Airport officials reveal staggering budget shortfall
By J. Scott Trubey and Maria Saporta
Friday, May 7, 2010
Once again the city of Atlanta and the airlines are about to prove just how much they need each other.
And once again, the fate of Hartsfield-Jackson Atlanta International Airport’s international terminal could hang in the balance.
Atlanta airport officials on May 4 revealed a staggering budget shortfall that’s been compounded by the lingering global economy, concessions offered to Delta Air Lines Inc. in its latest master lease deal, and an accounting change that has caused further headaches.
At stake is the airport’s top-of-the-line credit rating, which it needs to maintain if it is to re-enter the bond market for $650 million in fresh capital to finish the international terminal, plus cash needed for future capital projects and the refinancing of some existing debt. The terminal is now under construction and about halfway completed.
Ben DeCosta, general manager of Hartsfield-Jackson, on May 4 told Atlanta City Council members the support of all the airlines is critical to maintaining the airport’s credit rating. That undoubtedly means the city, Delta and the rest of the airlines will once again step up to the negotiating table.
“There’s three legs to this stool that would support our credit rating,” DeCosta told the council. “It’s cost containment, it’s new revenue and it’s airline support.”
Without new bond money, insiders fear terminal construction could be threatened.
DeCosta told council members the airport’s revenues will plunge nearly 10 percent to $355.2 million in fiscal year 2011 in part because of continued weakness in air travel and passenger spending, but largely because of revenues not collected under the city’s new master lease agreement with its largest tenant, Delta.
Airport officials are also grappling with an accounting change shunting certain expenses formerly accounted for as capital costs as operating costs.
As a result, certain fees such as short-term and daily parking and charges to operators of airport shuttles, among others, are going to have to go up. And 67 airport employees are going to lose their jobs.
A new round of talks between the airlines and the city will be yet another early test for new Atlanta Mayor Kasim Reed, who has made growth of the airport, particularly air cargo, a cornerstone of his five-month-old administration.
The airport also has yet to finalize a lease extension with AirTran Airways Inc., Hartsfield-Jackson’s second largest tenant, and the other air carriers.
It is likely the shape of those talks will be affected by the airport’s budget woes.
The $1.3 billion Maynard Holbrook Jackson International Terminal was designed to accommodate Delta’s overseas growth ambitions. But it became a battleground in late 2008 in a dispute over a new long-term lease and what Delta said were concerns about future capital projects costs.
Former Atlanta Mayor Shirley Franklin and top lieutenants crafted the new master lease extension with Delta after a brouhaha over the price tag of future capital projects threatened to derail construction of the international terminal.
Under its new seven-year deal with the city, annual revenue from Delta (NYSE: DAL) and the airlines collected through landing fees and rents will plunge $25.7 million.
That, coupled with a global recession that has chilled passenger demand for more than a year, has forced the airport into unprecedented cuts.
Non-airline revenues, those collected from concessions, parking and other sources like rental car fees, will decline $9.9 million largely because of the recession.
Airport traffic counts were down about 2 percent in 2009.
DeCosta told the council Hartsfield-Jackson has been named the most efficiently run large airport in the world by the Air Transport Research Society, and will be again this year. But efficiencies can only accomplish so much.
The shortfall will have to be made up through cost cuts and fee hikes, he told council members.
“The cuts we are recommending are ones we feel are necessary … to preserve and protect our credit rating so we can go to (the bond) market,” said DeCosta.
After the meeting, DeCosta declined to discuss the matter further with reporters.
The city withdrew its first attempt to sell and refinance the international terminal bonds after Delta pulled its support in late 2008. Delta wanted cuts to the price of the international terminal and more say in future capital projects to ensure operating costs remained low at Hartsfield-Jackson.
Delta and the city inked the new lease deal before Franklin left office Dec. 31, and the airline agreed to support the city re-entry into the bond market.
The new fees —including increases in short-term and daily parking and new surcharges on hotel airport shuttles and some additional property leases — will generate $20.9 million in new revenue.
DeCosta said the fee increases will be outlined in a future council meeting.
“This is extremely serious,” DeCosta told the council. “The fact I had to look in the face of 67 team members and tell them they don’t have a job.”
