Tailspin

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

· The FAA will give the city $141 million in construction grants. (The airport says the grants will be $10 million less than anticipated owing to falling passenger counts.)

· After terminal and gate leases expire at the end of 2005, the airport will set rates that will generate at least as much revenue as the airport is collecting now. (The outlook is uncertain, but if the airport charges too much, airlines could opt for less-expensive cities for connecting flights, which account for about half the air traffic at Lambert.)

Unison-Maximus is now revising forecasts in light of American's cutbacks. "Although we're troubled and concerned, we think the airport's finances are in fairly good shape, given the circumstances," says Anthony Drake, company president.

Thanks to Lambert's flagging fortunes, airport director Leonard Griggs recently was forced to ask the FAA for an additional $100 million
Jennifer Silverberg
Thanks to Lambert's flagging fortunes, airport director Leonard Griggs recently was forced to ask the FAA for an additional $100 million
Expansion critics wonder why the airport spent $12 million on this parking lot when parking revenues and passenger counts have been dropping
Jennifer Silverberg
Expansion critics wonder why the airport spent $12 million on this parking lot when parking revenues and passenger counts have been dropping

Butts in seats and planes on tarmacs pay the bulk of bills at Lambert, which has been hit harder than most other large hub airports since the airline industry went into a slump following the terrorist attacks. The biggest single chunk of money for the new runway is coming from passenger facility charges, commonly called PFCs, which are tacked on to ticket prices for nearly every passenger who starts a journey in St. Louis or catches a connecting flight.

When it issued $435 million in construction bonds two years ago, the airport figured there would be plenty of money to cover the debt service. Under the terms of the bond, the city had to certify that net revenues would exceed the debt service -- the amount of money earmarked to pay bonds -- by at least 25 percent. At the time, the per-passenger PFC was $3, which increased to $4.50 in the latter part of 2001. At the lower rate, roughly half of the airport's PFC money would be needed for debt service, according to projections by Unison-Maximus. When PFCs increased to $4.50, just 29 percent of the proceeds would be required to service the debt, the consultant predicted. There would be enough left over to pay for yet-to-be-determined projects, the consultant predicted as recently as February.

The consultant's financial projections are key to borrowing money for the new runway, because the airport uses the studies to demonstrate it will have revenues at least 25 percent higher than the annual debt service, a condition of issuing bonds backed by PFCs and other airport revenue. Griggs called Unison-Maximus one of the airport's most important consultants when the airport in 2001 extended the company's contract until mid-January 2005 at a cost of $900,000. The airport had already paid the consultant approximately $680,000.

The importance of the consultant's role in airport finances is further reflected by Darlene Green's response when asked for details about Lambert's financial obligations and prospects. Through a spokesman, the comptroller referred questions to Unison-Maximus.

John Bachmann, a managing partner at Edward Jones and a leader in Civic Progress and the RCGA who has trumpeted the new runway, blames faulty forecasts on irrational exuberance.

"It was probably all a part of the psychological bubble that we got into in 1998 and 1999 as a society, that was reflected in our capital markets," he says.

But optimism lingered after the recession, which began in 2001, became obvious.

By early this year, American Airlines was in serious financial trouble, and that spelled trouble for Lambert, considering that American accounts for more than 76 percent of the airport's total enplanements and more than 94 percent of connecting enplanements. When Unison-Maximus released its most recent report in February, American executives had announced a goal of cutting costs by $4 billion to stave off bankruptcy, eventually winning concessions from its unions totaling nearly half that amount.

Even before American announced in July that it would slash daily flights by 50 percent in November, the airline had been cutting daily departures, peaking at 512 in July 2001 and shrinking to 417 two years later, when the company announced it would cut daily flights to 207 in November. The cuts didn't escape the attention of Standard & Poor's analysts, who noted in a June report on hub airports that the number of seats on aircraft passing through Lambert plummeted by 47 percent between the second quarters of 2000 and 2003. That was the largest drop at any of the nation's 31 large hub airports. Coming in second was Washington's Dulles International, which saw a 40 percent decline. Overall, seat counts at large hub airports dropped by 14 percent.

Unison-Maximus, which has written at least four financial feasibility studies for the new runway since construction began, has always considered worst-case scenarios. But the studies proved wrong.

When TWA was teetering on the edge of bankruptcy as the airport prepared to issue its first construction bonds in 2000, Unison-Maximus considered the possibility that the airline would cease operations. Even then, the airport's prospects were rosy. Other airlines would pick up half of the airline's connecting flights while the number of TWA passengers who embarked from Lambert or ended their journeys here would remain unchanged, Unison-Maximus predicted, leaving the airport with plenty of money for the runway and easily meeting the 25 percent borrowing test. At worst, annual enplanements would bottom out at 12.2 million in 2000, then begin a steady climb to 12.7 million in 2002. More likely, the airport with its TWA hub would board 15.3 million passengers in 2000 and reach nearly 16 million in 2002, the consultant said. The actual number in 2002 was 12.8 million.

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