Monthly Archives: February 2011

Just When Things Looked Good…

By A.J. Muldoon
After weathering the recession of 2008 and stagnation in 2009, 2010 seemed like a pretty good year, particularly for the airline industry. Almost all North American carriers reported profits. The International Air Transport Association (IATA) revised its estimate of 2010 airline profits up from $8.9 billion to $15.1 billion and passengers, particularly lucrative international passengers, have been returning to the skies. And then oil reared its ugly head again. The top story on almost every newspaper and news broadcast for several weeks has been the cascading revolutions that have been toppling entrenched regimes across the Middle East. Beginning in Tunisia in January, the movement has spread to Egypt and now Libya. Leaders in Saudi Arabia, Bahrain, Yemen and Jordan are also closely watching events and trying to maintain order in their countries.

Futures prices in December vs. Now

Early on, oil prices remained surprisingly stable given the typical knee-jerk reactions that the petroleum markets have in response to any unexpected event in the Middle East. In December, when the protests were largely contained to Tunisia, oil contracts for delivery through the summer were relatively stable in the $92-$93 range. However, more recently as the protests have spread to Egypt and Libya, contracts for those same months have risen dramatically, topping $100/bbl on the long end. Egypt, while a net-importer of oil, controls the Suez Canal and major pipelines which are critical infrastructure for getting Persian Gulf oil to world markets.

Additionally, and probably most importantly for the aviation industry, Libya has the world’s largest proven oil reserves and Libya’s oil is of the “light-sweet” variety. Light-sweet crude has a low sulfur content which makes it the preferred grade to be refined into diesel and jet fuel. As concerns over the availability of input supplies mount, the cost of refining jet fuel has increased significantly. This is recognized in the “crack spread” or the difference in cost between a barrel of crude and a barrel of refined product.

The crack spread for jet fuel has more than doubled from around $13/bbl in December to over $34/bbl today and is approaching record highs. Perhaps even more concerning is that these increases are based solely on the speculation of disruptions. To date, given the turmoil that Libya has seen in recent days, oil operations remain largely unaffected. Other OPEC countries have also announced that they will increase production to make up for potential shortfalls. However, this may not alleviate the refining problem as these other countries’ oil is typically of a lesser grade. It is still unclear if another 2008-style fuel spike will occur, but if it does, air carriers may not be as well prepared for it as they were then, having already reduced capacity and operations as a result of the mounting fiscal crisis.

A Step Away from the Brink, for Now

By Jane Calderwood

On Friday afternoon, House Appropriations Chairman Hal Rogers (R-Ky.) introduced a two-week continuing resolution that would fund the federal government through March 18.  The purpose of the short term resolution is to provide the House and Senate with additional time to work out an agreement on the funding levels for the rest of the current fiscal year (FY11).  This is a necessary step to avoiding a government shutdown given that authority for the federal government to operate expires on Friday (3/4), and the fact that the Senate Democratic Leadership has expressed their unwillingness to accept the continuing resolution the House passed on Feb. 19. In a statement accompanying the two week continuing resolution, Rogers noted, “A government shutdown would halt critical and necessary services and programs that Americans across the country rely on, and it is not reflective of the kind of leadership that the American people expect or deserve of their representatives in Congress. While I would have greatly preferred that the Senate act on the hard-fought and thoughtfully crafted funding legislation that the House passed last week – which saves the taxpayers $100 billion compared to the President’s request – it is clear that more time is needed. This short term, two week continuing resolution will provide more time, while cutting $4 billion in spending as a symbol of our continued commitment to getting our nation’s fiscal house in order.”

The House proposal would cut $4 billion in federal spending over its two week lifespan.  It does this by terminating eight programs (four of which are under the jurisdiction of the Department of Education) at an estimated savings of $1.24 billion, and eliminating funding made available in the last fiscal year (FY10)  that would have gone to earmarked programs.  This change will provide and estimated savings of $2.7 billion.  The bill holds federal spending for the rest of the government at its current level.  The House is expected to consider the bill on Tuesday.

While Senate Appropriations Chairman Daniel Inouye (D-Hi.) had earlier expressed opposition to doing a short-term continuing resolution, in an interview early last week, the Inouye stated he expected a 30-day extension would provide sufficient time to work out the differences between the House and Senate.  In addition, in Sunday’s weekly address, the president urged a compromise on a short-term continuing resolution in order to provide time to work out the funding differences between the two chambers.

