Why expansion costs soar at MIA
10/19/1999 6:30 PM
08/12/2014 2:50 PM
Miami International is sinking in debt, borrowing billions of dollars for an expansion program that's turned into a money pit.
Pegged at $3.9 billion in 1995, the expansion's price likely will top $6 billion by the time it's completed in 2006. MIA's expansion is by far the most expensive public construction program in Miami-Dade's history - at least five times as costly as Metrorail, completed in 1984. Airport planners say the expansion is crucial for handling passenger growth expected in the next decade. But the soaring cost puts the airport at greater risk of plunging into a financial tailspin should passenger growth projections not hold up. The project is being financed with municipal bonds that will be paid off by increasing landing fees and other charges to airlines and passengers. Higher prices make MIA less competitive. That makes it harder for the airport to pay its bills. With the bulk of the construction just getting started, the expansion program is causing jitters on Wall Street, where MIA peddles its financing bonds. Two respected credit-rating firms posted a "negative outlook" for the airport last year, signposts that could signal higher interest rates for future airport borrowing. Among the reasons for the negative outlook: undue political pressure that's driving up the price of construction, financial analysts say. The County Commission has too much control over the awarding of construction contracts, the analysts say. Airport management is too weak to curb politically driven cost increases. "Historically, the airport has been under a lot of political pressure - management vs. the County Commission, " said Adam Whiteman, a credit analyst who monitors MIA for Moody's Investors Service. "Our concern is the ability of the airport to do a very complicated capital program on time and within budget, given the history of interference from various quarters within Dade County government." SIMILAR VIEW The same view is shared at Fitch IBCA, another credit-rating agency that watches the airport. "There need to be more checks and balances, " said Jessica Soltz, a Fitch analyst. "We'd like to see airport management that's more pro-active." Miami-Dade Aviation Director Gary Dellapa acknowledges that politics have pushed up the price. "The credit-rating agencies' concern is that the County Commission has gone beyond approval of the airport's master plan and into the awarding of specific contracts, " Dellapa said. "It creates a more expensive environment for construction and can jeopardize the financial plan. It could affect the airport's ability to meet its debt." Airport planners say terminal and cargo facilities need to double in size and a fourth runway must be added. By 2010, forecasters predict, 55 million passengers a year will pass through the airport, 20 million more than last year. If those projections hold true, the airport should reap more than enough in airline fees and other revenue sources such as concessions, planners say. There are indications that the passenger forecasts are too optimistic. Last year, 33.9 million passengers used MIA - 3.4 million fewer than projected in the airport's master plan. The projection was off 9 percent. In 1997, 34.5 million passengers used the airport, 1.3 million or 4 percent fewer than projected. Airport officials are hoping the downturn is a blip that will reverse in the next two years. They point to the longer trend - that over the past 10 years, passenger traffic has climbed 42 percent while cargo volume grew 150 percent. HIGH COSTS The cost of construction will make MIA one of most expensive airports in the nation. On average, the airport now charges airlines about $12 per boarding passenger. By 2008, the average charge will jump to more than $32 per passenger, mostly to pay off the debt of construction. It's likely only Newark and John F. Kennedy international airports will be more costly, according to a forecast issued last October - a projection that did not take into account the latest $655 million in additional construction proposed by Dellapa. The higher airline fees will make Miami more vulnerable to competition from other big airports. The prospect comes at a time when MIA already is hurting from the effects of Latin America's faltering economy. Passenger and cargo traffic has plunged this year at MIA, mainly because of Latin America's economic problems. Discount-fare domestic airlines also are shunning Miami, opting for cheaper Fort Lauderdale-Hollywood International Airport. EFFECT ON COUNTY It's not just a problem for the airport. A downturn at MIA could spread beyond the airport to much of Miami-Dade County's economy. Considered the county's No. 1 "economic engine, " MIA supports some 300,000 jobs - at the airport as well as in tourism, trade, trucking and an array of aviation-related businesses. The airport also is supposed to play a crucial role in the county's new Empowerment Zone, an effort to create 5,000 jobs in some of Dade's poorest neighborhoods. "It's a pretty direct relationship, " Dellapa said of the airport's impact on the local economy. "It means jobs, pure and simple - at hotels, restaurants, Burdines and even gas stations." Miami International must overcome a daunting array of financial obstacles over the next several years, The Herald found. Among the key problems: The deepening debt. By 2008, financial analysts say, MIA will need to take in $454 million a year just to pay interest and principal payments on the debt - nearly four times what the county paid last year. For every dollar in expenses, 41 cents will go toward paying off bonds in 2008. Last year, the cost of debt service was 28 cents on the dollar. The trend worries Wall Street. "The magnitude and increasing cost of the capital improvement program are a credit concern, " said an October report issued by Fitch IBCA, the credit-rating firm. Said Moody's: "The absolute size, complicated nature and ultimate cost remain major credit concerns. Miami's capital program is one of the most complicated and costly of any U.S. airport." Pollution and