Tag Archives: Allegheny County Airport Authority

Weakness in activity at Pittsburgh International Airport continued in October

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Summary: Like the region’s employment recovery through October, activity at Pittsburgh International Airport (PIT) has yet to return to the pre-pandemic levels of 2019 or 2018, for that matter.

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Employment

Private-sector jobs in the seven-county Pittsburgh Metropolitan Statistical Area (MSA) for October 2022 stood at 1.052 million, the lowest October level since 2013 when employment was 1.0469 million. Indeed, in the 22 years from October 2000 to October 2022 private jobs in the Pittsburgh MSA rose a scant 2.3 percent—and they remain below the eight-year ago readings.  

The relatively good gains between 2016 and 2019 represented the best three-year gain in any period since 2000, except for a recovery from the deep 2009-2010 recession.  The 2016 to 2019 gains were wiped out by the pandemic. Then, too, it is noteworthy that jobs statewide have yet to recover to levels posted in 2019. 

The region’s job recovery falls below the national rate and trails far behind the growth in several metro areas, especially in the southern states (as outlined in Policy Brief Vol. 22, No. 32).  While employment gains are not the only driver of air travel demand, it is certainly a very important factor for an airport that is not a major hub.

Population growth has also been very anemic (Policy Brief, Vol. 22, No. 18). 

The loss of the USAirways hub in the early 2000s made a major dent in the region’s employment count as well as causing a large drop in flights and passenger boardings and deplanements at the airport.  While air transportation employment statistics are not shown separately in the MSA data, they are shown separately in the state figures. That data showed a decline of 11,000 air transport employees from 2001 to 2008 with most of that decline undoubtedly traceable to the loss of the USAirways’ hubbing activity at PIT.

Transportation and warehouse employment dropped by 8,300 from 46,100 in 2001 to 37,800 in 2008. Trucking jobs held steady over the same period.

State data also show a strong rise in warehouse employment over the period. These data, taken together, point to an air transportation jobs decline in the region of close to 10,000 over the seven-year period.  That represents a sizable share of the area’s poor jobs performance over the last two decades, both directly and indirectly, because of the multiplier effect that further weakened labor demand in the region.

Activity at PIT

More importantly, recent developments at PIT are not encouraging.  Total passenger counts at PIT remained 13.8 percent behind the October 2019 posting. This is a poorer performance than in September when the total passenger count was 11.8 percent under the 2019 figure.  Meanwhile, Transportation Security Administration national numbers for October showed a much smaller shortfall (5.5 percent) than PIT’s from October 2019’s count of people going through security check points. And, as has been noted in earlier Policy Briefs, the TSA count is a good comparison measure for non-hub airport passenger counts.

But it gets worse. The international passenger count at PIT in October was still 43 percent behind the October 2019 reading and 42 percent below the October 2018 level. This despite the return of the British Airways (BA) subsidized travel in June.

Moreover, airport operations remained 20 percent behind the 2019 October reading and nearly 22 percent below the October 2018 level.  And still more worrisome, cargo handled at the airport, which had picked up strongly in 2020 and 2021, nosedived by 28.6 percent in October below the year-earlier reading.  Even more alarming was the decline in the cargo level—6 percent lower than the October 2019 figure. Cargo handling had been the one bright spot in airport activity data.

More subsidies for British Airways 

In light of the dismal performance at PIT in recovering the loss in passenger count, especially international travel despite paying BA a hefty subsidy to bring flights to the airport, a junket of regional political and business leaders flew to London to entreat BA to add more daily flights. And a deal was struck. BA will add two more weekly flights beginning next spring for $500,000.  Nothing has been said about whether the current subsidy of $1.5 million per year for the current four weekly flights will be continued.

Note the comment by a BA official regarding the new flights, “We are delighted to be increasing our flight frequency from Pittsburgh to London next summer. … As the only airline to operate a direct route between Pittsburgh and London Heathrow, these additional flights will give our customers even greater flexibility when travelling to Britain and beyond.” (BlueSky, a webzine publication of the airport, Nov. 10, 2022).

Interestingly, there was no mention of British customers flying to the U.S. Is it because the overwhelming share of passengers are U.S. citizens traveling to England? This is very likely since the airport has never published the percentages of U.S. and European passengers. And that is important because estimates of the economic impact of the flights rely heavily on the number of foreign travelers to the region and spending money in the Pittsburgh area. Earlier estimates of the impact on the Pittsburgh region of BA flights were totally debunked (Policy Brief, Vol. 19, No. 14).

