WOW, what a turn of events at PIT

Summary: Bad news continues to come for Pittsburgh International Airport in 2018—from airlines not meeting expectations or others canceling flights or ceasing operations.  The common thread for these events is the presence of subsidies which were offered that distort the marketplace.

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Pittsburgh International Airport (PIT) is having a very tough run.  At the end of November the Allegheny County Airport Authority announced that Qatar Airways’ cargo flights from PIT failed to generate their projected levels of cargo carried and thus obligated PIT to pay a “support fee” to the airline.  Then it was announced that WOW Airlines, another airline collecting PIT subsidies, is not offering flights to Iceland and from there to Europe after mid-January 2019.  This comes on top of the news just a few months ago that PIT is suing OneJet to recoup a loan. Shortly after that suit was filed, OneJet suspended all flights.  Then Delta announced it was cancelling its seasonal flights to Paris.  It’s fair to say that PIT has been hit with a run of very bad news during the second half of 2018.

We weighed in on the OneJet saga (Policy Brief Vol. 18, No. 32) and the decision of Delta to stop its seasonal flight to Paris (Policy Briefs Vol. 18, Nos.31 and 41) which occurred shortly after the Airport Authority announced it was giving a $3 million subsidy to British Airways to provide service to London beginning in the spring of 2019.

The Qatar Airways case is a bit different in that instead of receiving a subsidy to transport passengers to destinations previously unserved by other airlines—the Airport Authority’s justification for subsidizing OneJet, WOW, British Airways, Condor, etc.—Qatar was subsidized to carry cargo.  Before Qatar began operating at PIT in October 2017, the announcement of the added cargo service was accompanied by the usual enthusiasm and the promise of turning PIT into a logistics center.  News coverage of Qatar’s cargo service even mentioned that it might aid in attracting Amazon to the region.  Evidently, it was not a factor since Amazon is not coming to Pittsburgh.

Consider this:  in terms of cargo tonnage, PIT is ranked as the 53rd largest airport in the country by the Federal Aviation Administration, based on landed weight in 2017 (470.1 million pounds—roughly 235,000 tons).  Ten years earlier, in 2007, the airport ranked as the 48th busiest with 492.2 million pounds (246,100 tons) of landed cargo.  While things may be looking up2017’s landed cargo weight was 4 percent better than in 2016it still has not caught up to where it was before the last recession.

The Airport Authority took a gamble on Qatar Airways being able to boost PIT as a cargo center and lost.  From the news report in September 2017 it was claimed that Qatar planned to transport 200 tons of cargo to and from Pittsburgh each week from Doha to Luxembourg to Atlanta and then Pittsburgh.  Bear in mind that at the 2017 tonnage level, PIT averaged over 4,500 tons of landed cargo per week. So at the planned 200 tons per week Qatar would account for about 4 percent of PIT cargo handled.

Under the arrangement the authority was obligated to pay Qatar a “support fee” of $744,000 every six months if the carrier failed to average 480 tons of cargo per month—about half the planned 200 tons per week. It never came close to 480 tons. The authority paid the airline two installments for a total of $1.48 million for the year.  According to recent news, the best month for the airline netted only 180 tons (October 2018) and before that 163 tons (October 2017).  In June 2018 only 99 tons were carried with a further drop to only 61 tons in September.  The route was even changed to go through Chicago instead of Atlanta and two sales agents were hired to boost cargo totals and it still was not enough.

While Qatar is still operating at PIT, presumably without the subsidy, there have been news reports stating “that could potentially change if another deal is reached between Qatar and the authority.”

The authority still has dreams of being a logistics center—but at what cost?  The other, non-subsidized cargo haulers such as FedEx and UPS are at PIT and offering service because the market is strong enough they can do so profitably and without subsidies.  How will they react if Qatar is given additional subsidies to compete with them?  Will they ask for subsidies as well? The Airport Authority may have painted itself into a corner in their attempt to manipulate the market.

WOW Airlines’ decision to stop offering flights past mid-January was not a surprise but speaks to the lack of real demand for flights to Europe.

WOW has already stopped flying out of Cleveland and Cincinnati, with service lasting only from May to October from the latter, and will cease operating out of St. Louis in January, again after a brief stay of just eight months.

According to a Cleveland news report, WOW’s statement noted that the routes did not perform as well as hoped and that load factors were not achieving target levels.  Similar reasoning was used when pulling out of St. Louis while high cost and low profits were reasons for leaving Cincinnati.

WOW committed to Cleveland in August 2017, shortly after committing to PIT (June 2017).  Both airports subsidized the airline.  Cleveland offered $1 million over two years while PIT offered $800,000 over two years. St. Louis also offered $800,000 over two years but due its short time in that city, WOW failed to qualify for the agreed-upon subsidy.  News concerning the cessation of Cincinnati flights did not mention whether subsidies had been given to the carrier.

In Cleveland, WOW competed head-to-head with Icelandair with bad results.  According to another Cleveland news article, Icelandair was in talks to purchase WOW but those talks failed and the merger was called off in late November, just before WOW announced it was cancelling service at PIT. The article notes that with the failed merger, WOW’s “future is up in the air.”

So after an aggressive expansion campaign in 2017, and collecting taxpayer subsidies, WOW’s future is very much in doubt at the end of 2018.  It seems unlikely the airline with resume flights at PIT anytime soon—if ever.

Propping up business enterprises with public funds is not only a high-risk practice but it represents interference in the marketplace and begets ever more subsidies undermining the role of markets. This is especially egregious in the effort by PIT to artificially create travel to certain destinations by underwriting the cost of the fares.

It is folly on its face. Because to be truly successful in terms of sustaining adequate passengers loads for the flights, the subsidies would have to go on forever given that the real underlying demand is not there.   Perhaps the Airport Authority will learn a valuable lesson from 2018’s embarrassing failures and all the money that it has wasted.

The Airport’s Misguided $3 Million Subsidy to British Airways

Summary: On July 25, Pittsburgh International Airport (PIT) officials announced that British Airways would begin nonstop flights from Pittsburgh to London’s Heathrow airport. $3 million in subsidy is being provided to the airline to offer service at PIT.  This Policy Brief describes the deep flaws in the subsidy of British Airways.

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British Airways is set to begin flights in April 2019 with one flight per day on Tuesdays, Wednesdays, Fridays and Saturdays. Flights will arrive at 8:15 p.m. and depart at 9:50 p.m. PIT will become the 27th U.S. destination for the carrier and is by far the smallest airport in terms of enplaned passengers (ranked 47th in the U.S. in 2017).

