LAX Projects a 35% Decline in Passengers

Los Angeles International Airport officials are projecting a 35% drop in annual passenger traffic in the current fiscal year, a 25-million-traveler falloff that will seriously challenge the airport’s finances in the aftermath of the Sept. 11 terrorists attacks.

With fear of flying keeping passengers away and airline flight schedules being slashed accordingly, total passenger traffic at LAX could fall from a projected 70 million annually to 45 million this fiscal year, the same level as a decade ago.

If the precipitous drop in passengers since the East Coast terrorist attacks continues, the city’s airport department could lose more than $108 million in revenue from parking lots, concessions and landing fees by the time the budget year ends June 30, said Karen L. Sisson, chief financial officer for Los Angeles World Airports.

The drop in passengers, and revenue, reinforces Mayor James K. Hahn’s desire to significantly scale back the long-awaited redesign of LAX and to refocus the work on security, rather than increased capacity.

Airport managers already are drawing up a new budget, to be presented to the Airport Commission next month, that would reduce operating expenses by as much as 15%. That means the popular Van Nuys air show, scheduled for June, is being canceled to save $1.2 million. Also halted are nonessential equipment purchases and construction not related to safety and security.

Airport officials also say they will travel less to conferences and conventions and cut spending on consultants. If those reductions don’t go far enough, limited layoffs of airport employees may be considered next year “as a last resort,” said Lydia Kennard, executive director of Los Angeles World Airports.

The uncertainty created by the terrorist attacks has made forecasting future trends in air travel extraordinarily difficult for both airlines and airports. “We are operating in a world no one anticipated caused by events that were considered unthinkable,” Sisson said.

But the consequences of the steep downturn in passenger traffic are already being felt, with thousands of airline workers at LAX facing layoffs. And security costs have skyrocketed as police officers work overtime.

Preliminary figures for September show the city’s airport department lost an estimated $19.7 million for the month. And the financial red ink continued to grow in the first three weeks of October. “It is still a bleak environment,” Sisson said.

Wall Street has placed major international and hub airports across the United States on watch lists for a possible downgrade of their credit ratings, a move that could increase the future cost of borrowing.

Adam Whiteman, a senior vice president at Moody’s Investors Service in New York, said the rating agency believes the decline in air travel will be significantly worse than during the 1991 Persian Gulf War. It took eight to 10 months after the war for passenger traffic to return to prewar levels.

“Consumer confidence has been seriously eroded and this will affect travel for some time,” Whiteman wrote recently. “The simultaneous taking of several aircraft has caused the traveling public to fundamentally doubt the safety of air travel. The searing graphic images of these tragedies will have a negative impact on the aviation consumer psyche unlike any other since possibly the destruction of the Hindenburg.”

Low Debt Shielding LAX’s Credit Rating

Although Moody’s placed LAX on a watch list for a possible downgrade in its bond rating, Whiteman said the city’s airport department has the advantage of having only $232 million in outstanding debt. The figure is low because the city is not further along with expensive plans to improve and expand the airport.

“Somebody should be thankful for delaying it,” Whiteman said. “From a credit perspective, it’s a good thing that LAX has such a little amount of debt.”

Hahn recently announced that he does not want to proceed with the $12-billion airport expansion plan favored by his predecessor, Richard Riordan. Rather than building new terminals and expanding passenger capacity, Hahn wants to emphasize security improvements. Although he has provided few details, Hahn has proposed building a remote passenger check-in and security facility outside the central terminal area.

By contrast, Whiteman said, San Francisco International Airport is $3.7 billion in debt because it embarked on massive construction projects, including a new international terminal.

Major international airports such as Los Angeles and San Francisco are heavily affected by weakness in overseas travel. International flights account for one out of every four seats on scheduled flights out of LAX, according to airport figures.

The financial problems facing LAX are compounded by the airport’s design. The nine terminal buildings and the adjacent parking structures are so close to each other that concerns about a potential bomb blast prompted airport officials and law enforcement agencies to keep the airport closed to private vehicles from Sept. 11 until Saturday morning.

Sisson said preliminary figures show the airport lost $4.4 million in parking revenue in September alone. Based on the projected decline in passenger traffic, she is forecasting a 30% drop in parking receipts, which would cost the airport $22.1 million by June 30.

Altogether, income from LAX parking lots and concessions was an estimated $9.2 million below budget in September.

Most of the retail shops, restaurants and newsstands that produce ample rent for the airport lie beyond security checkpoints. And security restrictions imposed by the Federal Aviation Administration allow only ticketed passengers in that area--meaning a significant loss of business from “meeters and greeters” who once were allowed in the airport’s gate area.

Jody Hann, a tax expert who represents HMS Services, the major food and beverage concessionaire at LAX, said the company’s gross sales at the airport dropped from $4.2 million in September 2000 to $2.8 million last month. The decline was even sharper at the San Francisco airport, where sales fell from $4.5 million in September 2000 to $2.5 million last month.

“They have been damaged significantly,” Hann said.

As a result, airlines and concession operators are likely to seek reductions in their rent and taxes, based on declining sales.

Assessor to Consider Tax Cuts Over Losses

Los Angeles County Assessor Rick Auerbach announced last week that he agreed to allow airlines and on-site concessionaires to seek a reduction in property taxes based on losses suffered because of government actions to restrict access at airports.

Sisson said airport officials have rejected requests from two airlines to delay paying landing fees. Airlines are charged such fees based on the weight of their aircraft when they touch down. “We took the position we’re not going to provide relief,” she said. Airlines and concessionaires have been told: “You need to pay your bills on time.”

The airport suffered an estimated $2.5 million in lost landing fee income because of the shutdown of all air traffic for several days after the Sept. 11 attacks and the reduced number of flights ever since. However, the airport has the ability to raise landing fee rates at the end of the year in an attempt to recover those losses.

The fall in income came at the same time security costs for Airport Police, LAPD officers and city transportation workers increased by approximately $8 million in September alone. Los Angeles Police Chief Bernard C. Parks has insisted that some of the increased deployment must continue to make the airport safe.