"Flat growth at San Jose airport worries some"

Monday, December 31, 2007

Flat growth at S.J. airport worries some
FAILED PASSENGER PROJECTIONS WOULD AFFECT EXPANSION LOAN
By Deborah Lohse
The San Jose (CA) Mercury News


In recent months, San Jose airport officials have watched in dismay as
airline after airline - Cathay Pacific, Virgin America and Indian start-up
Kingfisher - skipped over San Jose to launch flights elsewhere. 

With risk-averse airlines flocking to larger airports such as San Francisco,
some observers have raised questions about how exactly San Jose is going to
achieve the kind of steady passenger growth it is counting on to pay back
the $725 million it borrowed this summer for a massive expansion project.

The airport also has been counting on growth in order to keep airline fees
low and to ensure that the $1.3 billion upgrade doesn't have to be scaled
back so much that it disappoints passengers - such as Scott Arnett, a
product manager for Pitney Bowes.

Arnett says he flies out of San Jose whenever possible because it's
convenient. But he says he would spend more time and money there if it had
nice restaurants and a lounge for United Airlines frequent fliers like
himself. "I'm waiting for them to fix up the airport; it definitely needs
that," he said.

Aviation Director Bill Sherry said Arnett and others will not be
disappointed in the new Mineta San Jose International Airport when the
upgrade is completed in 2010. Even if passenger growth stays flat, as it did
in 2007, Sherry says the $725 million San Jose borrowed is safely earmarked
for new roadways and two new concourses with 46-foot-high ceilings and
state-of-the-art baggage and security systems. "This will be an airport that
San Jose and Silicon Valley can be proud of," Sherry said. 

But an aggressive marketing campaign by San Francisco, rising oil prices and
a renewed focus by some airlines on their "hub" cities has led to a slower
pace of passenger growth than expected. San Jose officials had hoped to see
2 percent growth in 2007, but traffic remained at 10.7 million departing and
arriving passengers.

"It's a challenge" to woo airlines here, concedes San Jose's new air service
development director, Ed Nelson. 

Keeping costs down

So what happens if growth stays flat for a few years? In theory, the
procedure is to get the airlines to chip in for any rising costs. Airport
officials calculated that if growth remains flat, airlines could technically
owe about $11 to $16 per departing passenger in the coming years, instead of
the $8 or $9 they are anticipating.

But raising airline fees is the last thing San Jose officials want to do,
Sherry said, so officials will first find ways to trim the airport's $100
million budget. Already, for instance, the airport has eliminated chemicals
for cleaning terminal floors and delayed replacing an escalator in Terminal
A. Non-vital positions probably won't be filled if people leave. In an
extreme case, the airport could tap a $9 million reserve set up to keep
costs low for airlines. 

Even if San Jose is forced to raise fees on airlines temporarily as it waits
for the widely expected Silicon Valley economic upturn, passengers are
unlikely to see a direct increase in fares, experts say. "The good thing for
us as consumers is the airline industry is brutally intense, brutally
competitive," said Forrester Research analyst Henry Harteveldt.

Marketing strategy

Still, Sherry and Nelson say they are confident San Jose will win new
airlines or new flights from existing carriers. Nelson said his strategy for
doing so is multipronged:

. Look for "leakage." That sounds like a bad thing, but it means that if
Nelson can persuade certain airlines that at least 15 percent of the
passengers who now fly out of San Francisco or Oakland come from San Jose,
then an airline might see an opportunity to launch a flight from here. 

. Play the ethnic card. Nelson is convinced that Santa Clara County and
nearby places such as Fremont offer a critical mass of passengers clamoring
to fly to countries including Mexico, India and China. Nelson frequently
goes to airline pitch meetings armed with Mercury News clippings about the
county's diverse census findings.

. Find a pioneer. When he was at Ft. Lauderdale airport in its nascent
years, Nelson said it was very hard to get airlines to fly out of there,
with Miami so close by. But he persuaded an obscure airline owned by
Carnival Cruise Lines that the heavy Colombian population there would make
for a profitable flight to Colombia. It was a success, and other airlines
started Ft. Lauderdale-South America flights that still exist today, he
said.

. Accentuate the positive. San Jose has far fewer fog-related delays than
San Francisco, its largely unused international terminal offers plenty of
gate space for carriers, and the airport's new baggage-handling system is
likely to cut an airline's operating costs, officials say. 

And polls show there is demand for San Jose-based flights, especially
non-stops to key hubs such as Boston, New York, London or Tokyo. 

Barbara Norvell, a retired San Jose psychologist who flies at least 25 times
a year, said she'd love more non-stop flights from San Jose - not to mention
international choices. Norvell said she frequently has to fly to Los Angeles
to catch the best international flights on American, and even then she often
gets stuck on old MD-80 planes with no movies, footrests or even pillows.

"A non-stop to London would be my dream come true," she said.

Still, San Jose faces an uphill climb, experts say. Unlike a retail store
that wants customers to itself, airlines tend to huddle near one another,
knowing that customers want choices and backup options in case of delays.

Said Harteveldt: "Airlines have a total lemming mentality."


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