"Aviation facing another blow"

Friday, March 21, 2003

Aviation facing another blow
AIRPORTS: A HIT TO ECONOMY COULD DELAY EXPANSION PLANS
By Rodney Foo
The San Jose (CA) Mercury News


With dire predictions that the nation's airlines will lose billions of
dollars from war in Iraq, the nation's airports will suffer a corresponding
financial blow that could delay building programs, force hiring freezes and
even layoffs, aviation experts warn.

A prolonged war could postpone major expansion of Mineta San Jose
International Airport. Runway expansion at San Francisco and Chicago's
O'Hare airports could be threatened. Expansion at Oakland International
Airport already has been delayed by a weakened airline industry.

Airport officials say they can only hope the war ends swiftly and
triumphantly for U.S. forces, so the economic hit to airports might be
minimal.

``The key is, how long does it last?'' said Ralph Tonseth, San Jose airport
director. ``If it drags on for a long time, then I think we've got the Air
Transport Association's `perfect storm' scenario.''

That scenario laid out last week by the airline trade association predicted
the nation's largest passenger carriers would likely lose $4 billion in the
wake of a war, and perhaps as many as 2,200 daily flights and 70,000 jobs,
which would mirror the downsizing the airline industry suffered after the
Sept. 11 terrorist attacks.

It is a sobering picture for airports that rely heavily on revenue generated
by the airlines through airport taxes and fees. Fewer passengers also mean
cuts in lucrative parking and concession revenues.

``Obviously, the industry is very concerned about the potential impacts of
the war,'' said Spencer Dickinson, an executive with the American
Association of Airport Executives. ``In terms of the impact on travel, it
could be significant if it's a long-term military action.''

High jet-fuel costs

Since the Sept. 11 attacks, the airlines have lost $18 billion, analysts
estimate, and they now face some of the highest-ever jet-fuel costs.

In the aftermath of the gulf war in 1991, the airline industry lost $13
billion, seven airlines filed for bankruptcy protection and 25,000 jobs were
cut in an economic shakedown that lasted four years. Passenger traffic
lagged for more than eight months following the one-month war.

Any downturn caused this time by the war in the Persian Gulf region would
not halt the first phase of planned expansion at the San Jose airport -- the
$241 million north concourse.

``That's locked,'' Tonseth said.

Airport officials are scheduled to ask for the council's approval in two
weeks to seek $100 million in low-interest, short-term loans to start the
project this summer. That debt will be paid off when bonds are sold to
finance the entire project.

But a protracted war could postpone the rest of the expansion, which
ultimately will be based on service demands, he said.

``If it goes on and there is a negative impact,'' Tonseth said of the war,
``we'll have to look at the phases beyond the north concourse.''

The airport's bond rating remains unchanged at an A rating, according to
Standard & Poor's.

In a report in the fall, however, S&P said uncertainties regarding the San
Jose airport's large capital improvement plans could affect debt-coverage
levels and result in higher airport costs that could force a ``decline of
the airport's credit quality.''

That's what happened to San Francisco International Airport, which approved
dramatic expansion of its terminals and roadways in the 1990s. The San
Francisco airport now has about $4 billion in debt and must charge airlines
some of the highest fees in the country to help cover its expenses. The
airport has a negative outlook for the next two years, according to S&P.

Budget cuts likely

No matter how long the war lasts, it will almost certainly force airports to
pare their budgets. In this lagging economy, it's highly unlikely that
airports would raise their fees to airlines, said Robert Shumsky, a
University of Rochester professor who studies the aviation industry.

``The danger is the higher the rates, the less attractive your airport
looks,'' Shumsky said. ``In the long run, you drive away your customers and
you're collecting less fees.''

In the early 1990s, when American Airlines curtailed operations at San Jose,
the airport responded by freezing hiring, redeploying workers and postponing
or reducing the scale of programs and construction, Tonseth said.

Without raising fees, the weakened economy already has resulted in a near 16
percent drop in passenger volumes in 2002. In addition, lucrative non-stop
service to Taipei, Paris, Miami, Toronto and Cincinnati has been eliminated
at the airport since the terrorist attacks.

For airports, it's a familiar formula when times get tight.

``Basically, we'd just scale back projects and defer work,'' said Mike
McCarreon, San Francisco airport spokesman.

Optimistically, a short war might benefit the industry, Tonseth said.

``I think it actually might be helpful because it would remove the
uncertainty from the market,'' he said. ``People will get back to what they
might have normally been doing.''

Whatever the war's duration, Dickerson said the industry will bounce back.

``All you have to do is point to the tremendous challenges it's already
faced, whether it was deregulation, whether it's major accidents, whether
it's 9/11, or whether there are other bankruptcies,'' he said. ``It's a very
resilient industry.''