No Soft Landing

Airports are in for a bumpy ride, even if Congress approves more emergency funds

Last year, McCarran International Airport in Las Vegas had its busiest-ever year, handling more than 51m passengers. And this year, it was on track to beat that, with traffic in the first two months of 2020 up more than 6% compared with the same months in 2020. And then a virus began to spread. Traffic plunged, and by April, the airport saw only a little more than 150k passengers for the entire month, compared with more than 140k passenger per day in 2019. Passenger volumes have since rebounded as travel restrictions around the country have eased, and as travelers eager for summer vacations have flocked to leisure destinations. But the outlook for the fall isn’t encouraging.

Las Vegas is hardly unique. The contours of this story hold true for almost every airport in the U.S., as travel plunged, began to recover, and softened again, following the trajectory of the pandemic. The irony is that the months before the pandemic struck were boom times for airports. After all, the U.S. airline industry was the strongest and most profitable in the world for the better part of a decade.

Since consolidation, which coincided with the economic expansion after the 2008 financial crisis, traffic and capacity growth were steady if not spectacular. Airports did see hundreds of new aircraft serving hundreds of new routes, some launched by ambitious foreign carriers. Many airports and the communities they serve enjoyed first-time-ever nonstop links to lots of new cities. This emboldened airports to break ground on new terminal projects and other infrastructure programs. But now, much of that new air service is gone. And it might never come back. International routes, especially, are subject to much lower demand conditions for perhaps another three or four years. IATA for one expects international traffic to reach 2019 levels only in 2024. This leaves airports wondering what comes next.

In the short-term, it’s a waiting game. The CARES Act stimulus mandated that airlines continue operating to all the destinations they had served before the pandemic struck (although the Transportation Department has granted many exemptions). This will last until Oct. 1, when the CARES Act mandates expire. Airlines have signaled they will be much smaller in the fall, warning employees of impending furloughs and layoffs. Southwest CEO Gary Kelly, for one, said the carrier will be roughly 25% smaller in the fourth quarter. And American became the latest airline to signal its smaller future when news broke last week that it could axe service to as many as 30 cities after Oct. 1.

This, of course, means less money for airports, which derive much of their aeronautical revenue from landing fees, terminal rents, and other charges. Federal funding comes in the form of Passenger Facility Charges (PFC) levied on passengers, now capped at $4.50 per segment. Federal Airport Improvement Program (AIP) grants are earmarked for projects that improve safety or reduce noise. Other, non-aeronautical revenue streams, including from parking, rental cars, and airport concessions, have dried up as well, as passenger traffic has plummeted. U.S. airports are expected to suffer a $23b shortfall in revenues this year, according to Airports Council International-North America (ACI-NA).

The CARES Act went some way toward alleviating this by providing $10b in relief. ACI-NA and other airport groups had lobbied for another $13b to cover the estimated shortfall. One of the bills under consideration in Congress had an additional $10b for airports but talks between the administration and Congress fell apart earlier this month, and both houses of Congress have adjourned for a summer recess. Whether the issue resurfaces in negotiations in September remains to be seen.

In the meantime, airports will need funding to maintain operations and to service their debt. Most airports around the country raise funds for projects through municipal or other bonds. The payment on these bonds is due twice a year, and without cash flow from PFCs, rental cars, parking, and concessions, airports could be at risk of defaulting, says Kevin Burke, ACI-NA president. The group has long advocated raising the PFC but has faced fierce resistance from airlines, which say higher PFCs will depress travel demand.

Unlike in almost every other country in the world, airports in the U.S. are governed in a patchwork of varying structures: Some owned and operated by cities and counties, some by airport authorities. But all are publicly owned and operated and funded by the federal government. Governance structures may vary, but airports hew to an iron-clad rule, that all revenues generated on the airport stay in the airport (and can’t be diverted to fill potholes or whatever other needs a city may have). And the converse also is true — airports don’t benefit from local tax money.

