Airport Stays on Top of Debt

By Bonnie Pfister

Lingering post-9/11 shock, record-low airfares and soaring fuel prices have packed a wallop to airlines flying into Pittsburgh in recent years — and the airport built for them.

Yet Pittsburgh International Airport, completed in 1992 to meet the specifications of an airline that later twice filed for bankruptcy, continues to pay off a hefty debt and its bills on time, say officials with the Allegheny County Airport Authority, which operates the facility.

It has done so by trimming costs and drumming up revenue through passenger charges and by attracting low-fare carriers — which in turn increases parking and other non-aviation income.

Annual debt repayments have been around $60 million since county officials formed the authority in 1999. Last year the authority paid $62.7 million on the $542.9 million debt, according to its most recent financial statements. Authority Chief Financial Officer Jim Gill said the debt is on track to be paid off on time in 2019, 31 years after the first bond was issued.

Airport officials say they haven’t extended or refinanced on an emergency basis the $920.2 million of airport construction bonds. Portions of the debt twice were refinanced to take advantage of lower interest rates — first in 1997, and then last year for a one- year savings of $10 million in debt service.

“We are obligated to pay debt on a facility that was designed for 32 million people, at the request of US Airways,” said Brad Penrod, the authority’s executive director. “Business has changed, times have changed. But the facility and the debt responsibility don’t go away.”

Because airport authority debt is repaid by charges it levies on carriers, that forced the authority to raise rates across the board to all airlines, including US Airways.

Blow to US Airways

Sept. 11, 2001, delivered an especially harsh blow to US Airways because it was the largest carrier out of Reagan Washington National Airport, which closed for several weeks.

The carrier filed for bankruptcy in August 2002, emerging within seven months but announcing it would reduce from 40 to 10 the number of gates it rented on a long-term, or signatory, basis at Pittsburgh International.

US Airways spent the next year unsuccessfully lobbying to cut the airport’s debt by a dramatic $500 million, before heading back into bankruptcy in September 2004.

Elected officials including then-county Chief Executive Jim Roddey, successor Dan Onorato, and Gov. Ed Rendell scrambled to find money to help pay the debt faster. The solution: $150 million to be generated by future casino gambling.

The state levies a 55 percent tax on slots casinos, directing 34 percent of that tax money to offset property tax cuts statewide. Another 12 percent of what the state collects is put into a fund for horse-racing breeders and purses; counties and municipalities where casinos are located each get 2 percent.

In addition, 5 percent of the tax money collected from casinos statewide is set aside for a development fund that gives priority to eight projects in Allegheny County and to a Philadelphia convention center. The fund has brought in $106 million so far.

But the gambling money hasn’t yet lowered airlines’ costs at Pittsburgh International. Instead, when state officials in Harrisburg wired the initial disbursement of $19.9 million in casino collections on Dec. 31, 2007, Onorato used it to pay part of a little-remembered $42.5 million bond debt the county incurred when a shortfall arose during the airport’s construction.

“This came as a surprise to us, as we thought those funds were supposed to flow to the airport. We would very much like to see documentation of this loan,” said Morgan Durrant, a spokesman for US Airways.

Onorato maintains that all of the gaming money is going toward airport debt. In addition to the county’s $42.5 million, incurred by taxpayers, $107.5 million will go to the Airport Authority to lower carriers’ charges after future gambling collections, he said.

He angrily denounced Pittsburgh’s once-powerhouse airline.

“US Airways has no standing to even comment on this,” Onorato said recently. “They canceled their commitments to us. They reneged. If it was up to me, I’d make sure they wouldn’t get a penny of this money.

“They owe us millions. They have absolutely no right at all for how they basically lied to the community.”

US Airways’ Durrant said the airline would not respond to Onorato’s comments.

In October, Penrod predicted the authority could use soon-to- come gambling tax money to offset more gate cuts by US Airways. But he said he was not surprised or dismayed that the early gambling money went to the county debt.

“The county had given the airport project $42.5 million, knowing at some point in the future it was going to be repaid,” he said. “That obligation has always been there.”

