"D/FW plans for war, terror, AA bankruptcy"

Monday, March 10, 2003

Wells: D/FW plans for war, terror, AA bankruptcy
By Margaret Allen
The Dallas (TX) Business Journal


D/FW AIRPORT — Max Wells, chairman of Dallas-based The Oaks Bank & Trust
Co., was recently appointed chairman of the board of directors for
Dallas/Fort Worth International Airport.

Wells takes the seat at a time when major uncertainties cloud the
29-year-old airport's horizon. D/FW's fortress carrier, American Airlines
Inc., could declare bankruptcy if labor concessions aren't forthcoming, the
airline's chairman and CEO, Don Carty, has said. War with Iraq looms; future
air terrorism attacks elsewhere are feared; costly federal security mandates
are routinely imposed; and a slowing economy has passenger volume declining.

Yet D/FW, which is owned jointly by the cities of Dallas and Fort Worth, has
managed to cling to its title as the world's third-busiest airport,
recording about 52 million passengers annually. And work has continued
uninterrupted on one of the largest airport projects in the nation: A $2.6
billion capital-development program that includes a 2 million-square-foot
international terminal set for completion in 2005, paid for with occasional
issues of Joint Revenue Bonds.

DBJ: What's the impact on D/FW Airport if American Airlines goes bankrupt?

WELLS: We're very hopeful that won't happen. In my conversations with some
of the senior people, including Mr. Carty, at American Airlines, they are
very expectant that they are going to work out the negotiations with the
employee groups. But, clearly they have stated on the record that bankruptcy
is one of the options.

The important thing to remember is that the market is there. There is the
demand. American has an astounding number of flights out of here every day,
some 800 or 900. That market is there and someone will fill it. Hopefully it
will be American Airlines, because they are an important part of our
community.

The board has not formally discussed a bankruptcy. However, the staff,
starting in late December, has been doing a lot of contingency planning on
at least three items: A bankruptcy; a war with Iraq; and on another
potential air terrorism event somewhere else.

Hopefully, we'll never have to use any of them. The board has not seen any
of those plans. But we're certainly proceeding on the basis that if we
should have some kind of bad news, we'll be as prepared as an organization
can be.

DBJ: What's the impact if there's a war?

WELLS: You can go back to the Persian Gulf War a decade ago, and nationally
there was a drop-off for about 90 days of 15% of the passenger volume. It
was experienced here locally, also. It recovered almost immediately. There's
no hard evidence it wouldn't happen just that way again.

In the event of a war, in the short term, the affect on the airlines could
be very difficult for them. And in some ways, what's difficult for the
airlines, is difficult for the airport.

DBJ: How is D/FW's revenue faring?

WELLS: Our annual budget, which starts on Oct. 1, was approved in June. But
since then we have cut the budget at the February board meeting by $11
million. About $4 million is transfers of some money earmarked for
construction, but $7 million of it is real. Some of that has been
identified. Clearly, if revenues would fall off, it may well be we'll make
more adjustments in 60 days.

DBJ: Will there be layoffs?

WELLS: There have been no layoffs, to my knowledge, in the history of the
airport. We currently have a hiring freeze, with the exception of public
safety. At last month's board meeting, we approved some one-time bonuses,
with a two- or three-month window, for people already eligible for
retirement, to give them an incentive to go ahead and retire early.

That will help, preventively. Once vacated, those positions will not be
filled. Clearly, if revenue would continue to soften, I think the next step
is layoffs.

DBJ: How much income do airlines contribute?

WELLS: The great preponderance of our income comes from the airlines and, of
that, about 70% is from American, 20% from Delta and the rest, from numerous
others. In addition to that, we have parking and concessions, which are both
significant, with parking being the biggest.

Our parking income has struggled the last six months. Part of it is because
of fewer passengers, but also because over the years our parking has been
complicated. We have had so many different prices and so many different
locations. Now we have a whole new program, with only three kinds of lots
and better signage.

About 30% of the passengers through D/FW Airport are origin and destination.
So, because it's the local people who are paying the parking, I've always
thought we need a low-cost option and I've fought hard to keep $5 parking.
As it turns out, generally speaking, our $5 lots are full to the brim and
our other lots are struggling.

The staff hasn't recommended anything yet, nor have we discussed anything,
but I think everyone is open to reviewing our parking charges. We can worry
less about the price-per-car, and look instead at what brings us the most
total income.

DBJ: Does D/FW have money and borrowing power to finish projects under way?

WELLS: Absolutely. It's true that uncertainty is bad news if you're trying
to sell bonds. Clearly American's financial position and, to some degree,
Delta's, is obviously something that people who buy bonds are very
interested in.

But I perceive that before we're in the bond market, American will either be
clearly going to make it or will have declared bankruptcy and the chapter
they would file under would be reorganization and they would be back in
again. So the uncertainty will be gone.

DBJ: Will projects at the airport be delayed or put on hold?

WELLS: I don't speak for every board member, but my impression is that if
our income would just continue to drop off, I think part of our contingency
plan would include delaying lower-priority projects, such as a planned
taxiway over on the east runway that would make operations more efficient.
So far, we have not done that.

American, as I read the newspapers, if they can figure out a way to save a
buck, they're going to do it, and theoretically if they can talk us into
saving a buck, they'd perceive that as 70 cents of their's. So I would guess
we'll feel some pressure from them on these lower-priority items. It would
not surprise me to see them start to push to see those delayed.

DBJ: Has any of the $2 billion capital-improvement project been delayed?

WELLS: When 9/11 happened, we were almost $800 million into the project. Our
staff, in a very rough estimate, with the contracts we already had signed
where work hadn't even been started, estimated our exposure at about $1
billion. So it wasn't a hard decision to proceed.

It's worth noting, we're capitalizing the interest on this project. So the
interest is borrowed. We're not paying monthly interest and billing the
airlines. There's no impact on the airlines until April 2005.

The way our airport operates, our use agreement means the airlines agree to
pay by landings and aircraft weights. At the end of the year, if we're short
of money for operating the airport, we send the airlines a bill. If we're
over, we send a check that's distributed pro rata on each airline's part of
the business. So basically the airport never builds up a net worth.

We clearly understand that our airline tenants are struggling, every one of
them, and we have a responsibility to help them in every way we can.

DBJ: Does D/FW foresee an end to the hub and spoke system?

WELLS: Sure, we're concerned about that in the long run. But I don't
perceive that as a major problem, because we know 30% of the market is here
to start with. We're already seeing some changes, where American has come in
with this rolling hub, which is still a hub, but quite different from the
concept as we've always understood it. And it's cut its flights 3%-4%. So I
think we're going to see some changes like that.

Maybe the hub as we've known it the last 50 years is changing, but I don't
think it can go away completely. There is a trend also toward regional jets,
which are smaller, and they weigh less than the big jets. And since we
charge by the pound, that has an effect on us.

I think the airline industry will continue this long arduous trail through
deregulation for several years. It's been going for many years now. Clearly
the low-cost carriers are going to be a bigger part of the industry.

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