=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2002/02= /22/BU169640.DTL ---------------------------------------------------------------------- Friday, February 22, 2002 (SF Chronicle) Airport turbulence/Struggling with declining revenue, SFO is taking steps t= o regain its footing David Armstrong, Chronicle Staff Writer Hammered by a distressing decline in flights and passengers, San Francis= co International Airport is struggling to offset a sharp revenue drop by taking several steps, including raising airline landing fees and rents and returning cash-strapped airport shops to standard rents as soon as possible. In addition, John Martin, SFO's top official, said in an interview that the airport has obtained a $24 million cash payment from the financially troubled United Airlines, the airport's biggest tenant. Like other airports around the country, SFO, the region's busiest airport and the ninth-busiest airport in the world, is pressing hard to find sources of revenue during an extremely turbulent period for the airline industry. SFO has been especially hard hit by "the regional recession and a drop-off in business travel, plus weak international travel and the problems of United Airlines," said Kurt Forsgren, a transportation analyst with Standard & Poor's. The gravity of the situation was spelled out Tuesday, when the Airport Commission approved a $570 million budget for the next fiscal year that is 5 percent below last year's budget. Among other things, the budget calls for a hiring freeze, a hold on constructing a new airport hotel and an indefinite delay in renovating the now shuttered former international terminal. Dwindling passenger traffic has been a big problem for SFO. According to airport statistics, passenger traffic dropped from 38.8 million in 2000 to 30. 2 million in 2001. It is expected to climb modestly to 34.4 million this year, but that's still nearly 5 million fewer passengers than 2000. The decline in passenger traffic resulted in a 20 percent drop in non- airline revenue from parking, car rentals and concessions, from $298.6 million in 2001 to $238.3 million in 2000. Another major source of income, airline revenue, has also fallen. SFO to= ok in $279 million in revenue last year from the airlines -- $40 million less than the $319.4 million projected. The lower figure is due in large part to SFO's decision to hold off raising airline rentals and landing fees due to the recession and terrorist attacks. SFO expects a modest bump in airline revenue to $245.5 million in the coming year. Still, a prolonged downward spiral in airport finances could lead to shuttered airport shops, fewer food choices and higher ticket prices, should ailing airlines pass along their fees to consumers. And this comes on top of the longer lines at today's security-minded airports. Forsgren, the analyst, said that "although the airport is prudently taki= ng all the right steps," he doesn't believe SFO's situation will return to normal "in the near and intermediate term." Given that SFO's traffic continues to lag -- it was down 24 percent in December, compared with a national average of 14 percent -- Standard & Poor's yesterday reduced the credit rating to "A" from "A+" on SFO's $4.1 billion in bonds, including $365 million of bonds SFO plans to sell next week to refinance debt carrying higher interest rates. Bond downgrades lower the value of existing debt and make it more expensive to borrow. As SFO deals with financial turbulence, its most eye-catching measure is the big cash payment from United, the airport's biggest tenant. "There is a risk of a United bankruptcy," Martin said. "We are protected by the $24 million deposit, which is equal to five months' rent." As a result of the economic downturn and the airline industry in turmoil after the Sept. 11 terrorist attacks, United, the nation's No. 2 carrier, lost $2.1 billion in 2001 and is presently losing $10 million a day. United handles nearly half of all passengers and flights at SFO. Martin downplayed the cash payment, saying all of SFO's 50-odd tenant airlines are required to post an annual performance bond which is designed to provide the airport with cash if an airline goes out of business. A United spokesman declined comment on the payment, which SFO officials say has been standard operating procedure for years. SFO is beginning to recapture some of its international traffic, with the important exception of Japanese travelers, Martin said, but "domestic traffic is recovering very slowly." To offset declining revenue, SFO plans to take the additional step of increasing airline fees by 7 to 10 percent, Martin said. Peter Nardoza, SFO's deputy director for public affairs, said fees would probably go into effect in September, although the higher fees will be retroactive to July 1, the start of the next fiscal year. Airline landing fees are calculated according to an aircraft's weight, Nardoza said. For instance, the landing of a Boeing 747 jetliner typically generates $1,400 in fee revenue for SFO. That would go up to $1,540 under the new plan, which is subject to approval by the Board of Supervisors. The increase in landing fees is consistent with steps taken by other maj= or airports around the nation. At Newark International Airport in New Jersey, airline landing fees are up nearly a third, said Greg Trevor, a spokesman for the Port Authority of New York and New Jersey, which operates the airport, as well as John F. Kennedy International Airport and LaGuardia International Airport. "The airports most impacted by the terrorist attacks were SFO, Boston, JFK, Washington Dulles -- the major international gateways," Martin said, in explaining the rise in airline fees, as well as an increase in the rents that SFO charges to concessionaires. The monthly rent that SFO charges merchants in the airport's three terminals will rise as passenger traffic recovers. The airport's goal, Martin said, is to restore rents to pre-Sept. 11 levels when passenger traffic reaches 85 percent of what it was in 2000. In November, SFO temporarily suspended fixed monthly payments by the merchants, which suffered a sharp loss in business as security-conscious travelers shied away from airports. SFO replaced fixed rents with a monthly percentage of gross sales, to provide some relief to the economically distressed merchants. Business for many merchants in SFO's spectacular, year-old international terminal fell 20 to 25 percent in the six months prior to Sept. 11, said Mark Thornton, managing partner of San Francisco Golf, which sells golf clubs and paraphernalia in the international terminal. After Sept. 11, Thornton said, sales fell by up to 40 percent for many merchants. Even with rent breaks, several shops in the international terminal, including two duty-free outlets, have closed since the fall, victims of the prolonged slump. Travelers at the airport earlier this week said that flying has changed since Sept. 11 and that they spend less money, if not less time, in airports. "I get to the airport a bit earlier, because of security," said Robert McCallum, who was waiting for a United flight to his Chicago home, after spending Presidents Day in San Francisco. "By the time I get through the lines, I'm not so inclined to hang out in stores and buy things." Sam and Marian Kellerman, who were returning with their daughter Sasha, 12, to their home in St. Louis on American Airlines, said they felt similarly disinclined to shop. "We got here 2 1/2 hours early," Marian Kellerman said, "and by the time you deal with security, you're in a mood. In the St. Louis airport, they made me take my shoes off." An additional disadvantage, she said, was that friends can't come through security if they have no ticket to fly. Fewer meet-and-greet sessions means less shopping and less spending. For all the challenges, SFO's Martin said that the airport is moving ahe= ad on most major projects and that safety and security will not be compromised by increased fees, raised rents and slashed budgets. "We'll have the first terminal in the country to have checked baggage X- rayed," he said, saying all checked baggage would be scanned by state-of-the- art equipment in the international terminal by September and in all terminals by the end of this year. The airport's new people-mover, connecting all three terminals and the rental car center, is also on track to open by late this year, and the new SFO BART station will open on time by the end of this year, he said. Major steps being taken by SFO -- Raising airline rentals and aircraft landing fees -- Securing performance bonds from all airlines, including a $24 million cash payment by United Airlines -- Returning terminal concessionaires to pre-Sept. 11 fixed rents E-mail David Armstrong at davidarmstrong@sfchronicle.com., Bloomberg News contributed to this report.=20 ---------------------------------------------------------------------- Copyright 2002 SF Chronicle