To get the airline to resume operations at PIT after a long hiatus the Airport Authority will pay British Airways $1.5 million each year for two years. This after handing WOW Air $800,000 to fly to Iceland and on to Europe and $500,000 to Condor for seasonal flights to Germany. Note, too, that American Airlines offers one-stop service to London through Philadelphia and Charlotte with several flights to choose from each day. Those airports are American Airlines hubs and can gather travelers from many cities to fill planes flying to Heathrow. Then, too, American is already posting fares at PIT to match the British Airways fares for next April.

The obvious question—will the British Airways service create new passengers at the airport or take them away from existing flights, some of which are receiving airport subsidies? According to the British Airways spokesperson, there is pent-up demand for travel to Europe. If that’s the case, why are subsidies necessary and why haven’t U.S. airlines jumped at the chance to offer nonstop flights to serve the pent-up demand?  Something does not add up here.

Indeed, the only possible justifiable reason to subsidize any carrier is to create demand by foreigners to fly to PIT. Subsidizing passengers to fly out of the country on a foreign carrier to spend money as tourists abroad is folly.

And that leads to the worst part of the airport’s presentation announcing the subsidy arrangement with British Airways. Airport executives said the authority estimates there will be a $57 million economic impact resulting from the British Airways presence.  To be clear, the economic impact estimates were provided in a study prepared by the EDR Group of Boston.

Apparently, most of the estimated impacts in the EDR study are based on assumptions about non-U.S. passengers using the flights. The study does not provide figures for spending on baggage handling, gate services, or purchases of fuel, food and beverages. EDR assumes 40,562 arriving and departing passengers annually on 234 roundtrips (81 percent occupancy).  Presumably those figures are from British Airways. Of those, 29 percent (11,763) are assumed to be from the United Kingdom or other Europeans whose destination is PIT and are not connecting to another city. How the 29 percent figure was determined is not explained.

Spending by the UK/European visitors in the Pittsburgh region seems to account for the bulk of the economic impact of the carrier’s flights. All told, the study predicts the 234 yearly roundtrips will lead to 564 added jobs in the 10-county Southwestern Pennsylvania region with average worker income of $37,776 and a total labor income boost of $21,306,000. This will be accompanied by a value-added increase of $33,879,000 according to the study. The $57 million economic impact figure quoted by airport executives is for gross sales and not net value produced.

Before evaluating the study estimates in more detail, it is important to note three large potential differences in economic impact depending on passenger count assumptions. Obviously, the total of 40,562 passengers matters because it will determine the amount of services needed at the airport. The assumption of 29 percent (11,763) non-U.S. passengers is critical because that drives the bulk of the local economic impact. And third, the British Airways passenger count assumptions do not factor in the percentage of travelers that would have flown other airlines to and from England or Europe.

Note that most of the projected new jobs in the study will be at restaurants and hotels as a result of the increase in foreign visitors to the region. Bear in mind, however, that 11,763 visitors to the region over 365 days is an average of only 33 per day.  Even if they stay seven days on average that represents only 82,000 hotel or other accommodation room nights. The city alone has around 2.6 million room nights available per year and the rest of the region likely has at least half that many. Thus, UK/European visitor stays would make up only two percent or so of the region’s available room nights.

And in that regard, it is highly improbable that a two percent uptick in room nights would create a commensurate number of new hospitality jobs. Indeed, stats from “The Economic Impact of Travel and Tourism in Pennsylvania 2016”, prepared by Tourism Economics a division of the Oxford Economics Company, show that for Allegheny County in 2016, on average, $143,297 was spent by tourists/travelers for each job in the tourism related industries. If that figure is still anywhere close to the present ratio, the 11,763 visitors would have to spend over $80 million, or $7,000, each to produce 564 new jobs.

What’s more, most newly created jobs resulting from these foreign travelers would likely be low-paid hotel room attendants and restaurant wait staff for which pay levels are about $23,000, a far cry from the $37,776 pay level used in the EDR report. The figure EDR used for average worker pay would include salaries of managers, sales reps, engineers, security, repairmen, etc. It seems extremely unlikely that additional staff in these higher paid categories would be needed to handle an average of 224 people per night—assuming seven-day stays per visitor—at all the hotels in the 10-county region or even if they are concentrated in Allegheny County hotels.

And it gets worse. There is no estimate of how many of the 28,800 local passengers will be additional travelers to the UK/Europe or will be passengers that would have traveled on other airlines such as the already subsidized and very inexpensive WOW Air or from folks who would have flown one stop on American through Philadelphia or Charlotte—or United through Newark or Dulles. But it is almost certain that a large percentage will be passengers that would have taken other carriers. Likewise, it is not known how many Europeans will use British Airways instead of American or some other airline to come to Pittsburgh. If as few as half of Pennsylvania travelers to Heathrow are net new passengers and half of UK visitors are net new travelers that would mean the net effect of British Airways flights would be 15,000 more locals headed to London with 5,900 additional UK or other Europeans coming to the Pittsburgh area. Other assumptions about the ratio of new additional to total passengers could be made but this one will serve to illustrate the point.

If 5,900 is a better measure of the net additional UK/Europeans visiting Southwestern Pennsylvania, then the impact on the economy will be far lower than even a realistic estimate of the impact of 11,763 visitors, which the EDR estimate clearly was not.   Consider, too—assuming foreign visitors to Southwestern Pennsylvania spend about the same as local travelers spend abroad—that the outflow of dollars from the region to foreign-owned enterprises caused by 28,800 local travelers flying to London and perhaps visiting other European destinations will be far greater than the inflow of money associated with 11,763 foreign visitors to the region.  Using the EDR estimate of 29 percent of the passengers to be UK/Europe residents—which seems high—then U.S. residents make up 71 percent, a ratio of almost 2.5 to one. Thus, spending by Pennsylvania travelers would be 2.5 times greater than foreign British Airways travelers to the Pittsburgh region. That is not a win for the region. Indeed, it is just the opposite. Moreover, if the percentage of UK/European travelers turns out to be only 20 percent of total, the ratio of U.S. spending abroad to foreign spending in the region rises to four to one. And so forth if the percentage of foreign passengers is even lower.