Jake Haulk, president of the Castle Shannon-based Allegheny Institute for Public Policy, said he has studied county budgets and Airport Authority financial statements for years, but found no mention of the $42.5 million debt.

“But they’re all appointed by Dan Onorato, so they’re not going to say anything, not publicly,” Haulk said about the authority board. “It’s a very bad signal to send to the airlines that the county grabs this money instead of it being used for the purpose intended.”

Southwest’s contribution

The airport’s business model is based on a residual-use lease, in which debt and operating expenses are paid by charges to airlines. The authority each year calculates anticipated expenses, and then subtracts what it expects to receive from non-airline sources, which include concessions, rental car and parking fees. The difference is divvied up among carriers in per-foot terminal and ramp charges, and per-1,000-pound landing fees.

From the beginning and still today, US Airways has paid the lion’s share of the airport’s operating costs, including its debt. At the airline’s peak, between 1997 and 2000, that was nearly 85 percent of airport’s total costs, said authority spokeswoman JoAnn Jenny. This year, US Airways will pay 52 percent, or $31.6 million, of the $60.3 million collected from 13 airlines at Pittsburgh International.

Despite severe cutbacks, US Airways remains the carrier bringing the most flights to the facility. In 1997, that meant 18.6 million passengers, 89 percent of the 20.8 million total. Last year, those passengers still accounted for more than half — 5.2 million — of the 9.8 million local enplanements.

Airport management has cut costs and increased revenue. It leased gates on a short-term basis back to US Airways, charging a premium of 20 percent above the signatory rate. It took on services previously done by that carrier and other airlines, including jetway maintenance, flight information displays, tarmac de-icing and ownership and management of a baggage conveyor system.

In 2004, the airport for the first time began collecting passenger facility charges, applicable directly to the debt. Those $4.50 per person charges, collected by airlines when travelers book flights, have reduced the amount billed to the airlines by $15 million annually.

This year it sold off unused jetways, closed portions of two concourses US Airways once used, and last month stopped running one of the two trams between the airside and landside terminals to save money on electricity.

The upside of US Airways’ decline at Pittsburgh International is that it made space in what was a “fortress hub” for low-fare carriers, Penrod said.

In May 2005, Southwest Airlines began offering flights to Philadelphia, Chicago, Orlando and Las Vegas. Later that year, Atlanta-hubbed AirTran Airways beefed up its offerings to include flights to Florida. JetBlue began offering direct flights to New York and Boston in June 2006.

Those lower fares have translated into an increase of 2 million passengers originating and ending their travel in Pittsburgh between 2004 and 2008, in contrast to US Airways’ mostly connecting flights. Passengers on the newer carriers, in turn, have driven up non- airline revenue for the authority — including parking fees, concession sales and car rentals that in 2007 totaled $102.8 million, up 12 percent from the previous year.

Today, Southwest is the second busiest airline at the airport, with flights that grew steadily through the end of 2007 to 1.4 million passengers. Passenger figures have declined in 2008, however, and rising fuel cost has prompted the carrier to trim two of its 24 daily flights in the next few months.

Looking for ways to bring flights to Pittsburgh — even on a “reliever” basis — is part of the authority’s plan going forward. Penrod is asking the Federal Aviation Administration to consider sending planes to Pittsburgh International when weather or traffic congestion preclude timely landings on the East Coast. Twenty-seven planes did that July 23, he said, waiting out thunderstorms over New York City.

The authority is pushing a plan tentatively called The Pennsylvania Connection — that is, “feeder” flights from small communities that lost US Airways’ commuter service. Industry observers credit the authority and state and regional airport leaders for taking the lead in proposing service, rather than waiting for airlines to do so.

Colorado-based airline consultant Michael Boyd is skeptical about whether Pittsburgh would be a likely reliever airport, given its geographic distance from East Coast airports — roughly 290 miles by air to New York City’s LaGuardia Airport, for example — but he applauded Penrod’s approach to buoy Pittsburgh’s airport.

“You’ve got to go after things. You’ve got to push,” Boyd said. “There’s always an X-percent chance things could happen.”

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