Borrowing and spending at D/FW Airport
By Mitchell Schnurman
When Jeff Fegan recently announced his retirement at Dallas/Fort Worth Airport, supporters hailed the CEO for tripling annual revenue, overseeing expansion, steering through tough economic times and recruiting new airlines.
No one mentioned debt.
It wasn’t in the airport’s press material, Fegan’s biography or the local news coverage. One former colleague quoted by the airport said that airlines and passengers should be indebted to Fegan for his contributions.
While that was intended as a compliment, make no mistake: They will be in debt.
That’s been the big growth sector at D/FW Airport, and by a lot. In 1992, two years before Fegan was promoted to executive director, D/FW owed slightly less than $1 billion on joint revenue bonds. This summer, it owed $4.6 billion. With more borrowing and spending in the pipeline, the debt is projected to hit $6.1 billion in 2016.
Terminal D, the Skylink people mover, the renovation of old terminals — they all cost big bucks. And D/FW isn’t a pay-as-you go operation. It has great borrowing capacity, thanks to a strong local economy and the fortress hub of American Airlines, whose commitment hasn’t wavered in bankruptcy.
Fegan and his team deserve credit, too. They persuaded American and other airlines to go along with the debt plan, and the partners are on the hook for much of it. Under Fegan, D/FW has also managed its finances well enough to maintain solid credit ratings, and it’s been aggressive in expanding revenue from parking, concessions, even natural gas royalties.
“While we view debt per enplaned passenger as high, we consider the amount manageable for the airport,” wrote Standard & Poor’s in November.
Moody’s weighed in with a negative outlook, concerned about high leverage, American’s post-bankruptcy plans and the airport’s ability to meet its projections.
Long after Fegan departs later this year, D/FW will be dealing with a big debt load. In 1994, Fegan’s first year as airport chief, the annual debt service was $101 million. In 2010, it was $209 million. By 2020, debt payments will reach almost $470 million, according to the airport’s bond offering last fall.
For most enterprises, that would be an alarming increase, especially if they couldn’t grow their way out of it. During Fegan’s tenure, passenger growth at D/FW averaged less than 1 percent a year, while nationwide traffic grew four times as fast.
A look into the future
D/FW’s future doesn’t look much different: From 2011 to 2020, D/FW passenger traffic is projected to grow 0.8 percent annually, according to an airport consultant’s report in the bond documents.
D/FW is funded by airlines and passengers (not taxpayer dollars), so they’ll chip away at the higher debt. By 2020, airlines will pay $200 million more per year to rent terminals at the airport and another $48 million in landing fees, the consultant said.
D/FW will also continue to collect more than $100 million annually from a $4.50 fee added to each ticket, known as a passenger facility charge. In sum, airlines’ cost per enplaned passenger will more than double, an expense they’ll have to absorb or pass on to customers.
Non-airline sources, led by parking, account for more than half the annual revenue, so they have to pitch in more, too. In 2020, D/FW expects an additional $136 million from parking, commercial development and concession sales in the terminals.
If the higher revenue doesn’t materialize, the burden will fall to the airlines, and that means primarily American. If American scaled back here, S&P said it could lower D/FW’s credit ratings, but no one believes that’s likely, with or without a merger with U.S. Airways.
American’s largest hub is at D/FW, where the airline collected 33 percent higher fares per mile than the U.S. average in 2011, the consultant said. D/FW is so lucrative for American because it dominates most routes, especially the pricey business traffic.
For the public, the trade-offs from a fortress hub are higher prices and less competition from low-cost carriers. As a result, D/FW missed much of the boom in passenger traffic. From 2000 to 2010, a period that included 9/11 and two recessions, departing passengers at D/FW declined by 2.4 million, the consultant reported.
Much of the weakness stemmed from cuts in capacity, including Delta closing its D/FW hub in 2005. Traffic originating here also declined, despite growth in population and jobs.
The Wright amendment ends in late 2014, and that will spur more fare wars with Southwest Airlines and more traffic in general. But the consultant predicts that Southwest and Love Field will win most of the originating business, while D/FW passenger numbers will fall slightly.
At least Fegan can point to new service that added destinations and different business models. Spirit Airlines, Virgin America, Jet Blue, Qantas and others have come to D/FW in the last few years. The airport needs them all, and more, because it has big bills to pay.