Then too, the money spent by local residents to fly on British Airways will end up in that airline’s bank account.  And for that matter so will all the fares purchased by UK/European passengers. Using British Airways’ estimate of 28,800 Southwestern Pennsylvanians (and maybe some from out of the area) who will pay a low-side estimate of $1,000 or more for the trip means British Airways will collect $28,800,000 in fare revenue from area residents. And those dollars are leaving the region even before the travelers land in England. Note that British Airways’ basic economy fares at $716 will be available but these fares are accompanied by fees for luggage. And, the passengers cannot select their seats and must board last. Prices are significantly higher for other seat classes. The $1,000 figure is used for demonstration purposes as an estimate of average fares but the actual average is likely to be significantly higher and the regional outflow of dollars higher as well.

Even if half the passengers would have flown other airlines absent the arrival of British Airways, the British carrier would still collect $28,800,000 in fare revenue. And if average fares for the other carriers are close to British Airways, they would lose almost $15 million in revenue. Obviously, any reductions in U.S. airline revenue will lower the economic benefits of the arrival of British Airways.

The fact that PIT is not a major hub and that the area is not world famous as a tourist destination—certainly not a on a scale such as Orlando, Miami, Las Vegas, Tampa, Phoenix or even New Orleans—makes it harder to induce UK/Europeans to fly to PIT as tourists.

All these factors make the airport’s $3 million misguided taxpayer investment unlikely to ever pay for itself unless British companies with significant investment and potential employment that otherwise would not have located facilities in the region decide to place operations in Southwestern Pennsylvania.  And in the meantime, with the most probable effects of the subsidy being to damage competitors while increasing the net outflow of resources from the region, it is hard to see any upside to handing over tax dollars to the airline.

A Comparative Analysis of Pittsburgh International Airport Passenger Data

Summary: From 2015 to 2017 flights and passenger counts rose at Pittsburgh International Airport. While the numbers are certainly much improved, are they better than the performance at similarly sized airports? This Brief finds the Pittsburgh gains to be about average relative to the study group and well short of the best performers.

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A Policy Brief from earlier this year looked at the passenger data from the U.S. Department of Transportation and compared the performance of Pittsburgh International Airport (PIT) to that of similarly sized airports around the country.

But when that Brief was published data for domestic passengers in 2017 covered only through October.  The data for domestic passengers have been finalized for 2017 which enables a full-year comparison.  Domestic travelers account for the vast majority (98 percent in 2016) of airline passengers at PIT and will be the focus of this Brief.

The data cover origination passengers—the starting point of a trip—and destination passengers—the farthest point of travel from the origin of a trip of 75 miles or more (as per U.S. Department of Transportation criteria).

Based on information as of October, it was noted that passenger count at PIT had moved higher. The full year of data did not change that finding.  Predictably, local officials are touting the recent gain. However, as shall be shown in this Brief, some perspective on the latest uptick in passengers is called for.

In 2015 the number of domestic origination and destination passengers (O&D) using PIT was just above 7.61 million.  The count for 2017 was 8.34 million, an increase over the two years of 9.7 percent.  Bear in mind that PIT’s 8.34 million O&D passengers represent a mere 0.56 percent of the national figure of 1.483 billion.  PIT’s percentage growth over the two year period is better than the total for all airports (6.55 percent).

Interestingly, the two year gain at the major airports (the busiest 30) was only 5.5 percent with the remaining airports posting a nearly 9 percent higher count. The extent of concentration of airline flight O&D is demonstrated by the fact that the 30 highest passenger count airports account for 69 percent of all domestic O&D passengers. Nonetheless, faster growth appears to be happening at the smaller airports, perhaps because there is more capacity for additional flights. Note that PIT ranked as the 48th busiest airport in terms of enplanements (2016).

Of the 15 similarly sized airports—those ranking 38th through 52nd in the Federal Aviation Administration’s ranking by 2016 enplaned passengers—Cincinnati experienced the biggest jump in O&D at 25 percent, and ranked 52nd,  followed by San Jose (up 23.4 percent, ranked 40th) and Raleigh (up 14 percent, ranked 39th).  PIT’s 2015 to 2017 increase ranks ninth best in this group of 15 comparable airports.  San Juan, Puerto Rico (down 3.4 percent, 43rd) Santa Ana, California (up 3.8 percent, 41st) and Fort Meyers, Florida (up 4.9 percent, 45th) recorded the weakest two-year performances. Of course San Juan was beset by problems with the 2017 hurricane season that undoubtedly reduced air travel sharply. The average growth rate for the 15-airport sample is 10.5 percent.

Another metric of airport performance is the number of O&D flights at each airport.  PIT’s supporters point to a rise in number of flights being offered, but again how does that stand up to the activity at similarly sized airports?

From 2015 through 2017 the number of O&D flights at PIT rose by 2.8 percent.  For the 15-airport sample the average growth rate to O&D flights is four percent.  For all airports around the country that growth was more subdued at just 1.4 percent.  At the major airports the gain was a bit better at 1.5 percent while the remaining airports had O&D flight growth of just 1.3 percent.  In the group of 15 comparison airports, PIT’s growth in flights ranks ninth.  At the top is San Jose (25.4 percent) and Sacramento (12 percent, 42nd) while San Juan (-13 percent) and Milwaukee (-3 percent, 51st) sit at the bottom with drops in traffic. In fact five airports from this group had either no gains or declines.

An important measure of airline productivity is the “load factor.”  Load factor is defined by the airline industry as the ratio of passenger miles flown to the number of seat miles available.  For originating flights across all airports the load factor for 2017 was 84.57—down slightly from the 2015 level of 84.98.  For airports ranked in the top 30, the origination load factor in 2017 was 85.43, down from 85.79 in 2015 while for the remainder the factor was 81.99 down from 82.46.

In 2015 PIT had the lowest origination load factor of the 15 airports in the comparison group at 79.07. In 2017 the load factor at PIT edged up to 81.2, placing its ranking at third worst just ahead of Cincinnati (81.07) and Columbus (80.37).  San Juan had the highest load factor in both 2015 (89.19) and 2017 (90.97), while the average for the comparison group stood at 82.51 in 2015 and 83.14 in 2017.

Destination load factors are about the same as origination load factors, as one would expect.  The load factor for PIT’s destination flights stands at 81.24 up 2.4 percent from 79.31 in 2015.    While this percentage rise is respectable, the load factor remains low compared to the all airport total of 84.57 and the ratio of 85.55 posted at major airports.  PIT’s 2017 load factor was better than Columbus (81.07) but trailed the rest of the airports in the sample. The sample average in 2017 was 82.78 for destination flights.

