"Airports feel the sting of airlines' cost-cutting"

Thursday, May 18, 2006

Airports feel the sting of airlines' cost-cutting
By Scott McCartney
The Wall Street Journal


The new terminal at Toronto's Pearson International Airport features soaring
ceilings, terrazzo floors and millions of dollars of modern art -- helping
to make it one of the most expensive airports in the world for airlines and
passengers. 

Then there's the new terminal at Schiphol Airport in Amsterdam. Gates have
no bathrooms, no bridges linking passengers directly with planes and only
eight seats for each planeload of people. Among the few amenities: some
green plastic plants and a few pictures of windmills.

The same economic forces in the air-travel business that have created
buy-your-own box lunches in coach and fully reclining seats for long flights
in business class are now showing up in a split at airports. The split is
creating tensions as cash-strapped airlines balk at paying for first-class
airports. Air Canada, the main tenant of the new terminal in Toronto, says
it can't afford the high fees.

Airports have long been considered economic-development tools for the
communities that own them. Many, like Toronto, erected palatial terminals to
showcase their cities and passed on the costs to airlines and passengers.
Even as airlines have gone bankrupt, airport earnings have risen.

Now, the combination of financial woes of traditional airlines and the
explosion of low-cost competitors around the world is forcing big changes in
airport design and operation. Airlines, which have already won concessions
from employees, travel agents and suppliers, are now putting pressure on
airports to cut costs and fees. And low-cost carriers have sparked the
creation of bare-bones depots, like Schiphol's "Pier H," in Europe and Asia.

"Many airport monopolies still operate in the dark ages. And our patience
has worn out," says Giovanni Bisignani, director general of the
International Air Transport Association, the airline trade group that has
spearheaded an attack on airport charges in Europe, Asia and the Americas.

Pressure from airlines has had some results. Tokyo's Narita Airport agreed
to reduce charges to airlines 10 percent last year. In March, the Australian
government called for an inquiry into pricing at privatized airports that
are posting profits. Last month, Mr. Bisignani took the fight to the
European Union, asking regulators there for a directive pushing European
nations into more robust regulation of airport monopolies. If airlines and
airports can't resolve differences, the EU has said it could step in with a
proposal this fall. And Star Alliance airlines, which include UAL Corp.'s
United, Lufthansa in Germany and Ace Aviation Holdings' Air Canada,
threatened in December to organize boycotts of airports with high charges.

In years past, local taxpayers typically funded airports by issuing bonds,
just as they'd pay for roads and bridges, and collected some revenue from
airlines and passengers. But as municipal finances tightened, communities
shifted more of the cost directly to airport customers. In many countries,
the cost of nearly every ticket includes a "facility charge" -- capped in
the U.S. at $4.50 per boarding -- that goes to the airport to cover bond
payments on new terminals and runways. Parking fees, retail-store rents and
advertising display charges all go toward paying for airports, along with
federal grants and landing fees and rents collected from airlines.

Some privatized airports earn profits for shareholders. Communities now draw
cash out of municipal airport funds to pay for roads and community
improvements. In Canada, the federal government taxes airports at hefty
rates to generate revenue.

The battle over fees between cost-conscious airlines and image-conscious
airports highlights a strange fact about the airline business. While
airlines historically have struggled to earn profits -- the U.S. industry
has tallied cumulative losses of $38 billion since 2001 -- suppliers,
vendors and others dependent on airlines usually do well. Maintenance firms,
leasing companies, manufacturers like Boeing Co. and city-owned airports
feed off of the money-losing airline business, but are profitable
themselves.

Some airports have resisted airline pressure, moving ahead with expensive
plans they see as economic-development projects to accommodate long-term
growth. Aeroports de Paris SA is continuing with a plan to renovate
terminals and raise charges to airlines 5 percent a year for the next five
years, after price increases totaling 35 percent over the past five years.
The British government and airports operator BAA PLC are bucking airlines in
proceeding with a $5 billion plan to build a second runway at London's
Stansted Airport.

