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.

US Airways Taking the Area for Another Ride?

USAirways has entered into a merger agreement with American Airlines.  If the merger passes regulatory muster-it has already received approval of American’s bankruptcy judge-the USAirways brand will disappear from the landscape and possibly most of the remnants of the once powerful airline’s presence in the Pittsburgh area-its birthplace. 

 

The last two operations-other than local flight operations-remaining in the area are the airline’s flight operations center and a heavy aircraft maintenance center.  The former has already been mentioned as a candidate for closing, entailing the elimination of 600 jobs. Meanwhile, the maintenance center employees may want to cross their fingers.  Normally in the course of business, firms come and go and jobs are created and destroyed, but what makes this instance so egregious are the enormous sums of money state and local officials have thrown at the airline over the last twenty plus years in an effort to keep the carrier happy and jobs in place.  It has turned out to be quite futile.

 

At its peak the airline employed more than 12,000 people locally with more than 500 flights per day.  Since 2001 the airline has gone through two bankruptcies and a merger with America West.  These and other events impacting the carrier have lowered local employment that today stands at 1,800 with fewer than 50 daily flights.  The job count is likely to be reduced further if the merger is approved. 

 

What makes this particular news disturbing is the $16.25 million financing package of state and local subsidies that included grants, tax credits and a low interest loan that was provided in 2007 as an incentive to build the $25 million operations center and to retain 600 jobs.  But USAirways has a habit of disappointing the Pittsburgh airport despite receiving heavy subsidies and getting a new terminal built to handle the expansion projected twenty five years ago. They abandoned the airport first as a principal hub and then as a “focus city”.  While the latest developments may come as a mild shock, it should not come as a surprise. 

 

In 2006, USAirways pitted Pittsburgh against Phoenix and Charlotte to see which would offer the best deal to host the operations center.  We commented at the time (Policy Brief Volume 7, Number 54) that “the competition was almost certainly a ruse.  Moving the heart of the operations system on the fly is clearly impossible.  To move the center during operations would have required creating a parallel system at great cost.”  Prior to bidding, Phoenix had a smaller center serving America West that was not adequate to accommodate the much larger USAirways traffic. The odds were very much in Pittsburgh’s favor with or without a subsidy.  The situation with American and Dallas is very different, making the Pittsburgh center odd man out.

 

Not long after Pittsburgh’s “victory” in obtaining the operation center, USAirways announced a large round of flight cuts with 450 local jobs eliminated along and the relocation of 500 pilots and flight attendants.  We also noted in the 2007 Brief, “…that may not be the last of the reductions.”  At the time, the CEO was asked if this is the last of the cuts. He responded “you never say never.”  In defending the cuts he also noted that the nature of the airline industry is “far too hard to predict.” 

 

And he has been proven correct in that assessment.  The airline industry has changed dramatically since the events of 9/11/2001.  Other cities have suffered the loss of hubs as mainline carriers have faltered and discount carriers, with point to point service, have become more prominent.  Thus, showering taxpayer subsidies on airlines seems like a losing proposition-their business is too hard to predict.  The danger for taxpayers now is the temptation for local officials to throw even more money at the newly merged airline in a vain effort to keep the center open.  Phoenix’s operations center may not have been much of a competition for Pittsburgh, but the American operations center in Dallas is.  Short of including the sun and the moon any such offer will almost certainly be rejected.

 

The focus now should be on making Pittsburgh’s airport as attractive as it can be for carriers (in terms of costs of operations, quality of service, etc.) who will compete for and stimulate origination and destination travelers.  One positive arising from the reduced USAirways presence has been the advent of more competition for local air travelers.  Gaming tax revenue is being used to service airport debt, incurred for the new terminal that was built to USAirways specifications, allowing the Airport Authority to lower airline fees. Moreover, the agreement to drill for natural gas on airport property should help drive costs down even further, enhancing the attractiveness to other carriers.  Lowering airline fees still further could entice carriers to offer even more service. 

 

Will area policy makers learn something from the USAirways experience?   Sadly, history is not encouraging on that question.

Pittsburgh International Still Struggling With Low Passenger Count

In early 2011 the Allegheny Institute wrote two Policy Briefs (Volume 11, Numbers 8 and 16) outlining some of the problems facing Pittsburgh International Airport (PIT). The first Brief detailed the decline in passengers at PIT and how nearly twenty years after the new terminal opened it was grossly underutilized-due in large part to the loss of the US Airways’ hub.  In the second Brief, it was noted that, owing to the hefty debt incurred to build the facility, PIT was forced to keep airline fees high compared to other airports. The question was posed whether these high costs might be hindering growth.  It has been more than a year and a half since we raised these issues. Have there been any improvements?

