Airports and airlines are unified in their fears over approaching security deadlines as they try to determine the direct and indirect costs of the new US security regime that begins from 2003

The new world of US security is probably here to stay. So too are airline complaints about how much it is costing them. What is less apparent is the way heightened security and increased costs are reshaping the relationship between airline and airports. Airlines appear to be taking greater control over their role in the relationship.

The driving force is the new regime imposed by the US Congress and the newly created Transportation Security Administration (TSA), which has imposed a deadline to have full, unified and consistent baggage screening in place by the first day of 2003. Airport and airline security consultant Cathal Flynn says: "This has united airlines and airports because they are both victims of the congressional mandates that shape TSA." Flynn was the FAA's head of civil aviation security from 1993 to 2000.

Costs pile up

The price airports will pay is far from clear as the industry waits for Congress to decide how much of the bill it will pick up. Estimates for the nation's airport system security costs have reached $9 billion. The revenue side of the equation is changing for airports as they reconfigure. Many are seeing increased spending on small retail items and food service, because of longer waiting times, but bigger purchases, such as luggage, have dropped because of security limits on bags and bag size.

That changes the airport-airline equation fundamentally, says Flynn, because "the costs will have to recouped even if they have put it off for now because they just can't get money out of airlines that do not have it".

The bigger question of how much security is costing the airlines directly is coming into sharper focus, with carriers considering the indirect and sometimes intangible costs to them of the new airport regime. Flynn says that extrapolating the experience of Israel's El Al to the US industry as a whole, indirect costs would reach $40 per passenger per flight departure on top of the direct costs.

American Airlines chairman Don Carty estimates the direct cost to the US industry is over $3.5 billion for 2002. This includes $1.6 billion in the security segment tax, much of which the carriers absorbed because customers would see it as a price hike and resist paying. Carty says: "There was $900 million in increased costs for insurance that the government requires us to hold, nearly $300 million in lost revenue due to government restrictions limiting the mail we can carry, $200 million in forgone revenue for providing seats for federal air marshals, and nearly $200 million for the fortification of cockpit doors."

These figures include nearly $400 million that it costs airlines to carry out services, such as screening catering supplies and materials, that they continue to provide and for which they have yet to be reimbursed by the TSA. Airlines have lost about half of their postal service revenue because of the security restrictions on letters over 16oz (45g). This loss could reach $350 million.

Carty adds to that an estimated $2.5 billion that the industry is losing in annual revenue because of many travellers deciding not to fly to avoid the much-publicised security hassle at airports. This could all account for up to 35% of the industry's pre-tax operating losses for 2002.

Hassle factor

Delta Air Lines chief executive Leo Mullin says it is difficult to calculate the damage done to airline revenues by the "hassle factor", but based on market research, he believes it accounts for "roughly 20% of our revenue drop from 2001 to 2002".

Continental, which posted a $137 million loss in the second quarter, says it paid out $50 million in extra security fees, including the cost of flying federal air marshals. Chief executive Gordon Bethune adds these costs are a major reason why Continental failed to make a profit in the period.

But airlines know they cannot simply blame airports and Congress. Northwest Airlines senior vice-president Dirk McMahon says: "We decided that we had to do as much as we can to control our fate, to control our parts of the airport process. So we accelerated the push to technology out in the airport, and installed 250 more self-service passenger check-in devices on top of the 338 we had before the summer of 2002, and by year-end we will have them in every domestic station and three in almost every station. That cost about $7 million." In cases where Northwest cannot use technology to resolve airport problems, it has adjusted schedules, but McMahon did not quantify the cost.

For Northwest, already committed to such technology, the change was largely one of pace; for other carriers, it has been a new direction. And nowhere has the change been greater than at Southwest Airlines, where the new regime cost $50-$60 million a year in delays, additional staff and extra processing.

Chief executive Jim Parker describes the changes as "revolutionary". The airline has reconfigured its entire boarding process, which had always been a distinctive part of the Southwest brand. New security procedures compelled the discount king to add a step by which fliers could obtain its version of a boarding pass at the ticket counter instead of going into the secure area and then determining their boarding priority.

Southwest will also replace people with automation for the first time in its history. But its $2 million project to deploy IBM kiosks has hit delays. Gary Kelley, executive vice-president and chief financial officer, says: "We haven't finished adjusting for the security process at the gate." The security process has affected Southwest's on-time performance by increasing gate delays, says Kelley, and the carrier has also been forced to take on 1,000 more staff to deal with the airport process. Consequently, productivity figures have suffered.

At America West Airlines, security may cost $60 million a year more than before, including direct and indirect costs, says chief executive Doug Parker. But the indirect costs - related to putting more aircraft on standby or altering schedules - cannot be itemised given the general downturn and capacity and network reductions, he adds.

Airline and airport executives fear chaos in the end-of-year holiday season as the security deadline approaches. Boeing is TSA's lead consultant in working out what individual airports must do to meet the deadline. Boeing Homeland Security and Services chief Rick Stephens says: "I am confident that we're going to create a number of problems at airports. I don't want that to be quoted out of context. What I mean is that as we transition to this, people are going to have get used to a new system and new process for doing things."

Even Stephens is not looking forward to the holiday season and adds: "What are we going to get blamed for at Thanksgiving and Christmas when airports are already a zoo? Airports in many cases will say holiday delays are a direct result of the TSA and I think that will be unfair."

Wrong solutions

Fair or not, the complaints have already begun. Bruce Baumgartner, manager of aviation for Denver International Airport, says: "My main worry is that we have not only TSA, but Boeing their contractor, and Boeing I don't think is sure about what it's doing. They are determined to meet a deadline but they are eager to adopt wrong solutions just so they can meet it. And if we do what they want, it will end up violating local fire and safety code because it will block some fire exits and will force us to have other emergency exits open."

Others see the real culprit for the crisis on Capitol Hill. Lynn Hampton, chief financial officer of the Metropolitan Washington Airports Authority, says: "We wouldn't be where we are if not for Congress."

The heavy hand of the TSA and the overwhelming power of the legislators have brought airports and airlines together in adversity. But will this forced unity between normally feuding parties go away once the deadline has passed? Not so, says Bob Poole of the Reason Foundation, who studies airport security. The next two years lead up to the congressional deadline that allows airlines to try to opt out of the federal workforce regime and, in effect, privatise their security functions.

"Never before have I seen the two so united," says Poole. "I was surprised when 30 airports got together and approached the government for delay, but later when it was over 100 airports, I was astounded at this sea-change in airport-airline relations. It is a probably a good thing, but for the foreseeable future we have simply institutionalised not knowing who's in charge."

REPORT BY DAVID FIELD IN WASHINGTON

Source: Airline Business