Tuesday, 2 October 2012

Public Agency Fixed Cost Death Spiral: Sacramento Airport Edition

I have been busy making travel plans for myself and family members lately, and I am extremely annoyed at the cost of flights and poor connections out of the Sacramento airport.  I am increasingly finding flights from the Bay Area to be substantially less expensive with better connections.

I strongly suspect that this is at least partially to blame on the outrageously expensive $1 billion Terminal B replacement, and the resulting hike in airline lease rates, parking rates and other costs.  Before they started building the project, the airlines begged the Sacramento Airport Authority to consider less expensive alternatives before embarking on their grand plans, but were ignored.

The bond payments for Terminal B are finally starting to kick in, and the Sacramento Airport authority could be in significant financial trouble in a few years if they aren’t able to increase traffic.  Since 2008, the airline terminal rental rates at the Sacramento Airport have more than doubled, and annual debt service costs have increased from about $20 million to $80 million.

With Frontier Airlines announcing they are pulling out of Sacramento at the end of the year, the job just got tougher, and airline fares will probably go higher now that Southwest is losing a low-cost competitor in the market.

Data from the Sacramento Airport bears out the problem.  Since the airport rates were jacked up to pay for the new terminal in 2008, passenger traffic at the Sacramento airport has declined 17.5%, compared to 1.7% decline nationwide over the same period.  Undoubtedly, the recession is partly to blame, but I suspect they are losing traffic to other airports as well, and there is no sign of a significant bump in traffic from the new Terminal.

Of course, none of this stopped the Sacramento Airport Authority from receiving tons of awards, including economic development awards from various local groups who rave about the pretty new terminal.  This makes me wonder whether economic development awards for people running public agencies are bad for economic development.  It just encourages them to build costly monuments and take on excessive debt for the next generation.

What would really help economic development is not a pretty gateway, but more flights at lower costs.  While Terminal B was outdated and needed to be replaced, it could have been done with a similar facility as Terminal A for a fraction of the cost.

By increasing rates a few years ahead of the increase in debt service, the airport has built up some financial reserves.  I wouldn’t expect any serious financial issues for several years, and the airport authority will probably squeak by, although the citizens of the region will endure lousy schedules and higher fares.

Maybe Frontier Airlines will come to Stockton to join ultra-low cost Allegiant.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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