 

The Federal Aviation Administration (FAA) keeps data on enplanements at the nation’s airports.  In 2008 the FAA noted that PIT had 4.3 million enplanements.  That number had fallen to just under 4 million for both 2009 and 2010 before rising to 4.1 million in 2011.  Thus from 2008 to 2011 the number of enplanements at PIT fell five percent.  The most recent data available on PIT’s website shows that through August 2012 the number of enplaned passengers, year-to-date, was lagging the 2011 figures by 3.6 percent.   

 

Looking around the country at airports serving similarly sized metros such as Austin, Denver, Indianapolis, Kansas City and Nashville shows some airports with declines in enplaned passengers during this time as well.  PIT’s five percent decrease fared better than Indianapolis (-10 percent) and Kansas City (-7 percent) but not Austin (plus 4 percent), Denver (plus 5.7 percent), or Nashville (plus 0.5 percent).  Keep in mind that from late 2008 through early 2010 the nation went through a severe recession and a prolonged period of economic weakness that almost certainly affected air travel negatively.

 

Do carrier fees explain some of the changes in air travel?   In 2010, PIT’s landing fee for signatory airlines stood at $3.485 per thousand pounds.  They were boosted less than one percent in 2011 to $3.5147 before being lowered for 2012 to $3.4148.  However, as mentioned above, the numbers of enplaned passengers increased from 2010 to 2011 and are trending lower in 2012.  Certainly, in the short run, the small change in fees would predictably not affect travel significantly. More likely, other factors such as the state of the economy or the availability of affordable flights had much more influence on passenger counts. Indeed, both Indianapolis and Kansas City, had lower much landing fees than PIT at $1.95 and $1.96 respectively in 2011.  Denver had higher fees ($3.532) than PIT, yet had substantially greater passenger growth.  Austin and Nashville had passenger growth with landing fees ($3.21 and $1.26 respectively) less than those at PIT.  Obviously, while landing fees are important they do not necessarily translate into short run changes in enplanements, i.e., demand for travel.  

 

Another airline cost is the terminal fee.  Much like the landing fee, PIT increased the signatory terminal fee from 2010 ($128.28/sq. ft.) to 2011 ($133.73) and then reduced it for 2012 ($129.06).  This is much higher than any of the airports mentioned above.  Indianapolis’ 2011 signatory terminal rate is next highest ($95) with Kansas City having the lowest ($31.75).  For 2012 the other airports in this small study all lowered their signatory terminal rates, with the exception of Austin, thus PIT hasn’t gained much ground in this area.  While higher than average, fees are not the only factor in determining ticket prices and sales, there can be no doubt that over longer periods they could affect sales, especially for price sensitive travelers. 

 

One reason for the high fees is the debt load carried by PIT.  As is well documented, the debt incurred to build the new terminal in the early 1990s was staggering.  It has taken nearly two decades to make significant headway in debt reduction.  According to the Allegheny County Airport Authority’s audited financial statements, total long-term debt in 2008 stood at $452 million.  It has been falling steadily, hitting $337.4 million at the end of 2011-a reduction of 25 percent.  A big help in bringing this debt down was the arrival of gaming revenues.  As we had written about before, PIT was to receive $150 million in gaming money as directed by the 2004 gaming law.  However, the County Executive at the time grabbed the first $42 million rather than sharing with PIT, delaying the use of gaming dollars to supplement airport revenues that would fund the subsequent reduction in carrier fees.  The gaming money finally arrived in 2010 when PIT received $14.6 million and another $12.4 in 2011. 

 

More reasonable explanations for the lack of passenger growth are the cost of tickets, the availability of seats to desirable destinations and the paucity of international flights.  With the loss of hub status in 2004, PIT now has to rely on local origination and destination traffic to drive demand for flights.  Paradoxically, the economy’s performance appears not to have been a factor in the weak enplanement numbers in the recent year. The Pittsburgh region fared better than many other areas around the country during the recession, thanks in large part to the Marcellus Shale development, growing the average annual number of total private jobs 2.6 percent from 2010-2011.  This growth lags only Austin (4 percent) and Nashville (3 percent) in this small sample. 

 

For whatever reason, the economy’s strength did not produce rising passenger growth. Maybe the job growth was not in sectors that are heavy commercial users of air travel or incomes did not rise commensurately with the jobs gains. However, going forward it will be important for enplanement growth that the Pittsburgh metro area continues to show solid economic gains and faster population growth along with affordable and available flights to desired destinations.

Room (For Improvement) at the Inn

If you had a relatively new and shiny airport and there was no interest-none whatsoever-from people in the hotel industry to build a hotel to capitalize on travelers, perhaps that would be telling you something about the demand for rooms. But not the leaders of Allegheny County government circa the turn of the century: by hook or by crook they wanted to have a hotel there, and, with no private interest and local government authorities that were "maxed out" according to one of the former County commissioners, they turned to an authority from Dauphin County to get the job done.