In the same BlueSky posting, an airport publicist writes, “The flexibility the additional frequencies offer to passengers isn’t just about departure and arrival times at PIT and LHR. They offer more chances to make connections to international routes that aren’t as frequent.”  Thus, even the airport’s own public relations department alludes to the added convenience for domestic travelers making connections at Heathrow.

The CEO of the Airport Authority weighed in on the need for the junket to convince BA to add flights.  “Pittsburgh is a global brand, and we need to tell that story whenever and wherever we get the chance. That’s vital to building partnerships and increasing international air service. Thanks to our partners at British Airways for taking the time to understand and believe in this market.”

If all that is true, if Pittsburgh is a standout market in the world, why is it necessary to go to great lengths to sell it?   How is it that after the time it has been operating at PIT, BA did not see the need to add flights?  Were they unaware of the “global brand” that justified more flights?

Drawbacks to subsidies

Subsidizing local citizens to fly to London is not a good or appropriate use of public money.  Local residents go to England and other points on to the continent and spend money.  Subsidies to the carrier and the ticket revenue for the carrier are dollars leaving the country before the passengers even arrive at their destinations abroad and spend more money.  Many might have traveled without the subsidy using a one-stop connection and most likely would have bought their tickets on a U.S. airline. Many others may not travel to Europe through PIT at all without the BA subsidy.

If subsidizing business travel is aimed at creating sales abroad then the counties in the region (especially Allegheny where the airport is located) should lower any tax that is levied on business so firms would have more dollars to spend on travel. Note the state corporate net income tax is slated to decline in 2023.

Lowering taxes is far fairer to other businesses that don’t have overseas dealings. Indeed, subsidizing companies to do overseas business by subsidizing the airlines is inherently unfair. Just as subsidizing personal travel is likely to benefit residents who are more affluent.  

Conclusion

The Pittsburgh regional economy has far bigger problems than lack of flights to Europe. Indeed, there are many options to get to London on one-stop flights for people who really need or want to go. As noted earlier, regional employment is not expanding, population growth is nearly non-existent, and the core city is essentially living on its past glories.

The problem is fundamental: Pittsburgh is not a business-friendly region.  Labor issues, taxes and the regulatory environment are major roadblocks to achieving the kind of growth many areas of the country are enjoying. 

All the special development programs and subsidizing this or that flavor-of-the-month sector, including air travel to England, are very poor substitutes for an economic climate that is business friendly.

Prospects for gas well output at Pittsburgh International have dimmed

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Summary: In February 2013, the Allegheny County Airport Authority (ACAA) signed a lease with CNX Gas Company LLC to drill wells into the shale formations at Pittsburgh International Airport (PIT).  That lease included bonus payments and royalties for gas produced.  The ACAA, at the time, offered to use the proceeds to lower airline rates.  This Brief looks at the production of those wells, the outlook for production and airport revenue from the operations thus far. Production data come from Pennsylvania Department of Environmental Protection and financial data from the ACAA Annual Comprehensive Financial Reports (2015 through 2021).

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The lease included a nonrefundable bonus payment of $45.1 million to be paid to the ACAA from 2013-2018.  After that the lease became year-to-year with royalties being paid as gas is extracted.  It also contains “ground rent payments” for undeveloped acreage.  In 2021, royalty revenue was $8.2 million and the ground rent payment was $320,000 for total gas drilling revenues of $8.51 million. In 2020 total revenue was only $5.56 million.

Well production

Drilling began in July 2014 when ground was broken on six wells with an additional eight in September.  Twelve more were added in January 2015 for a total of 26 wells.  The six wells from July 2014 began producing in June 2016 and over the last seven months of the year produced a total of 4.9 million Mcf (thousand cubic feet).  Perhaps the delay in production was the result of a steep drop in the price of natural gas.  It fell 38 percent from 2014 to 2015, an annual average of $4.42 to $2.66 per Mcf.  It didn’t surpass the $3 mark until late 2016.  The table below shows annual production totals.

In 2017 the number of producing wells rose to 14 in March as the wells started in September 2014 became productive.  In 2017 the average annual price was $3.11.  The production total rose to 19.9 million Mcf—tripling output with the additional wells.  In 2018, those same 14 wells produced 22.01 million Mcf, the high-water mark since drilling began and a 10.6 percent increase over 2017. 

Then production began to decline.

In 2019, production came in at 16.09 million Mcf—a decline of 26.9 percent from a year earlier.  It then fell even further in 2020 to 11.15 million Mcf (30.7 percent) and again to 8.87 million Mcf in 2021 (20.4 percent).  All output was from the same 14 wells that were drilled in 2014.  Interestingly, none of the 12 wells drilled in 2015 have produced to date.  And in 2019, six of the 12 were made inactive, reducing the number of active wells to 20. 

