As US airports pay for long-term projects, but airlines push for short-term savings, their relationship has become decidedly frigid

Tension between airports and airlines over charges has been simmering for a while in the USA. But this has now shifted from a handful of local disputes into a broader public clash as carriers target cuts in every corner of their cost base.

US Airways chief executive David Siegel, locked in a landmark fight with the Pittsburgh airport over costs, neatly expresses the view from the airline boardroom. "Airport costs are part of the next wave of aviation industry restructuring," he warns. "The seemingly insatiable public appetite for air travel has led to the development of too many airplanes and too many hubs chasing too few passengers."

Such remarks may be cheered by carriers, but have brought the ire of airports leaders, who say it is time to move beyond the battle of words. Just how to do so is the emerging question. The old landlord/tenant model may be outdated, but the airline response seems to invite more regulation at a time when, overall, they have been arguing for less.

But as airline losses continue, the strife over airport charges is spreading. City officials that placed their hopes for economic growth in their airports, now find themselves accused of building white elephants. Denver, with a $5 billion airport open for less than a decade, has been a case in point. It has found itself caught in a struggle between its two largest users: United Airlines, slimming down in a bid to emerge from bankruptcy, and Frontier Airlines, demanding the right to fill the gap.

United says that its bankruptcy protection entitles it to pay lower costs and to retain the prime gates coveted by rival Frontier. Without the eight additional gates, Frontier says it would go elsewhere to double its growth to 190 daily flights. Demanding that the city resolve the situation, United says it, too, might leave. In response, then-mayor Wellington Webb held a press conference to rip up a United letter making the demands. although his successor reached a deal with the carriers.

United has the power to change airport financing with its threat to the future of special-facility bonds, points out Jessica Stoltz Rudd, an airport expert with Fitch Ratings. United's attempt to abandon some $1.7 billion in bonds issued by five airports to build facilities specifically for United may mean no more airline-tailored financings.

But US Airways, free from bankruptcy since April and so with no such leverage, has become the crucial defining case. In taking US Airways through bankruptcy reorganisation, Siegel took on areas that had been taboo such as employee pensions and airport costs. While the pensions issue has become federal, Siegel is leading the attack on airports in a case that Rudd says will help shape the future of airports.

Siegel says that the industry is a victim of its own ambitions. "Airports and airlines built very expensive and elaborate facilities that transformed airports into destinations themselves," he says. "So just as airlines expanded too much in the last decade, so too have airports."

The airlines also have on their side the fact that overall, US airports are not in critical condition. Rudd says that airport credit ratings have held up remarkably well in contrast to those of airlines. Kurt Forsgren, airport bonds expert at Standard & Poor's, says that in the third quarter, the rating agency had kept stable ratings on 57 airport issues, but downgraded only 14 securities.

Even if airports were to trim construction plans, which few have done, they would face a revenue crunch as airlines shift to smaller aircraft or to regional jets - so reducing seats and take-off weights, which are two of the most widely used bases for fees. While a few airports, with San Francisco as the most visible example, have recently cut fees to attract business, the pricing trend is upwards. Toronto's 27% increase may have caught headlines, but at Detroit's Metro airport, fees are set to rise 21% - only after a planned 26% increase was recently rolled back. On a less dramatic scale, the Metropolitan Airports Commission has considered an increase of about 6% at Minneapolis/St Paul.

Airports argue that their costs only represent 4-5% of an airline's total operating cost. Airlines reply that while airport costs may take a relatively small share of expenses, they are also rising.

Disturbing trend

"The trend is creeping up and becoming disturbing," says Southwest Airlines properties manager Michael AuBuchon. At Southwest, for example, airport cost as a percentage of unit costs have risen from 5.7% to over 6.8% since 2000, AuBuchon told an American Bar Association forum. When airlines like US Airways measure their losses in millions per day, even a percentage point is plenty.

At Pittsburgh, US Airways must help pay off $500 million in airport debt. Without this burden, says the airline, its operating costs there would fall from $9 to $2 per passenger. Airport officials and others stress that US Airways specified in great detail the facilities that made the airport what it is, white elephant or not.

The Airports Council International-North America (ACI-NA) recently formed a task force to work together with airlines to create a new relationship and seek out a new framework policy to alter the long-standing regulations that govern most every airport activity.

Mark Reis, deputy managing director of the Seattle-Tacoma International Airport (SeaTac) and the chairman of the ACI-NA panel, says that the airports must prepare for "a multi-year sea change in the airport-airline relationship as the airline crisis continues".

Timing is exactly the issue that is at the heart of the increasing gulf between airports and airlines, says ACI-NA senior vice-president for policy and strategic development Steve van Beek. "The airports have to plan and budget for billions over decades; even $100 million over a year or two is short-term planning," he argues. "By contrast, the airlines are being whipsawed by fundamental economic changes that assert themselves in terms that demand a short-term, even a monthly, response."

At SeaTac, for instance, the airport was moving from a 30-year-plus agreement to one of a shorter term of seven to 10 years, just days before the 11 September attacks, says Reis. "That changed everything," Reis says. Now after running on status quo, Seattle is close to a short-term user agreement. "With a two- or even a three- or four-year contract, you may be negotiating constantly," says Reis. That may have the unintended effect of causing airlines and airports to communicate ever more closely than in the past.

The ACI-NA economic affairs committee is looking at issues such as greater freedom in the use of departure fees or Passenger Facility Charges (PFC) collected by most US airports from most domestic passengers. There are strict limits in how the proceeds may be used, that have not been changed since airline deregulation, van Beek notes.

They have included a prohibition against using the PFC funds to pay off bonds debt. The airports want this freedom in paying off debt and, in general, says Van Beek, "more ways of loosening strings on ways PFCs are raised". Kevin Cox, senior vice-president and chief operating officer of Dallas/Fort Worth International, says reclassifying airport issues as public-use instead of private-activity bonds would lead to significant tax savings.

Policy drive

Congress would face resistance if it tried to exercise the power to redefine the relationship. As Siegel says, every airport is different, and an industry-wide, national policy is inappropriate. The airports lobby is reluctant to seek a basic rewrite of the statutory framework and instead seeks to construct a new policy by degrees.

If no general policy is forthcoming, airlines and airports will be left to their own devices. Even benchmarks present problems. Measuring the balance of benefits in the airport/airline equation is nearly impossible. Van Beek says: "Costs of operation and cost per enplaned passenger are different and do not always consider differences such as climate and weather." Rudd notes that some airports bundle in fees for telecommunication, clerical and janitorial services, while others charge separately.

Deep down, the airline-airport dispute is institutional and it is about control of the territory. "When the airlines say it's not enough and try to tell us what our business model should be, that's a pretty fundamental problem," says Reis at SeaTac. Salt Lake City Airport attorney Jodi Howick says she is troubled by a "lack of willingness" from the airlines" to share their burden of risk but desire to maintain control".

Laura Einspanier, an American Airlines vice-president of corporate real estate, admits to the charge. "We do try to tell airports how to run their businesses, even though we don't do such a great job of running our own," she concedes. Still, in the words of Van Beek at ACI-NA: "The world is changing out from under us and we are sitting around arguing about these things."

Source: Airline Business