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Sunday, July 20, 2003

By Mark Belko, Post-Gazette Staff Writer

When the Allegheny County Airport Authority raised US Airway's rent at Pittsburgh International Airport last month, it was easy to think that airport managers and the region's leaders had lost their minds.

	Related article: Pullout by US Airways would hurt small regional airports

After all, wasn't the goal to reduce the airline's costs?

But the decision to increase the cost for each passenger by $1.48 cents to $9.07 was not the result of wanton overspending, gross mismanagement, or even some in-your-face negotiating tactic.

In fact, US Airways, the dominant carrier with about three-quarters of all flights, really had no one but itself to blame.

It is a basic staple of airport economics that passenger costs go up as traffic volume comes down. And in Pittsburgh, because of repeated cutbacks by US Airways since Sept. 11, 2001, traffic has been going one way -- down.

"We're not raising our costs, they're just cutting flights," Allegheny County Chief Executive Jim Roddey said. "So far, we haven't been able to cut our costs as fast as they've cut flights."

Since Sept. 11, 2001, US Airways has eliminated 143 daily departures at Pittsburgh. Total boardings for major airlines, with US Airways representing the vast majority of them, have fallen from a total of 9.8 million in 2000 to 8.95 million at the end of 2002 to a projected 7.75 million for 2003.

	Online chart: Airport ups and downs

While US Airways boardings have dropped in Pittsburgh, they have increased at its Philadelphia hub from 8.8 million in 2000 to 9.9 million in 2002 and from 11 million to 11.5 million in Charlotte, N.C., now the airline's largest hub, all the result of the airline's ongoing restructuring.

As Pittsburgh traffic has tumbled, the airlines' cost per passenger has skyrocketed, from a low of $5.33 in August 2001, when the airport was on pace for a record passenger year, to $7.26 at the end of 2002 to an estimated $9.07 for 2003. For the month of June, it hit $10.21.

Under the airport's lease with US Airways and other major airlines, profits generated by spending at airport shops and restaurants, car rentals and parking are used to reduce the airlines' costs. But with traffic down, those profits have evaporated as well.

"If you're cutting back, you're raising the cost not only to yourself but also to the other carriers [operating at that airport]," said Stephen Van Beek, senior vice president for policy for Airports Council International--North America, an organization representing airports.

The cost per passenger is a benchmark used in the aviation industry to measure the expense of operating at an airport. It is determined by taking an airport's operating and debt costs and spreading that out over the number of travelers who board planes each year.

The symbiotic relationship between per-passenger costs and airline traffic is one reason state and local officials are pushing US Airways to increase departures and maintain service to at least 100 destinations out of Pittsburgh in exchange for a $263.9 million package of airport savings and capital improvements.

Adding departures and accompanying boardings would be a way for the airline to share in the goal of reducing the airport's costs.

US Airways has threatened to drop its Pittsburgh hub unless it can cut its Pittsburgh costs to a profitable level. It rejected its airport leases before emerging from bankruptcy in March and has given state and local politicians and the Airport Authority until Jan. 5 to renegotiate them.

Authority officials have argued that it was unfair for US Airways to complain about high costs in Pittsburgh, given that they are increasing, in part, because of cutbacks made by the airline.

Authority Executive Director Kent George said the airline never complained about its costs until after it had rejected its airport leases. Until that point, US Airways had said it would honor those leases, and never sought to reduce debt costs while in bankruptcy, George said.

"I think it's unreasonable for US Airways to complain about either per-passenger costs or debt service costs when the facilities and the operations are so much driven by the way they operate or by what they do," George said.

But a US Airways official said debating per-passenger costs misses the point -- even though airline Chief Executive Officer David Siegel has said he would like to see Pittsburgh's per-passenger cost closer to the $1.48 it is in Charlotte, the lowest in the country.

Chris Chiames, US Airways senior vice president for corporate affairs, said it was the $673 million in debt in Pittsburgh that's the problem, not whether the airline is paying $5 a passenger or $10.