In 2022, through August (most recent figures), production had reached 5.7 million Mcf—projecting out to just 8.54 million Mcf for the year. This represents a further reduction of 3.8 percent.  Two more wells from the 2015 slate were also made inactive, lowering the total number of active wells to just 18. The lack of output from the 2015 wells, but kept on the active list for several years, suggests they were deemed to have relatively small output and revenue potential and would have required a very high market price to economically justify starting production.  The deactivations in 2019 and 2022 indicate that hopes they will ever be profitable have waned dramatically even as the average annual price of natural gas in 2021 rose to $3.76, the highest average since 2014.

Moreover, given that production of the 2014 wells has fallen continuously since 2018, combined with the facts that no new wells have been started since 2015 and eight of the ones drilled that year have been deactivated, it is reasonable to conclude that the future of natural gas production and gas revenues at PIT is growing dimmer each year.     

Revenues

From the 2021 ACAA annual comprehensive financial report, “Net revenues from the natural gas lease have been used to reduce airline rates and charges and for capital expenditures, including economic development, at the Airport.” 

Upon signing the lease in 2013, ACAA received $7.14 million as part of the bonus payment.  That increased to $9.07 million in 2014 and then $10.19 million in 2015, for a total of $26.41 million without any of the wells producing.  Once production began in 2016, gas drilling revenues were boosted by royalty payments ($3.2 million) and reached $13.92 million.  According to ACAA, through 2016 “all bonus and rent payments covering the initial term were received.”   

The peak revenue from gas was reached in 2017 when ACAA collected $25.98 million from gas production ($15.3 million in royalties) and ground rental payments. Even though 2018 represented the height of gas production, gas revenues fell 26 percent to $19.27 million—$17.2 million in royalty payments—as rental payments dropped. Revenues then fell sharply to $10.12 million in 2019 ($9.8 million in royalties) and then even further to $5.56 million ($5.2 million in royalties) in 2020 before rebounding to $8.51 million in 2021—the lowest gas drilling revenue since the lease was signed in 2013.  The prospects for 2022 appear a little brighter as the price has climbed 81 percent from 2021 (through August 2022). 

As noted above, revenues were pledged to “reduce airline rates,” among other uses. In the explanatory section of the comprehensive financial reports, the ACAA mentions that some of the money is allocated to reducing airline rates.  In 2014 and 2015, the ACAA dedicated about half of the gas revenues to reducing airline rates—$5.2 million of $10.19 million in 2015 and $4.9 million of $9.07 million in 2014.  In 2016 that ratio was a bit higher ($8.4 of the $10.7 million bonus payment).  In 2017 and 2018, a total of $7.2 of $12.8 million was allocated for this purpose. 

The ratios began to fall as the terminal modernization plan was approved in 2017 and natural gas drilling revenues were pledged to be part of the financing plan to pay for the nearly $1.4 billion, and climbing, project.  With drilling revenues of $10.12 million in 2019 and another $5.56 million in 2020, the ACAA allocated $3.8 million to airline rate reduction and $7.9 million in capital projects—most likely the new terminal project. The 2021 comprehensive report does not show how much of the revenues were dedicated to airline rate reduction.   

Conclusion

Natural gas drilling at Pittsburgh International Airport provided the ACAA with a substantial upfront payment but has not provided much in terms of royalties as production has trailed off dramatically since the peak in 2018.  While CNX still has the right to drill more under the terms of its contract, it is uncertain how much more gas reserves are beneath the property in light of the slowing production and deactivation of wells.  In that regard however, the ACAA and CNX came to a new agreement earlier in the year that will permit CNX to drill more wells in the deeper Utica Shale formation over the next five years. The ACAA has agreed to have post-production costs taken from their royalties in return to have more wells drilled with the potential to continue the royalty revenue stream.   

This will become more problematic as the ACAA needs cash to pay for the ambitious and questionable terminal project. With passenger counts not recovering to pre-pandemic levels, operating revenues are not going to cut it alone. Raising airline charges would be self-defeating and it’s also likely another infusion of federal money from pandemic relief will not happen. Money from the Build Back Better legislation is more likely. 

In sum, it looks increasingly likely that PIT’s natural gas revenues will not be a major source of revenue over the next 20 to 30 years to service the enormous debt issued to build the new terminal.

Pittsburgh’s airport woes continue as junket visits England

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Introduction and background: A contingent of Pittsburgh International Airport (PIT) officials, local business and community leaders are in London this week visiting British Airways (BA) to discuss the airline’s activity at PIT.  As per the Sept. 23 Pittsburgh Post-Gazette:

“The Allegheny County Airport Authority and tourism group VisitPittsburgh organized the jaunt to Great Britain to showcase the value of [BA’s four-times-weekly] flight and make the case for its expansion.”

