May 5, 2004 - From the May, 2003 issue

Lydia Kennard Defiantly Leading LAX Through Stormy Economic Waters

Although the proposed reconfiguration of LAX may be the most politicized topic of discussion regarding the airport, LAX is weathering a storm that has decimated the aviation industry. One analysis suggests that the airline industry has lost as much money in the past 18 months as it had earned in its history. Through deft management and a well diversified business plan, LAX not only is surviving, but it recently had its bond ratings raised by Standard & Poor's and Moody's. MIR is pleased to present this interview with Lydia Kennard, Executive Director of Los Angeles World Airports, in which she discusses how LAX has fared since 9/11 and how the changing economics in the industry will impact LAX.


Lydia Kennard

Since 9/11, the airline industry and the travel and tourism industry both have experienced significant reductions in revenue. How has LAX fared through these tough times?

Actually, I think we've done quite well. As you can well imagine, it has been a difficult period for us. It started before 9/11 with the general downturn in the economy. Then, this year we had a double hit with SARS and the Iraqi War. However, we are very proud that in November of last year we received AA ratings from Standard and Poor's and Fitch - the highest ratings ever received by a U.S. airport. This reflects our robust air travel market and strong financial position.

We attained this financial position through a combination of actions. These included immediate cost cutting post-9/11 that not only targeted expenses, but also, unfortunately, eliminated about 400 staff positions. On the plus side, we were able to avert layoffs through a combination of natural attrition, movement to other city departments and buyouts of our most senior employees who were eligible for retirement. In addition to the cost cutting, we actively sought ways to enhance our revenues. For instance, there is a request for proposals out on the street right now for advertising in the terminals at LAX, which is a new concept for us and one which we believe will produce some significant new revenue.

During the immediate aftermath of 9/11, there was friction between LAX managment and labor. Are the economics at the airports any better? Is labor/management friction at LAX a thing of the past?

Well, I wouldn't call it friction between labor and the airport per se. There was just general frustration with the state of travel and tourism. Here at airport, our concessionaires were taking some big hits. They're slowly recovering, and in some of our more heavily traveled terminals, are doing quite well. But I wouldn't couch it as friction-just frustration with the impacts of a slowing economy and 9/11.

Have the concessionaires recovered?

Yes, they are in most cases. Concessionaires who primarily serve international travelers have been the slowest to recover. Duty free shopping has been greatly impacted. But, as we look forward, we know that the industry will recover and are hopeful that recovery will be coming shortly.

Could you address the financial burdens placed upon the airport by the need now to provide increased and enhanced security. What precisely is that obligation? Who's setting the standards and who's paying for security?

There's a multiplicity of new costs that we're facing as a result of 9/11. The first, and probably most formidable, has been the increase in labor costs as a result of adding more law enforcement personnel. We had to expand our own airport security forces and we've had to buy overtime labor from LAPD and from the Department of Transportation. If you recall in the early days of 9/11, we had closed the central terminal area. We needed traffic officers from DOT to help us on the perimeter streets. All of that adds up to tens-of-millions of dollars. The airport front ended all of these costs itself and is seeking reimbursement from the Federal Government. Indeed, we have gotten some reimbursement, but nowhere close to the actual cost of providing the services rendered.

To comply with the new security regulations while maintaining customer service standards we needed to expand the number of security checkpoints to ease congestion and facilitate the processing of passengers. We paid for that expansion ourselves. The new security regulations also mandated the installation of the explosive detection equipment for checked baggage. We are the largest airport in the country to have met the deadline for this requirement with full technology. Once again, we accomplished this by fronting our own resources to get it done. We received about $10 million of federal reimbursement to date on what the feds have identified as reimbursable costs. Our total expenditures, however, were close to $56 million. So, you can see the disconnect-huge amounts of dollars that don't even qualify for reimbursement. We're constantly working at the federal level to try to get as much reimbursement as possible.

LAX's legacy carriers-United, American, Delta etc.-are all struggling, as are all of the long haul carriers. How has their fiancial plight affected the airport's financial health, as well as LAX's long-term planning?

We're advantaged here because no one carrier dominates our business, which is a very good place to be. United, which is probably the most troubled of the big carriers right now, has only about 18% of our passengers and only represents about 8% of our operating revenue. United's bankruptcy has not impacted us to date. United continues to operate at the airport and is current in its post-petition payments to us. So, from a current cash flow perspective, we are in good shape. And, we're hopeful that United will successfully emerge from bankruptcy stronger and fitter. American is holding steady in its service patterns here and thus far has avoided bankruptcy.

