Saturday, June 4, 2011

If you build it, they may go

In the past 24 hours I’ve had a chance to spend considerable time at two major US airports — Pittsburgh and Denver — thanks to my once-favorite airline, United Megalith Airlines. (“We try to ream you™”). In fact, UMA gave me multiple chances to enjoy Denver by canceling my flight home.

But both were examples of airports built in a period of boundless optimism by civic boosters hoping that massive government spending would boost the local economy.

Pittsburgh is pretty clear cut: when the new airport opened in 1992, US Airways was using the city as a major hub. However, the airline filed for bankruptcy after 9/11 and ended the hub in 2004. The airport is vastly over-built and under-utilized, just as the Kansas City airport expansion in the 1980s was tied to TWA’s brief experiment with hubbing there.

Denver is less clear-cut. United still has a hub here, and the airport gets considerable traffic from the 2.5 million people in the metropolitan area. However, the big planes are now medium sized plans and the medium sized planes now commuter jets, as United seeks to increase load factors and reduce service as part of its ongoing march toward high-volume, low-quality service.

However, after the merger with Continental, United is reducing its hubs to 10 worldwide, a pilot told me yesterday. Airlines have been eliminating their Western hubs — Delta has pulled back from Salt Lake City and Southwest from Las Vegas — and United no longer has the flights from Denver that it once did.

When (if) I get home, one terminal at San Jose airport was built for American’s hub there, now gone. With airline traffic less than expected, city fathers are wrestling with a range of options to pay what it borrowed for the $1.3 billion expansion.

The best analog I can think of is the sports stadium — worthless if the major league team leaves town. This seems a little different — you have the case of a single individual shopping his team (almost always a he) to the highest bidder. The airlines seem to be more dropping hubs than moving them and thus seem less likely to abandon a facility on a whim.

The fundamental problem is that capital investments like this have a 20-30 year amortization period against a planning horizon that may only be 2-3 years. Betting on local boardings/deplanings is a bet on the local economy — as long as there are local businesses and residents, there will be airline traffic. However, the hub bets are vulnerable to acquisitions, bankruptcies, or merely business incompetence.

I think this falls under the category of the fallacious “will,” as in statements like “this investment will bring $2.4 billion in economic growth over the next 20 years.” Obviously this is not true — the correct form is “is predicted to” or “is expected to” — but economically (or mathematically) challenged reporters seem to play along with this snow job by reporting these political claims unchallenged.

Of course, this ties back to the inherent short term/long term disconnect between our ruling caste and the common citizen. Politicians make promises to get re-elected next year, while taxpayers have to pay the bill s for decades to come.

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