Further quoting the P-G story: “[Authority CEO Christina] Cassotis is hoping the local delegates can convince their overseas audience that the region can support additional international service and destinations beyond London. The purpose is to demonstrate that we have a great business and leisure market, she said.”

To put it as kindly as possible, making a convincing case for expansion and to demonstrate credibly the vitality of the business climate will be very difficult.  British Airways has plenty of its own experts to investigate the viability of markets where it operates and potential markets to enter or where to expand service. 

The Pittsburgh region’s economy and population fall far short of being dynamic or exhibiting strong economic gains. Moreover, passenger counts—both domestic and international—at PIT lag well behind pre-pandemic levels.

Population and employment

As reported in Allegheny Institute Policy Brief (Vol. 22, No.18) the population of the

seven-county Pittsburgh Metropolitan Statistical Area (MSA) in 2020 was 2.6 percent below the U.S. Census count of 2000—two decades earlier. Allegheny County, by far the largest in terms of the metro’s population and home of PIT, lost roughly 42,000 residents from 2000 to 2021, according to the latest Census annual estimate.  Gains in Butler and Washington counties were not large enough to offset losses in the other counties.

Numbers for private-sector employment (a key measure of economic vitality) in the Pittsburgh MSA do not paint a picture of strong positive momentum in the economy.  Indeed, unfortunately, the picture since 2000 is one of long-term weakness with a couple of periods of respectable gains, notably in 2017, 2018 and 2019 with a combined increase of 32,000 jobs. This was the best sustained three-year gain except for the recovery from the deep recession of 2009-2010.  Unfortunately, the MSA’s 3 percent increase from 2016 through 2019 was slower than the national gain of 5 percent.

Even more disturbing, the Pittsburgh MSA private jobs count through August (latest available data) was 37,700 or 3.5 percent below the August 2019 reading. Indeed, the latest count of 1.046 million was the lowest posting since 2013 and stood an incredibly paltry 1.9 percent above the August 2000, 22 year-earlier figure. 

Nationally, jobs had fully recovered from the pandemic in August, standing 1.4 percent above the August 2019 level and over the period since 2000 rose 16.7 percent. It is important to note that even if the 2019 levels were reached, that is not a sufficient interpretation of job strength. Given that national employment had posted a 5 percent gain from 2016 through 2019, if growth had been just 4 percent from August 2019 through 2022, private employment would have been 2.25 million greater than the actual reading.

But to get a more instructive picture of the weakness of the Pittsburgh MSA employment situation, it is useful to look at an MSA that reflects what a region can do with good economic policies in place. That is to say, a region that does not impose a regulatory environment inimical to economic expansion. Those inimical policies were discussed in several earlier Policy Briefs (Vol. 22, Nos. 8, 17 and 32).

For a stark comparison, the Nashville MSA will be used. By July 2021, Nashville had fully recovered all the jobs lost in the pandemic and began adding net gains above the 2019 monthly readings.  In August 2022, private employment was 66,800 (7.2 percent) above August 2019 to stand in sharp contrast to the 3.5 percent shortfall in Pittsburgh. Moreover, employment in Nashville climbed 55 percent from 2000 to 2022, enormously outpacing the barely positive 1.9 percent gain posted over the 22-year period in the Pittsburgh MSA.

PIT passenger counts

Presumably, any carrier, with or without international destinations, that is looking to possibly start or increase service from an airport will want to see data not only related to the economic conditions and population trends in the airport “catchment area” but passenger count statistics as well. Thus, it is almost a certainty that British Airways is already well aware of the lagging performance at PIT.

Total passengers

Just-released passenger counts at PIT continue to show a very weak picture. Total passengers in August remained 16.3 percent below the August 2019 figure. (Note that month to same month comparisons are used because of large seasonal variations in travel).  This followed shortfalls of 18.5 percent in June and 17.3 percent in July, with a three-month (June, July, and August) average deficit of 17.4 percent. 

By way of comparison, Transportation Security Administration (TSA) checkpoint data showed national passenger count to be down an average of 10.5 percent for the three months—an average of 6.9 percentage points lower than PIT’s shortfall. TSA checkpoint statistics are valid comparison for airports that have little or no hubbing activity but would not be for a major hub. Since PIT is no longer a hub, the TSA numbers are useful in contrasting the degree of recovery.  Importantly, the September TSA count was only 5.9 percent below the 2019 number following the 8.6 percent shortfall in August.

