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Tue, Jul 15, 2003

Next Card: Airports?

After the Airline Slump, Can Airports Not Follow?

Traffic is down; rates will rise. The extra costs will drive business away, and traffic will dive still deeper. That, of course, will trigger another rate increase. Hey -- is this any way to run an airport?

Of course, if demand shifts [and it shifted], adjustments need to be made, and not all the costs involved are readily-changable. Contracts need to be honored, or trudge through lengthy renegotiations; but the future is uncertain, and the 'winning' (at least in the short term) side doesn't want to give up too much, too soon. On the other hand, the 'losing' side can't go on losing forever -- and, if it fails, the 'winning side' takes a monumental dump, too, its remaining reputation forever besmirched.

If besmirching is forever, it stands to reason that everything else is subject to change. That's what is staring Toronto, particularly, in the face right now. In a lousy industry climate, particularly devastated by the SARS scare, Pearson Airport is facing a major crisis. Last year's sleepy total of just under 26 million (following an unexciting 28 million or so in 2001) PAX would look good as a projection for this year's volume, especially after the slowly-recovering airport got hit first by Air Canada's bankruptcy and its ensuing disruption, and then the World Health Organization's proclamations regarding SARS, and especially SARS in Canada.

OK -- the SARS 'epidemic' seems to have passed. Toronto, however, is still on the 'critical' list.

Can the airport raise sufficient revenues, merely by raising selected fees? If so, will passengers and vendors pay? For how long? Or -- if the airport doesn't raise fees, will it be able to maintain solvency, at all? Or -- if the airport does raise fees, will the inevitable dropoff in traffic cause longer-term troubles?

Oh -- and if higher rates beget higher fares, will the airlines survive to bring the customers to Pearson, at all?

Such are the decisions being faced by airports all over the world, though arguably Toronto -- with its main carrier in court and its passenger pipeline squashed all but flat for three months -- is right at the top of the list of "hurtin' airports."

What's next?

Well, it's a cinch that the end of the SARS scare will help loosen up the voluntary travelers; Air Canada's continued viability, though still in doubt, is less a question than in the Spring; and a general uptick in air travel, should it reach Canada's busiest airport, will help stop the flow of red ink. The ink, though, is still projected to be red, and no amount of 'volume' will fix a losing entity.

Where can all the airports go?

We watched the beginning of a shakeout in the airline industry. Painful as it was, it wasn't a wholesale shutdown of the entire, essential segment of the broader air travel industry. Airports, though, are different: airlines can mothball a few airliners, get their unions to rather quickly understand the problem (or, lacking that that, announce furloughs), and stop serving meals for free. Airports -- they're pretty much non-fungible. They're there, and they deteriorate all at once, and they support a lot of infrastructure. Raise the temperature a few degrees to save air conditioning bills, and defer some semi-optional maintenance, and you're about done with the "big" items. Reduce security? Turn off the monitors? Not likely. Raise rents to vendors and carriers? Not when they're already hurting for customers.

The idea here isn't to show the plight of Toronto, good example though it may be, but to point out that the 'ripple effect' of years of bad airline news hasn't progressed beyond direct airline employees and vendors. There's plenty of 'ripples' left in the pond, from the stone of September 11...



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