ANALYSIS: Washington Dulles and National airports operator navigates challenges

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The Metropolitan Washington Airports Authority (MWAA) has seen a dramatic shift in passenger traffic at its two airports during the past decade.

Passenger numbers at Ronald Reagan Washington National, the US capital’s constrained close-in airport that sits just 6km south of the White House, has grown dramatically while Washington Dulles International, an expansive 47.9km2 airport that rose out of Virginia farmland in the 1960s, has shrunk.

Traffic increased nearly 17% to 20.4 million passengers annually at National from 2005 to 2013, while it decreased nearly 19% to 22 million passengers at Dulles during the same period, MWAA data shows.

Passenger traffic at Dulles and National airports, 2005-2013

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MWAA

“There’s been a series of regulatory decisions that have been made that have made it easier for carriers that could not service Reagan National before… to shift to Reagan National,” says Margaret McKeough, chief operating officer of MWAA.

These decisions include eight new beyond-perimeter - flights from National are limited by a 2,012km perimeter - slot pair exemptions created by the US Federal Aviation Administration (FAA) reauthorisation bill in 2012, eight slot pairs auctioned under a settlement between the US Justice Department (DOJ) and Delta Air Lines and US Airways in exchange for approval of their slot swap deal in 2011, and 22 new slot pairs created by the FAA reauthorisation bill in 2003.

Through these regulatory actions, airlines like Alaska Airlines, JetBlue Airways and Southwest Airlines gained access to Washington National, and many beyond-perimeter flights to the western USA that previously departed from Washington Dulles have shifted to the close-in airport.

“It’s an imbalance in the distribution about the domestic passengers at this market,” says McKeough. “We really think that those regulatory changes have resulted in the imbalance.”

Dulles saw about a third less domestic passengers in 2013 than in 2005, according to MWAA. International traffic grew nearly 43%.

But shifting traffic and regulatory action is not whole story.

DULLES DEBT

United Airlines, the largest at Washington Dulles – and at both of MWAA’s airports combined – with a major hub at the airport, has been shrinking its operations.

Seat capacity on the Chicago-based Star Alliance carrier fell 7.2% to 8.69 million in 2013 compared to a year earlier, and seats are down more than 14% since 2010, Flightglobal/Innovata data shows.

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Flightglobal/Innovata

“This hub also disproportionately bears a lot of debt service compared to other airports inside of MWAA, which is a terrible competitive burden and inappropriate burden on this hub,” said Jeff Smisek, chairman, president and chief executive of United, during an event at Dulles in November 2013. “We’re keenly interested over time in discussing that with MWAA.”

Higher lease and landing fees at the airport makes it “more difficult to do business here compared to other hubs”, he said.

Debt service is $237.6 million at Dulles compared to $75.8 million at National in 2014, according to MWAA’s budget. This is down 3.9% at Dulles from 2013.

The higher debt level at Dulles is due to a number of major infrastructure projects, including a renovated and expanded international arrivals facility, and the underground AeroTrain between the terminal and concourses that opened during the past decade

The cost per enplanement is $26.24 at Dulles and $11.32 at National in the budget.

MWAA acknowledges the cost issue at Dulles and is working to address it, says McKeough. This includes reducing operations and maintenance costs, and refinancing debt to take advantage of lower interest rates.

The operator hopes to achieve $23.8 million in interest savings by refinancing airport debt in 2014, she says. It saved $13.7 million from refinancing activities in 2013.

McKeough adds that the average cost per passenger rises at Dulles as traffic falls, so an increase in traffic would result in decreasing costs to airlines.

While the question of costs at Dulles versus National is an important one, Smisek’s comments were far from altruistic. MWAA and airlines are engaged in their first airport use and lease contract negotiations in a quarter century in 2014, the result of which will have a significant impact on United’s costs at Dulles for some time to come.

In addition, Smisek’s comments on the plans United has for its Washington Dulles hub were made to local journalists, whose stories would reach many of the airline’s frequent travellers - ones who would likely want MWAA enable further expansion by the carrier.

McKeough says that discussions with all of the airlines that serve its airports are on going. The use and lease agreement covers all of the carriers.

SEEKING EQUILIBRIUM

The imbalance in traffic between Dulles and National airports is just a “short-term situation”, says McKeough. With a finite number of slots and a constrained footprint, there is a limit to how much the latter can grow, she explains.

On the other hand, Dulles airport can expand as the population of the Washington DC region continues to grow, she says.

The region is expected to add about two million additional residents by 2040, according to various local planning organisation estimates. They anticipate that about one million of them will live in Virginia.

MWAA’s immediate challenge is how to handle the increase in passenger traffic at National. JetBlue and Southwest will add 39 new flights at the airport in 2014, which they bought from American Airlines under a DOJ supervised auction. The carriers will operate flights with at least 100-seat aircraft compared to ones mostly flown on 50-seat regional jets that they are replacing.

One concern for MWAA is security checkpoint capacity. Either JetBlue or Southwest will have to move to the centre pier, where American is divesting five gates, to support their expanded operations. The additional passengers are expected to put pressure on the pier’s five screening lanes during peak hours.

Another concern is connecting traffic between American’s operations in the centre and north piers. Flights to the carrier’s American subsidiary hubs are expected to remain in the centre concourse while the bulk of its US Airways subsidiary flights will operate from the north concourse. This operational organisation will likely put pressure on the shuttle bus that currently connects the piers.

American’s slot and gate divestments are the result of a settlement it reached with the DOJ in exchange for approval of its merger with US Airways in 2013. The buyer of another five pairs at National has yet to be disclosed.

Not everyone agrees that Washington National is at capacity. The US Government Accountability Office (GAO) found that the airport handles only about 53 movements per hour compared to its capacity of 67 hourly movements, in a 2012 report. The shortfall was due to a decline in general aviation traffic after 11 September 2001, it said.

MWAA acknowledged that the airport has excess runway capacity but cited passenger terminal constraints as a reason not to add additional flights at the time.

National has a design capacity for between 15 million and 16 million annual passengers.

Advocating that there are no more regulatory changes to slot controls at Washington National is MWAA’s number one priority in rebalancing passenger traffic between its airports, says McKeough.

“Our two airport system has [and will] continued to grow,” she says.

There is no clear path forward for Dulles and National. Passenger traffic is likely to continue to grow, as McKeough says, but only time will tell how it is spread across the facilities.

The federal government maintains a control over service at National more than any other airport in the country. Despite MWAA’s objections, the US Congress can increase the number of slots with a single legislative act and airlines continue to lobby for more access.

Dulles will eventually grow. It stands to benefit from new development in the about 44km corridor between the airport and Washington DC after a new Metro line opens later in 2014. A direct rail link to the terminal is scheduled to open in 2018. Debt service, while an issue today, will eventually come down but other expenses will eventually arise.

“We’re running an airport system that has two airports in it,” says McKeough. “Our strategy is about preserving the system and balancing it.”