International passengers

International passenger counts at PIT remain woefully behind the levels reached in 2018 and 2019. After trailing 2019 levels by an average 61.8 percent in the five months January through May, the June-through-August period saw the shortfall decline to 44.3 percent.

No doubt the resumption of the British Airways flights boosted the June-through-August monthly international passenger average to 16,900, nearly double the April-May average of 8,800. The same pattern existed in 2017 and 2018 when the June-to-August count more than doubled the March-to-May count.  However, in 2019 the rise between the two periods was only 50 percent. It is likely the loss of the Delta Air Lines flight to Paris was a major factor in that decline.

Delta announced they would suspend the flight shortly after the Airport Authority granted British Airways a $3 million subsidy to be paid in two installments, the second of which to be paid this year.  It had been delayed because BA pulled its flights during the pandemic.

It appears likely the renewal of British Airways flights in June 2022 has had a positive effect on international travel numbers. But in the absence of publicly available information on carrier-specific data the exact amount of the boost is unavailable to the public.

Note, too, that there was an unusual occurrence in the May to June domestic passenger totals this year.  For the preceding several years, domestic passenger counts have increased, and fairly substantially from May to June.  It is surprising that in 2022, the PIT domestic passenger count in June fell by more than 20,000 from the May posting. This happened as the international count rose significantly.  A possible explanation is that passengers who were, prior to June, taking a domestic flight from PIT to JFK, Charlotte or another airport and then boarded an international flight to Europe are now choosing the nonstop British Airways flight.

It is important to note that 2019 months are not the best comparison to see just how really weak the August 2022 international passenger count was.  In August 2019, international passengers totaled 25,951. In August 2022, the count was 14,415—a drop of 44.5 percent. However, in August 2018, the international count was 41,384, making the August 2022 count a drop of 65.2 percent. And almost as bad, the decline from the August 2017 reading—five years ago—was 59.5 percent. The 2016 statistics are not available.

In short, the international passenger count at PIT is far short of recovery to the 2019 level and much further still from 2017 and 2018 counts.  Bear in mind, too, that the British Airways flights are publicly subsidized.  Indeed, many international carriers have been subsidized in one form or another in the past. Delta, WOW and Condor were all receiving some assistance to get them to fly out of PIT to international destinations.

British Airways

British Airways has returned to Pittsburgh International after a 27-month hiatus. The carrier had received a $3 million subsidy from the airport for two years of operating a four-flight per week schedule. After almost 12 months of service, from April 2019 to March 2020, only one half of the agreement had been completed. To date, there has been no announcement as to whether the subsidy will be renewed after next June.

Thus, it is not clear whether BA is setting fares lower than they would be without the subsidy or whether the $3 million is basically a bonus payment for operating the flight. Does it prevent losses on the route or increase profitability?  Based on a thorough web search, it appears the only other U.S. airport that has subsidized BA is BWI in Baltimore.  That appears to be the case in light of the absence of any reporting of a subsidy in the news media or otherwise made public.

BA currently serves 27 U.S. markets and appears to be looking at several other, mostly second-tier markets. They might be negotiating subsidies as well.  All the major markets—several are large hubs—have BA service already and there is no reporting of any subsidy. Presumably those markets are profitable enough to keep BA service.

The original announcement of the subsidy was accompanied by an economic impact study that contained logical flaws and was seriously over optimistic.  

Which begs several questions:  What is the junket to London about? The putative reason is to convince BA to start a daily service.  But what will be the offer? More subsidies? BA has publicly stated that it is having trouble finding adequate personnel.  Committing to more Pittsburgh flights would likely necessitate shifting personnel from other flights. There might be weakly performing markets where flights could be cutback and personnel moved but that is problematic because if they’re unprofitable markets they would already be seeing cuts in flights.

In that environment, a large enough subsidy might obtain the desired result. But as we have written many times, subsidizing area residents to fly to London is a huge mistake.  The fares paid go immediately to BA coffers.  Moreover, traveling in England or other points in Europe and spending tourist money is of no benefit to the Pittsburgh region. If there is no subsidy, the free market will determine if this route will be undertaken. 

Conclusion

It is likely the effort to maintain the direct flight to England is more about image and bragging rights.  The hard reality is that Pittsburgh International is currently struggling with seriously reduced passenger counts (domestic and international) compared to the pre-pandemic levels while it builds an expensive new terminal. But as was noted above, the Pittsburgh area is not demonstrating economic vitality in terms of job gains and is experiencing population stagnation.

More subsidized international flights are not the answer to the Pittsburgh region’s economic woes.  Strong growth in the economy in terms of jobs, income and population would create market-driven demand for international flights. The focus of political leaders needs to be on policies that are inhibiting growth.