The fees are not likely to be popular with the passengers who park their cars or with the city’s hospitality community. Last year, the hospitality community convinced city leaders not to increase fees for operators of shuttles for each time they drive to the airport.
Councilwoman Felicia Moore, a member of the transportation committee, said the lease with Delta is to blame for some of the airports budget woes.
“When we decided to do the lease extension,” Moore said, “we set ourselves up for many of the scenarios that we have here.”
With all due respect to our previous mayor who was a vast improvement over Campbell, this looks like another grenade handed to the Reed administration.
A new lease deal with Delta had to be crafted, and Delta needed something that was competitive, so I wouldn’t blame the lease deal.
Instead, I would look to possible airport operational inefficiencies and mild “corruption” at the airport (not illegal, just inefficient awarding of contracts that raise costs for the airport and reduces net revenues). In addition, the biggest problem is the international terminal that is way behind schedule and incredibly over budget – also due to some of the aforementioned problems.
I genuinely feel like Reed has walked into an Obama-like situation, having been handed a rash of problems from the Bush administration (mainly a failure to deal with underlying financial issues due to inability of the voters and council members / Congress to focus on financial fundamentals except in times of absolute emergency). It doesn’t appear that Reed has yet made some of the mistakes the Obama administration has. We shall see. What a mess. It makes me sick to my stomach. Really, just unbelievable.Report
There’s no grenade here. DeCosta needs to downsize just like every other business has had to do.
The airport is completely bloated with far to many employees. Delta and its CEO Richard Anderson knew this during the lease negotiations. They negotiated the lease knowing the airport would have to make cuts. Obviously, Franklin didn’t disagree with Anderson.
Here’s an example. CA One used to do retail compliance for the airport with three employees. DeCosta didn’t renew their contract and started his own in-house compliance division, with OVER TEN EMPLOYEES. That’s just one example of how bloated the payroll is at the airport, but I’m sure there are more.Report
Andre, I don’t disagree. It just would have been preferable if necessary changes had been made prior to Shirley’s exit. Handing someone a mess is not good housekeeping.
And now we learn the water department is a notch above junk status from the rating agencies. An economic downturn is not Shirley’s fault. But not being prepared is.Report
I don’t disagree with you in theory. However, the Delta lease negotiations weren’t complete until December. It would have been impossible to make changes before her term ended.
You’re pretty hard on ole Shirley. I think she thought the Feds and the state might help with the water upgrades and they obviously didn’t. The bonds are barley above junk status because the revenue to debt ratios are low. The only solution would be to increase the rates, which doesn’t need to happen.
Bottom line, she should be congratulated for risking everything to fix the water problems that had been ignored for decades.Report
I agree she deserves credit for tackling a difficult and very expensive problem. She was given a worse hand from Campbell than she has given Reed. At the big picture level, our city leadership (mayors) are getting progressively better.
But goodness knows two or more decades of neglect mean things are an almighty mess.
We’re going to have the most expensive water in the nation. If the unions don’t take a pension benefit cut, we’ll end up with even higher property taxes than the already highest in the state. The airport’s a mess. Parks are underfunded. The Beltline progress, to the extent it is happening, is pretty much being made solely from the benefit of donors.
There are days when you want to give up any hope of Atlanta having a prosperous future, and other days when you just want to stick your head in the sand. As an observer, there seem to be very few days when you get to be excited and optimistic about this city’s future. Not a fun time to be a mayor or a resident. I hope Reed relishes challenges.Report
Mayors are on the front line as far as government is concerned. I think Reed knew what he got himself into. After all, Shirley mentored him and helped his campaign and she never ran from challenges (or a fight), so hopefully he’s up to the challenge.
Atlanta is having problems like many others. Pensions are definitely at the forefront, but if the stock market returns and Reed makes some tweaks we should be fine. Parks and other such services are the first to go in a crunch, but have you seen the new park by city hall east? That thing is going to be phenomenal when it’s complete.
That city hall east park is the beltline. The next park is being built between grant park and the US penn. Hopefully, the transportation bill mayor Reed helped pass can close the loop on the transit piece of the beltline.
One point of clarification – the airport is not a mess. It is consistently ranked among the best run airports in the world. Yes it has a shortfall this year, but what government entity doesn’t? The international terminal and a possible sixth runway will set it up to be an industry leader for the next generation.
The glass is half full and filling up.Report