notified of the possibility of peak period pricing implementation and given the opportunity to adjust schedules before surcharges are imposed. Taylor adds that this plan and each of its triggers are amendable, depending on traffic conditions at the airport.

To begin with, carriers will be assessed a $150 peak period charge which, under the plan, can be adjusted after 2007. Taylor adds that an exemption program protects small community air service routes from this charge.

Boston Logan is not overscheduled now, says Taylor, but the plan is "on the books and official. We're not certain when it will go into effect; it depends on traffic."

John Rober-son, commissioner, City of Chicago Department of Aviation, says congestion pricing may work for airports like Boston Logan, but "it can't be applied to O'Hare and Midway in the same way."

FAA has asked O'Hare's two main carriers, United Airlines and American Airlines, to cut back on flights during peak times. Recently, FAA issued an NPRM which according to Roberson, "essentially is reimplementing the high-density rule. We should not be managing demand. We should be meeting it." Roberson adds that managing demand through FAA's restriction of flights through Chicago is "artificially constraining our ability to create revenue. The answer for us is simple: more runways."FORT LAUDERDALE — The 2005 Airports Council International-North America Economic Specialty Conference was held here in mid-May. The annual meeting offers airport executives the opportunity to discuss issues impacting airport finances, including security, capacity, the health of the airlines, and benefitting from new, non-airline revenue streams. As ACI-NA president David Plavin encourages the industry to recreate what he sees as a broken business model, airports share their innovations for managing capacity and revenue.