Sea-Tac Airport bets risky step will turn into a lucrative one By J. Martin McOmber Seattle Times business reporter Seattle-Tacoma International Airport has rolled out a new contract with airlines that ushers in a riskier but potentially more lucrative era for the region's largest airport. The changes mean substantially higher costs for airlines that land at Sea-Tac ? and eventually higher ticket prices for passengers who go through the airport. The new two-year agreement went into effect Thursday and gave managers at the Port of Seattle ? the public agency that runs Sea-Tac ? more control over nearly every aspect of airport operations, from the assignment of gates and ticket counters to the $4.2 billion construction program under way. Sea-Tac gave up what amounted to a guarantee by airlines to cover budget shortages and pay debt from terminal and runway projects. The new contract culminates years of planning and reflects a nationwide power shift between major airports and the once-dominant airlines. Officials say the changes will allow Sea-Tac to operate more like a private business than a lumbering bureaucracy, introducing technologies and practices to improve airport efficiency and save money. "As the industry has continued to change, it has become more and more clear that the dependence airports had on airlines absolutely needed to be broken," said Gina Marie Lindsey, Sea-Tac's managing director. The deal has been tough for some airlines to accept. They gave up veto power for airport-construction projects. They also say the higher landing fees hit when airlines can least afford it ? adding costs that will be passed on through higher ticket prices. "I'm not saying that will happen today, tomorrow or next week, but we have to be concerned about airport costs," said Cliff Argue, an Alaska Airline executive who led the airlines' negotiating committee. "At some point, it is a cost that we can't continue to just absorb." Trading financial security In changing the airline-use agreement, Sea-Tac joins a growing number of airports across the country trading the financial security once offered by major airlines for the chance to operate more like a private business. About one-quarter of airports now use a system similar to Sea-Tac's new one, airport consultant Leigh Fisher Associates says. Airports no longer need airlines' credit to back large expansion projects, as they did before deregulation, bankruptcy and competition for low-cost carriers took their tolls on the industry. It also allows Sea-Tac to change the way it charges airlines. Under the old agreement, airlines paid whatever airport costs weren't covered by income from parking, rental-car fees and concessions. In effect, the more money the airport made from those areas, the less airlines paid in rent and landing fees. The new agreement does away with that subsidy, charging airlines for the direct cost of using the terminals and runways regardless of how much money the airport makes from parking, rental cars and other nonairline revenue. By increasing the costs to airlines and putting more effort into increasing income from rental cars and other nonairline sources, Sea-Tac hopes to generate millions of dollars more each year. The airport will use the money to reduce the amount it has to borrow for construction. The Port, which will collect about $60 million from King County property owners this year, has a long-standing policy not to spend local taxes at the airport, although it could tap that source if it had to. "It offers the potential for more benefits, but it does have more risks if flights fall off the table and the number of passengers drop," said Stephen Van Beek, an executive with the Airports Council International, an industry group. Change in culture The focus on nonairline revenue has meant a change in culture at Sea-Tac. The airport has reined in costs ? including a round of layoffs last year ? while trying to foster more entrepreneurial spirit among employees. "Four years ago, we started training courses with staff to make it clear that under the new agreement, the airport was going to take more of the risk and there would be more and more emphasis on generating more nonairline revenue," Lindsey said. That shift in thinking underpins many changes at Sea-Tac. The $125 million terminal expansion is designed primarily to increase sales of food, beverages, books and gifts, Lindsey said. The airport also is bringing in new national and local restaurants and stores and requiring food, drinks and retail items be sold at "street" prices, not inflated for the airport. Sea-Tac plans to increase its nonairline revenues by 40 percent over the next decade, an ambitious goal that follows three tough years. Take parking, which provides about one-fifth of the airport's income. Revenue is down about 20 percent since use of the 13,000-stall garage plummeted after the Sept. 11, 2001, terrorist attacks. The airport also faces competition from a growing number of nearby private lots, which offer cheaper parking. That has prompted the airport to consider several projects to improve the garage, including installing more reliable signs showing which floors have empty stalls. Money and power For airlines, the trouble with the new agreement boils down to money and power. The airport's overall budget will grow 12.5 percent this year, mostly because of increased debt payments. The airlines' fees are jumping 20 percent. Sea-Tac officials say they understand the airlines' concerns and have cut operating costs to ease the financial burden. And if the airport meets its financial plan this year, it will refund about $11 million to airlines under a special revenue-sharing agreement. But even if airlines get a refund, it won't make much difference. Alaska, Sea-Tac's largest airline, expects its airport costs to jump from $31.6 million in 2003 to $40.2 million this year. "We aren't making money (in 2003), so (in 2004) having an additional $9 million in costs from just one airport doesn't help matters," Alaska's Argue said. And the figure will continue to grow. Sea-Tac has slashed more than $1.3 billion from its long-term construction plan, which the airlines approved under the old agreement. But the expansion projects, which include a third runway, still will drive up airline costs for years to come. The airlines' cost per enplanement ? essentially what an airline pays for each passenger to use an airport ? is projected to more than double from $10 last year to high of $21.56 by 2012. Officials hope to get the figure down to $18. Sea-Tac will be among the costliest for airlines, trailing only some of the country's largest airports, such as New York's LaGuardia; Washington, D.C.'s Dulles; and Miami International. That's a big concern for Southwest Airlines, which says it wants Sea-Tac do more to lower airline costs. "Sea-Tac is one of the most expensive airports in terms of cost per enplanement," spokeswoman Whitney Eichinger said. "What we are comfortable with is less than what the airport is charging. But we have signed the lease, and we will be working through it." The airport also is doing away with the longtime practice of allowing airlines to have exclusive control over terminal gates and ticket counters. Instead, Sea-Tac will assign the gates based on demand. Some airlines will get dibs on preferential gates; other airlines will have access to those gates when they're not in use. Controlling the gates, Sea-Tac officials say, will help them run the airport more efficiently and reduce the need for expansions. "A new gate costs about $20 million," said Mark Reis, the airport's deputy director. "So if we can make more efficient use of the space (by sharing it among airlines), that is money we don't have to spend later." Sea-Tac officials had hoped to sign the agreement last fall but backed off when a majority of airlines balked over the rising costs. The airport made some changes to the agreement ? including adjustments to the revenue-sharing clause ? then sent it back to the airlines, noting that only those that signed by Dec. 1 would get preferential gates and a share of any refund. Argue said the airlines had little choice but to sign the agreement, but he expects to be back at the table with the airport next year. "There is not a great deal of leverage, but the leverage we do have is to foster a spirit of cooperation with the airport," Argue said. "They don't want to get into a position where they price it so high that it results in reduced service." Reis said the airport understands the airlines' concerns, but the future of the airport also is at stake. "Airports exist because airlines exist, so we are partners," Reis said. "We need to take into account airline concerns, but we also need to take into account the financial health of the airport and the Port as a whole." J. Martin McOmber: 206-464-2022 or mmcomber@xxxxxxxxxxxxxxxx