More Gates for Low Cost Carriers

chase

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Good article talking about expansion plans at BWI, LAX & the dilemmas for low cost carriers. Demonstrates why the growth will be in these carriers over the next few years, AirTran, ATA, SWA, Frontier, etc.

"Competition Grows as Airports Move to Take Back the Gates"

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Wednesday, March 6, 2002

Competition Grows as Airports Move to Take Back the Gates
The Wall Street Journal


Last week, the Maryland Aviation Administration agreed to pay US Airways
Group Inc. $4.3 million to give 29 gates at Baltimore-Washington
International Airport back to the airport. In January, the
Raleigh-Durham Airport Authority agreed to acquire one of its terminals
from AMR Corp.'s American Airlines for an undisclosed sum.

Strange, isn't it, that an airport is paying an airline to buy back the
airport's own gates, especially when the gates weren't being used? It
happens frequently these days.

What airports are really doing is buying out long-term leases and
reimbursing airlines for the cost of improvements and of moving
equipment. But the big picture is this: Airports will go to great
lengths to attract competition.

For years, one favorite tactic of big airlines has been to block
competition from low-fare invaders by hoarding gates. With no place to
dock airplanes, new entrants are often shut out of markets -- and
communities pay more for less air service.

That seems particularly reprehensible when you consider that typically,
the community built the airport and the terminal in the first place for
the good of the community, not the individual airline. "I think it's a
crime," says Bob Montgomery, head of real estate for Southwest Airlines.
"A community should be able to make sure that a public facility is
utilized for the good of the public."

Mr. Montgomery has fought the good fight for many years so that
Southwest could be one of those pesky competitive airlines. It hasn't
been easy. For a time, Southwest was so cramped in San Diego that it
operated 19 flights a day, on average, from each of its gates. In Los
Angeles, Southwest was running 102 flights a day in 1996 from seven
exclusive-use gates, while down the corridor, US Air, which controlled
the lease on the terminal, was running 18 flights a day from six gates.
US Air wouldn't budge, knowing that with a few gates more, Southwest
would just keep chomping away and building market-share.

Today, after pressure from the airport forced a change, Southwest is
running 127 flights a day at LAX and it has full or partial use of 11
gates. It would like more there. It's running 12 flights a day on
average from its gates in San Jose -- the highest in its system. But by
and large, across its system, Southwest now has access to more gates.

Having low-fare competition makes a huge difference. A Department of
Transportation study published last year found that average air fares
are as much as twice as high in markets without low-fare competition as
markets with low-fare competition, depending on the length of the trip.
For trips of 500 miles, for example, the average fare in the third
quarter of 2000 was $186 in markets without a low-fare competitor,
compared to $92 in markets with a low-fare competitor. Just consider the
impact Southwest had on Baltimore. Able to get gates for expansion,
Southwest pushed fares down as much as 73% after entering Baltimore in
1993, according to the Department of Transportation, and traffic has
more than doubled to 19.6 million passengers in 2000 from 9.4 million in
1993.

That's the good news for travelers: The balance of power in airport real
estate has swung to favor airports and travelers, and away from the
airlines.

Airports no longer offer airlines 30-year exclusive leases on gates, and
instead of relying on airline backing of bonds, airports pay for
terminals themselves. In the past, airlines actually took some financial
risk in building the terminals, and so they got exclusive, long-term
leases. Now, airports build the facilities using money collected from
passenger-facility charges, the roughly $3 per flight fee added on your
tickets. When Congress allowed such charges, it insisted that any gates
built with that money be "preferential use gates," not exclusive use
gates.

Smart move. With preferential-use gates, airlines can get a multiyear
lease, but the carrier has to regularly meet specified use requirements.
If it doesn't use the gate enough, the airport can take it back and
lease it to another airline -- or at least force the incumbent carrier
to share.

What's more, the Federal Aviation Administration has required all
airports where one carrier has 50% of the traffic -- known as fortress
hubs -- to come up with a plan to increase competition. So last fall,
for the first time ever, Dallas-Fort Worth International pushed American
into a preferential-use lease, instead of an exclusive lease, on two
gates involved in a swap. Atlanta's Hartsfield International already has
said that when its exclusive-use contracts expire in 2010, it will push
preferential-use gate agreements.

"That's definitely the trend," says Richard Marchi, senior vice
president at Airports Council International, a trade group for airports
.

Things aren't yet where they should be: Airports still can't act like
conventional real-estate developers and build projects to include
vacancies. Extra capacity would be nice for airports to have, but they
have to have some way to pay for the space, and FAA rules make it
difficult to charge individual airlines for things they aren't getting
to use.

But progress is real. In Baltimore, Airtran Airways is expanding rapidly
and will take some new gates as the airport quickly moves US Air out
from space it wasn't using. (US Air's lease ran until 2013.) Southwest,
too, will be able to step up an expansion project in Baltimore because
of the US Air buyout. From 16 gates today, Southwest will grow to 26
gates, with the option to expand to up to 31. Some airlines near
Southwest will be moved to former US Air gates, and the space gained
back by the airport will allow quicker construction of some new gates
for Southwest. Plus, the airport has the opportunity to entice other
carriers with a big chunk of gates it can offer.

Instead of lying dormant for years, those gates will soon be productive
for Washington-area travelers. This is one time when public policy has
improved flying.
 
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