SAN FRANCISCO - West Coast airports are reconsidering ambitious capital spending and bonding plans in the face of soaring jet fuel prices, falling demand, and huge airline industry losses.

Oakland International Airport has canceled plans to build a third terminal and is in cost-cutting mode after 10 straight years of growth. McCarran International Airport in Las Vegas has slashed its five-year capital plan by a fifth. And Los AngelesInternational Airport is watching to see if it needs to cut projects from the later years of its new rebuilding plan.

Airports are cutting back because their airline customers are getting hit hard by both a slowing U.S. economy and a surge in fuel prices that has already bankrupted some small carriers. Jet fuel prices have surged 70% over the past year and increased almost fivefold since 2001.

"It may require airport operators to bring out the playbook that they had back in the fall of 2001," said Kurt Forsgren, a managing director at Standard & Poor's, indicating the air transportation industry is facing its biggest challenge since the 9/11 terror attacks.

The Air Transport Association expects airlines to lose between $7 billion and $13 billion this year. It says the rise in jet fuel prices will cost carriers an extra $20 billion this year, pushing fuel costs above labor costs.

Standard & Poor's put the whole industry on negative credit watch in May. Moody's Investors Service last week assigned a negative outlook to the sector. Seven small carriers - including Aloha Airlines and ATA Airlines - have gone out of business this year, while two others declared bankruptcy.

The airline industry's woes will hit airports, though there will be a lag and the impact may be somewhat less pronounced, according to Forsgren. But airport operators will soon have to cut costs to meet the needs of their airline customers, he said.

The three biggest U.S. airlines - American Airlines, United Airlines, and Delta Air Lines - have announced plans to cut capacity by 10% to 14%, hitting some western airports hard. The biggest cuts will take hold in the fall, after the end of the summer travel season.

A USA Today analysis of flight schedules for November showed an 8.5% drop in the number of seats being offered on domestic flights this fall compared to a year ago. The biggest capacity cuts were predicted in Oakland and Honolulu, which could face cuts of 20% or more. The newspaper also showed decreases of more than 10% for Las Vegas, John Wayne Airport in Orange County, Sacramento International Airport, and Mineta San Jose International Airport.

Airport analysts expect the biggest declines at airports that are heavily dependent on domestic travelers. International gateways like San Francisco International Airport and LAX in Los Angeles are reaping the benefit of a weak U.S. dollar, helping offset some of the weakness in the domestic market.

Oakland, the region's sixth-busiest airport by passenger volume, has been one of the area's strongest airports in recent years, benefiting from the strength of discount airlines. But it expects passenger traffic to fall as much as 15% this year, due in large part to the loss of carriers, including American, Continental Airlines, ATA, and Aloha.

Oakland gets just 1.1% of its passengers from international travel, according to Standard & Poor's.

Even Southwest Airlines - the only profitable U.S. airline and Oakland's dominant carrier - is cutting nine flights from the city, and recently began flying to nearby San Francisco. For its part, Oakland recently added one carrier, Hawaiian Airlines.

The airport has reacted to the current situation by cutting operating expenses and delaying capital spending. It shut one of its four surface-level parking lots, saving $1.8 million in operating costs, said spokeswoman Rosemary Barnes. All told, Oakland International expects a $3 million to $4 million drop in revenue from a budget of about $35 million.

The slowdown has convinced officials to delay plans to build a new terminal.

"We will wait and see what the airline industry looks like a number of years from now" before continuing planning for a new terminal, Barnes said.

The airport is a part of the Port of Oakland and has about $1.5 billion of revenue bonds outstanding. Its senior-lien bonds are rated AA-minus by Fitch Ratings, A1 by Moody's, and A-plus by Standard & Poor's.

A Port of Oakland spokeswoman estimated that the airport closed the fiscal year with a coverage ratio on its senior-lien debt of 1.75 times debt service, compared to covenants that require coverage of 1.25 times. She cautioned that the numbers are still preliminary.

The contrast with nearby San Francisco is stark. SFO, the Bay Area's biggest airport, is still seeing increases in traffic, though it is asking its consultants to re-estimate traffic projections in light of the deterioration in market conditions.

"We don't yet know what the direct impacts are going to be from the fall schedules," said Kevin Kone, SFO's assistant deputy airport director for capital finance. Before the recent round of airline capacity cuts, the airport expected a 5.7% increase in passenger traffic this fiscal year. "We're revisiting that," he said.

