"D/FW loses its bet on airline industry recovery"

Sunday, January 30, 2005

D/FW loses its bet on airline industry recovery
By Bryon Okada
The Fort Worth (TX) Star-Telegram


D/FW AIRPORT - In the days after Sept. 11, 2001, D/FW officials gambled. As
some airports cut back, D/FW pushed forward with its $2.7 billion expansion.
In doing so, it rolled the dice, betting that the airlines would stabilize
and that the industry would quickly recover.

Neither happened. Now Dallas/Fort Worth Airport faces the toughest times in
its 30-year history.

"I don't think anybody knew what to fully expect after 9-11," D/FW Chief
Executive Jeff Fegan said. "We knew the airlines were in significant trouble
after 9-11. I can't say that any of us predicted the kinds of things that
happened."

D/FW officials believed they could produce revenues that would outgrow a
mountain of new costs.

But the pullout by Delta Air Lines, announced in September and to be
completed Tuesday, sank revenue projections -- adding a $35 million bad guy
to fiscal 2005, followed by a $50 million bad guy in fiscal 2006, and so on.

After four years of operations cuts, layoffs, pay freezes, SARS, security
costs and war, it's a swath of empty gates in Terminal E that has D/FW at
its most financially vulnerable since it opened in 1974, its top executives
say.

"We are basically to the bone and can't cut any more -- and come next year,
all the expenses come on," D/FW Chief Operating Officer Kevin Cox said.

The financial concerns are mounting:

   . On Tuesday, Delta leaves 24 gates empty, and D/FW loses its elite
status as one of two U.S. airports -- with Chicago O'Hare -- to boast two
hubs run by large, traditional carriers.

   . The $1 billion, 2-million-square-foot Terminal D, which opens in July,
increases terminal space by 52 percent, but it is not fully leased.

   . This year's operational budget is $494.1 million, up 50 percent from
last year. Net debt service and mandatory reserves account for nearly half
the budget.

   . Energy costs are doubling this year.

   . Debt, held below $700 million before the Terminal D expansion, is more
than $3.8 billion.

   . D/FW's low cost to airlines -- its biggest selling point in attracting
carriers -- will more than double by 2009, according to airport consultant
Leigh Fischer.

   . Most of what would have been Delta's share of the debt payments will
probably fall on American in the form of higher landing fees and charges.

   . The Wright Amendment, which limits growth at rival Dallas Love Field,
is under siege. Southwest Airlines' attempts to start long-haul service at
Dallas Love Field could siphon additional revenues from D/FW.

And, having abandoned any hope of luring Southwest to D/FW, airport
executives are free to express their fury at Southwest's attempts to repeal
the Wright Amendment.

"The thing that bothers this industry the most is uncertainty," Fegan said.
"I think the Wright Amendment presents a tremendous amount of uncertainty
into the industry and into this marketplace, and that's not good."

D/FW and American have argued that uncertainty over the Wright Amendment is
one factor hindering efforts to lure tenants to Terminal E.

How important are Delta's empty gates to D/FW's decision-making?

Airport officials wouldn't have considered building Terminal D if they
suspected Delta was leaving; instead, they would be remodeling Terminal E,
Fegan and Cox said.

"It doesn't mean we wouldn't ultimately need D," Cox said. "But we would
wait to see if we got E backfilled. Otherwise we're building facilities
where we have capacity that exists."

Economies of scale

For 30 years, D/FW officials have followed a simple formula: A bigger
airport will bring in more passengers, which will mean airlines can spread
out costs over more ticket buyers.

"Every time we have major capital improvements, over time the growth in
passengers actually caused the cost per enplaned passenger to go down,"
Fegan said. "That has historically been the case."

D/FW gets its revenues from aviation and nonaviation sources, including
landing fees charged to airlines, parking, terminal rent, use fees (such as
permitting nonsignatory planes to land), concessions, utility fees to tenant
companies, employee transportation, taxi rentals, and leasing portions of
its 18,000 acres for cargo hangars, gas stations, warehouses, distribution
centers and foreign trade zones.

At the terminals, however, D/FW was following the industry pattern of
running out of space.

Before 9-11, airports made the news because of record flight delays and
cramped terminals.

After soaring to 851,101 takeoffs and landings in 1997, D/FW operations
leveled off. The seven-runway airfield wasn't the problem. D/FW didn't have
enough terminal gate space to get any bigger. American's D/FW gate turnover
-- the number of times a day that a plane pulls in and pulls out at a gate
-- was at or near the top nationwide.

So D/FW embarked on its five-year expansion program. Airlines were sold on
the idea that the costs would go through the roof but that additional
flights and passengers would eventually drive the costs down.

But after 9-11, airline bankruptcies, the Iraq war, the SARS outbreak,
increasing jet fuel prices and airline labor unrest created instability in
the industry.

Still, it is Delta's departure that leaves the airport without a growing
passenger base. The airport's 2005 outlook is 718,000 takeoffs and landings
-- 102,000 below the forecasts before Delta announced its pullout.

That means D/FW, traditionally one of the nation's most affordable big
airports for airlines, is -- for now at least -- overdeveloped and too
expensive.

D/FW's cost per enplaned passenger -- an industry figure used to measure an
airport's cost-effectiveness to airlines -- will rise from $4.24 in 2004 to
$8.93 in 2009. As D/FW loses traffic, the cost rises.