The relatively low load factor at PIT for both O&D flights points to substantially more unfilled seats than the national average as well as 2.4 percent more unfilled seats than the comparison group average. This relatively low load factor is almost certainly a consideration in decisions about adding flights. If underserved markets for Pittsburgh area travelers can be ferreted out, there might be further expansion.  Otherwise gains in passenger counts will depend heavily on growth in the population age groups that have high propensities to travel by air and on the growth of employment and incomes in the airport’s service area.

However, as has been documented, officials in charge of PIT don’t necessarily rely on market forces alone to help airlines make decisions.  For example, a late January news article noted that in 2017 PIT paid out $3.4 million in incentives to offer passenger service to five destinations and cargo service by a Middle Eastern carrier.  OneJet also received a million dollars to begin service over the next two years and Allegiant Air has begun service to Charleston, S.C. with a “small marketing” incentive.  Unfortunately, six months into the cargo flights things are not going well and the airport may be on the hook for $1.5 million in wasted subsidies—a glaring example of how ignoring market forces and looking for headline grabbing announcements can be misguided and very costly.

More unfortunately, there seems to be no sign of ending carrier subsidies.  Subsidy-happy airport officials must have warmly welcomed the Legislature’s indefinite extension of the $12 million per year in gaming money that was about to come to an end.

The bottom line:  PIT’s flights and passenger counts have risen in recent years.  But other airports of similar size have seen more improvement than PIT in key gauges of activity. Plus there has been a significant rise of air travel nationally that has benefitted most commercial airports.  In short, the airport needs to be a little less self-congratulatory about its better numbers.

Passenger Count Grows at Pittsburgh International Airport

Summary: In late January, Pittsburgh International Airport (PIT) released passenger numbers for 2017.  Total passengers enplaned and deplaned at PIT last year reached 8.988 million—8.16 percent growth over 2016’s 8.31 million.  While those in charge of PIT are busy congratulating themselves, perhaps some perspective is in order.

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PIT’s passenger count reached the highest level since 2007 when it reached 9.822 million. PIT’s troubles over the years have been documented by Institute Policy Briefs, from the high debt levels incurred to build the current terminal to the financial struggles of US Airways and its dramatically reduced activity at PIT. Rising passenger counts since 2013 are surely welcome news.

2017’s jump of over 8 percent compared to 2016 is the largest yearly gain this century.  But is this significant rise unique to PIT or are other airports seeing similar boosts in passenger totals?  Using U.S. Department of Transportation (DOT) data, PIT’s performance can be compared with other similarly sized airports.

DOT airline passenger data for 2017 are available only through October.  So for purposes of comparison to 2016, all airport data, including PIT data, will use cumulative passenger counts through October of both years.  Also this Brief will look only at domestic activity, that is, only those travelling within the country. Since DOT international data are available only through July 2017 and international passengers at PIT only accounted for 0.6 percent (23,762 of 3.89 million) of total enplaned passengers in 2016, the most meaningful comparison of air travel at PIT to other airports is the domestic passenger count.

For all U.S. airports the number of domestic passengers enplaning in 2017 grew by 2.76 percent over 2016 levels.  However, it is noteworthy that at major U.S. airports—those ranked in the top 30 in terms of enplanements—passenger count rose only 1.94 percent in 2017.  For all other airports the gain was higher at 4.65 percent.  Thus, the nation’s largest airports grew at a slower rate than the smaller ones, perhaps because they are already at or near capacity.  Note that PIT ranks as the nation’s 48th-busiest airport in terms of enplanements and accounted for 3.87 million of 720 million, or 0.54 percent of 2016 domestic enplanements in the U.S.

Looking at airports close to PIT in size, those ranked from 40th busiest (San Jose) to 52nd busiest (Cincinnati), only two had a decrease in enplaned passengers—Santa Ana, California—John Wayne-Orange County (down 1.5 percent) and San Juan’s Luis Munoz International Airport (considered a domestic airport, down 1.1 percent).  Cincinnati had the largest passenger count increase in 2017 with a jump of 16.1 percent followed by San Jose (13.8 percent) and Cleveland (9.2 percent).  PIT’s 7 percent rise, going from 3.23 million through October 2016 to 3.45 million through October 2017, was the fourth best just above Sacramento (6.4 percent).  Thus, PIT’s performance in 2017 was a nice improvement but well below the gains posted at Cincinnati and San Jose.

Another brag item mentioned by PIT officials is the number of flights that have been added.  Again DOT data for domestic flights (year-to-date through October 2016 vs. year-to-date through October 2017) provides some perspective.  Flights at PIT rose 3.2 percent during the period, increasing from 43,624 flights through October 2016 to 45,028 through October 2017.

For all airports in the country the number of domestic flights was virtually unchanged (down 0.2 percent).  Flights at the top 30 airports fell slightly more (down 0.3 percent). For the remaining airports the combined total flights were virtually unchanged.

Again, looking at the airports ranked from 40th to 52nd, the largest gain in domestic flights occurred at San Jose’s airport (14.1 percent).  Five airports had losses with San Juan having the greatest decline (7.7 percent) which is no doubt related to a very active 2017 hurricane season in the Atlantic (the number of flights for September and October were cut by a quarter).  PIT’s increase of 3.22 percent is the 5th largest rise of the 13 airports in this list—again not bad.  But the notion that PIT is a world beater in obtaining flights ignores the fact that other comparable airports are doing just as well and some are doing it better.

Interestingly, one brag item for PIT is the number of international flights offered.  As mentioned above the DOT data for international flights is available only through July 2017.  Through July 2017 PIT had 1,070 international flights, a decrease of 7.75 percent from the 1,160 international flights taken through July 2016.  However it is up 40 percent over 2015’s number (through July).

To be sure, the increase in both flights and passengers at PIT is encouraging for an airport that has had little to cheer about this century, especially in the context of a being in a regional market with no population growth and mediocre job gains.

One final metric to consider is what the airline industry calls the “load factor.”  Load factor is the ratio of passenger miles flown to the number of seat miles available.  For all airports in the country in 2017 (through October) the load factor was 84.53.  For the 30 largest airports it was 85.30.  For the remainder of airports the load factor was 82.35. Neither of these load factors changed much from 2016.

