"Aviation Experts Debate American Airlines' Impact on Dallas/Fort Worth Airport"

Sunday, March 16, 2003

Aviation Experts Debate American Airlines' Impact on Dallas/Fort Worth
Airport
The Fort Worth (TX) Star-Telegram


It's a nightmare scenario for an area that has had a long love affair
with aviation: The hometown airline that bears the nation's name and
employs a city's worth of local workers suddenly declares bankruptcy. 

The assumption follows that as American Airlines goes, so goes its
mighty fortress hub -- Dallas/Fort Worth Airport. 

Aviation experts say that's not necessarily true. 

American is teetering on the financial high wire, losing $5 million each
day, with some analysts even with labor concessions and a possible
federal bailout -- that bankruptcy is in the near future. United
Airlines and US Airways are already in bankruptcy. 

But D/FW will probably continue to be one of the nation's major
airports, regardless of what happens with American Airlines. In the
unlikely scenario that American ceased operations at D/FW, airport
officials say they have enough cash in reserve to operate for about a
year. Industry analysts say the airport would also be flooded with
offers from carriers wanting to take advantage of D/FW's unmatched
capacity of seven runways and its geographic location. 

D/FW executives would not comment on American's future but acknowledged
that they have been making contingency plans since December. The
scenarios run the gamut -- American bankruptcy or not, short or long war
in Iraq, federal bailout for airlines or not, domestic terrorism or not.


"We do not see anything but American retaining its strong hub at D/FW
Airport," said Kevin Cox, D/FW's senior executive vice president. "If
they give back space, we would look to backfill. Right now they're in
three terminals. We hope they will grow to four terminals." 

American declined to discuss how D/FW Airport might be affected by a
bankruptcy, stating: "We are not commenting on hypothetical situations.
We're focusing on working with our employees to achieve our
cost-reduction goals." 

D/FW has been doing what it can to help American survive, even as the
airport struggles with its own financial problems. 

Most of D/FW's revenue sources are in decline, but the airport board
recently approved a 10 percent reduction of landing fees to help bolster
struggling tenant airlines. 

In the midst of its $2.6 billion expansion, at a time when the airport's
ability to safely cover its debt is shrinking, the airport is going to
pay for $35 million in projects for American with a bond issue on April
15. 

And although the airport would survive American's worst fate, it would
face some significant challenges in making the changes necessary to
retain its standing as the nation's third-busiest airport. 

For starters, declining revenues may cause D/FW to make further cuts in
its operating budget and to lay off employees. Last month, the airport
board trimmed $11.4 million and imposed a hiring freeze. But a
bankruptcy could create some other key issues: 

   -- American could decide that D/FW will no longer be one of its hubs.


   -- American could contest how much it must pay D/FW for the expansion
that's under way. 

   -- The demise of a major carrier could further push the market toward
low-cost carriers, putting more financial pressure on the airport. 

About 70 percent of D/FW's business comes from American, its flagship
carrier. American deeply impacts every way D/FW makes its money, from
landing fees and passenger boarding taxes to airport parking and how
many hot dogs a retailer sells. 

Of the 25 million people who bought tickets to fly out of D/FW in 2002,
16 million flew on American, 1.9 million flew on American Eagle and
54,000 flew on TWA. All three are owned by AMR. Another 27 million
passengers used D/FW as a connection in 2002 -- the majority of them
flew on American. 

If American reorganized through Chapter 11 bankruptcy, which is the most
likely scenario, the airline would accept its lease commitments at D/FW,
and the process would simply restate D/FW's standing as a fortress hub
dominated by a leaner, tougher version of the nation's largest carrier. 

The other two major airports in the central United States are already
involved in Chapter 11 proceedings for their major airline, United. The
Chicago O'Hare and Denver airports have had steady post-bankruptcy
passenger traffic. 

"At the other airports where major carriers filed for Chapter 11, they
continue to stay current on their bills," said Jeff Fegan, D/FW's chief
executive officer. "We have experienced that already with United and US
Airways." 

In Chicago, before United's bankruptcy, Chicagoland Chamber of Commerce
officials warned of an economic doomsday if O'Hare's flagship carrier
went down. But three months later, with United operating in bankruptcy,
Chicago Department of Aviation officials say O'Hare's traffic is holding
firm. To help out, the city did not increase O'Hare's landing fees. 

"Traffic is pretty normal for this season," said Monique Bond, a
spokeswoman for Chicago's Department of Aviation. "We always felt that
United would prevail, and we still do. The jury's still out though, and
we'll be able to tell more with spring and summer travel season
approaching." 

But there are other uncertainties in the air. 

United has sued to prevent Chicago from taking back some of its gates
after the carrier failed to make interest payments on $1.1 billion in
bonds for the airport's expansion. The city never tried to take back the
gates, so much of the situation could turn out to be legal posturing or
a negotiation tactic, with the airline looking to reduce its obligations
to O'Hare Airport. 

When United signaled that it might pull out of Denver, there was a mad
rush of airlines seeking to move in. 

Continental Airlines emerged as the prime candidate to start a new hub
in Denver. But whichever carrier moves in, or if United retains its
lease, there was never a doubt that space at a well-situated airport
like Denver would be filled. Industry experts say the same would go for
D/FW. 

If American stopped using D/FW as a hub, the airline's connecting
passengers would go elsewhere. The other American hubs in the central
United States are at Chicago O'Hare and Lambert-St. Louis airports. An
additional hub to Latin America is at Miami. 

But D/FW is a connection the air traffic system will always need, said
Tom Hansson, a partner with Virginia consulting firm Booz Allen
Hamilton. 

And as some smaller hubs go away, the remaining hubs -- even mega-hubs
like Chicago O'Hare and D/FW -- may actually have to get bigger. 

