Lingering Problems at Pittsburgh International

Member Group : Allegheny Institute

The Allegheny County Airport Authority has released its budget for 2010. And while it contains a very slight increase in expenditures over this year’s budget it has been necessary to boost airline charges to cover expenditures and to reverse a decline in revenues. These higher costs will ultimately be passed along to passengers or lead to lower profits for the airlines.

Prior to 2001 Pittsburgh International (PIT) relied on the presence of a large US Airways hub. The new terminal was built with the expectation of ongoing major hub activity that would cover construction bond payments with charges tied to traffic levels. However, as the airline industry entered a period of massive turmoil, with the large legacy carriers struggling mightily, US Airways finally succumbed to financial challenges and filed for bankruptcy twice in a just a few years time. Eventually, the airline drastically downsized its presence at PIT and eliminated its hub status. Flights and passenger counts plunged.

With US Airways’ operations vastly curtailed at PIT the welcome entry of new carriers and added flights has not been able to stem the slide in activity at the airport or the accompanying drop in revenues. In 2003, 14.3 million passengers enplaned or deplaned at PIT. Thanks to the severe national recession and additional flight eliminations by US Airways, by 2008 that number had fallen to 8.7 million—a decline of nearly 40 percent. The passenger count year to date through August 2009 is below the 2008 pace for the same period. But the real tragedy for PIT is illustrated by the fact that 20.7 million passengers moved through the facility in 1997, a facility built to handle far more passengers even than the 1997 count. To say the airport is being underutilized would be a colossal understatement.

Fewer passengers and fewer flights exert downward pressure on revenues—revenues needed to make payments on the remaining $500 million in bonds. With fewer passengers, the Authority had little choice but to impose higher charges on the carriers, resulting in higher per passenger fees. The newly released budget reflects this unfortunate fact by calling for a boost in airline charges amounting to an increase from $13.41 to $15.24 (almost 14 percent) in per passenger fees through a combination of higher charges for terminals, landings, and ramps.

Increased fees cannot be helpful in trying to encourage already struggling carriers to expand service at PIT. This in turn could produce detrimental effects for the airport and the economic well being of the area. After all, the ability to attract new firms to the area, as well as the growth of existing firms, depends on providing adequate and expanding air service. Keeping costs down for airlines and passengers would be an important step in that direction.

However, the airport has gone in the opposite direction of late. Indeed, this is the second straight year the budget has included an increase in fees. They had been raised to $15.80 at the beginning of 2009 but were rolled back in June to $13.41, still well above the national median of $6.24. The rollback was accomplished through borrowing $20 million and using the loan proceeds to fund the airline fee reductions. The Airport Authority also notes that the increase in fees for 2010 would have been larger without $10 million they expect to receive in gaming revenue promised when the gaming legislation was passed in 2004.

The gaming bill contained a provision allotting $150 million over a twelve year period for PIT to help pay off its construction debt. The first annual installment became available unexpectedly in the late afternoon of New Year’s Eve 2007. However, the County Executive, claiming the airport owed the County $42.5 million dating back to its construction, intercepted the first installment which, at almost $20 million was well above the amount one would have expected given the terms of the gaming legislation. According to the audited County financial report for 2008 and 2007, "the county, the direct recipient of the funds, received $32.3 million of the project funds prior to the close of 2008…The Authority expects that future receipts from the fund to be first used toward the remaining County capital contribution of $10.2 million." Once the County intercepts its remaining $10.2 million share this year, the Airport Authority will presumably receive the remaining nine annual payments totaling $107.5 million and be able to reduce the costs charged to the airlines.

Because the County has or will have intercepted the first three years of gaming allotments, the Airport Authority (likely under great pressure from airline executives) borrowed $20 million to cut carrier charges last June. While the borrowed money enabled the reduction in fees, the money has to be paid back with interest and signals just how desperate the Authority was to get airline fees down.

As we have argued before, instead of grabbing all of the $42.5 million in the first three installments, the County should have opted to recapture the $42.5 million over ten years at $4.2 million per year. Under that scheme, the airport would have received $30 between late 2007 and late 2009—more than enough to have precluded the need to borrow $20 million last June. Moreover, the $30 million would have allowed an earlier and larger reduction in charges to the airlines. This might well have helped improve relationships with airlines and perhaps paved the way for future increases in the number of flights.

Sadly, as we now know, this seizing of all the funds intended to help the airport has not solved the County’s long term structural budget problems as shown by the recent talk of looking at hospitals or other non-profits as a source of tax revenue.

Frank Gamrat, Ph.D., Sr. Research Assoc. Jake Haulk, Ph.D., President

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