The load factor at PIT in 2017 (through October) was 81.09 percent—a slight decline from 2016 (81.38) despite the pickup in enplaned passengers. Of the airports ranked by size from 40th through 52nd, PIT’s load factor was the second lowest of the group, above Cincinnati (80.92) and just below Columbus (81.11).  The highest load factor was San Juan (90.33) followed by Kahului, Hawaii (87.13) and then Santa Ana, California (84.52).  With PIT’s load factor ranking amongst the lowest of its peer group, there would appear to be a weakening incentive to add more flights.

Finally, consider the amount of money Allegheny County’s Airport Authority has given to airlines to offer flights at PIT.  A late January news article noted that in 2017 the authority paid out nearly $3.4 million in incentives to airlines to offer passenger service to five destinations and cargo service to the Middle East. On top of that, OneJet also received a million dollars to begin service to 10 new destinations over two years.

The authority’s CEO shrugs off criticism of doling out money to airlines saying it’s the cost of doing business in the industry.  And that’s a sad commentary about the industry as other airports play the same game.  For example Delta will receive a subsidy to fly from Indianapolis to Paris (as it does from PIT for a similar flight) and WOW Air, also a recipient of PIT subsidies, will begin service from Cincinnati and Cleveland this May thanks to taxpayer money.  But the question remains: how are subsidies that, in effect, lower passenger ticket prices or lower shipper costs compared to what they would be without the subsidy, good for taxpayers? It is like subsidies to sports stadiums that enrich owners and make tickets more affordable than they otherwise would be.  This is very poor public policy.

While PIT and county officials are pleased with the uptick in both passengers and flights offered, is it a sign that these subsidies are working?  How much of the increase in passengers at PIT is due to a general rise in air travel demand and how much to the subsidized added service?  Since the majority of comparable airports also had increases in enplaned passengers, it is quite likely a growing national economy that is spurring air travel that gets much of the credit for 2017’s gain.  Once the subsidies are gone (if they ever are), will the subsidized flights disappear as well?  Airlines are not in business to lose money and low or falling load factors accompanied by the end of subsidies could and probably will lead to some reductions in service.

Local demand for air travel depends on the size and income of the population. As we have been saying for years, once the Pittsburgh region’s economy and population starts to grow appreciably and people have the disposable income to fly, the demand for travel at PIT will increase without subsidies and the airlines will respond accordingly.

Will Airport Reconfiguration Justify the $1.1 Billion Cost?

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.

A WOW Question: At What Cost?

Summary:  The announcement of two new international airlines beginning service at Pittsburgh International Airport in 2017 has been applauded by local officials and the media.  However, these two new airlines will be receiving taxpayer subsidies to operate here.  If history is any guide these subsidies will likely end up being another misuse of taxpayer money.

 

Recently Pittsburgh International Airport (PIT) announced the arrival of two new airlines to the fold, WOW Air from Iceland and Condor Airlines from Germany.  Both are discount no-frills airlines that will fly to Europe beginning in 2017.  While the media hails this move as a big positive for PIT, it must be asked at what cost and what effect on the airport’s lackluster passenger count?

 

Both airlines are reported to begin receiving public subsidies to operate at PIT in 2017.  News accounts place the amounts at $800,000 over two years for WOW and $500,000 for Condor.  In addition neither airline will have to pay landing fees for those years, which according to the news story, is a cost reduction given to all new airlines beginning service at PIT.  The money for the direct subsidy will come from the State’s Department of Community and Economic Development.

 

It has been noted in the media that subsidies to entice airlines is a regular practice.  PIT bested Cleveland-Hopkins International Airport for both airlines as Cleveland reportedly offered WOW $400,000 over three years.  No word on what Cleveland offered Condor.

 

Delta launched the PIT to Paris summer route with $9 million in subsidies from the Allegheny Conference on Community Development and the state (Post-Gazette, Sept. 23, 2016). Baltimore-Washington International subsidizes British Airways routes to London.  However, just because airports are eager to boost their portfolio of destinations served does not mean that taxpayer dollars should be used to do so.  And even if the subsidies are enough to bring these carriers to the airport, ultimately it will be passenger demand that will keep them long term.  The Condor route to Frankfurt is to be seasonal and its future will depend upon local demand for the flight.

 

 

We have commented in many Policy Briefs about the troubles PIT has had, not only financially, but with passenger counts as well.  For the most recent month available, September, the airport boasted an increase in passenger traffic, (combined enplanements and deplanements), of 45,142 compared to the same month a year earlier—an increase of 6.8 percent.  Since 2010 only three months had better year-over-year growth:  November 2015 (7.0%), February 2011 (12.2%) and January 2011 (8.9%).

 

But when taken in context of similarly sized airports, September’s year-over-year gain is quite modest.  As outlined in Policy Brief, Volume 16, Number 12, for 2014, PIT was the 46th busiest airport in the country as designated by the Federal Aviation Administration (FAA).  PIT ranked higher than the airports of Cleveland, Indianapolis, Milwaukee, and Columbus, 47th through 50th, respectively, but not as high as Sacramento, San Antonio or Fort Myers, Florida (42nd, 44th, and 45th).

 

Of these comparably sized airports (in terms of traffic), PIT’s September year-over-year growth bested Sacramento (5.5%), Cleveland (4.9%), and Fort Myers (-3%).  At the same time however, it fell below that of Columbus (12.6%), Indianapolis (9%), Milwaukee (8%), and San Antonio (7.4%).  It appears that September was a fairly active month for air travel overall and PIT may have benefited from the national upswing in passengers travelling.  There is no apparent, ready explanation for the September jump in travel.

 

On a year to date basis, the first nine months of 2016 saw a total increase in passenger traffic at PIT of nearly 130,000 over the same period in 2015—an increase of 2.1 percent.  However, that growth rate was better than only San Antonio (1.4%) in our list of comparable airports.   The year to date growth for the eight airports ranges from 1.4 percent to 9.3 percent (Indianapolis).  The average growth rate for the comparable airports is 4.9 percent, more than double PIT’s growth over the nine months. Note that the gain in passenger count in September 2015 to the count in September 2016 is much higher than the year to date increase, suggesting that unless the monthly pickups continue, September will in retrospect likely be considered an anomaly.

 

The crucial question: Will the addition of two new airlines with destinations to Reykjavik, Iceland and Frankfurt, Germany substantially improve the passenger count at PIT? Consider that Delta’s seasonal flight to Paris remains just that; seasonal after several years. In June of this year, Delta announced it was paring the days the flight will be offered from seven to five days, including taking off at a later time to accommodate leisure travelers instead of business passengers. Another important question: Will flights to Frankfurt take some passengers away from Delta’s Paris flight because Paris was merely an entrance point to Europe for them or not their primary European destination?

