Airports Feel the Carriers' Pain
In case the folks who run U.S. airports didn't have enough to worry about lately, the troubled airline industry is spreading more misery their way. Consider the showdown now under way in Pittsburgh. Minutes before emerging from bankruptcy on Mar. 31, US Airways Group Inc. stunned local officials when it announced it may walk away from all its leases at that hub, effective Jan. 5. Using the threat of drastically downsizing or even pulling out of Pittsburgh, US Airways is demanding big cuts in the $62 million in annual costs the airline pays to the airport.
That's no idle threat: US Airways accounted for 83% of Pittsburgh's traffic last year. And with United (UALAQ ) in bankruptcy and American still on the brink of Chapter 11, airport operators around the country are starting to worry that other big carriers might copy US Airways' strong-arm tactics. Other airports vulnerable to airline pressure include high-cost San Francisco and Denver, where United Air Lines Inc. dominates, as well as Miami and St. Louis, which rely heavily on weakened American Airlines (AMR ) Inc. "The Pittsburgh case may be precedent-setting," says Kurt E. Forsgren, a director at rating agency Standard & Poor's.
The pressure on airports to lower costs and pass the savings on to their ailing airline tenants couldn't come at a worse time. They've already been reeling from a travel slump that is hurting parking, car rental, and concession revenues. That has led investors and the rating agencies to take a harder look at what historically have been extremely safe investments: airport revenue bonds. Municipalities and airport authorities issue such bonds to pay for airport construction. To pay them off, they depend on revenue from airline terminal leases and landing fees, plus parking, retailers, and other concessions.
That said, even in the volatile airline business, there has never been an airport bond default. While most experts don't expect defaults even now, the rating agencies have issued a raft of downgrades on airport debt as the airlines' financial health has deteriorated. "Credit ratings are likely to continue to come down for airports," says Dan C. Champeau, head of the airport ratings group at Fitch Ratings Ltd.
Lower credit ratings will translate into a further squeeze for airports, since they'll need to pay out a higher yield to attract investors. Already, increased security measures and bills coming due from capital projects approved in the booming 1990s will push up airport costs by about 15%, figures American Airlines.
Still, airport costs are only about 4% to 6% of an airline's expenses -- but that hasn't stopped unprofitable carriers like American from taking a list of cost-cutting ideas to their airports. These include layoffs, energy conservation programs, and less- frequent cleaning of airport carpets. American's aim: a 5% decrease in its airport costs, says Laura A. Einspanier, vice-president of corporate real estate. Says Einspanier. "This really needs to be shared pain."
The message is getting through. San Francisco International is laying off 140 workers and has delayed construction of a hotel. At Dallas/Fort Worth International Airport, where American accounts for about 70% of the flights, the airport has made up part of its revenue shortfall with unused funds for capital improvement. That will help cut landing fees by 8% this year. In Miami, the airport cut a $5.4 billion capital-improvement program by $600 million. Still, says Angela Gittens, aviation director of Miami International Airport, "You can't spend billions of dollars and not charge anybody."
In Pittsburgh, the question is whether US Airways is bluffing about abandoning the hub. No one wants to find out, so local and state officials are scrambling to come up with a deal that will keep the airline and its 8,000 local jobs. But "there will not be a taxpayer bailout," says Kent G. George, executive director of the Allegheny County Airport Authority. "We're not going to be intimidated by [US Airways'] gun."
As the big carriers continue to slice costs and restructure their networks, other airports could find themselves in the same vise. The trouble is, whatever the airlines squeeze out will be just a drop in an ocean of red ink.
By Wendy Zellner in Dallas