"Cutbacks for airlines carry over to airports"

Tuesday, November 2, 2004

Cutbacks for airlines carry over to airports
By Steve Johnson
The San Jose (CA) Mercury News


At the height of the boom, airports could afford to turn away small airlines
and had grand plans for expansion. Now, as the nation's airlines battle for
their financial life, airports are cutting costs and battling for every
flight they can get.

``Just a year ago, San Francisco had a huge ceremony welcoming AirTran with
their one flight a day,'' said Steve Grossman, aviation director at Oakland
International. ``Five to seven years ago, San Francisco used to call me and
say, `Can you take these guys? They're too small for me.' The world has
changed. We're all a bit more competitive.''

But while some airports have scaled back their building plans, those in the
Bay Area and many other places have been reluctant to take that step. They
know that in 10 years, the boom could be back -- and they'd better be ready
for it.

In August, Mineta San Jose International began work on a $1.3 billion
terminal improvement plan that airport officials call the biggest public
works project in city history. It will enable the airport to handle
substantially more passengers in 10 years, which is crucial, according to
Jim Peterson, deputy director of business development.

``The demand for air service is going to be there,'' he predicted.

The ups and downs of the economy and vagaries of international events can
make it tough to run an airport.

When business was good and local companies were growing fast, air traffic
increased dramatically. The number of people flying out of San Jose nearly
doubled from 3.16 million in 1990 to 6.14 million in 2000.

But then things got ugly. The soured economy, Sept. 11, the SARS health
scare and worries about the war in Iraq prompted a huge plunge in air
travel, sending many airlines into a tailspin.

Battered by rising fuel costs, most major carriers have struggled to compete
with low-cost outfits such as Southwest. Despite cutting 123,000 employees
since 2000, the airlines lost $23 billion from 2001 through 2003, and their
losses this year are expected to hit $6 billion.

Four airlines have gone into bankruptcy in the past three years -- United
Airlines, US Airways, Hawaiian Airlines and ATA Airlines, which filed for
Chapter 11 protection last week. Others, including American and Delta, are
fighting to keep from doing the same.

By comparison, airports here and elsewhere in the nation have done
relatively well.

``For the most part, they've held their own,'' said Jessica Soltz Rudd, a
San Francisco-based analyst for Fitch Ratings, which issued a generally
upbeat report last week on the economic health of airports.

But the loss of passengers has hurt airports, forcing them to change how
they do business. Some have laid off workers, passed more costs to airlines
and bolstered their cash reserves.

Many also have become leery of depending heavily on a single carrier --
especially one with money problems -- and are working harder to lure
profitable low-cost operators. And all three Bay Area airports are limiting
the past practice of giving airlines exclusive use of certain gates, so
those sites don't sit unused if an ailing carrier cuts flights.

Local airports have faced serious challenges to their budgets. San Jose's
annual passenger total fell by 1 million to 5.1 million from 2000 to 2003.
As a result, it lost its distinction as the Bay Area's second-busiest
airport to Oakland.

Oakland is the only Bay Area airport to see an increase in passengers since
2000. Nonetheless, it lost $3.5 million a year in rent in 2003 when United
closed its maintenance base there, consolidating its maintenance at San
Francisco International Airport. That empty facility now costs the airport
$500,000 a year to maintain.

Then, in September, Alaska Airlines -- which pays Oakland about $1 million
for its maintenance operation -- announced that also was closing. Alaska has
hired other companies to do its maintenance.

But San Francisco -- where United is the main carrier -- has had the worst
of it. Fitch last year dropped the airport's credit rating from A+ to A
because of its sizable debt and huge plunge in passengers -- from nearly 19
million in 2000 to about 14 million last year.

San Francisco is among the airports trying to keep fees competitive, to
avoid driving away cash-strapped airlines. It managed to reduce landing fees
by 19 percent beginning in July, to $3.21 per 1,000 pounds per aircraft. It
is generating more income from concessions, parking and car rentals, but has
trimmed expenses, too, pruning its work force in recent years from about
1,600 to about 1,300, said spokesman Mike McCarron.

But local airport executives don't expect air travel to remain anemic.

Indeed, it already has picked up nationally and the Federal Aviation
Administration reported to Congress last month that it will continue growing
fast in the Bay Area. From 2002 to 2014, the agency estimates, Oakland will
have experienced the nation's third-largest increase in passenger traffic --
an 86 percent surge. San Jose should see 80 percent growth, ranking it
fourth, while traffic at 42nd-place San Francisco is expected to increase 49
percent.

As a result, while construction of a hotel and a terminal upgrade are on
hold at San Francisco, major expansion projects are under way at Oakland and
at Mineta San Jose International Airport. The first phase of work at San
Jose -- a $335 million concourse between the two existing terminals --
should be done in 2007. By 2014, the gates at the 1965-era Terminal C will
be reconfigured, and the building will be replaced.

This isn't the first time airports have dealt with troubled airlines. Since
the industry's deregulation in 1978, more than 130 airlines have gone
bankrupt. Yet no airport over that period has defaulted on its general
revenue bonds.

Nonetheless, the turmoil in commercial aviation now is unprecedented,
prompting proposals in Congress to make it harder for airports to bill their
expenses to airlines.

``That's crazy,'' responds David Plavin, president of the Airports Council
International-North America. ``If we can't recover our costs, how can we
provide service?''

But in a speech to Plavin's group in September, James May, president of the
Air Transport Association of America, issued a grim warning if the carriers
he represents go out of business.

``Either the airlines are going to get well, or the airports are going to
become sick,'' May said. ``Just think of all the magnificent railroad
stations across the country that were mothballed, or turned into hotels,
when the railroads that served them failed.''


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