The Morning Report
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Operations at the San Diego International Airport look nothing like they did a month ago.
Airlines are cutting flights, and British Airways and Lufthansa have temporarily ceased operating in San Diego altogether as global efforts to slow the spread of the novel coronavirus keep passengers at home.
Just 185 out of 409 scheduled takeoffs and landings took place last Sunday. Foot traffic at security checkpoints was down more than 81 percent from a year ago during a recent seven-day period. Most airport eateries and shops are closed, except a few providing to-go items and medicine, airport officials said.
“Fewer passengers means fewer people to park, to rent cars, to shop in our terminals. The parking occupancy rate is very low. Concessions have lost a tremendous amount of sales revenue,” said Kim Becker, the airport’s CEO, at a March 23 board meeting held remotely. She said the airport association, known as ACI-NA, projects U.S. airports will lose $14 billion in revenue combined, “and that the coronavirus will have six times the impact of Sept. 11.”
The loss of flights, passengers and related consumer activities amid shelter-at-home orders will decrease the airport’s operating revenues, and those of its tenants, which are now asking the airport for a reprieve from the payments they’d normally owe.
Despite amassing a healthy $853 million-plus reserve over the years, San Diego airport officials are now grappling with the immediate financial impacts of the virus and contemplating the long-term impacts it may have on its plans – notably its hard-fought $3 billion plan to rebuild Terminal 1 and make other capital improvements. That project is largely going to be funded by airport bond debt backed by passenger and airline fees, as well as other revenue streams. Smaller portions will be paid with airport cash and grants.
But the airport has now granted a request from airlines to delay paying the airport any fees for 90 days, airport spokeswoman Nicole Hall wrote in an email to Voice of San Diego.
Hall said the 90-day deferral the airport has granted tenants will not jeopardize the timeline for the airport’s Terminal 1 redevelopment. She acknowledged, however, that the airport doesn’t know if its plan to issue debt to fund the project will be affected by the pandemic in general. The airport planned to issue bonds in late 2021 at the earliest, she said.
Southwest Airlines, the largest airline operating in Terminal 1, cut flights across the airline by 50 percent and ditched plans to add nonstop flights to Hawaii this month.
In a statement to VOSD, Southwest officials said they are working with the airport to control costs and deal with the hit to travel demand in the short term while still focusing on long-term planning. Southwest has consolidated boarding gates, and is working with the airport to temporarily delay rent payments and landing fees.
“We’re jointly evaluating timelines associated with the Terminal 1 Replacement Project,” Southwest Airlines officials said in a statement.
Becker, the airport CEO, told the board March 23 no airlines had expressed concern about the 10-year airline operating and lease agreement signed last year that serves as the backbone for the airport’s long-term plans, but, “certainly they are seeking rent abatement and looking at anything we can do to control our costs and expenses.”
Airline revenues of all kinds – including landing fees, aircraft parking fees, building rentals and other charges – made up 46 percent of the airport’s total operating revenue last year, topping $134 million. Concessions brought in $71 million and parking brought in nearly $63 million for the airport last year, according to its 2019 audited financial statements.
“We are going through multiple financial scenarios,” Scott Brickner, the airport’s chief financial officer, told the board at the March 23 meeting, adding the projections often change daily or hourly. “But we know it (losses) will be substantial.”
Becker recently enacted a level three – worst case – financial resilience plan, which calls for a hiring freeze, delayed and reduced non-essential spending and a stop to non-critical capital projects that aren’t part of its $3 billion airport development plan. That massive plan includes a rebuilt and expanded Terminal 1, new roadways, a new administration building and 5,500-space parking structure.
“We are continuing to move forward with construction projects already underway and are assessing our options for the long term,” Becker told the board.
Hall, the spokeswoman, said no major changes have been made to the timeline for the $3 billion project adopted in January, but that award of a $2.2 billion terminal and roadway construction contract planned for May will be pushed to July.
Some $170 million in separate non-essential construction projects have also been sidelined, including the replacement of the Terminal 2 East baggage handling system, replacement and refurbishment of passenger boarding bridges and some utility projects. Meanwhile, $172 million in airline support facility projects are proceeding and aren’t expected to see significant delays due to the virus, also known as COVID-19, Hall said in an email. Those projects include a maintenance building, due to wrap up in May, followed by a fueling center, storm water cistern and finally an airline support building, scheduled for completion in December.
Airport officials planned to award the construction contract for the $2.2 billion Terminal 1 rebuild in May and break ground in November 2021, before opening the first phase of the terminal and roadway project in 2024 and the final phase in 2026, according to January board documents. Contracts for the remaining work – including a new administration building and parking structure – are supposed to follow, with the last contract let in February next year.
Work under a $35 million contract awarded to Jacobs Engineering for airfield pavement work earlier this year “has not been significantly delayed due to COVID-19,” Hall said in an email.
The coronavirus poses the latest challenge to the airport’s long-envisioned $3 billion development project that includes replacing the ‘60s-era Terminal 1. More than $30 million has already been spent on the project since 2012 for consultant help with master planning and environmental review, Hall said.
The airport’s draft environmental impact report for the project was released in July 2018, but reworked and re-released in September 2019 following outcry from other government agencies and some residents who felt the airport didn’t do enough to support a regional vision for a multi-transit hub near the airport, nor to adequately address the impacts of the planned expansion. Among other changes, the parking structure was reduced by 2,000 spaces.
In a departure from previous major capital projects, airport officials also agreed to a union-friendly project labor agreement last year for the development plan, a move that irked at least one board member.
San Diego International Airport – the country’s busiest single runway airport – is working with more cash than many agencies across town as they deal with the financial blow caused by the coronavirus, but the airport’s primary revenue streams make it extra vulnerable to a prolonged crisis of this type.
“We are starting from a position of financial strength,” Brickner, the CFO, told the board, indicating at the end of February the airport had more than 1,000 days’ cash on hand. “While these metrics are strong, the impact of this situation is extensive, and the risk is high. … We must proceed with extreme caution.”
The airport budget for the next fiscal year is due April 30.
“None of us ever envisioned this, but we knew that good times don’t last forever and we are as prepared as one can be,” April Boling, chair of the Airport Authority board, said at the board meeting.
Money airlines and the airport will receive from the federal stimulus known as the CARES Act will help but how much they’ll get remains unclear, Hall said. The board was told it would likely be allocated partly based on a formula tied to the airport’s share of the aviation market, according to audio of the March 23 meeting.
San Diego International Airport served 12.4 million passengers last year, according to airport records.
A representative from Sun Country Airlines said its sole route out of San Diego to Minneapolis is reduced this month in response to demand. Another route to Cabo San Lucas scheduled to begin in June is currently unaffected.
“We are working with all airports we operate out of on rate reductions in light of the current travel environment,” Sun Country’s media team wrote in an email.
A spokesman for Frontier Airlines said in an email that the company has also been decreasing its flight capacity in response to demand.
“It is the company’s belief that, if there is strong compliance with the U.S. government’s current guidance for Americans to stay at home for an additional 30 days, the airline will be in a position to gradually build flight capacity back beginning in May,” spokesman Zach Kramer wrote.