Philadelphia International Airport plans a $5.2 billion expansion project that would include about $4.2 billion of borrowing to help finance an increase in capacity. Officials also would like to improve the facility’s on-time record, especially during bad weather.
The Federal Aviation Administration ranked the Philadelphia airport as the fourth most delayed airport in the U.S. in 2009, only behind New York City area airports. It is the ninth-busiest airport in the country. It had 472,668 takeoffs and landings and served 30 million passengers in 2009.
Officials expect capacity will nearly double by 2030 to almost 60 million passengers. To accommodate the anticipated growth, the airport is looking to add a new 9,103-foot runway and lengthen two of its existing runways. The plan also includes development of a new terminal, upgrades and expansions to current terminals, and construction of an automated people-mover to connect terminals and parking facilities, among other capital projects.
The FAA approved the airport’s expansion plan earlier this month. Construction is set to begin in 2013 and the expansion project will take 13 years to complete.
The city of Philadelphia owns and operates the airport. US Airways is the facility’s major carrier, accounting for 67% of activity at the airport in fiscal 2010, according to Standard & Poor’s. Southwest Airlines is the second-largest carrier at the airport, with 11% of enplanements in fiscal 2010.
The airport has $1.5 billion of outstanding airport revenue bonds, according to Moody’s Investors Service. The bonds are limited obligations of the city and repaid solely from airport revenues. Fitch Ratings and Standard & Poor’s rate the bonds A-plus and A, respectively. Moody’s rates the credit A2.
The city last issued bonds for the airport in October when it sold $624.6 million of revenue bonds, including $273 million of new-money bonds. Those bonds are insured by Assured Guaranty Municipal Corp. and are not subject to the alternative minimum tax.
The Series 2010A new-money bonds priced with yields ranging from 1% on a 2% coupon for debt maturing in 2011 to 4.62% with a 4.5% coupon for debt maturing in 2035, according to the official statement.
The $4.2 billion of anticipated borrowing includes $3.6 billion of airport revenue bonds and $600 million of bonds secured by passenger facility charges, according to Tom Becker, the airport’s assistant director of aviation for budget and federal services.
Officials anticipate borrowing $250 million for initial costs for land acquisition and design, with potential bond sales in late 2011 and spring of 2013.
The remaining $1 billion will come from federal grants, non-airline revenue such as parking revenue and concession fees, and pay-as-you go financing.
Passengers currently pay a PFC of $4.50. Officials expect that fee would need to increase to $6 to help support the capacity enhancement program. In addition, US Airways, Southwest Airlines, and the facility’s other carriers would probably face additional lease and landing fee increases. Becker said the airport is in discussions with the airlines and that officials aim to retain the facility’s competitiveness among airports.
“We’re briefing our airlines on it and as you would expect, they’re concerned about the cost,” Becker said. “However, we are in communications with them. We’d like to point out that our cost per passenger of $10.41 is reasonable for a large hub this size and we anticipate as we work forward with our airline stakeholders that we will remain cost effective and competitive.”
A spokesman for US Airways declined to comment on the expansion plans, but said in a statement that the airline is working on extending its current contract with the airport. That use and lease agreement expires June 30, according to Moody’s.
“The city of Philadelphia Division of Aviation and a committee of airlines led by US Airways are finalizing arrangements on a two-year extension of the current Airport-Airline Use and Lease Agreement,” the statement reads. “This two-year extension will provide time for the airport and the airlines to continue in-depth discussions on the airport’s proposed capacity enhancement program and to discuss terms for a longer term use and lease agreement.”
Obtaining airline approval is key when airports look to expand. Chicago last week postponed a $1.1 billion bond deal to finance O’Hare International Airport expansion plans after American Airlines and United Airlines sued the city. The airlines are seeking to halt the financing plans on the final stage of the airport’s $8 billion expansion initiative. The airlines have yet to approve financing for the remaining projects.
The Philadelphia airport’s cost per passenger is expected to increase to a range of $12 to $13 by 2016, according to Fitch, which it considers competitive for an international airport and large domestic hub.
The anticipated $4.2 billion of additional bonds will increase the facility’s outstanding debt significantly. The rating agencies noted that how the airport finances the expansion plan in relation to its revenues will be a credit factor in the future.
“This higher level of leverage may pressure the airport’s finances should forecasted traffic levels fail to materialize and non-airline revenues under perform,” according to a Fitch report on the credit. “However, Fitch recognizes that the airport can defer components of its longer-term capital plan should traffic or airline performance decline, and airline majority-in-interest approvals are required.”
Standard & Poor’s in an Oct. 13 report said it does not expect to raise the airport’s ratings during the next two years due to a potential large increase in debt.
All three rating agencies cite US Airway’s high concentration of enplanements at the airport as a credit challenge. Strengths include the facility’s large and stable service area and the airport’s ability to withstand the recession better than comparable airports. Philadelphia airport’s enplanements declined by 4.3% in fiscal 2009 while peer U.S. airports saw an average 6% decline, according to Moody’s.
Increasing capacity could add 2,880 jobs at the airport and also generate 45,000 construction jobs, according to Christine Derenick, the airport’s chief of staff. The city will need the anticipated job growth to help offset expected revenue losses.
According to the FAA’s record of decision, as a result of the airport’s acquisition of private property for its expansion, Philadelphia’s property tax revenues will decrease by $1.14 million annually, which is 0.1% of the city’s total tax levy.
As the airport will acquire three privately owned parking facilities, the city’s parking revenues will decline each year by $550,000.
The airport also lies within a portion of Tinicum Township and the Interboro School District. Tinicum will lose about $216,000, or 13%, of its total annual tax levy while Interboro will lose about $1.8 million of tax revenue each year, or 6% of its total tax levy, according to the FAA. In addition, the municipalities are limited in raising taxes through the Pennsylvania Taxpayer Relief Act.
While Philadelphia will be able to absorb the loss of revenue, the smaller municipalities may have a harder time adjusting to the anticipated revenue decrease.
“Tinicum Township could experience an economic hardship due to the loss of taxes, if businesses do not relocate within the community,” according to the FAA’s record of decision.
Still, city officials expect that increasing the airport’s capacity will help boost economic activity in the region.
“Philadelphia International Airport is the economic engine for all of southeastern Pennsylvania,” Mayor Michael Nutter said in a statement. “This expansion program is critical to the economic health and growth of our entire region and will create thousands of jobs.”
Some area residents are opposed to the expansion project. About 72 housing units and 80 businesses would need to relocate under the plan. Most of the 80 affected businesses are within the aviation industry and would move within the airport’s campus.
Following the FAA’s approval of the expansion plans, Tinicum Township hired Barbara Lichman, managing partner at Chevalier, Allen & Lichman LLP, to work on a potential appeal of the FAA’s decision, said township manager David Schreiber. Any appeals would need to be filed by March 1.