Non-hub airports such as PIT are not principal economic drivers. They are part of the infrastructure that facilitates the service area’s travel and cargo needs and, in doing so, helps the economy. These airports need to operate efficiently and at the lowest cost possible while ensuring adequate capacity. By being cost-efficient, existing carriers can be induced to offer more flights and new carriers attracted to add service.  Offering subsidies to some carriers is market-distorting and creates unfairness for the unsubsidized.

Will Airport Reconfiguration Justify the $1.1 Billion Cost?

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Summary: The Allegheny County Airport Authority has announced plans to reconfigure the terminal system at Pittsburgh International Airport.  The estimated cost is $1.1 billion.  But is this expensive project justified given the current, or even projected, demand for air travel?  And will the authority be able to finance the project? This Brief explains the difficulties the plan faces.

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In mid-September the Allegheny County Airport Authority released a proposal to reconfigure the terminals of Pittsburgh International Airport (PIT) at a cost of $1.1 billion.  The plan includes a new landside terminal that will be connected to the current airside terminal, a new parking garage and new infrastructure to reconfigure the property.  Needless to say local officials argue the project is necessary to update the facility

Authority officials stress that no local taxpayer money will be used and that it will not have to increase landing or other fees charged to airlines servicing PIT.  Instead, to repay the bonds issued to fund the project, the authority will rely on savings from the reconfiguration, specifically the savings from maintenance costs from the old landside terminal, revenue from airport parking, concession and retail sales, a passenger facility charge and grants (federal and state tax dollars), along with royalties from Marcellus Shale gas extraction on airport property.

A reality fact-check 

The current terminal system was built over 25 years ago to the specifications of US Airways, then one of the largest airlines in the nation.  It was constructed to accommodate more than 30 million passengers expected from US Airways growth at the Pittsburgh hub. Today, after bankruptcy filings and mergers, US Airways is gone, having acquired American Airlines and adopting that venerable name. PIT never saw the passenger level projections that were used to justify the much larger terminal.

In fact, the highest passenger count at PIT was only 19.9 million (2001) while it was still a major US Airways hub.  News reports note that the new facility will be able to handle about 18 million passengers.  Whether or not the 18 million figure is ever reached, the traffic will almost certainly be exclusively origination and destination passengers, as there appears to be little prospect of any airline putting a significant hub operation at PIT.

Since the 2001 peak passenger count, and as the fortunes of US Airways tumbled into bankruptcy and downsizing, annual passenger totals fell through the next several years   dropping to 8 million passengers in 2009.  From 2010 through 2016 the passenger counts ranged between 7.88 million in 2013 and 8.31 million in 2016, with an average of 8.1 million thus far this decade.  The projected total for 2017 is about 8.39 million—slightly above the 2016 level, but still well below the 2007 level.  The harsh reality is that PIT’s slide has lowered its ranking to 48th among U.S. airports in terms of enplanements.

With PIT relying on origination and destination travelers, passenger growth will depend heavily on two factors: the gains in population and expansion of the economy, especially income and employment. Availability of very cheap flights and more non-stop destinations can induce higher demand. However, the effect is limited as shown by the recent experience at PIT.

While the area’s population decline is not as dramatic as it was through 1990, it is still slipping.  The seven-county Pittsburgh metro area’s 2016 estimated population count was 2.342 million—down from 2.356 million in the 2010 census which was down from  2.431 million at the beginning of the millennium. There is little or no indication that the metro area is on the verge of a substantial upturn in population growth.

Further, payroll data shows the area’s employment gains have been very anemic over a long period.  In 2000 average monthly non-farm jobs stood at 1,159,800. By 2016 that number had managed to rise a scant one percent to 1,172,000 jobs.  National growth during this period was 9.4 percent, far from strong, but the period did encompass the massive recession of 2008-2010. In Allegheny County personal income per capita expanded by a mere 2 percent per year between 2007 and 2015, not much, if any, after adjusting for inflation. Thus, the area’s economy has exhibited very slow gains over a long period and surely can offer no optimism that it will suddenly start to rise rapidly driving up demand for air travel.

Much has been made about PIT’s ability to attract low-cost airlines such as Frontier, Condor, WOW and Spirit.  This is offered up as proof that the demand for air travel from PIT is growing.  But it is worth noting that several of these carriers were lured here with subsidies in hopes of stimulating demand.

Frontier Airlines, after only one year, has already announced a reduction in the number of destinations from five cities to just two, and their flights will be seasonal and limited to just a couple of days per week.  Will other low-cost carriers face the Frontier problem, especially those with subsidies when the subsidies expire? Clearly, added competition and carriers have done little to produce an appreciable rise in passengers.

