The Loma Prietan
February-March 2003
Airline Business Bad, But Runways Move Ahead
by Richard Zimmerman
Business is down but SFIA continues to party as if it were still 1999. The proposed runways are moving ahead even as the number one tenant at the airport files for bankruptcy and the airline business continues to nose dive.
In early December, United Airlines filed for bankruptcy protection under Chapter 11. United is the top air carrier at SFIA, accounting for 55% of flight operations, according to the Department of Transportation. United's payments to SFIA are 28% of the Airport's total yearly revenue stream of almost $600 million.
In addition, United employs almost 14,000 people at SFIA and over 15,000 people in the Bay Area. That number is being reduced almost on a daily basis with the attendant impact on the Bay Area economy.
Airport Director John Martin, in an appearance before the San Francisco Board of Supervisors Financial Committee, tried to put a brave face on United's demise, saying there would not be a long-term impact if United goes under.
Martin added, however, that the airline business was undergoing a "major shift." He said, "no expert can predict what would happen in the coming months." Even so, local press quoted him as saying the proposed runway project was moving ahead. How SFIA could pay for the runways, estimated to cost $5-10 billion, isn't clear.
Airline business downturn continues
The entire airline business, not just United, has been in the doldrums since early 2000. In fact, Harper's Index reported that the total airline profit since 1970 is equal to the federal subsidies given the industry since September 2001.
One aspect of the airline crisis that presents an opportunity is the impending demise of the hub and spoke system. Airlines have touted the hub system as expanding the number of cities that can be serviced.
Briefly, the system works by scheduling banks of planes to arrive or leave a major airport in a short time. The idea is that a passenger can fly into a hub and, in a short time, catch an outgoing flight.
The problem for the airlines is that the hub system is expensive. Many employees must be available to handle the rush of arrivals or departures, then sit idle until the next bank. A second problem is that the scheduling is done without regard to what the airfield can handle. That can lead to delays while the planes queue up for arrival and takeoff slots.
Low-cost airlines, such as Southwest, eschew the hub system as too expensive, choosing instead to use point to point connections. American Airlines announced they were modifying their hub system to reduce expenses in 2002.
In dropping the hub system, airlines are abandoning the smaller airports around the county. A recent report by Reconnecting America found that airline service to smaller airports, using the number of flights as the metric, had been reduced by almost seven percent. The number of seats lost is even greater as the airlines switch to regional jets that seat fewer people.
Crisis equals opportunity
The opportunity in this crisis stems from the fact that many flights cover less than 400 miles. In addition, the National Resource Defense Council found that airplanes are the least efficient means of transportation, other than the solo auto commuter, for short distances.
The solution, says Reconnecting America, is to provide rail and express bus service to smaller cities and use the major airports as transportation hubs. In fact, people are implementing their own version of this as more people drive to destinations that they previously might have flown to. Cost plays a role but the increased time that must be allowed for security also makes flying short distances no longer attractive.
Reconnecting America uses SFIA as an good example of an airport that is becoming a transportation hub with the advent of BART and the shuttle from Caltrain to the airport. And the proposed California High Speed Rail would include a stop at SFIA.
What if United goes under?
Worst case, for SFIA, would occur if United does not emerge from bankruptcy. Many airlines entering bankruptcy have not managed to emerge. Nevertheless, Martin said, such an event would be "very disruptive, short term" but not in the long term. He didn't define short term.
Martin's argument was that San Francisco is a primary origination and destination for passengers, with 77% of the passengers at SFIA starting or ending trips here. That's in contrast to airports such as Chicago O'Hare where only 50% of the passengers are origination/destination passengers. Thus, says Martin, other airlines would step up to take over United's passenger load if United cuts back or goes out of business.
Meanwhile, other airports have reduced expansion plans because of the economic maelstrom in the airline business. Across the Bay, Oakland International Airport (OAK) announced cutbacks in a planned expansion due to the economic slump and uncertainty due to security requirements. OAK scaled a $1.4 billion expansion plan back to $400 million.
One of the few airports in the U.S. experiencing growth currently, OAK stands in sharp contrast to SFIA where the number of passengers and flights have dropped sharply over the past three years. SFIA operations have dropped by over 19% since the peak year of 1999, while the number of passengers has dipped by over 22%. Passenger counts peaked in 2000.
At least some of Oakland's growth can be attributed to the fact that the low-cost airlines are based there. Southwest Airlines currently has almost 60% of Oakland's traffic. Jet Blue and Spirit Airlines are also based in Oakland.
Deeply in debt
SFIA is over $4.2 billion in debt--that's $270 per departing passenger--with almost 50% of its annual budget going to interest payments. In addition, SFIA's cost per passenger is over $20, according to Standard and Poor's.
SFIA's credit outlook had been reduced to "negative" after Sept. 11. Outlook is different than bond rating. The reason, according to Martin, is "concern with the United bankruptcy" and SFIA's "high debt load." An earlier S&P report also said a negative was the "potential runway expansion that will result in higher costs and a more substantially leveraged facility."
The proposed runways would increase the debt significantly while not solving transportation problems. At SFIA, the purpose and need of the proposed project is to build runways, not to solve transportation problems.
Learn about SFIA's plan to fill the Bay at Richard Zimmerman's website: www.ProtectOurBay.com.