This tale comes back to the surface due to an article that shows neither the County, nor the municipality or the school district where the hotel is located, have received a payment in lieu of taxes. Smacks of a "sweetheart deal" when it is discovered that all other expenses took precedent over tax payments and, because of all the other dealings the Authority was involved in, there is no money for tax payments. Ironically, one former County commissioner said that the hotel was needed to "attract more flights": one would think that the airport would have spun off development, not the other way around. Sounds eerily like the situation with the convention center and its quest for a headquarters hotel. If the hotels were so integral to the success of these facilities, why were they not included in the initial plans?

If an out of county property owner failed to make tax payments on a property he would be put on the delinquent rolls and be labeled a tax cheat or an absentee property owner. And when there is a discussion about tax-exempt properties very rarely does the property owned by public sector entities get mentioned. Why does a public authority not get the same treatment? This is an episode County taxpayers, and those writing checks for property taxes in the airport area, should not soon forget.

Maglev, De-Railed

In announcing the release of some $26.4 million in Federal money to the Commonwealth for rail improvements, left at the station is the proposed high-speed Maglev project that would have connected Pittsburgh International Airport to Greensburg in Westmoreland County (passing through Downtown Pittsburgh). The project sought $2.3 billion, and received zero.

One could say that the writing was on the wall when the U.S. Secretary for Transportation noted in a visit to Pittsburgh that Maglev (in general) is "very expensive" and that the administration had more interest in developing high-speed rail. Sure, backers of Maglev here locally were awarded some $28 million in September to study the feasibility of the Airport link, which was originally estimated to cost $3.75 billion to link to Greensburg.

Pennsylvania did get the money it was seeking ($750,000) to study rail improvements between Pittsburgh and Harrisburg, where AMTRAK service provides one daily trip (contract that with Harrisburg to Philadelphia service, which has 14 daily trips).

Who knows what this means for the experimental project that is Maglev, especially in western Pennsylvania. Maybe the transportation generosity was all used up on the North Shore Connector.

Gaming as a Way to Fund Spending a Sure Bet

No cards have yet been dealt, not a roulette wheel spun, and no dice have been tossed, yet several stakeholders are counting on table games to fund their budgetary needs. In Allegheny County this includes the Carnegie Libraries and the Allegheny County Library Association, as well as the tourism agency in Monroeville. Statewide there will be many others.

And this should come as no surprise: the original 2004 slots bill allowed for economic development handouts for debt at Pittsburgh International Airport, to pay off debts related to subsidy programs administered by Pittsburgh and Allegheny County, for a hockey arena, for the convention center, etc., etc.

Of course the state needs the licensing fee money for this year’s budget and then when the table game enterprise is up and running it can count on recurring revenue. As one state representative noted, using slots for budgets and economic development projects is the worst way to raise revenue "’except for all the other worst ways."

This all raises a line of inquiry: how would the state and the region fund its "needs" without the slot money? Would the absence of $150 million for debt at the airport have forced the County and the Airport Authority to raise fees or possibly look at turning the facility over to a private operator to raise money and achieve efficiencies to retire the debt? Would the City of Pittsburgh, caught in the quagmire of legacy costs, be able to find the money to pay off the Pittsburgh Development Fund? How would the hockey arena be built?

As much as it would be desirable to witness, it seems awfully unlikely that the City and the County would have cut general spending in order to save money to devote annual allotments to these projects.

Lower Airport Traffic Puts Pressure on Costs

It has just been reported that Pittsburgh International Airport (PIT) traffic in 2008 fell to its lowest annual total since before the new terminal was opened-and presumably quite a number of years prior to the opening of the new facility.

And there is no doubt why. USAIRWAYS at one time had 500 or so flights per day, now the number is 47. While other carriers have come and started flying out of the airport, the loss of the USAIRWAYS hub simply cannot be offset by growth in local travelers.

The bad news is that even though fares are down for many flights owing to the greater competition, the fixed costs of the huge airport debt is an anchor around the airport’s finances. With many fewer landings, gate operations, deplanements and enplanements, the fees charged to the airlines have had to increase to raise the money needed to pay the principal and interest on the airport bonds. That puts PIT in the unenviable position of being one of the higher cost facilities in the country. At a time of recession and weaker travel demand, PIT needs to be lowering costs. If the Chief Executive had not grabbed the $30 million or so of gaming money intended to help pay off the bonds, the airport could have made sizable cuts in the two previous years. It would have been great for the carriers.

Now, even with the $20 million the airport is borrowing for that purpose (pledging future gaming revenues), the $40 million the County plans to intercept means that the gaming money going to the airport will now total only $110 million rather than the $150 million the legislature intended.