"Mineta San Jose Airport expansion plan hits turbulence"

Sunday, February 27, 2005

Airport plan hits turbulence
OFFICIALS HOLD ON TO THEIR OPTIMISM, WHILE AIRLINES BALK AT THE POTENTIAL
COST
By Tracey Kaplan, Aaron C. Davis and Rodney Foo
The San Jose (CA) Mercury News


San Jose's grand vision for a world-class airport by 2012 is headed for a
very late arrival, if it lands at all.

Even as Mayor Ron Gonzales describes the $2.8 billion project as on track,
the Mercury News has found that city officials have no solid financial plan
to complete it and airlines are balking at the share they're being asked to
pay.

Under the most optimistic scenario, it will be at least 2016 before
travelers see the super terminal that stretches three-quarters of a mile,
with its stately entrance, parking garages and double-decked roadway to
reduce traffic bottlenecks. But the delays could last for many years more,
leaving passengers with an outdated, congested airport for far longer than
promised.

The airport already owes about $305 million and plans to issue $200 million
more in bonds to complete the first phase, including the North Concourse
wing of the terminal. But it is asking Southwest Airlines -- its biggest
carrier -- to pay what could be the highest fees of any major West Coast
airport to help underwrite the cost. Southwest has threatened to move
operations to Oakland if costs don't drop.

The discount airline would be willing to stay in San Jose, its executives
say, if the city makes the design of the North Concourse more modest, rather
than the planned showpiece with sail-shaped extensions and towering glass
walls.

But city officials who see Silicon Valley's biggest dreams reflected in the
airport's sweeping design are reluctant to lower their sights. With
unflinching optimism, they see the economy turning around soon, and
travelers flocking back to the skies.

As recently as December, airport officials proposed dramatically expanding
that vision. The city council is scheduled to vote Tuesday on the proposal
to increase the total size of the new airport buildings by 60 percent or
700,000 square feet -- roughly the same size as the HP Pavilion and the San
Jose McEnery Convention Center combined -- for an unknown cost. The
expansion would accommodate meditation rooms, children's play areas and
bathroom stalls big enough for luggage carts.

``You never move forward by standing still,'' Mayor Ron Gonzales told the
Mercury News on Friday. ``What we're trying to accomplish now is to get this
project started and get a clear impact on the project in the next 10 years
so the airport will begin to be easier to use.''

But he acknowledged that the city no longer is certain of the timing, saying
that looking ahead more than five to eight years ``gets less reliable.''

In their focus on long-term economic optimism, though, San Jose officials
are ignoring other seismic changes that have unsettled the aviation
industry: the Sept. 11 terrorist attacks and the rise of discount airlines.
Critics point out that other cities, even those less hard-hit by the dot-com
bust, have scaled back their airport expansion plans.

``San Jose is behind on the paradigm shift,'' said David Stempler, president
of the Air Travelers Association in Washington. ``Now is not the time to
build these huge monuments, these Taj Mahals that are going to keep the
industry in the red.''

In good times

It wasn't supposed to be this way. The plan approved during the boom called
for travelers to arrive in 2012 at a Mineta San Jose International Airport
strikingly different from today's small-town row of antiquated terminals.

Passengers would be funneled through a double-decked roadway separating
arrivals and departures. High-tech people-movers would whisk them from
ticket counters to 40 gates. A central terminal with soaring ceilings and
large open spaces would serve as the main entrance, with space for people to
mill, eat, and check in their luggage before moving to concourses and gates
on either side.

The airport was to be built in three rapid, overlapping phases -- the North
Concourse, South Concourse and Central Terminal. The city even hired a
master consultant whom it has already paid about $60 million to manage the
fast-track plan.

In August, when the airport held its groundbreaking ceremony for the North
Concourse, the mayor hailed the construction as just the beginning of a
comprehensive terminal improvement program. The news release offered only
the subtlest of hints that everything wasn't quite right: It rolled back the
completion date for the whole project by one year to 2013.

But in the eyes of Wall Street, it was already clear that the airport
couldn't afford to finance the second and third phases as quickly as the
public had been led to believe. Airports pay for such expansions by issuing
bonds that are supported by fees they collect from airlines, as well as
revenue from parking, concessions and other sources.

As of last spring, the bond rating agency Fitch Ratings regarded the second
and third phases as on hold. Borrowing more money ``poses a credit
concern,'' according to the agency's May outlook report, which influences
whether high-quality new bonds would be issued. Passenger traffic would have
to increase enough to give investors confidence that the airport could
re-pay the debt.

San Jose officials said nothing publicly at the time about the looming
delays, but city budget documents also began to indicate the project faced a
setback of ``one or more years'' depending on whether the number of
passengers and revenue increased.

In a recent interview, Acting Aviation Director Frank Kirkbride confirmed
that phases two and three of the project are on hold. The airport will have
to wait at least a year or two to see if passenger traffic increases as
hoped before planning resumes.

As a result, the single new concourse, which should be finished by late
2007, will play a much larger role than intended for years to come. On the
bright side, the concourse will have nine new gates for a total of 40 gates
and more comfortable waiting areas for ticketed passengers. But out front,
ticket counters and a baggage claim area will be crammed into a temporary
foyer designed to last at least 20 years. Behind the scenes, the new
concourse will be outfitted with a bomb-detection system for screening all
of the baggage from every terminal, including the existing A and C
terminals. But some airline officials worry that the system could wreak
havoc on airlines operating out of the other terminals by forcing them to
send bags back and forth.

