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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