Sunday, July 6, 2008

The Airline Crisis Comes to San José

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

Today's Mercury News provides an in-depth look at Mineta San José Airport expansion and asks whether it will be a "waste" as the price of oil leads to dramatic cuts in flights and services:

With the airline industry in disarray amid the startling rise in oil prices, new questions are emerging about the impact on San Jose's lofty $1.3 billion airport expansion.

Even as airport officials promise a state-of-art new terminal will open by 2010, they are also grappling with some disturbing trends that might eventually lead to fewer flights here. Increased traffic is key to paying off the expansion - and while airport officials are reluctant to speculate about long-term trends, nobody can say whether the short-term belt-tightening now under way will be enough to weather a protracted downturn.

SJC officials are in a tight spot - to keep airlines there, they have to have low fees. But to repay the $1.3 billion in bonds that were sold to finance the project, they need income. If flights are cut and the number of passengers drops SJC would have to get more money in fees from the airlines - which would cause the airlines to cut back service further.

THAT is what true financial risk looks like. SJC gambled that air travel would remain a viable form of transportation well into the future - and that oil prices would remain low. They may lose that bet.

The fear that fuel prices may rise even higher looms over San Jose's Aviation Director Bill Sherry. He recently showed the city council data from industry analysts who estimate that if oil goes to $150 a barrel, national passenger levels could fall by 23 percent. At $200 a barrel, they could plunge by 35 percent.

The airport's original $100 million budget for the fiscal year that began this month projected a passenger growth rate of 1 percent. If traffic instead decreases by 10 percent, officials say revenues for the airport - which is self-supporting and receives no money from the city's general fund - would fall as much as $9 million.

The price of a barrel of oil is going to fluctuate for some time. $150 is certainly possible within the next few weeks, just as $99 is possible within the next few months. But the long-term trend is upward, there can be no mistaking it. The result, as I have consistently argued on the blog, is reduced service:

Delta Airlines spokesman Anthony Black said the rising cost of oil means one simple solution: "Fewer flights and fewer markets." The company has already cut back flights nationwide by 13 percent since December and now operates nine daily flights into San Jose.

I don't welcome this - SJC is my primary airport, given how expensive it is to fly out of Monterey. This means my own travel options are going to be reduced and made more expensive.

What is to be done?

"The airport is the dance hall, and the airlines are the pretty girls," quips Forrester Research travel-industry analyst Henry Harteveldt. "You have to have the pretty girls to get the guys to show up - and the guys are the passengers."

Of course, SJC isn't the only dance hall in town. The other SJC - Diridon Station - is poised to become one of the Bay Area's key transportation nodes. HSR would complement Caltrain, the Capitol Corridor, and VTA light rail, all of which currently serve San José Diridon. Theoretically BART will be added into the mix, and even though I do not expect that to actually happen, Diridon Station will still be well positioned to use its "girls" - modern, high speed trains - to attract the "guys" - passengers - for travel purposes. HSR can move travelers quickly to SFO, and the Capitol Corridor can take passengers to OAK (where the Amtrak California line already has a station). Of course, HSR will also connect passengers to other points in California, notably in Southern California.

Whether we want to continue the tortured dance hall metaphor or not, it is clear that passenger rail is showing rates of growth that the airline industry cannot match. HSR won't replace the mid or long-range flights, but it would help passengers in the Santa Clara Valley have affordable and sustainable travel options, which they clearly are going to need in the future.

The real "financial risk" in this case is that the Silicon Valley places all its eggs in Mineta-SJC's basket, relying solely on airlines and an airport that both might face serious financial problems in the near future. Wouldn't it make sense to hedge against the risk by building a transportation system that has proved to be a global success, and that maximizes the ongoing passenger rail trend?


Rob Dawg said...

Can San Jose tax the bejesus out of HSR the way it does air travel?

My point is that there is a negative incentive built into the CAHSR financing model for localities. SJ didn't build the airport because they like airplanes. They did it for the money. That incentive doesn't exist for CAHSR.

Brandon in California said...

San Jose built the airport to enable greater travel options for their citizens AND foster business development.

I think the wise thing to do, if I were in San Jose shoes, would be to postpone plans for the time being, or reduce their scope. The idea being would be to wait and see where the air travel market and industry is heading. This November's ballot measure could be related.

A year or two should suffice.

I am sure the Board representing the airport would also reach out to the airline industry to vet the implications of any proposal to raise applicable fees... to eventually benefit their businesses too.

Tony D. said...

I respectfully disagree with your post. The money incentive does exist in San Jose for HSR. As we speak, the SJ Redevelopment Agency is busy buying up huge parcels in the Diridon Station area for a future Transit Oriented District (I'm stilling dreaming that 13 of those acres will go towards Cisco Field/future A's ballpark, but that's another story for another blog). The Diridon area, with a HSR station, "Santana Row" on steroids development, and current HP Pavilion, could be a financial boon to the city; especially the downtown. Downtown San Jose would then have the "transportation synergy" of many European city's (Rod Diridon, 07). As I've stated before, a "St. Pancras Station" west in downtown $an Jo$e!