How does PIT expect to pay for the $1.1 billion retrofitting? 

News reports say the authority will use savings from closing the current landside terminal, estimated to be about $23 million.  The most talked about savings would be realized from the elimination of the tram between the airside and landside terminals, people-movers, elevators and escalators, all of which are coming to the end of their useful lives.  The thought is that instead of replacing or repairing these items, it would be more appropriate to build a new landside terminal.  As one aviation consultant was quoted as saying, “You’re going to spend $1.1 billion to save $23 million?  What Wall Street person would ever make that decision?”

Using a standard repayment formula, $1.1 billion in 30 year bonds at 5.5 percent interest, would require annual debt service of about $75 million per year.  With $23 million in expected annual savings from abandoning the current landside terminal leaves around $52 million the authority will have to find to make the full payment.  At the end of 2016 PIT had long-term principal and interest obligations of $209 million through 2031. A 2017 debt service payment of $62.1 million is due followed by a payment of $57 million in 2018. After that payments fall substantially and by 2022 roughly 80 percent of the $209 million in principal and interest will be paid with the remainder to be completed by 2031. And this assumes no additional borrowing, other than for the planned reconfiguration.

Beginning in 2019, the debt service payment decline will, assuming all revenues remain in place and no unexpected expenditures arise, free up  $40 million or so that could be applied to new debt. That number would rise to around $60 million in 2031.

But there are a couple of questions with the scenario implicit in the plans for financing the reconfiguration.  One, how will the net operating revenue and expenses balance move over the next 30 years?  The terminal concourses that are to remain in place and related other infrastructure are almost 30 years old.  Maintenance of those structures or their replacement will be very expensive. Other costs will also rise over the three decades. Will revenues from operations and fees keep pace?  Where are the long term costs and revenue forecasts?

Two, there can be, and are likely to be, troubles with the special non-operating revenue sources listed by the authority as their sources to cover the project cost: gaming money, gas royalties and the passenger facility charge.

When the state’s gaming law was signed in 2004, it included a payout of $150 million to the authority to help with the airport debt. The money was to be paid in equal installments over 12 years starting in 2007.  However, as Policy Brief, Vol. 9, No. 62 explained, the County Executive claimed the authority owed the county $42.5 million and arranged to intercept that amount off the top, leaving $107.5 million for PIT.  According to the latest authority comprehensive annual financial report (2016 CAFR), these payments to PIT began in 2010 with a $14.6 million payment.

From 2011 through 2016, the annual payments have totaled $89 million.  This leaves just $18.5 million of the original $150 million gaming money to be received in the next two years. Therefore, gaming tax dollars will not be available to pay off any new debt. Not unless the Legislature and governor agree to renew the gaming money appropriation for PIT. And given the state’s dire budget problems and other program funding needs, this does not seem likely, especially since the $150 million set aside for PIT was not at all popular with some legislators when that deal was made.  Other parts of the state will want that money allocated to them.

Then, too, revenue forecasts from gas royalties are problematic. When the authority executed an agreement to begin unconventional gas drilling on its property, it received a $46.3 million upfront payment. The authority decided to realize that as non-operating revenue over a five-year period, ending February 2018 (roughly $9.26 million per year).  Thus the bulk of that money has already been received. In 2016, the authority began receiving royalty payments from gas being extracted from the property—$3.2 million.  Obviously, royalties will have to be much greater than $3.2 million to play much of a role in servicing a billion dollar debt.

With more drilling taking place and greater production possibly forthcoming, royalty payments could increase. However, with the price of natural gas suppressed as new supplies are being tapped in Pennsylvania and elsewhere, royalties might not rise as hoped.  Moreover, since the likely term of the construction bonds will be 30 years, it is very probable that aging wells will have become less productive and whether new wells will find other pockets on the property to refresh the gas flow is unknown.

Another non-operating revenue stream mentioned as a funding source is the passenger facility charge (PFC).  This is a charge allowed by the Federal Aviation Administration (FAA) and is currently capped at $4.50 and charged to “qualified … enplaning passengers by airports to finance eligible airport-related projects that preserve or enhance safety, capacity or security of the national transportation system; fund noise mitigation at the airport; or furnish opportunities for enhanced competition between or among air carriers.”

The FAA has to approve the projects on which the PFC can be spent and this could present a problem. Obviously, reducing capacity from 30 million to 18 million passengers is not enhancing capacity. And the planned reconfiguring seems to do little to enhance national transportation security, reduce noise or furnish opportunities for enhanced competition.