D/FW officials had enough warning of Delta's pullout to cut $10 million from
the 2005 budget. But "we don't have that revenue source," Cox said. "We
don't know if we cut enough or not until we see what the actual revenues
are."

Industry analysts say that after 9-11, the consensus was that -- based on
what happened in the Persian Gulf War -- aviation would be down for two
years.

The biggest airlines were also out making huge commitments to their labor
unions and ordering up lots of new planes, resulting in today's runaway
expenses and overcapacity.

But recovery has been slower. Most recent airline projections contain gloomy
forecasts for 2005 and 2006.

Not a time for a hub airport to be sticking its flagship carrier with extra
bills.

At a mid-January news conference of AMR, American Airlines' parent, Chief
Financial Officer James Beer listed D/FW's Terminal D among "drivers of
costs going in the wrong direction."

Further, if the Wright Amendment protection falls, costs to airlines
operating at D/FW could be higher than expected.

American spokesman Tim Wagner said of D/FW's expansion: "This financing was
put in place with the full belief that the Wright Amendment would be in
place."

The Wright Amendment is a concern, Colorado-based airport consultant Mike
Boyd said -- if you're American.

A second and possibly larger effect of the Wright Amendment is its
protection of D/FW's international profile. Right now, D/FW is the center of
a giant "hub-and-spoke" system; through D/FW a traveler can pretty much go
from anywhere to anywhere.

The cheaper option is low-cost carriers using point-to-point routes. And
that's great for a traveler living in, say, New York, who wants to get to
Los Angeles, said Stephen Van Beek, senior vice president of policy and
strategic development for Airports Council International-North America. For
the traveler in Lubbock who wants to get to London, it's another story.

Lubbock doesn't have enough London-bound people to make it worthwhile for an
airline to offer that flight. The successful international airport juggles
numerous short-haul flights -- accumulating one passenger from Lubbock,
another from El Paso, two more from Austin -- to make a London flight
profitable enough, Van Beek said.

"You need to understand the ripple effect," Cox, of D/FW, said. "If we lose
connecting traffic and [origination and destination] traffic, then we're not
going to get international flights."

Those are exactly the flights D/FW officials hoped to add when they started
the airport expansion.

But echoing Southwest's argument, Boyd said repealing the Wright Amendment
would cause lower fares and more passenger traffic at both airports. "D/FW
is served by everybody who wants to be there," he said.

Going forward

Gates are available at D/FW.

Terminal D will open with 28 gates and room for 12 more. American is leasing
20 gates, with eight more being taken by foreign and other carriers.

Terminal E is mostly empty. D/FW officials offered a $22 million incentive
plan to any airline willing to start a new hub there. Airport officials say
"multiple" carriers are kicking the tires on the deal.

Aviation experts, however, have their doubts.

"I was surprised the airport thought they had a chance at that," said
Patrick Murphy of Washington, D.C.-based Gerchick-Murphy Associates.
"Airlines may want to and will expand at Dallas, but to open up a large hub
at this moment with the airlines all fighting to stay alive?"

Murphy speculated that D/FW's leaders may actually be looking to negotiate
smaller deals.

Terminal E can be partitioned into three sections. If worse comes to worst
-- nobody wants to hub there, nobody wants a smaller portion of gates there
-- sections can be sealed off.

Plans to move out concessionaires are under way.

Normally, if someone were to ask D/FW to build a hub, the lag time would be
about five years of construction for a new terminal. Terminal E is a unique
opportunity. But the question remains: Does anybody new really want to hub
at D/FW?

In those terms, Terminal E has become a spec building.

"We're at the 10-yard line," Fegan said.

By that, he doesn't mean close to scoring a touchdown.

"We're on the 10-yard line on the other side of the field," he clarified.

IN THE KNOW

Covering the gap

D/FW Airport has relied on long lease agreements with airlines since it
opened in 1974. Those airlines are known as signatory airlines and are
ultimately responsible for the operating costs of the airport.

When expenses start to exceed revenues in a given year at D/FW, the airport
can raise the signatory airlines' landing fees to close the gap. If the gap
is not closed by the end of the year, the airport bills each airline
according to the landed weight of its planes in that year.

The last time D/FW sent its airlines a bill was 1996.

When a signatory carrier, such as Delta Air Lines, reduces service, the
financial responsibility is redistributed among all carriers. As of Tuesday,
Delta's share of debt payments for the airport expansion will decline by
more than 90 percent.

D/FW's signatory airlines are Air Canada, AirTran Airways, American Eagle,
American Airlines, America West, ATA Airlines, Atlantic Southeast Airlines,
British Airways, Champion Air, Continental Airlines, Delta Air Lines,
Frontier Airlines, Korean Air Lines, Lufthansa German Airlines, Midwest
Airlines, Northwest Airlines, SkyWest Airlines, United Airlines and US
Airways.

Attached Photo's:

The day before Thanksgiving in 1999.

A decline in air traffic after 9-11 is one of several reasons for financial
troubles at D/FW Airport, shown at top on the day before Thanksgiving in
1999 and above on the day before the holiday in 2001. Delta's hub closure is
more bad news for the airport.

DFW Term Pre Nine Eleven.jpg

DFW Term Post Nine Eleven.jpg