Anonymous said...

1. Airlines are expanding due to an expanding population. There are more passengers than ever. The skies are crowded. It's tough going through airport security. Therefore, we need HSR to relieve the air carriers of their over-loads.

2. Airlines are shrinking due to high fuel costs. There are fewer passengers every day. The skies will become empty. The air terminals are no longer needed. Therefore, we need HSR to carry those travelers who aren't flying any longer.

Sound familiar?
1. We will cut taxes because we have a surplus so we can give the money back to the taxpayers whose money this is.
2. We will cut taxes because we have a deficit so that we can pump that money into the economy instead of the government collecting and wasting it.

Anonymous said...

Check out Michael Keisling's solution to this problem

The maps are a little hard to read and if I get a chance I will do up his route in Google Maps.

Anonymous said...

Dawg - San Jose does not make money on SJC. On the contrary, it loses money hand-over-fist. In the most recent two fiscal years, San Jose transferred $3.5 million to SJC, not vice versa. The only significant fees that the city charges SJC are to reimburse the city for the cost of providing airport police, rescue, and firefighting services.

Far more important, however, is the opportunity cost of the land. Nearby residential zoning has around 6 houses per acre on it. SJC takes up 1,050 acres, so the alternative use for SJC's land would take be around 6,000 houses. With a median house value of $600,000 and a property tax rate of 1.1%, that means the government is losing $40 million per year by having an airport there rather than using it for housing. And that doesn't even take into account the implied value of the land that the city is effectively leasing the airport for free (this would be much more than the lost tax revenue).

Clearly, having the airport there is a giant money-losing proposition for the city and the state from a financial point of view. There is certainly a case to be made that the non-financial benefits make it worthwhile, but from a purely financial view, no question, it's a giant money hole.

Anonymous said...

Anonymous: your fallacy is in conflating actual airline passengers with people who want to travel. The population is still increasing, people still want to travel, it's just that they can't afford the now very expensive airline fares.

Winston said...


San Jose's airport is a substantial money loser. According to the airport's financial reports, it loses about $33 million per year on its operations. The taxes you mention only make back $22 million of those losses.

The in 2005, 2006 and 2007 the airport received a net subsidy of around $18 million per year from the City of San Jose, Santa Clara county and others.

Anonymous said...

sacramento's airport is expanding also, although there are (even now) reports of airlines cutting service

Rob Dawg said...

You misunderstand my point. San Jose is possibly the second dumbest municipality in the State and yes they are losing money with the airport. That's not the point. They thought they were going to make money and they do charge $22 million against air travel. The CAHSR will have all the obligations and none of the revenue power. I also agree that HSR will induce ancillary economic multipliers. San Jose won't be smart enough to recognize that.

So you see right or wrong municipalities up and down the corridor are faced with a difficult financial situation.

Rafael said...

With the exception of VTA light rail, the Santa Clara/SJC station offers the same intermodal connectivity (opportunities) as San Jose Diridon. However, it would be superior for any high-speed network route through the Altamont Pass.

The argument that the City of San Jose already has big plans for the Sunol-Midtown area west of Diridon station doesn't really hold water - it's just a couple of miles from Santa Clara/SJC with connecting services by Caltrain, ACE and Amtrak Capital Corridor plus a planned BART subway.

Rather, both SJ Diridon and Santa Clara/SJC should be seen as transit hubs, with associated transit-oriented urban zoning and architecture. Siting the HSR station in Santa Clara would better serve the needs of all of Silicon Valley, which contrary to claims by San Jose actually extends well beyond the Golden Triangle bounded by the 101, 880 and 237 freeways. It would also direct more passengers to SJC for destinations not served by California's HSR system.

Even if that strategy fails because air travel were ever to become so expensive that SJC goes out of business entirely, an HSR station in Santa Clara would be a perfect gateway for a brand-new mixed business/commercial/residential district on that parcel of land.

For reference, the city of Concord would like to close Buchanan Field to general aviation in favor of a new airport in Byron. Fresno Yosemite is much larger and still an active commercial airport. However, HSR would open it up to fierce competition from both SFO and Palmdale, even Sacramento Int'l.

TJ said...

The way I understand it, airports are to be reasonably self-sufficient on user fees (fees charged when an airplane lands; perhaps takes-off). Seems to me SouthWest accounts for roughly half of SJC's fee base (visual ovservation). Looks like the City of SJC has itself in a Catch-22: Raise user fees and SWA pulls out in favor of OAK (who is MUCH more accomodating, and which I believe SWA threatened to do not too long ago) and has better SW connections); and SJC continues with big-league image objective (which they can't back down from given current construction progress). I guess the good here is that for the next 10-15 years, SJC will be a VERY spacious facility.