 

What’s more, when American Airlines recently eliminated a flight to Los Angeles, an airline spokesperson called the route “underperforming” and unprofitable.  This is a pointed reminder that unless travelers pack the planes on their way to Iceland and Germany, the commitment of the airlines is unlikely to extend beyond the subsidy period.  Success might also depend heavily on the layover times in Reykjavik for travelers going on to other WOW destinations and the number and location of other destinations on the continent.

 

In the long run passenger demand will dictate the flights and destinations of the airlines.  Dangling subsidies in front of airlines as an incentive to bring them here is at best a risky exercise. Who benefits from these subsidies? Pennsylvania taxpayers? Not if all the subsidies do is allow vacationers to travel at lower than market based cost. It remains to be seen whether any related new jobs in the region or state ever produce the taxes needed to cover the subsidy.

 

Once the subsidies are gone, too often so are the airlines.  To repeat a cautionary comment from previous Policy Briefs; until the Pittsburgh area economy begins to make major strides in job and income growth and climb out of its recent doldrums, the number of passengers travelling through Pittsburgh International is unlikely to grow much.

Passenger Count Up Slightly at Pittsburgh International Airport

When the Allegheny County Airport Authority Board hired their new Airport Authority CEO in January 2015, there were high expectations regarding Pittsburgh International Airport (PIT) and its passenger count.  Since January 2015, the results appear to be modestly positive—passenger counts are up, though very slightly, as are the number of daily flights, and the number of nonstop destinations.  But how do these results stack up against the performance at similarly sized airports?

 

The Federal Aviation Administration (FAA) ranks PIT as the nation’s 46th busiest airport based on 2014 enplanements, a spot it has held since 2010.  In 2000, it ranked 24th, gradually sliding to 40th in 2006, before settling in at its current rank in 2010.  In 2014 PIT had fewer enplanements than Southwest Florida (Fort Myers), San Antonio International, and Sacramento International.  PIT did however have more enplanements than Cleveland, Indianapolis, Milwaukee (General Mitchell), and Columbus.  While the FAA rankings are based on the number of enplanements, we will look at the total number of passengers (enplaned and deplaned) for the airports listed above over the last two years.

 

Airport FAA Rank

2014

Passenger Traffic Percent

Change

2014 2015
Sacramento Int’l 42 8,972,756 9,608,948 7.09
San Antonio Int’l 44 8,369,628 8,507,459 1.65
Southwest Florida 45 7,970,493 8,371,801 5.03
Pittsburgh Int’l 46 7,998,970 8,128,187 1.62
Cleveland-Hopkins Int’l 47 7,609,404 8,100,073 6.45
Indianapolis Int’l 48 7,363,632 7,998,086 8.62
General Mitchell Int’l 49 6,554,152 6,549,353 -0.07
Port Columbus Int’l 50 6,355,974 6,975,978 6.92

 

As can be seen from the chart, PIT’s increase of 1.62 percent is the second lowest of these similarly sized airports, ahead of only Milwaukee’s General Mitchell International and just behind San Antonio International.  However, PIT lags well behind Indianapolis with its 8.6 percent increase, Sacramento, Columbus (7 percent), and Cleveland-Hopkins (6.45 percent).  Thus compared to this group of similarly sized airports, PIT’s gains are very meager.

 

According the U.S. Department of Transportation’s Air Carrier Traffic Statistics, the number of revenue passenger enplanements nationwide increased by 4.6 percent from 2014-2015.  The growth rate for enplanements at PIT was only 1.34 percent—well behind the national rate.

 

Earlier Policy Briefs reported on PIT’s performance as it grappled with falling passenger counts after USAirways began downsizing operations in 2000.  The fortunes of PIT were heavily tied to this hub airline that accounted for the overwhelming majority of passengers and flights. Of course, USAirways had many problems during the early 2000s including bankruptcies. Upon merging with American Airlines and adopting that name, the USAirways identity has officially disappeared altogether. In 2001, PIT hit a high total passenger count (enplaned and deplaned) for the new millennium of more than 19.94 million (the all-time high was set in 1997 at 20.7 million) before steadily falling throughout that first decade as USAirways dropped PIT as a hub. The airport’s low traffic mark since the loss of the hub came in 2013 when only 7.88 million passengers passed through PIT.  Since then the growth has been minimal, over the last two years—1.46 percent in 2014 and 1.62 percent in 2015.

 

The loss of a major hub also meant the loss of flights and destinations served.  As noted in news reports, at the hub’s heyday, there were 633 flights to 114 destinations.  In January 2015 that number stood at 142 daily flights to 36 cities.  The current totals from PIT’s website claim 149 daily departures to 47 destinations.  When compared to the other airports in the list above, PIT had the highest number of destinations while a low of only 29 destinations were available in Sacramento.  Southwest Florida had 46 destinations available, the highest count after PIT.

 

The number of cities served by flights from PIT has increased as the result of new, smaller carriers entering the market for travelers flying mostly to vacation destinations.  Carriers such as Frontier and Allegiant have begun service to Las Vegas and Jacksonville.  Meanwhile, Sun Air Express offers trips via small aircraft to Altoona and Jamestown NY. Porter Air offers service to Toronto.  It is also worth noting that Frontier and Allegiant have also expanded service at other airports as well.  Thus, the expansion of service by low cost carriers may be driven more by an increase in demand for air travel nationwide rather than anything special happening at PIT.

 

The progress in attracting more carriers and daily flights is commendable, but the passenger traffic pickup has been negligible for the last two years.

 

As explained in previous Policy Briefs, nearly 25 years ago PIT tied its future to USAirways with the construction of the larger and costly new terminal. When USAirways’ struggles began in the early 2000s, so too did those of the airport.  The carrier largely abandoned not just the airport but the region as well.  PIT was left with a very large debt load from the terminal construction.  To help make bond payments, PIT maintained some of the highest fees paid by air carriers at comparable airports.  With money from gaming taxes and an upfront payment for the rights to extract natural gas from its property, the airport has made strides in bringing that debt down and subsequently has been able to reduce its fees.  We would expect that as royalty payments start to accrue from the unconventional wells on the property, fees should continue to decrease.

