A $970 million new terminal or major renovation at Kansas City International Airport can be paid for without dramatic increases to ticket or parking prices, airport and airline officials told a City Council committee Tuesday.
As city leaders and the public continue to debate KCI’s future, and many people question a massive building project of nearly $1 billion, representatives of the city’s aviation department and the airlines who serve KCI sought to reassure the council’s Airport Committee that there is an affordable way to finance such a major modernization.
KCI remains one of the lowest cost medium-sized airports in the country, and would still be in the middle of the pack even with this costly project, said John Green, chief financial officer for the Aviation Department.
“We’re not anywhere near the upper echelon” in cost, either now or in the future, Green told the committee.
In 2015, based on an industry measurement, the cost of operating KCI was $6.70 per enplaned (departing) passenger. With a $970 million improvement project, which is the estimated cost of a new terminal, that cost per passenger boarding would bump up to about $9.00 in 2015 dollars, he said.
That cost would be borne by the airlines, and they believe it is affordable, said Jim Burchett, vice president for financial services with AvAirPros, a consultant for the airlines in negotiations with the aviation department on KCI improvements.
“The airlines will sign up for a deal with these assumptions,” Burchett said after the Airport Committee presentation.
Green and Burchett emphasized that the cost per enplaned passenger is not a direct correlation to ticket prices or fees and does not mean ticket prices would rise by less than $3 per ticket.
But they said ticket and parking prices should not rise significantly. Indeed, Green said the close-in parking garage prices, one of KCI’s largest revenue sources, would be expected to rise from $22 per day now to $25 per day by 2022.
Green and Burchett outlined for the committee how the financing for a new terminal or major renovation project would work, assuming voter approval of a 35-year airport revenue bond at the end of this year, about four years for design and construction, and opening the improvements in 2022. They assumed 3 percent inflation and just under 6 percent interest rate on the bonds.
But they also assumed the airport’s passenger numbers will grow by 1.9 percent to make the financial numbers work, and Councilwoman Teresa Loar, a committee member, was highly skeptical of that growth projection of nearly 40 percent more passengers by 2035.
“Our growth has been flat for 15 years,” Loar pointed out. “I don’t know where you come up with these numbers.”
While passenger numbers have languished through several recessions and a difficult, though improving environment for the airline industry since 2000, Green and Burchett said they believe the growth projections are very realistic.
They said they have been checked and verified by the Federal Aviation Adminstration, the airlines, and by credible estimates of the Kansas City area’s population growth.
KCI’s passenger numbers have been on the upswing for several years. Just Tuesday, KCI reported that January passenger boardings were up 9.5 percent, continuing a streak of 21 consecutive months of improved results at the airport.
Among the financing elements that Green outlined:
▪ A major new improvement would be expected to cost about $970 million.
▪ About $49 million of that would come from federal grants over about four or five years, which is comparable to what KCI now gets in annual federal grant funds.
▪ About $78 million would come from pay-as-you-go airport funds over many years. The airport’s money comes from user fees, and none of the airport funds come from general Kansas City taxpayer dollars.
▪ The rest of the construction cost, about $843 million, would be bonded over 35 years, with an annual debt service of about $86 million.
Of that annual debt service, Green said the airport can afford to contribute about $22 million. So that leaves $64 million for the airlines to pay per year, which Burchett said the airlines accept. That’s up from the $34 million they contribute per year now.
Green and Burchett said the airlines would bear the risk with this financing, as they have with airport improvements in other cities, so they have an incentive to make sure these assumptions and numbers are credible.
Airport officials also sought to address skeptics who don’t see how ticket prices can’t skyrocket with this added capital cost.
Ticket prices are determined far more by labor and fuel costs, and are only marginally affected by construction costs, Aviation Deputy Director Justin Meyer told the committee.
“There is no direct correlation between airport costs and airfares,” he said.
That doesn’t mean airfares won’t go up, Meyer conceded.
Indeed, he predicted they will continue to go up because that’s the airline industry trend. But it will be because of supply and demand and governed by the competitive airline environment, not by any airport construction project, he said.
“I believe fares are going to increase because that’s what they’ve done. They are increasing at a gradual rate, barely outpacing inflation,” he said.
Meyer pointed out that San Jose, Sacramento and Indianapolis all have done $1 billion airport improvements in recent years, without seeing big bumps in ticket prices. Sacramento especially saw a big increase in its airport costs per enplaned passenger, from $5 before construction to $17 after construction, but that didn’t translate into major ticket price increases. That airport’s average airfares remain below the national average, Meyer said.
The aviation department and airlines continue to negotiate on a final construction price that all parties can accept. They are expected to bring that recommendation back to the Airport Committee in April.
Any recommendation must still be approved by the City Council, and any airport revenue bonds to pay for the project must still be approved by voters. Aviation Director Mark VanLoh said Tuesday that such an election may be scheduled in November.