San Francisco International hasn't cut its capital spending plans, Kone said. After having refinanced its large auction-rate portfolio earlier this year, the airport has no more bond sales planned for this year. Kone said the airport's variable-rate portfolio is performing well now.

But memories of the dot-com Internet stock bust and a 25% drop in business in the early part of this decade remain fresh in airport managers' minds. So SFO, rated in the A category, is studying its operating budget to identify potential cost cuts before it gets hit by the slowdown. Kone said the airport is preparing for cuts of 5% to 10% of its budget just in case the slowdown hits.

"We're just beginning to strategically think about some of the cuts we would make," he said, adding that at this point they don't yet look necessary. Hotel tax revenues continue to climb in San Francisco. The city has escaped the worst pain of the housing market's collapse, and it is benefiting from an influx of foreign tourists.

Standard & Poor's said San Francisco gets a quarter of its business from international flights, second in the region only to LAX in Los Angeles.

LAX is the West Coast's biggest and most international airport. Almost 28% of its traffic comes from international travelers. It plans to reenter the bond market this month with $950 million of airport revenue bonds, its first major new-money issue in more than a decade. Fitch yesterday assigned a AA rating to the senior revenue bonds and a AA-minus to the subordinate revenue bonds.

If traffic slows precipitously, the airport can consider cutting projects from the later years of its capital program, but for now it plans to go ahead with its a $3 billion-plus capital improvement plan that will be its first major overhaul since the 1984 Los Angeles Olympics, said Steve Martin, chief operating officer of Los Angeles World Airports, the department that runs four city-owned airports.

LAX's building plan is about improving service and keeping the business it already has, not adding capacity, he said.

Officials expect traffic to be flat this year and next year, and have made minor cuts in their forecast to match cuts in airline schedules, Martin said.

Las Vegas is the quintessential boom town, where planners have had to scramble for years to keep up with surging demand. Last year, the bottom fell out of the housing market, cutting deeply into the local economy. Population growth has slowed. Even gambling revenues are down.

The city's convention and tourism industry is overwhelmingly domestic. McCarran airport, the second biggest in the Far West, got just 4.8% of its passengers from international travel last year, Standard & Poor's said.

Airport spokesman Chris Jones said traffic decreased 1% in the just-completed fiscal year. He declined to give a forecast for the new fiscal year. The USA Today analysis shows a 15.5% drop in the airport's domestic schedule this November.

McCarran seems to be planning for a major slowdown. Jones said it had shaved 20% from its five-year capital improvement plan. Still, planners have to be ready for growth when the economy rebounds and can't throw out their $3.8 billion capital plan entirely.

"There are 35,000 additional hotel rooms scheduled to open in Las Vegas by the end of 2011," Jones said. "We believe McCarran will need to complete its build-out to meet the expected passenger demand those hotel developments will create."

Some of the new capacity is set to come online this fall, when nine new gates open, even as its business shrinks. The new gates and a new security checkpoint helped drive a 5% jump in the airport's operating budget for fiscal 2009, which began July 1.

The airport, owned by Clark County, currently has $2.5 billion in debt, and its senior debt is rated AA-minus by Standard & Poor's and Aa2 by Moody's. Jones said McCarran was able to maintain its strong debt service coverage ratios in fiscal 2008 even as traffic slowed. Jones said the coverage ratios remained "about the same" as 2007's 3.9-times coverage for senior-lien bonds and 1.79 times for subordinate lien.

"We will continue to be prudent going forward, whether we're in a downturn such as today's conditions or a boom similar to what the United States, and Las Vegas in particular, enjoyed over the past three or four years," he said.

Actual passenger traffic may decrease less than capacity at some airports as yields - the percentage of full seats - increase, said Lisa Stanton, chief administrative officer at the Sacramento CountyAirport System. In Sacramento, the number of seats available is down 13%, but the number of passengers is down a much less dramatic 2% in the first five months of the year, she said.

Sacramento plans to go ahead with its $1.27 billion terminal modernization plan. The airport sold $585 million of revenue bonds in April, about half of it new money, and plans to return to market with another $350 million in December. The airport's senior debt is rated at the A-plus level.

"It takes many years to plan and implement airport improvements," Stanton noted. "Sacramento County is proceeding with the program to ensure that we will be well positioned to accommodate demand when the business cycle begins its upward trend."

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