To pay off the debt, major airlines operating under airport leases contribute $62 million a year, the bulk of which is paid by US Airways because it is the tenant with the vast majority of flights from the airport.

"It is the debt that is saddling the airport with regard to costs," Chiames said.

Without debt relief, US Airways officials say, there is no way they could bring enough people through Pittsburgh to make the airport profitable. And where people make connections, they say, is not something the airline has total control over; travelers make that decision when booking flights.

Chiames said one reason US Airways had dropped more flights from Pittsburgh than its other hubs is that the Pittsburgh flights were losing money, in part because of the debt and in part because of the region's relatively small local market, which couldn't fill the seats.

Over the past few years, US Airways departures in Pittsburgh have dropped 26.4 percent compared with 10.4 percent in Charlotte and 9 percent in Philadelphia.

"Whether it's for the sake of maintaining the hub or attracting new carriers or existing carriers to expand, it is in the Pittsburgh region's economic interest to make the airport more competitive," Chiames said.

Roddey agreed that debt costs were the main issue in the negotiations aimed at keeping the carrier in Pittsburgh.

"The enplaned passenger cost is not as critical to them as the debt service," he said.

Van Beek said terminals such as Pittsburgh's were built at a time when the major airlines saw nothing but unlimited growth in passenger volume.

The midfield terminal, for example, was built to handle as many as 32 million travelers a year, but the highest it ever reached was 20.7 million in 1997.

Van Beek described such terminals as the "all you can eat" airport model because the more airlines used them, the cheaper they became. But with the emergence of discount carriers and industry downsizing, the model has backfired on the airlines using it, he said.

"Now they're getting the other end of it," he said, meaning the more the airlines cut flights and boardings, the higher their costs go.

Airport costs typically total 4 or 5 percent of an airline's operating costs. But as US Airways and other airlines struggle to survive, every little bit helps, said Darryl Jenkins, director of the Aviation Institute at George Washington University.

"While they're small numbers in and of themselves, the bottom line is equally as small. So anything you can do to tweak it becomes enormous," he said.

Van Beek said the negotiations between US Airways and the state and county were being watched closely in the industry because other airports also are feeling pressure from airlines to reduce costs.

"From the airport perspective, this is sending shivers through airport directors throughout the country."

Van Beek, for one, does not believe the airline's complaints about its Pittsburgh expenses are justified, in part because US Airways controls the cost based on how much it uses the airport.

Plus, he said, the airline agreed to assume the debt it now objects to when it signed on to build the $1 billion terminal, which opened in 1992.

"They're utilizing the facilities they asked to be built," he said. "I don't think it's reasonable to ask the citizens of Pittsburgh and Pennsylvania to backfill that business decision."

But Michael Boyd, a Colorado-based aviation consultant, said it was unreasonable to hold current US Airways executives accountable for decisions made a decade ago, especially given the dramatic changes in the industry and the bankruptcies since the Sept. 11, 2001, attacks.

"That was then. This is now," he said. "I don't know that US Airways is complaining. It simply is making a statement. The world has changed. The industry has changed. As that changes, certain relationships change, certain cost relationships change."

Boyd said the Pittsburgh airport, for which he has high regard, was not alone. Other airports are facing similar pressures, as airlines seek to drive down costs to remain competitive or to stay in business.

"Pittsburgh built a terminal on what they legitimately saw for the future. Things have changed dramatically. They have to look at ways of restructuring the debt, refinancing," he said. "This is a situation, not a screw-up."

At last year's $7.26, Pittsburgh's per-passenger cost ranked slightly to the high end for large hub airports.

At the projected $9.07, it would be in the upper end, lower than San Francisco, Washington-Dulles, Reagan National and Miami, but higher than numerous others, including Philadelphia, Charlotte, Boston-Logan and O'Hare.

George said, however, that some of those airports, including Philadelphia, Logan and O'Hare, are or have been engaged in building projects that will push their per passenger costs above Pittsburgh's over the next four to five years.

Most of Pittsburgh's building is behind it, he said.