Some Airports Lose Energy Cushion

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DALLAS - As airlines struggled with soaring fuel prices last year, Dallas-Fort Worth International Airport capitalized on the energy boom, earning $28 million in royalties on gas production on its 18,092-acre property.

Now that energy prices have fallen to recessionary levels, DFW is losing some of its energy cushion amid falling airline traffic.

DFW's income from natural gas production is expected to rise slightly to $30 million this year as more wells come on line. But that is about half of anticipated earnings under the peak prices of last year, according to Chris Poinsatte, the airport's chief financial officer, who isn't one to look a gift horse in the mouth.

"It is a new source of cash that is not dependent on the airlines," he said. "It makes us a lot more attractive from an investment standpoint."

For allowing Chesapeake Energy Corp. to drill, the airport earned a bonus of $185 million. Royalties of 25% began flowing in fiscal 2008 as natural gas wells began producing.

The signing bonus allowed the airport to launch a $45 million terminal renovation program that will be completed this year. But hard times in the airline industry have forced DFW officials to trim the budget by $20 million after cutting costs $23 million last year. So far, they have found about $18 million in savings.

"So far we've not had to lay anyone off," Poinsatte said. "We're down far less than other airports."

DFW, the world's third-busiest airport in terms of operations, is not the only U.S, airport where hydrocarbon exploration is underway. Denver International Airport - which rivals DFW in operations and exceeds it in physical size - produces both natural gas and oil.

When the city and county of Denver acquired the land for DIA, there were 90 wells on the 22,000-acre site. In 2006, DIA gave Petro-Canada Corp. the go-ahead to expand drilling. Oklahoma City's airport has had drilling for gas and oil for years, and Fort Wayne, Ind., is also considering the possibility of exploration.

With the downturn in natural gas prices, Chesapeake has furloughed three of its five drilling rigs at DFW as production from completed wells continues to flow.

In addition to their energy production, DFW and DIA are fortress hubs for major carriers struggling to stay aloft financially. DFW is home to American Airlines, which recently saw its credit ranking fall further below junk levels, while DIA hosts United Airlines, a formerly bankrupt carrier. The Denver airport's second-largest tenant, home-grown Frontier Airlines, is currently in bankruptcy.

United's 6.5% drop in passengers in 2008 was the largest in the industry, followed by American at 4.8%. Neither carrier was able to cut capacity to match those levels, with United's seating down 4.5% and American's down 3.8%.

While DFW's traffic was down 4.5% in 2008, DIA's actually rose 2.9%.

In a report last week, Fitch Ratings analysts indicated that large "fortress hubs" are expected to fare better in the downturn than secondary hubs such as Oakland, whose traffic decline of 21.5% for 2008 led all airports in the U.S.

"Considering the widespread nature of air traffic losses, Fitch believes airport management will need to make operating and financial adjustments to reflect new realities and be prepared for a worsening environment," analysts wrote.

On the Fitch scale, only one carrier, Southwest Airlines, earns an investment-grade rating of BBB-plus. Southwest is based at DFW's competing airport Love Field and also flies from Denver.

Fitch rates American Airlines at CCC and United at B-minus, both with negative outlooks.

Like Fitch, Moody's Investors Service issued a negative outlook on the sector in its report last month. Moody's rates DIA's and DFW's revenue debt at A1, while Fitch rates them A-plus and AA-minus, respectively. Standard & Poor's rates both airports A-plus.

Because they are capital-intensive operations, airports typically carry heavy debt loads supported by revenues. Dallas-Fort Worth issues debt separately for airport, rental car, and hotel facilities. DFW completed a $2.7 billion capital improvement program that added Terminal D and a SkyLink automated train connecting the terminals.

Poinsatte said the airport's only large bond issue on the radar screen is a $440 million refunding of 2004 and 2006 bonds in September that may take advantage of the alternative minimum tax holiday provided by the federal stimulus legislation.

Denver officials last year called off plans to issue $200 million of revenue bonds for an airport hotel that were expected to draw ratings of BBB-plus. The deal was halted mid market turmoil and the loss of major bond insurance providers. Issuers have struggled to bring any bonds to market with ratings below the double-A category in the past six months.

"Managing these financial pressures will likely require airports to further temper capital spending requirements, where possible, by cancelling or deferring projects until traffic activity recovers and market access has become more stable and economic," Fitch analysts said.

At DFW, which is jointly operated by the cities of Dallas and Fort Worth, chief executive Jeff Fegin last week acknowledged the harsh financial conditions but said the airport is in a good position to withstand them.

"Monumental changes have occurred since DFW's opening in 1973, and the airport understands the economic decisions we make are necessary to continue the region's growth," he said. "Any airport in the nation would welcome the challenges we face, and we will continue to look for ways to create more economic impact."

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