If the Senate does go along with the House on the two-week continuing resolution, as it appears that they now may, the road toward resolving FY11 funding could be nearing an end now that half the year is over.  If this proves to be the case, that still does not completely dispel talk of a government shutdown.  The debt limit still has to be raised and that is something the Congress will be forced to address sometime in April.

Will The Federal Government Shutdown?

By Jane Calderwood
Is there a federal government shutdown coming? The answer to this question has Washington buzzing as the answer remains far from clear.  At the beginning of the week, with the House having just passed its fiscal 2011 Continuing Resolution which cut $100 billion from the President’s FY11 request,  and Senate Appropriations Chairman Dan Inouye (D-Hi.) insisting the Senate would remain at current funding levels, things were not looking good.   The two sides were $60 billion apart and the only thing passing between the two sides of the Hill was a war of words.

In what Politico is calling “signs of a February thaw” Chairman Inouye has tasked Appropriations Committee staff to find additional cuts while the House leadership took a step back from its take it or leave it approach.  House Republicans are expected to introduce a two week continuing resolution sometime Friday that provides $4 billion in cuts, many taken from programs President Obama’s just released fiscal year 2012 budget would eliminate.  A two week resolution would provide time for the House and Senate to work out a mutually agreeable long term continuing resolution.  Senate Democrats have not yet seen the new proposal but appear to like the general approach though they are making it clear they would prefer to do this in the context of a long term resoluiton as opposed to the House’s two week approach.

At the same time this drama unfolds, the battle over FY12 funding begins as both House and Senate Appropriations Committees start their hearings on the president’s budget proposal next week.

Are Airport Credit Ratings That Important?

By Liying Gu

Silly question – yes, however this question seems to be continuously debated between airports and airlines. Almost two years ago, the differing views were aired at an ACI-NA Economics and Finance Conference.  While the topic was “how airports and airlines can work together to control airport costs”, the discussion spurred a lively  debate regarding the importance of high credit ratings to airports in order to reduce borrowing costs and maintain access to the municipal bond market, which is the primary funding source for airport capital projects.

Fast forward to today when ACI-NA is proud to announce the release of “Credit Rating and Cash Reserves: How They Influence the Borrowing Costs of Airports”, an industry white paper prepared by Ricondo & Associates at the request of Airport Council International – North America (ACI-NA) Finance Committee.

The first part of this white paper – the first of its kind to examine the basis for the difference between airport and airline credit ratings – reviews the criteria applied by the rating agencies.  The bottom line – fundamental differences in business structures which leads to the present disparity in their respective ratings.

Airlines question whether airports need to maintain what they believe to be in certain cases is excess levels of cash and debt service coverage to support a particular rating. Airports respond that by maintaining higher levels of reserves, they are able to retain favorable credit ratings and achieve lower borrowing costs that benefit their airline tenants and ultimately passengers using the airport.

Kudos to Pete Stettler of Ricondo & Associates for his work as the principal author of the study.  He worked with an oversight panel of the ACI-NA Finance Committee leadership to ensure that the white paper reflects the views of the airlines, FAA, and the rating agencies.

If you want to know more about the study or airport finances, let me know.

ACI-NA Releases 2011 Capital Needs Survey, $80.1 Billion in Essential Future Airport Projects

By Morgan Dye

Airports Council International – North America (ACI-NA) today released the detailed results of the ACI-NA 2011 Capital Needs Survey. The comprehensive study provided information on all airport projects over the next five years, not just those that are Airport Improvement Program (AIP) eligible, as is the case with the Federal Aviation Administration’s National Plan of Integrated Airport Systems (NPIAS) report.

The ACI-NA 2011 Capital Needs study indicates that airports, including both commercial and general aviation airports, have $80.1 billion in total projects that are considered essential by the airport and airport users.  Information on the types of projects by airport size for 2011 – 2015 is outlined in the report.

“The 2011 capital needs survey shows that airports must continue to improve airport infrastructure to ensure the safety and security of the traveling public”, said ACI-NA President Greg Principato.  “These projects, financed by the self-funded, job-creating Airport Improvement Program (AIP), as well as Passenger Facility Charge (PFC) user fees,  allow communities to use local resources to fund local projects, generating local jobs.”   “These projects also help reduce passenger delays and facilitate price and service competition for passengers across the United States,” said Principato.

The Department of Transportation tells us that $1 billion in transportation infrastructure supports approximately 34,779. If all of the $80.1 billion in airport capital needs were met, the airport industry could help add 2 to 3 million jobs to our struggling economy.

To review the report, click here.

For a presentation on the highlights of the study, click here.