Airports can cut costs — to a degree. They can close concourses and restrooms and turn off escalators and elevators, among other things. But they must remain open, and for that they need to maintain staffing, at least to a minimum to maintain safety and, now, public health. Airports, like airlines, are mandated by the CARES Act to maintain staffing, but many have offered voluntary separation and retirement packages and leaves of absence. Some also are reducing hours for all employees, when feasible and when it will not affect airfield safety. “We are trying to take as many costs out of the system as we can,” says Christina Cassotis, CEO of the Allegheny County Airport Authority, which runs Pittsburgh International Airport.

Other cost-cutting levers include stopping work on capital improvement projects when those projects don’t affect airfield safety or are not so far along that it makes little sense to halt them. San Francisco International Airport, for one, delayed the start of a $1b new terminal expansion project. The Port Authority of New York and New Jersey may delay the $15b New York JFK terminal improvement projected unveiled by Gov. Andrew Cuomo in 2018. Miami has paused a major terminal project until traffic begins to return. This pattern is repeating itself around the country, at large and small airports.

But will passengers return? Of course, but not at the same level as in 2019 for years, if current forecasts hold. Even with effective therapeutics or vaccines for Covid-19, it could take until the end of 2021 for life in the U.S. to return to normal. Until then, airports at risk of losing air service are working with airlines to maintain operations. Philadelphia, for example, is among the airports that have rolled out incentive programs that include reduced or waived landing fees to attract service. Las Vegas, to cite another example, is keeping airline rates and charges stabilized at least through the end of the year. “We want to remain competitive when special events come back, when conventions come back,” said Clark County (Nev.) Director of Aviation Rosemary Vassiliadis. “Leisure travel has carried us, and if our costs spike, we’d lose that discretionary traveler.”

For the most part, traffic will return, eventually, to large- and medium-sized hub airports or those in metropolitan areas. But the return may not be equal. In cities with multiple airports, airlines could consolidate at the largest one, as JetBlue is doing in the Los Angeles Basin, ending most of its operations at Long Beach. Airports in Nashville or Boston or Minneapolis, to cite a few examples, will recover, because there are few alternatives to getting to those cities. And large hubs in which airlines have invested heavily and are critical to their networks — think Atlanta, or Charlotte, or San Francisco — also will see traffic and demand start to return.

But what about smaller cities or airports? That story could be determined by what happens with regional airlines. Given that most small airports are served by regional carriers (with the exception of service by carriers such as Allegiant or Sun Country in some markets), the current shrinking of the regional industry is worrying. The 2008 financial downturn is instructive, when smaller markets saw air service slashed. Capacity didn’t start returning to smaller markets until the middle of the last decade. Non-hub airports rely on the network carriers for connectivity, and the network carriers for the most part are cutting their regional flights and concentrating on their larger markets. “I don’t think all the airports that had commercial service on March 10, 2020 will have commercial air service on March 10, 2022,” says William Swelbar, research engineer at the Massachusetts Institute of Technology’s International Center for Air Transportation.

If current trends hold, then, it’s likely we’ll see a tale of two airport recoveries. One, the happier tale of hubs and large-market airports recovering as traffic returns. And another, the less-happy tale of small communities that will lose all air service. And that could become a vicious cycle, as federal grants are allocated by enplanements and non-aeronautical revenues dry up.

Even with another federal stimulus, it’s hard not to imagine this scenario. After all, the original stimulus was meant to bridge the gaps between the two legs of a “V-shaped” recovery, or the space between a sharp downturn and a sharp uptick. It is becoming increasingly apparent that the recovery will be some other shape, possibly “W-” (downturn, uptick, downturn, uptick), “U-” (sharp downturn, prolonged recession, followed by a recovery), or in the worst-case, “L-shaped,” (sharp downturn, followed by a long recession or depression). In any of those other cases, federal money will again run out, and whether there is political will next year to provide additional funds to tide airports over is a big question mark, especially as Congress hasn’t even decided if it can cough up another $10b for airports now.

And so for most airports now, airport belt tightening is the order of the day.