"Paying for Mineta San Jose Airport Overhaul"

Wednesday, August 22, 2007

Paying for airport overhaul
By Deborah Lohse
The San Jose (CA) Mercury News


San Jose today will try to sell the largest bond in the city's history -
$767 million that's key to the dramatic face-lift under way at its
42-year-old airport.

Like a family with a modest mortgage that decides to take out a jumbo loan,
airport officials are ratcheting up their debt level significantly. To help
pay it off, those officials are counting on passengers to spend more at the
airport's parking garages, concession stands and rental car counters.

Oh, and flying more would be nice, too.

Officials say revenues from all of those sources will cover the costs of
paying back investors and running the airport with no contribution from the
city's general fund. As part of the deal, airlines, rental car companies
and, perhaps, concessionaires will see fees increase.

But airport officials downplay how much of that will be passed on to
travelers.

"I don't think that it will be directly more expensive to the passenger,"
Aviation Director Bill Sherry said.

Unless they need to rent a car. Rental car users will see their current $5
surcharge double to $10, which will help pay off a separate $225.5 million
the city is borrowing to build a new rental car facility. The airport's
rental car companies also are kicking in $4.8 million a year for the next 10
years.

But Sherry and others say it is unlikely that the biggest cost to travelers
- air fares - will rise as a result of the upgrade. Even though airlines are
expected to see their costs at San Jose rise from an average of $5 per
departing passenger to $8 in coming years, more-efficient baggage handling
and heavier passenger volumes could offset some of the increase.

Even if they don't, air travel is highly competitive, which limits the cost
increases airlines can pass on to customers. 

"There are many factors that go into setting fares," said Southwest Airlines
Properties Manager Greg Gillis, who represented the airlines in negotiations
with the airport. "It's not solely a cost issue."

Instead of higher fares or fees, airport officials plan to cover the debt
with revenues from increased passenger traffic, snazzy new concessions and a
steady increase in parking income.

Parking fee increase

Parking has historically been the airport's top source of revenue, although
airline fees are expected to surpass it within a few years. Currently, long-
and short-term parking brings in about $31 million for the airport - or
about 33 percent of last year's gross revenue. Parking fees are expected to
rise by $2 a day in 2012, but officials say that's in line with inflation
and is not tied to the upgrade.

The airport also is hoping that a new concessionaire or developer will bring
in 40 hot new stores or restaurants - spread over twice the current square
footage - tempting travelers to spend more. 

"If you poll travelers, they like to have the mall kind of experience at the
airport," Sherry said. The airport will seek bids next month to replace all
28 of the current storefronts, many of which are run by travel retail giant
HMS Host.

Every extra bit will help. To repay the bond being sold today, and hundreds
of millions more for the new rental car facility and other structures, the
airport will need to use as much as 40 cents of every dollar it takes in.
That's double what the airport has spent on debt repayments in recent years.

And after this phase of the upgrade is completed, airport officials hope to
expand the number of gates at the terminal for another $300 million or more
- although where that money will come from remains a mystery.

Bad timing

The long-planned mega-bond deal also hits at a bad time in the bond market.

For weeks, the meltdown in the subprime mortgage industry has caused many
large investors to hoard their money in short-term bonds. That will make
selling a huge package of 30- or 40-year bonds for the airport more
challenging - and probably more expensive, since it will take a hefty amount
of interest to lure investors.

Despite the higher debt load, analysts at bond rating agencies say they have
faith in the airport's ability to generate the revenue it will need. 

Among its attributes: It has a variety of revenue sources to pay off the
bonds; it is not simply a hub used by airlines as a transfer point for
passengers, which would make it more vulnerable to airline whims; and its
airlines are in favor of the upgrade and are willing to pay higher fees to
fund it.

Finance experts also say San Jose is still in better position to pay off
debt than the typical airport of its size.

"There's a lot of things about the airport and its demographics and profile
that we consider very stable and very favorable," said Mary Ellen Wreidt, an
analyst at Standard & Poor's Ratings Services.

 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dcfp/dcboard.php


*****************************************