It's not that the airport is in danger of going bankrupt due to the
expansive project. Bond analyst Jessica Soltz Rudd of Fitch Ratings noted
that the airport deserves high marks for its sound financial position and
strong management, and will be able to pay off bonds for the North Concourse
and existing debt from previous projects, including runway extensions and
Highway 87 improvements that have already been completed. Unlike other
municipal services, the airport is financed by its own revenues, not by city
taxes.

Short on passengers

But completing the North Concourse as ornately as envisioned -- let alone
raising additional funds for the second and third phases of the expansion --
relies heavily on factors beyond the control of the airport.

Before Sept. 11, 2001, when officials were crafting the plan, they estimated
about 14.8 million passengers would use the airport this year, generating
enough funds to offset the costs of the expansion.

Instead, only 11.1 million passengers are expected to use the airport this
fiscal year, which ends June 30, about 25 percent short of the forecast.

The number of passengers was expected to continue to soar, reaching 17.6
million by 2010. But now, even under a highly optimistic scenario, the
airport won't see those numbers until at least 2016. To do that, the annual
rate of passenger growth would have to double from its current rate of under
2 percent -- and maintain that healthy growth for 10 consecutive years.

``The airport improvements are demand-driven,'' San Jose airport's Kirkbride
said, ``and we just don't have the demand we expected.''

To build even the North Concourse now means that the airport needs the
airlines to contribute more than they had expected.

For more than two years, Southwest officials say they had been asking for a
breakdown of construction costs and how much their fees would rise. They
expected the fees to rise from the current $5.86-per-departing-passenger.
But executives say they were stunned three months ago when the airport
declared that the fee would need to rise as high as
$17.53-per-departing-passenger -- just to cover the first phase of
construction.

The tripling of the fees would make San Jose's airport the most expensive
major airport on the West Coast for airlines, even before the bulk of its
new facilities -- the signature Central Terminal, South Concourse, and
double-decked roadway -- are complete.

Role of airlines

But no-frills airlines like Southwest are now playing an increasingly
powerful role at airports, especially San Jose. Eager to keep expenses down,
those airlines have become notorious among airport officials for not wanting
to help pay for needed improvements.

That's a dramatic shift from just a few years ago, when the nation's largest
carriers were a driving force behind airport expansions. United Airlines,
for example, was a major backer of San Francisco International Airport's
recent $2.6 billion overhaul.

Southwest, which accounts for nearly 40 percent of San Jose's passengers, is
on the leading edge of the cost-cutting trend. Early in 2001, for example,
when costs to airlines nearly doubled at San Francisco because of its
expansion, Southwest pulled out in favor of less expensive Oakland, citing
the costs and chronic weather delays.

San Jose's Kirkbride said the cost per passenger could possibly be lowered
to $10 to $12. Ralph Tonseth, who recently retired as head of the airport,
said he has long believed Southwest could afford higher fees. ``We're
talking chicken feed,'' he said.

But Southwest is paying far less in Oakland. There, the cost per passenger
is expected to rise just 50 cents, from $4.50 to $5, after Oakland completes
its expansion.

``If San Jose fails to get costs within reason, there are some things we'd
have to consider,'' said Greg Gillis, Southwest's properties manager.
``You're making a market like Oakland look better. It would make more sense
to consolidate our assets in a more profitable market.''

Simplification urged

Threats like that are part of the negotiation over fees. Airline officials
have been urging the airport to simplify its plans for the first phase, the
North Concourse. Southwest officials have suggested that the sweeping
metallic sails that give the airport its distinctive design be excised from
the plans -- or postponed until later -- to save money. Kirkbride said some
flooring in the North Concourse will be stained concrete, not the originally
planned terrazzo tiles, but officials are reluctant to give up architectural
flourishes.

Southwest argues that San Jose should look to its more frugal neighbor.
Oakland in the late 1990s drafted a sweeping $1.5 billion airport makeover.
But commissioners at the Port of Oakland, which controls the airport's
budget, have methodically scaled back their vision to one that costs just
$150 million.

Still, Oakland will net five new gates, a new baggage claim area, additional
ticket counters, and an expanded roadway when the project is completed in
two years.

San Francisco International Airport, meanwhile, cut other costs to bring its
fees down from a high of $20 in 2002 to $15.75 per passenger, eliminating
500 positions. It plans further painful cuts in an attempt to push the fee
down to $13 in the next two years.

City's big dreams

San Jose airport officials took a small step earlier this month that
indicates they may be adjusting to market realities. They quietly dropped a
$200,000 plan to remodel their offices, a renovation intended to give staff
and consultants room to design and manage the rest of the expansion.

But San Jose officials like to dream big, whether it's the $388 million City
Hall, the $4.2 billion BART project or the $600 million in bonds for
libraries, parks and fire stations that voters have approved since 2000.
Gonzales earlier this month in his annual State of the City speech gave no
indication that the city might scale back its hopes for the airport or come
up with alternative financing.

``That's not the Silicon Valley way,'' Gonzales said Friday.

Vice Mayor Cindy Chavez also believes the airport still can be built as
planned. But to do it, she goes so far as to suggest turning to the private
sector to help fund the airport, an unorthodox approach used in Europe and
Asia but seldom in the United States.

``Full build-out? We have no idea how to pay for that,'' Chavez said. ``But
we have to get the airport built as quickly as possible. I believe it is
critical to our continued economic rebirth.''

Attached Photo's:

David Rice, 6, of Santa Cruz looks out the window from the waiting area at
Terminal A at Mineta San Jose International Airport.

Covered walkways on the tarmac protect passengers from the elements at
Terminal C.

Passengers with children enjoy a play area at Terminal C.

Because of the lack of jetways at the airport, passengers exit airplanes via
portable stairways.

Arriving passengers enter Terminal C.

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