Others are responding to airlines' concerns. A $1 billion new terminal at
San Francisco International Airport was designed in the dot-com boom but
opened in 2001, after the bust. The new facility led to a doubling of fees
and charges at SFO to about $20 per passenger from $10 just as United, its
biggest tenant, filed for bankruptcy-court protection. Under pressure, the
airport has cut costs and reduced charges to $15 -- still one of the highest
rates in the U.S. "In retrospect, our timing was bad," says airport
spokesman Michael McCarron.

San Jose International and Los Angeles International have both recently
scaled back big projects, recognizing that airline tenants can't afford
grand schemes. Denver International, which was attacked for its high fees
when it opened in 1995, has since cut costs and reduced fees, winning back
low-cost Southwest Airlines. And some airports, such as Schiphol and the
Cologne Bonn Airport in Germany, have moved ahead by luring new airlines
with low operating costs. In the low-margin airline world, a savings of a
few dollars per passenger can turn an unprofitable flight into a
money-maker, especially among discount airlines charging less than $100 per
ticket.

"Nowadays if you start to build a new terminal, you are no longer able to
build a castle," says Michael Garvens, chairman of the Cologne Bonn Airport,
which opened a terminal for low-cost airlines in December 2004.

Air Canada, which has its largest hub in Toronto and emerged from bankruptcy
reorganization in 2004, says it tried to tell the Greater Toronto Airports
Authority that the carrier couldn't afford grandeur before the airport went
ahead with plans for a $4.1 billion construction project. The plan includes
Terminal 1, a people-mover system and the largest parking garage in North
America. Air Canada joined with other carriers in proposing a less-expensive
alternative, but the airports authority rejected it. After that,
collaboration with airlines waned, says John Segaert, Air Canada's general
manager in Toronto, who was involved in the discussions. "They did what they
wanted," he says.

"We found (the airlines' plan) to be very limited in design and not
reflective of the connectivity we need for a major hub airport. It had
limited capacity," says Steve Shaw, vice president of corporate affairs for
the Toronto authority. "The airlines were consulted and were kept very
informed."

Landing fees in Toronto nearly tripled to $31.06 per metric ton this year
from $11.05 per ton of aircraft weight in 2000. Per-seat terminal fees for
international flights escalated 70 percent over the same period to $8.32.
Passengers get hit with a $13.47 "airport improvement fee." In all, the
airport estimates that costs to airlines and passengers will work out to
$37.98 per passenger this year. The Transportation Research Laboratory, an
independent London-based group, estimated the costs even higher, at $51.20
per passenger, tallying all costs on a sampling of eight aircraft types.

Air Canada says its costs in Toronto have increased "hundreds of millions"
of dollars a year since Terminal 1 opened. Despite the increased costs,
continued construction has left the airline's operations spread over four
terminals, with some passengers bused to remote gates. Until next February,
passengers from the U.S. connecting to Air Canada flights will have to
transfer between terminals. As a result, Air Canada thinks the new terminal,
despite its niceties, has actually cost it customers.

The terminal has soaring curved ceilings that sparkle in shades of white
with some gray and silver accents. Floors are terrazzo throughout; a
three-story, pink granite wall stretches for half a mile. The terminal is
decorated with nearly $9 million of modern art, including a giant
floor-to-ceiling "fish tank" with plastic cubes, rather than fish, swirling
in the current.

Terminal 1 forgoes sources of revenue that would help ease the burden on the
airlines. It is largely devoid of advertisements. And airlines complain
that, unlike other large airports, the 4.2-million-square-foot terminal
doesn't have a mall. The lack of retail space even prompted Air Canada to
give up a passenger check-in counter in one gate area so the airport could
put in a bar.

The airport authority recently let automobile companies put some new cars on
display inside the terminal to generate revenue. Officials are also working
to reduce the airport's rent payments to Canada's federal government, with
any savings passed on to airlines.