According to the CAFR, the authority collected $168 million in the PFCs from 2007 to 2016—an average of $16.8 million per year—with $16.3 million collected in 2016.  Among the FAA approved projects on which this money can be spent is an allowance for “reimbursement for pre-application projects (to be applied to debt service).”  Thus the PFC has been helpful in lowering the old debt from terminal construction.  But will the FAA approve using the PFC revenues for the reconfiguration plan? That will need to be taken care of immediately if it has not already.

Surely, the experience with the failure of the massive spending undertaken for the current terminal configuration to produce a self-funding facility would lead planners to be cautious about claims for huge new projects.  Some reasonable sounding projections of the next 20 years of operations revenue and spending including maintenance and replacement costs for aging equipment and infrastructure along with forecasts of non-operating revenue and debt service loads should be an absolute must. Stakeholders and the taxpayers ought to see exactly what the project portends in terms of financial viability.  It is unlikely that the commonwealth will be prepared to come with another bailout. Indeed, that should not even be contemplated given the amount of money it has provided for roads and access to the airport already.

In sum, a very close, objective, look at what passenger traffic, airport revenues and expenses are likely to be in the future is a prerequisite for proceeding with the reconfiguration plan. The region does not need another big failure to go along with the overly expensive, downsized North Shore Connector project or taxpayer funded stadiums that have yet to deliver promised economic payoffs.

Misplaced Priorities at the Airport

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When the Allegheny County Airport Authority hired its new CEO back in January of this year, they did so with the goal of improving flights and service from Pittsburgh International Airport.  And they paid handsomely for this hire.  In a newspaper interview, she stated that “she hopes to attract more West Coast destinations, more international and regional flights…”

 

Since then some direct flights to vacation destinations were added on discount airlines on a seasonal basis.  Flights to Toronto have begun as well as a business-orientated carrier which started offering specialty flights amid small jets to Indianapolis and Milwaukee with the promise of adding more destinations as demand is warranted.  These flights are based on traveler demand and represent a small fraction of PIT’s origination and destination traffic.

 

But the focus from the new CEO has been on international flights.  They have focused on the Middle East (Qatar) and this week, she is in South Africa attending the World Routes conference to pitch other international destinations from PIT.  However, while on this junket, Delta Airlines has pulled the plug on domestic flights to Cincinnati, while other direct flights via an American Airlines’ regional carrier to St. Louis, and Hartford have also recently been scuttled.  The Cincinnati flight was offered six days a week and according to reports averaged less than 25 passengers per flight.  While a spokesperson blamed this loss on a pilot shortage, the numbers are more indicative of a lack of demand.

 

As we have said in past research, until the local business economy begins to strengthen which should subsequently increase the demand for travel, the problems at PIT will continue.  PIT should not be chasing flights, international or domestic.  If the passenger demand is there, these flights will be chasing PIT.

Allegheny County Airport Authority Involved in Privatization Effort

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The recent news that the Allegheny County Airport Authority is supporting privatization came as a bit of a surprise given the longstanding strenuous anti-privatization stance taken by the current and most recent Allegheny County Chief Executive.  But there it is–news that the Authority is engaging in a privatization effort but not of any operations at Pittsburgh International (PIT). The twist is that the Authority is part of a consortium that has placed a bid to take over the San Juan Marin International Airport in Puerto Rico.  While all the specifics of the request for bids and the bid submitted have not been divulged, the issue certainly raises many questions–and eyebrows.

 

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Garage Privatization Plans: Stuck in Neutral?

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Earlier this year the Mayor of Pittsburgh announced his plan to sell or lease garages and lots, possibly meters as well, in order to get an up front lump sum amount that could both retire the Parking Authority’s debt and make a healthy down payment towards the City’s unfunded pension liability. Soon after, the County Executive likewise floated the possibility of leasing or selling the parking garage at Pittsburgh International Airport as a method to bring down airport debt.

What has happened since then? It is almost November and the gears are grinding slowly. The City’s Parking Authority has heard from a consultant that told them, yes, there would be a lot of interest in a lease or sale of the assets. But there are additional steps to be carried out: an even if an interest is expressed, there is a lot of negotiation to follow. Keep in mind that the City has until 2011 to show a 50% minimum funding ratio for its pensions to avoid a state takeover. One would think there would be more urgency.

The County’s Airport Authority-the entity that would have to sign off on a deal for the County-has yet to publicly discuss the issue at any of its board meetings, according to the Authority’s public records officer. There is no timeline other than a self-imposed one by the County Executive (a May newspaper article said the Executive "…will ask the county airport authority to put Pittsburgh International’s parking garage and surface lots, about 13,200 spaces in all, up for sale this year"); by that measure there is no way a deal gets done this year.