"Whichever way the system is designed, there will clearly be a need for
the biggest hubs to remain connecting places," Hansson said. "Dallas is
not the biggest -- the greater metropolitan area is smaller than Chicago
-- but it's bigger than many places that have hubs today. Dallas is
likely to be one of the big contenders to being a main connection going
forward." 

According to Salomon Smith Barney's most recent Hub Factbook, a
connecting airport's growth potential ultimately depends on two basic
factors -- population (local traffic) and geography (connecting
traffic). 

The Metroplex has about 5 million residents. The regional population has
doubled since D/FW opened in 1974, and projections by the North Central
Texas Council of Governments put the 2030 population at about 12
million. That takes care of the first factor. 

Being in the central United States, in a region with comparatively mild
winters, takes care of the second factor. Salomon Smith Barney ranked
D/FW as the nation's second-best airport in terms of catchment, which is
a facility's ability to support connecting traffic. Atlanta Hartsfield
Airport was ranked first. 

"We believe the hub systems of American and Delta display the strongest
catchment areas in the industry," the factbook says. Delta Air Lines
also has a hub at D/FW. 

In contrast, the Miami Airport, which is on the East Coast, ranked
poorly in catchment. 

"It's simple supply and demand," said Cox, the senior executive vice
president at D/FW. "It's never tied down to any particular airline. By
no form or function does that downgrade what American and Delta airlines
do. They drive a huge amount of traffic through this facility. But the
financial underpinnings of this facility are driven primarily by the
people who want to travel." 

By contract, an airline keeps the right to stay in its terminals and
operate out of its assigned gates as long as it stays current on its
bills. 

But if American declared bankruptcy, any agreements between D/FW and the
airline would become "different animals," Cox said. The airline would
still be required to stay current on its pre-bankruptcy debt. If the
airline owed 30 days' worth of landing fees, that would have to be
immediately paid in full. 

But at that point, the airline would have a choice to make: accept or
reject the airport's lease. 

"If they reject, we will get the space back," Cox said. "If they accept,
then they have to stay current, even in bankruptcy. That's why you see
United and US Airways going through the machinations of accepting leases
at different airports." 

D/FW is attempting to work out the acceptance or rejection issue with US
Airways. 

"From our perspective, whether it's American or Delta or any other
airlines, the leases are valuable assets," Cox said. 

Because gate spaces are often precious commodities to be fought over,
airlines do not leave hubs without a struggle. 

American's retreat in 1995 from a Nashville, Tenn., mini-hub -- in part
because the hub siphoned traffic from D/FW and Chicago O'Hare -- and its
exit in 1996 from Raleigh-Durham in North Carolina are two examples. 

"It took a little while, not a long time, before other service was put
in place," Hansson said. "Both communities did not suffer for a long
period of time." 

If D/FW faced a delay in finding a new tenant, it has enough cash to
operate while a new tenant is selected. 

Since July 2001, D/FW has charged each passenger a $4.50 boarding fee
and socked away $1.50 of it for a future terminal project or, if need
be, for a rainy day. The other $3 paid by passengers secures the debt
D/FW is issuing to pay for construction projects. 

According to D/FW's 2002 financial statement, which was recently audited
by KPMG in Dallas, the airport has $183 million in unspent passenger
boarding fees, $427 million in bond reserve funds and $105 million for
other contingencies. 

A longer-term consideration for D/FW is whether it can lower its costs
as more travelers switch to low-cost carriers. 

Last month, D/FW staff reported that increasing numbers of passengers
were using low-cost carriers like Frontier, AirTran, ATA and America
West. America West's passenger traffic rose 75 percent last year. 

That trend puts pressure on major airlines to be more cost-efficient.
They, in turn, want airports to lower landing fees and other costs. 

To survive, airports need to somehow simultaneously lower costs while
major airlines reorganize and emerge as more-affordable carriers. 

The new vision is of a D/FW serving more flights than ever, headed to
intercontinental and smaller community markets rather than high-density
cities. Passengers move at a quicker pace, engaged in a simplified
check-in system, with business travelers on separate flights. Connection
times may be longer, which means more sales for terminal retailers. In
this form, D/FW would be one of the nation's few mega-hubs. 

Hansson calls this the "tailored business streams" approach, which is
already revolutionizing heavy manufacturing, including automobile
assembly, and financial services. 

D/FW would still serve the premium market -- those who demand
last-second seamless travel from anywhere to everywhere and a glass of
merlot en route. 

It would be a small segment of the market. But it would be valuable for
an airline and for marketing the value of a hub, said Dick Marchi, a
senior vice president at Airports Council International-North America. 

That's why the hub-and-spoke model should not be shelved, Marchi said. 

Instead, this market segment could be served by a separate fleet of
smaller jets, flying in and out of hubs like D/FW and offering the same
variety of destinations as the current system. 

"If that happened, you'd see as many frequencies with smaller aircraft,
and to hell with competing with JetBlue between Long Beach and Kennedy,"
Marchi said. "It won't change D/FW at all. They'll just have smaller
planes, the same number of flights, and maybe American'll make a little
money." 

Other analysts and airport executives generally said the same thing:
D/FW's future -- and American's -- is brightest using a model that
offers both simplified service for the bulk of passengers and
flexibility for those willing to pay higher prices. 

"The hub-and-spoke model is the future," said Mike Boyd, an aviation
consultant in Colorado. "There's no other way of collecting large
amounts of revenue on a major system. Even Southwest is a hub-and-spoke
system. At Love Field, Nashville, Houston. There's AirTran, Frontier,
hub-and-spoke. The only issue is the costs are too high. Management
needs to cut costs. Operating costs need to go down. Management needs to
work with labor. 

"And D/FW? They're part of the solution, not part of the problem."


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