Tough Times at MEM…and More To Come

 

 

Earlier this week, we posted our four modest proposals to address the crisis at Memphis International Airport.

The suggestions were to:

1) reform the airport authority with more reasonable terms of office and oversight;

2) begin a national search for the next president of the Airport Authority to identify someone with specific experience in leading a fortress hub through a transition to an airport with multiple carriers;

3) develop an entrepreneurial plan of action by a nimble, small group of leaders powered by a sense of urgency; and

4) do something  for economic development officials to support a campaign to give the public a voice in recruiting other airlines.

Not Worth the Paper It’s Written On

After the post, we were asked about our comments about the Airport Authority’s preferential contracts with Delta Airlines creating a barrier to entry for other air carriers interested in coming to Memphis.   That’s because unlike contracts in cities like Pittsburgh and Nashville, there are no penalties for Delta Air Lines as it continues to reduce the number of flights in Memphis as it will undoubtedly do in the next 2 months.

In fact, if Delta shuts down the hub altogether, they can walk away with short notice and with no obligation to pay for the improvements that were made for it at Memphis International Airport.  In other cities, airlines that eliminated their hubs were by contract on the hook to pay for the investments made on their behalf.

Meanwhile, we should celebrate Southwest Airlines’ entry into Memphis with the purchase of AirTran, but it’s more likely that it will get serious about Memphis in 2014 rather than in 2013.  So far, Southwest Airlines is doing what it was always going to do in Memphis, so we hope reports that the Airport Authority is giving its entire $1 million incentive to Southwest are erroneous.

Then again, the way the Airport Authority structured the incentive, Delta Air Lines could get it.  In the great scheme of things, a $1 million incentive is never going to be a game-changer, but we hope that it’s kept for an airline that’s doing more than what’s expected.   The ultimate test for Memphis is whether Southwest Airlines adds more flights here than exist here now and whether it will add a significant number of flights here with the significant investment it has made in the Nashville airport.

Say a Little Prayer

Considering that the Airport Authority’s long-term debt is about $550 million, no one should be let off the hook of paying its fair share of the costs of the improvements.  All of should say a prayer for FedEx because if its contract with the U.S. Postal Service is reduced or international problems persist, particularly with China, revenues will take a precipitous drop and make it hard to pay the bills at the airport.

Normally, one strategy that would be considered about now is to refinance the debt in light of record low interest rates, but the airport’s interest rate would be higher because of the downgrade of the Airport Authority’s credit rating and a change in its rating outlook from stable to negative.

As we’ve said before, when the airport authority decided to get in bed with Delta, it kicked everyone else out, and as a result, we now have a high hurdle that acts as a competitive disadvantage at the time when we need as few as possible if we are to attract other carriers to reduce some of the highest airfares in the country and end the fortress hub here now.

It’s almost like Memphis was so fixated on Delta Air Lines and its fortress hub as Memphis’ only option that we doubled down and missed the best window of opportunity when other airports like Nashville were transitioning to a healthier business model with multiple carriers and lower airfares.

Price Gouging Gets Even Worse

If you think that our airfares have finally peaked, think again.  USA Today reported a few weeks ago that although we are one of the two most expensive cities in which to buy a airplane ticket, comparing the first quarter of 2012 to the first quarter of 2011, Memphis airfares still rose an astounding 14.6%.

The average ticket price in Memphis, according to the newspaper, is now a staggering $520.  By way of comparison, our other airports – Nashville and Little Rock – have an average ticket price of $368 and $383 respectively.  While Memphis’ airfares were climbing about 15%, the average ticket price in Nashville only increased 5% and Little Rock’s average ticket price declined 2%.

All in all, the crisis at Memphis International Airport calls out for more oversight, considering the importance of this city-county board to the economic future of this region.

We also received a question about the length of the terms for airport authority members.  As we stated, if the city and county mayors’ terms are for four years, we are hard-pressed to understand the logic of seven-year terms for authority members.  Terms of three to four years are much more common for their peers in other cities’ airport authorities.

In Nashville, the 10 airport authority members serve for four years.  The same goes for San Diego, Indianapolis, Columbus OH, Orlando, and Jacksonville.  Airport authority members in Tucson and Hong Kong serve three-year limits.  Pittsburgh members serve for five years.  Jacksonville and Tucson have limits for each member of two terms.

The New York Authority

The Port Authority of New York and New Jersey does serve a longer term than these, but keep in mind that it operates and manages four seaports; five airports that include JFK, LaGuardia, Newark, Teterboro, and Stewart International Airport in Newburgh, NY; the downtown Manhattan heliport; six bridges and tunnels; a rapid transit system; three bus terminals; and acts as developer in projects around the region, including the World Trade Center.

Despite this massive portfolio, the members of the Port Authority of New York and New Jersey serve six years and that’s still one less than Memphis and Shelby County Airport Authority.