 

The reduction in fees will no doubt be a key ingredient in luring still more low cost carriers to PIT.  However, the demand for flights will not only be dependent upon offering more destinations but also growth in the area’s disposable income that can be spent on travel.  Business travel will also depend to a degree on the pace of expansion of the local economy.

Is the Passenger Count at the Pittsburgh Airport Taking Off?

Recently Pittsburgh International Airport (PIT) shared news with the media regarding passenger counts and flights.  The headline was that for the fifth consecutive month in 2014 (May through September), passenger counts were better than they were for the same month in 2013.  It was also announced that two new carriers were launching service at PIT.  Is this a sign that, after years of declining passenger traffic, things are improving at PIT?

 

Perhaps it is a bit premature to suggest that the increased origination and destination (O&D) passengers at PIT over the past five months is the start of turnaround.  Keep in mind that in 2013 a total of 7.88 million passengers either emplaned or deplaned at PIT.  This was the lowest total in at least a decade.  Airport data for 2002 place passenger traffic at over 18 million. The count then declined to under 10 million by 2006. After further drops it settled into a range of 8 million to 8.3 million from 2009 through 2012.  2009 passenger traffic represented the previous low for the last ten years when just over 8 million O&D travelers used PIT.

 

Thus, an uptick in 2014 compared to the weak numbers 2013 can be misleading. Note that the first quarter of 2014 showed a year over year drop in passengers from 2013.  Based on the first three quarters, the projected annual O&D passengers for 2014 should surpass that of 2013, but still could be one of the worst yearly totals since 2002.

 

As has been well documented in previous Policy Briefs, PIT suffered a huge blow with the sharp reduction in flights by USAirways.  It happened quickly as the airline declared bankruptcy (twice), moved its headquarters out of the region, and reduced its presence by first abandoning PIT as a hub, and then as a focus city. Even though USAirways is still the largest provider of flights at PIT, it does so at a fraction of the activity of 15 years ago. By merging with American Airlines last year, its name will soon be a memory for air travelers.  Nonetheless, it will leave behind a legacy in the form of the airport facility constructed to its specifications more than two decades ago, for which PIT is still making payments.

 

While we pointed out in earlier Policy Briefs the massive debt load carried by PIT as a result of this construction, considerable headway has been made in reducing this long term debt.   According to the Allegheny County Airport Authority’s most recent Comprehensive Annual Financial Report (CAFR), at the end of 2012 the total revenue bond debt (associated with terminal construction) stood at $375.4 million before falling to $327.9 million by the close of 2013.  Ten years ago in 2004, total outstanding debt facing the Authority was $614.3 million. Thus, in a decade the outstanding debt has been cut by almost half.

 

But a lot of credit for this progress, at least over the last few years, can be given to two external sources of funds—over and above revenues from operations at PIT.  These are the legislatively mandated gaming money and money from a lease allowing drilling in the Marcellus Shale formation beneath PIT.  The airport was slated to receive $150 million from state taxes on slot machine revenue over a period of years. The first $42.5 million of the gaming money was intercepted by the County Executive at the time and used for the County’s budget.  The remainder will be used to pay off the bonds ($39.4 million has been used already, with $68.1 million remaining).

 

From a gas drilling lease agreement the Authority received an up-front bonus of $46.3 million that will be used over the next five years—except for $3.5 million being held in escrow “until certain property deed mineral rights issues are resolved”.  Once production commences the Authority will receive monthly royalty payments. While the gas money has not been specifically pledged to bond payments, it has to be used at PIT, per Federal Aviation Administration rules.  As such it provides room to shift other funds to debt service.

 

The additional sources of funding have helped PIT reduce the fees charged to airlines using the facility.  Landing rates for signatory airlines (those who have an agreement with the airport) rose to $3.5147 per 1,000 lbs. in 2011 before gradually falling to $2.81 in January 2014—a reduction of 20 percent.  A similar situation has occurred with the signatory ramp rates as they have fallen from $282 (per lineal foot) to $218.38—a reduction of 23 percent.  But as we pointed out in a previous Brief (Volume 14, Number 9), these fees are still higher than at comparable airports.  Being able to reduce these fees, and they still need to keep falling, will help induce more airlines to offer flights that should lift O&D totals.

 

Two new airlines did commit to PIT in the last couple of months.  The first airline is Sun Air Express which will offer flights via small craft to regional airports at Altoona, Bradford, Lancaster, and Franklin along with Jamestown, NY.  They will do so under a federally subsidized program called Essential Air Service.  Reports estimate that flights to these cities will increase O&D traffic by 1,000 per week for the duration of the program, which is expected to last two years.  Sun’s CEO claimed that without the subsidy, reported to be $800 per flight, the flights would not make economic sense.  In short, it is not certain if the reduced airline fees played much of a role in their decision to bring these routes to PIT, as it is clearly relying on the Federal program.  Once that program ends, the service may terminate as well.

 

On a separate note, we question whether using Federal funds to subsidize uneconomical flights is a good use of money.  When the program ends will the airline have developed enough demand to keep providing the service to these smaller cities when the ticket prices will inevitably rise sharply?

 

The other airline to begin service is Las Vegas based Allegiant Air.  Allegiant Air focuses on leisure travel and will offer flights to three Florida cities, including Jacksonville—a city not currently served from PIT.  This commitment is perhaps a better sign that the reduction in fees is paying off.

 

Of course smaller carriers have come and gone at PIT over the last decade or so, but none have been able to push PIT’s passenger counts back to the previous peak levels enjoyed during USAirway’s heyday.  Once the carrier removed its hub at PIT, passenger levels plummeted.  The hub system has been replaced by point-to-point service and it is unlikely a new major hub will be coming to PIT. Instead, PIT will have to rely on local demand and O&D traffic as opposed to connecting passengers.

 

While O&D passengers will in a large part depend on the local economy, continuing to reduce airline fees at PIT should certainly help make the airport more attractive to airlines and could help boost flight offerings and lower ticket prices—a good way to increase the number of air travelers.

Pittsburgh International Still Struggling Despite Fee Reductions

Pittsburgh International Airport’s (PIT) struggles to grow passenger counts and flights have been well chronicled in past Policy Briefs.  One obvious culprit has been the high fees charged to airlines doing business at PIT. The high fees are driven by the need for the airport to generate revenue to pay off debt incurred building the facility more than twenty years ago.  However, thanks in large part to money coming from gaming revenue and from a recent lease allowing drilling for natural gas on airport property, PIT has been able to reduce some of these fees.

