Tailspin

Lambert's billion-dollar expansion hangs on a wing and a prayer: The numbers no longer add up

Looming cutbacks by American have finally forced airport officials to admit they're facing a money crunch with no easy answers. Griggs is begging the Federal Aviation Administration for $100 million to subsidize runway construction, with no assurance that the feds will pony up and no back-up plan. St. Louis mayor Francis Slay has appointed a task force of business leaders to come up with a twenty-year plan to ensure Lambert will remain a regional economic engine, even though the airport in 1996 adopted a twenty-year master plan to guide airport development. Airport officials have been trying to soothe investor concerns and convince airlines to come to St. Louis.

In short, it turns out that airport and city officials were wrong when they said a new runway is a can't-miss proposition. Wall Street is starting to worry.

When American Airlines in July announced that it will cut daily departures from 417 to 207 in November, Standard & Poor's downgraded Lambert's credit rating and warned that an additional downgrade may come this fall. The Standard & Poor's downgrade from A- to BBB+ brought the airport's rating to the low end of investment grade, which is anything above BBB-. Lambert and Pittsburgh International Airport, where officials have openly worried about defaulting on $670 million in bond debt since U.S. Airways canceled its gate leases earlier this year, are the only two major hub airports in the nation with ratings below the A range. Pittsburgh International bonds are also rated BBB+.

John Krekeler is a lonely voice on Airport Commission: "My intent is to bring things to light that they'd rather not talk about"
John Krekeler is a lonely voice on Airport Commission: "My intent is to bring things to light that they'd rather not talk about"
The Missouri Air National Guard facilities have been deemed an "aircraft obstruction" once the new runway opens, but the airport recently postponed plans to move them
Jennifer Silverberg
The Missouri Air National Guard facilities have been deemed an "aircraft obstruction" once the new runway opens, but the airport recently postponed plans to move them

Any rating below BBB- is considered junk-bond status, and Standard & Poor's has Lambert just three steps away (the highest possible grade is AAA). Moody's and FitchRatings, the nation's two other major credit-rating agencies, kept the airport's credit-rating at the A- level but, like Standard & Poor's, launched a review of airport finances that could result in downgrades by the end of October. The ratings are key because downgrades can increase borrowing costs for future projects.

Whether the worst actually happens remains to be seen. No large airport in the United States has ever defaulted on a construction bond. And Lambert isn't the only airport under scrutiny from bond analysts. In the past year, FitchRatings has downgraded the credit ratings of four major airports. Standard & Poor's has ten large hubs with negative outlooks, meaning downgrades are possible.

In the event of a default, city taxpayers won't be on the hook because airport bonds are backed by revenue generated at the airport as opposed to the city's general fund. In addition, the city has insured the airport bonds, so bondholders would get their money. Even when public agencies default on bond payments, bond insurers typically look for solutions short of handing control over to a trustee.

In a written statement prepared in response to an interview request, city comptroller Darlene Green, who has signed off on more than a half-billion dollars in bonds to pay for the new runway, says she's not worried. "I remain confident the airport will have sufficient funds to complete the runway expansion and cover all bond debt at the airport," Green wrote. Liz James, a spokeswoman for MBIA Insurance Corporation, which has insured more than $100 million in airport debt, also says the company isn't concerned.

Despite safeguards, Krekeler says he fears the new runway will prove a financial disaster.

"The sad part is, I don't know the answers," he says. "I don't know any more than you do. What does that tell you?"

Like Krekeler, Colonel Michael Brandt, commander of the Missouri Air National Guard at Lambert, has had trouble getting answers out of Griggs and other airport executives. He says he doesn't know what the future holds, and he can't guarantee that the Guard will remain at Lambert. One thing, however, is certain: Keeping munitions, a hospital and headquarters where they are isn't an option when the new runway opens.

"They have to be moved -- there's no ifs, ands or buts about it," Brandt says. "In talking to the colonel [Griggs], I said, 'You know, you've got to move that.' And he goes, 'Yeah, we'll take care of it.' And I said, 'But where?' And he says, 'We'll take care of it.' We can certainly appreciate the financial difficulties that the airport has -- I'm not grousing at the colonel. But this latest move does not make us happy."


Feasibility studies prepared as recently as February by Unison-Maximus, a Chicago-based aviation consulting firm hired by the airport, have been based on six assumptions, several of which have not proven true or are looking shaky.

The assumptions, and their current statuses:

· American Airlines will continue to operate a major hub at Lambert. (Service cutbacks announced by American already far exceed the consultant's worst-case scenario.)

· The new runway will open in the first quarter of 2006. (The opening has been delayed until the latter part of 2006 owing to shortfalls in projected passenger counts that have resulted in shortages in construction money.)

· The city will complete the runway expansion project and all other capital-improvement programs on schedule and within budget. (Given that the runway won't open on time, the outcome looks doubtful.)

· The city will complete the runway expansion within the $1.1 billion budget. (Halfway through construction, cost overruns are at $50 million, nearly two-thirds of the project's $78 million contingency budget.)

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