politics. Since 1993, the county has spent $224 million cleaning up decades-old jet fuel and chemical spills, and making other environmental improvements at the airport. The cost keeps rising as construction proceeds. The tab is expected to cost at least $96 million more. In recent years, much of the work has been handled through no-bid contracts awarded to construction teams selected by the County Commission. Last year, the county manager ordered a top-to-bottom audit of the bills because the charges for some projects appeared exorbitant such as a car wash that cost an extra $1 million. The airport is borrowing money to pay the mounting tab. It has had limited success recovering the losses from former airport tenants blamed for the mess. Political interference in airport concessions. The County Commission sacrificed millions of dollars in restaurant and retail-shop revenues as they tried to steer concessions to favored businesses. Only recently has the airport opened a food court in the main terminal - an improvement approved four years ago. A 1995 retail plan languished until recently, a hostage to political maneuvering. Passengers, left with limited, sometimes unappealing, options for refreshments and shopping, simply held onto their money while waiting for flights. The lost revenue was made up with higher charges to the airlines. Their national representative, the Air Transport Association, blamed politics for delays in boosting concession income. "It is understood that this is an instance of lobbying retarding decisions to make needed airport improvements, " the association said in a confidential 1997 study of airport efficiency. Bigger bills for airlines. To cover its skyrocketing expenses, MIA expects airlines to accept the added cost - because Miami gives them a gateway to Latin America. "Miami has a distinct market advantage: geography, " said aviation director Dellapa. Air traffic analysts, however, warn that there may be limits to what the airport can charge. Airlines, which lease space at MIA on a month-to-month basis, could leave on short notice depending on market conditions. Some current conditions do not bode well for MIA's future. LATIN AMERICA Financial turmoil in Latin America, MIA's most important market, is expected to curb airport growth for at least the next several years. The crisis is blamed for a 2 percent dip in passenger and cargo traffic in 1998 - the first drop in six years. Even before Latin America's troubles hit, MIA's international passenger growth had slowed from 10 percent in 1995 to 4 percent in 1997. Competition from other airports slashed Miami's market share for South America from 72 percent in 1993 to 55 percent last year, according to John F. Brown Co., the airport consultant. More and more, U.S.-bound South Americans, who once had no option but to fly through Miami, have opted to fly through Atlanta, Newark, JFK, Dallas/Fort Worth and Houston. With South America accounting for a third of MIA's international traffic, increased competition is a big reason for MIA's slowed growth. Another threat: newer generation aircraft allow longer flights, reducing the need for refueling in Miami. DECLINING SHARE Miami's market share to Central America also declined last year, from 61 percent to 42 percent. The biggest competitors in that market: Los Angeles, Atlanta, New York-area airports and Houston. The increased competition, combined with economic conditions in Latin America, could mean trouble for MIA's expansion plan, said Fitch IBCA, the credit rating firm. "While the capital improvement increased in cost, [passenger] forecasts have been readjusted downward, " the company reported last year. "This downward trend reflects the economic difficulties in South America and increased competition for South American routes." Meanwhile, Orlando and Fort Lauderdale-Hollywood international airports are winning more vacation travelers while MIA's share stagnates. The reason: Miami's fees are too steep for discount airlines. For the first time, Fort Lauderdale-Hollywood last year topped MIA in domestic "origination and destination" passengers - fliers who either begin their travel at the airport or the airport is their final destination. O&D passengers are coveted by airports because they tend to be repeat customers - residents from neighboring communities or business travelers. GROWTH IN BROWARD In 1998, Fort Lauderdale counted 10.4 million O&D passengers, a million more than MIA. "Whereas the number of domestic jet flights from MIA declined from mid-1993 to mid-1998, substantial increases occurred at Fort Lauderdale and Orlando International Airport, " Brown Co. reported. "The increases resulted largely from the introduction of low-fare service by Southwest Airlines, AirTran, Delta Express and US Airways MetroJet over the past few years. The recent growth of low-fare services at Fort Lauderdale may result in further near-term gains in domestic traffic share at the expense of MIA." Orlando has been discounting airline fees to lure more tourist traffic. Both Fort Lauderdale and Orlando charge airlines less than $4 per passenger compared to MIA's $12 bill. Dellapa shrugged off Fort Lauderdale and Orlando, saying MIA doesn't have room for the discount domestic carriers. But he concedes the shift in passenger traffic affects the county's tourist business. As more snowbirds take advantage of cheap fares to Fort Lauderdale, more are likely to vacation at Broward resorts than along Miami Beach. He said Latin America's economy already is showing signs of a comeback and predicted Miami will continue to be the nation's dominant gateway. "Competition is strong and likely to increase, and at MIA we are taking it very seriously, " Dellapa said. "We are improving to remain competitive. . . . We are getting better." MORE AIRPORTS ARE LATIN AMERICAN GATEWAYS Competing U.S. airports are offering more flights to Latin America, digging into Miami International Airport's share of the market. Dozens of U.S. airports are offering alternatives to Latin American travelers that were not available eight years ago.
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