July 26, 2013

For A Few Dollars More (Terminal Financing – Part 2)

According to the Kansas City Star, adding $14 to every ticket will have little repercussion on Kansas City International Airport’s (MCI) financial position. Unfortunately, it does not accurately reflect how airports operate or the important negative impacts of higher fees at MCI.

The Show-Me Institute post that the Kansas City Star responded to showed that the claims from the Kansas City Aviation Department about the moneymaking potential of a new airport are incorrect. My post ended with the statement that MCI would have to find federal funding, use local taxpayer money, or increase landing fees. The Star rightfully points out that I used rounded-down debt payment estimations — to give the city the benefit of the doubt on finding construction savings.

However, the treatment of the $14 per passenger misrepresents the actual impact to the airport. First, an airport cannot legally place a per-head charge on passengers. Only the United States Congress can do that, and the current cap is $4.50 a person. If MCI requires $14 more per passenger to break even, it will have to pass that cost onto the airlines or find the revenue on its own. Given MCI’s current contracting model, the airport is responsible for terminal debt and needs to either raise fees on airlines or sell $40 million more in hot dogs. While MCI may be able to pass all $14 onto the airlines, it would affect MCI’s ability to find new tenants to increase or maintain passenger volume. In addition, the reliance on airlines for funds means MCI is highly exposed to airline bankruptcy, which in the past has allowed major airlines to push debt onto the airport.

Additionally, the idea that this is just “a day at the movies” is incorrect. Airports compete with each other and various transportation services for customers, and they do so based on market size and cost per enplanement (CPE, or cost per passenger). Having a high cost per passenger can mean fewer passengers, as the marginal leisure traveler chooses not to fly for vacation and businesses decide to economize on airline tickets. This, in turn, reduces airline profits and constricts service, which further pushes up CPE. This is precisely why that measure is a major point in airport bond ratings, and why MCI currently advertises the fact that its CPE is only $5. The Star seems to assume that $19 per passenger, far above the median CPE for peer airports, will have no effect on MCI’s bond ratings or competitiveness.

There is no way to predict the future, but moving from a low-cost, low-debt airport to an extremely high-cost, high-debt airport that has lost passengers over the last decade is risky for MCI and Kansas City taxpayers.

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