Since the new terminal opened, the airport has been running deficits. Last
year, expenses exceeded revenue by $106 million, which the airport authority
said "can be primarily attributed" to increased interest and amortization
costs from Terminal 1. Of $960 million in costs last year, more than half --
$488 million -- went to cover debt payments and amortization.

Mr. Shaw says costs in Toronto were pushed higher by the complexity of air
traffic, with domestic, international and transborder service with the U.S.
all requiring separate facilities. The airport wanted a building with long
life that would be highly flexible, he says. "And we tried to build a
signature building, one that would reflect Toronto and be a major gateway."

Now, he says, "We're working hard to ensure costs will be as low as they can
be."

In contrast to Toronto's Pearson, airports around the world are increasingly
catering to low-cost carriers. The airport serving Cologne and Bonn in
Germany had fallen out of favor once the capital of the reunified country
was transferred to Berlin from Bonn in 1990.

In 2002, Mr. Garvens, a Lufthansa veteran newly hired as airport chairman,
decided low-cost airlines might be his airport's ticket to revival. The
airport offered low-cost carrier Germanwings available gates and incentives
like advertising money. A new low-cost terminal and a train station that
gave the airport rail service for the first time both opened in 2004.

The airport also changed procedures to help low-cost carriers empty planes
and fill them back up quickly. German law prevents refueling planes while
passengers are boarding -- unless a fire brigade is in position. "So we send
a fire truck and position it at the aircraft every time," says Mr. Garvens.

The new terminal, which has glass walls on four sides and a simple metal
ceiling, was designed and built in a year and cost $32 million. It's full of
retail space and was built without jet bridges that shepherd passengers
seamlessly from the building to the plane. Instead, the carriers wheel out
portable stairs to the planes, allowing them to load and unload passengers
from the front and rear simultaneously. That makes for quicker stops and
more flights per day at gates. Rates are also lower for gates without jet
bridges.

Cologne Bonn last year handled 9.5 million passengers, up 73 percent from
5.5 million in 2002. "Airports are faced with a buyer's market today. You
have to compete for business," says Mr. Garvens.

In Amsterdam, Schiphol Airport has also adapted to low-cost carriers. "Pier
H," a long, skinny terminal with seven gates, was built in nine months at a
cost of $38 million.

How was it kept so cheap? The terminal's only bathroom is at the security
checkpoint, a 10 to 15 minute walk from some of the gates. Seating is
severely limited and there's no retail in the terminal itself. Lighting is
fluorescent and the floors are linoleum tile, with steel side walls and
ceiling.

The terminal is uncomfortable by design. Schiphol, the fourth-largest
airport in Europe, wants passengers to congregate in its massive shopping
area -- which includes a mall, a casino and a museum -- and not head for
Pier H until 30 minutes or less before the flight.

Since passengers will spend little time in Pier H, no bathrooms were needed,
says airport spokeswoman Kathelijne Vermeulen. "If you just communicate well
to them, the passengers know that they have to go to the bathroom in the
beginning," she says.

Landing fees for an Airbus A320 are 25 percent lower at Pier H than at a
Schiphol gate with a jet bridge. For easyJet, which averaged about 20
flights per day into and out of Amsterdam last year, the savings add up to
about $1.4 million per year.

The warehouse-like conditions are fine with many customers. David Jones, a
food-company executive from Manchester, England, flies through Pier H every
week. "I always wait until the last minute to go to the plane anyway," he
says. "More airports are going to go this way to cut the cost, I think."

But for travelers hit with flight delays, Pier H can be difficult. Airlines
tell customers to wait out delays back in the main terminal. But that means
long walks and an additional trip through security checkpoints.

Sione Raaijmakers from Amsterdam also found the facilities lacking. Her
children were parched and no one had told her there was no cafe in the
terminal. The lack of chairs meant sitting on the floor. "I think it's quite
inconvenient not to have a toilet and a changing room," she said. "It's at
least a 20-minute walk to go to a bathroom."

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