 

Everything equal, the reduction in fees should encourage more flight activity. But, it might be an uphill battle.   Note that passenger counts for 2013 (through November) were below 2012 levels which were below 2011 levels.  Whether the airlines and travelers respond positively to the lower fees, remains to be seen. And that leads to the inevitable question. What can be done to make passenger counts take off at PIT?

 

The terminal at PIT, built at the request and to the specifications of USAirways, has become a financial albatross for the Airport Authority.  According to the most recent comprehensive annual financial report (2012), PIT still owes $375 million in revenue bonds associated with the construction.  Coupled with more than $20 million in other debt, and PIT’s annual debt service is projected to be just over $68 million in 2014. It dips to around $67 million in 2015 and 2016 and to $63 million in 2017 before falling to just over $23 million per year for 2018 through 2022. With operating revenues in 2012 exceeding $135.8 million, debt service (interest and principal) consumed about half of PIT’s operating revenues.

 

The largest component of operating revenues at PIT is terminal fees (42 percent), followed by parking revenues (21 percent) and landing fees (13 percent).  The terminal fee rate for signatory airlines (those who have an agreement with PIT) at the facility has been well above that charged by similar airports.  In 2012, the rate was $129.06 per square foot.  By comparison, Indianapolis ($92.80), Denver ($70.219), Kansas City ($30.09) and Cincinnati ($28) were much lower.  After PIT raised the fee nearly ten percent in 2013, it was reduced to $138.82 for 2014, but remains above the 2012 figure.

 

Meanwhile, the signatory landing rate was $3.4148 per 1,000 pounds in 2012 and was much more competitive with other airports. In fact, it was lower than Denver ($3.914) and Cincinnati ($3.998).  The landing fee was also raised for 2013 (slightly) before dropping nearly 20 percent to $2.81 for 2014.

 

Given the large debt load, it might seem to be counterproductive to lower the fees that comprise the bulk of the operating revenues.  But since the airport is no longer a major hub, and appears unlikely to become one again, it has to rely on enticing carriers to offer point-to-point service for passengers using PIT for the origination and destination (O&D) of their travel.  This effort to reduce carrier costs received a boost when the airport was the recipient of money from the state’s gaming law, which from 2010 through 2012 amounted to $39.4 million, to be applied specifically to debt service at PIT.  They were allotted $150 million under the law, but the first $42 million was intercepted by the County Executive at the time and used for the County’s budget.

 

In another fortuitous circumstance, the natural gas boom in the Marcellus Shale formation had drilling companies bidding on the rights to drill on airport property.  The winning bidder paid an upfront bonus, reportedly up to $40 million, and will pay royalties when extraction commences.  This allowed PIT to lower airline fees midway through 2013 then again at the start of 2014.

 

Whether or not these cuts will be enough to attract airlines to offer more service to more destinations remains to be seen.  In another attempt to lure airlines, the Airport Authority has recently unveiled plans to offer a subsidy to airlines that are willing to offer nonstop flights to select locations, such as San Diego or Seattle.  The subsidy will take the form of either marketing assistance or a waiver of landing fees.  This is a direct attempt to cater to the O&D market as the list of cities was chosen based on a survey of businesses.

 

And of course that is the point; PIT is no longer a hub that can rely on a large number of flights carrying passengers who are connecting with other flights, so it must work to increase the number of O&D travelers.  While they can work on promotions such as the one mentioned above, and make efforts to reduce airline costs, they will be relying heavily on the regional economy and to some degree on the strength of the national economy.

 

Unfortunately, the local labor market has not been overly supportive. While private employment growth in the seven county Pittsburgh metropolitan statistical area (MSA) has outpaced that of the state, it still has not been robust.  In 2013 only two months, September and October, posted growth rates in private employment that were two percent over the same month a year earlier.  In 2012, this only happened in the first four months.  Thus, the remaining sixteen months over the last two years had growth rates less than two percent over their year earlier totals.  The good news is that job gains in the region have been stronger than the state growth.

 

That being said, some of the sectors that have lead the job gains (such as education and health, and leisure and hospitality) are not sectors that are big drivers of employee air travel. The Marcellus Shale boom has caused jobs in the mining and logging sector to more than double over the last few years, but total employment in that sector accounts for only about one percent of the total private jobs in the MSA.

 

The major and somewhat surprising bright spot in job creation has been the professional and business sector, specifically the professional and technical subsector.  The professional and technical subsector has grown at a year over year rate ranging from 5 to 8 percent during 2013 and accounts for a significant fraction of all net new private jobs. As we wrote previously, detailed data as to which areas within this subsector are experiencing the most growth are not available at the MSA level, giving some cause for concern about the accuracy of the numbers being reported.  But the positive news for PIT is that these may be employees with a need for air travel or at least with enough income to stimulate demand for travel.

 

Moving forward, PIT needs to do all it can to right its financial ship, such as using the new found sources of revenues to lower debt obligation and lower carrier fees further thereby becoming more competitive with other airports in attracting airlines and flights.  It also ought to be involved in trying to promote more business friendly policies to stimulate regional economic growth and demand for air travel, be it for business or pleasure.

Carrier Costs Decrease at PIT

When Allegheny County signed off on a deal to allow natural gas drilling at Pittsburgh International Airport (PIT) earlier in 2013 we noted that the money they received should lower fees at the airport, enhancing its attractiveness to carriers. Well the Airport Authority has followed through with a reduction in carrier fees beginning July 1, 2013. While this is only a first step, it is one in the right direction in helping PIT rebound after years of declining passenger counts.

As we had written previously, PIT’s airline fees were higher than competing airports such as Indianapolis, Nashville, and Kansas City in the areas of terminal rates, landing fees, and ramp rates. While this first round of cuts will not vault PIT past any of these airports, it certainly closes the gap. The signatory landing fee has been reduced by twelve percent from its January level while the non-signatory landing fee has decreased more than eight percent. The signatory ramp fee fell five percent while terminal rates, for both signatory and non-signatory carriers, fell slightly. The Authority has mentioned that this is the first of hopefully many more steps to reduce these fees and making PIT more competitive.

But it is only one part of the overall picture. In order for carriers to increase service at PIT, now an origination and destination airport since US Airways ceased hubbing activities, the demand for air travel in the area needs to increase as well. The best way to do that is to work on making the area’s economy more robust. This will increase not only the demand for business travel but for vacationers as well. The Authority has taken its first step, now it’s up to local officials to implement policies that will grow the economy.