We are mindful that in this environment more airlines may seek to reorganize in addition to United, Air Canada and US Airways, which successfully emerged from bankruptcy in March. We have a policy of requiring the airlines that lease our facilities to post a security reserve in the amount of two months' fees and rents. That provides us a cushion. In the end, I think you have to trust the strength of the underlying market here. The airlines make money serving this market.

And the international carriers?

The international carriers that dominate in the Asian marketplace have taken a big hit from the SARS outbreak. But, the crisis is diminishing and, fortunately, the impact on traffic, I think, will be of short duration. It is important to understand that a good portion of fees paid by the airlines are fixed-for example, terminal charges and leases. Landing fees vary a bit, but not significantly. Downturns in traffic – international or domestic – impact parking and concessions principally. Those areas are where we take the financial hits.

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With the the long haul carriers-international and domestic- in the red, is it really practical to assume that those airlines will be able or willing to carry most of the financial costs of any LAX modernization plans?

Obviously, the marketplace is changing and you're going to see a shakeout of carriers. Those that are less profitable may have to change their business models significantly or they simply may not make it through. One of the advantages we have here in Los Angeles is not only a diversity of carriers, but also a very strong market for air service. Although we were impacted post-9/11, the dynamics of this market are holding up exceedingly well. We still are handling 55-to-60 million annual passengers. And, we're advantaged by our debt structure. We have extremely high reserves and a low debt burden.. Our cash balances are nearly $450 million-which is how we were able to make it through the 9/11 crisis. Our financial footing is very strong, which will allow us to weather the storm.

The Riordan Administration went to battle with the airlnes years ago over the issue of how much of the airport's resources were available to share with the city of LA. Has that fiscal and policy debate been settled?

It's basically a moot point. The battle was fought and there's federal legislation that now precludes us definitively from sharing our airport-based revenues with the city. Now, that being said, there's lots of synergy between the airport and the city. We buy a lot of city services-planning services, traffic services, police services. So, there are ways in which LAX participates in the city family.

Let's turn now to cargo and its revenue stream. Brief our readers on the value of the goods that go though LAX and how that traffic compares with passenger counts over the last two years.

It's very interesting. Our cargo numbers are not down nearly as significantly as passenger traffic. In fact, there has been a very marginal growth. Certainly out in Ontario, we've seen stabilization of both cargo and passengers. As far as the contribution of cargo to our bottom line, it's not as significant as the passenger activity. Nonetheless, it's a very important component of our entire business plan and it provides a significant number of high paying jobs and value into the local economy.

Looking ahead, the Mayor has been vocal about capping passenger traffic at LAX at 78 million annual passengers (MAP). To what degree is LAX working with other regional airports and the airlines to proactively plan for future passenger travel demand that might exceed MAP capacity?

One of the challenges that we face is that there's no regional coordination relative to the allocation of airport demand-that has been challenging us for years. SCAG has been helpful, but they lack legal authority. In fact no public entity-including the city of Los Angeles, the county of Los Angeles and Orange County-has any authorization to allocate passenger demand. That being said, we work very hard to manage demand positively with the regional reallocation of business among our airports. The most stunning example is our promotion of Ontario Airport. The LA Times recently discussed at length how Ontario is primed and ready to accept more passengers as demand grows in the region.

We have two new terminals at Ontario that can handle between 10 and 12 million annual passengers. Today, Ontario serves about 6 1/2 million annual passengers. And, we have a by-right opportunity to build a third terminal, meaning that the airlines have to agree to the construction of a new terminal once we hit 10 MAP. So, we're bullish on Ontario.

If we were to speak to you one year from today, what could we expect to be discussing and what should our readers be vigilant about?

Well, there's certainly a lot on our horizon. You can look forward to additional security enhancements at LAX. Today, we can say that LAX and Ontario certainly are much safer airports than they were pre-9/11. But, you're going to see even more security. We would love to be initiating our new in-line baggage screening system-that's our next big program. It's a hugely expensive one but it's something that's very necessary.

If you have come to our terminals recently, you've seen the big trace machines or x-ray machines in our lobby. We'd like to move all of those towards the "back of the house" so that we can free up public areas in the ticketing and departure areas. Those areas never were designed for baggage check-in facilities. We're also putting in CCTV video surveillance throughout our terminals-about 1200 new cameras. We're implementing a perimeter fencing upgrade program. There are a lot of new projects you'll see as a positive from the security front. We are getting terrific leadership and support from Mayor Hahn on a wide range of security initiatives. And, of course, in that regard, we are all looking forward to the completion of the Master Plan process so that we can begin the long-overdue modernization of LAX in the near future.

Lastly, we hope to see a rebound in our business and the rebound of the tourism industry. People should be getting back on airplanes, travelling to all sorts of destinations-and we want to be prepared for that future.

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