BWI's big bet pays off

THE BALTIMORE SUN

Now a year old, the terminal built for Southwest Airlines at Baltimore-Washington International Thurgood Marshall Airport appears to be running well -- a model of planning, and a little luck, in a turbulent industry where choosing the right airline partner makes a world of difference.

The airline's passengers enjoy the terminal's vast lobby and new choices of restaurants and stores.

After an initial glitch that caused some mishandling of luggage, the terminal's automated conveyor-belt system is helping security agents and baggage handlers get the airplanes off on-time and loaded with the right bags.

"The facility seems to be operating as planned," said Timothy L. Campbell, who became BWI's new chief about six months ago.

All airport administrators would love to be able to repeat those simple eight words, especially since the Sept. 11 terrorist attacks made the airline business so volatile.

The decision to build a $264 million terminal to benefit Southwest -- the airport's dominant carrier and the nation's most profitable airline -- may seem obvious.

But aviation experts note that much can go wrong when a public airport makes expensive capital plans years in advance. This is because airlines are known to change course with each shift in gas price and passenger mood.

Take, for example, Pittsburgh International Airport. Pittsburgh spent $800 million in 1992 to open a model terminal for US Airways, which in its heyday controlled 80 percent of the regional market. The airport later filed twice for bankruptcy protection and cut more than two-thirds of the airport's 560 daily flights.

Pittsburgh has won plaudits recently for cutting its costs and luring healthy low-fare carriers to fill some of the partially moth-balled US Airways terminal. Even so, passenger traffic at the airport remains at about a third of capacity.

Airports in today's environment are having a hard time finding the right balance to keep growing, make money and please customers. They're competing more intensely for record numbers of travelers who are better able to shop for airfares on the Internet, at a time when cash-strapped airlines are balking at contributing to pricey new terminals.

For a time, the two facilities in Pittsburgh and Baltimore were in the same position, both dominated by US Airways. BWI always had a higher percentage of local traffic, a steadier business than at Pittsburgh, which historically served as a hub destination.

US Airways first retrenched in Baltimore, losing its top position in 1999, about the same time the airport decided to build the Southwest terminal.

The decision was part of a strategy to become a regional discount airport, providing something that rival Washington airports weren't offering.

The planners had no way to know that low-cost carriers would become so popular and relatively profitable, when compared with traditional airlines.

"They were ahead of the curve," said Stephen D. Van Beek, executive vice president of Airports Council International, a trade group representing airports. "They re-branded themselves. Now, they're as well-positioned as they can be."

BWI is now partnered with an airline that earned $61 million in the first three months of the year, while most other airlines lost money because of fuel costs.

Southwest may not always be immune from rising fuel prices, analysts said. The airline was able to beat rivals because of an extensive hedging program that gave it cheaper fuel. But the percentage of fuel being hedged is declining, adding more to its costs each year.

For now, the new BWI terminal appears to be helping the carrier and the airport. Additional shops and restaurants has meant more income for the airport, which has meant it could keep rent and landing fees low and appeal to airlines considering an expansion, Van Beek said.

The money from the airlines, along with concessions, parking and passenger charges on tickets, go to pay off the bonds that helped finance the $1.2 billion for the terminal and other improvements.

Airline payments to the airport typically are measured in cost per passenger. At BWI, each airline pays the state-owned airport $6.48. This is cheaper than the industry average of $6.55, as well as the rate at Pittsburgh ($11.03), Philadelphia International ($9.09) and Washington Dulles International and Reagan National airports ($12.54), according to Moody's Investors Service.

BWI embarked on its expansion in 1999, with the Southwest terminal as the cornerstone. It gave Southwest more gates immediately and room to expand.

The terminal was designed before the 2001 attacks, but there was time to modify the plans to accommodate extra security. The basics of the terminal remained the same.

The terminal has a wide curb outside, although a portion of it is still blocked by construction that continues this year, and an expanded ticket counter inside.

There are two security gates at either end of the long ticket counter. Farther inside the terminal is a line of eating places and shops that overlook many of the 22 gates Southwest uses. There also is a big picture window of the tarmac where passengers can watch Southwest's 167 daily flights board and take off.

Airport and airline officials say the terminal alone is not likely to bring more passengers. The demise of a rival discounter, Independence Air at Dulles, likely provided more of a bump this year. But officials and passengers agree that the new terminal has made the airport experience nicer.

"It's made such a huge impact with customers and with employees," said Steve Goldberg, Southwest's BWI station manager. "You can see it in their faces when they walk in. Everything in here is easy."

Aside from the road construction in front and the initial trouble with the automated baggage system, Goldberg said the terminal has everything the airline wanted.

Stacie Reeder, a regular Southwest passenger, agreed. The Severna Park woman, recently en route to Raleigh, N.C., said there are many more things to do, from shopping to snacking to sitting and watching planes take off.

She flies Southwest because it is usually the cheapest, not because of the terminal, which she considers a bonus.

"It's a lot more open and inviting than the old terminal," she said. "I've been here since 10:30 a.m. for a 12:30 p.m. flight because that's when I could get a ride. But I thought it would be OK. I've already gotten something to eat and I could shop if I get bored."

That shopping has led to an increase in sales per passenger in April to about $7, according to BAA Maryland Inc., the local arm of the British company that has been overhauling BWI's concessions for the past year.

More shops and restaurants will be added throughout the airport over the next year. The company anticipated a year ago that concessions would roughly double to 100,000 square feet of store space, yielding about $7.84 per passenger.

The average for airports is closer to $5.50, which is what BWI was making before the overhaul began. The airport gets a percentage of the rents and the store sales, and BWI officials estimated a year ago that it would increase concession revenue to $11 million annually from $7 million once all the shops opened.

"We're well on projection," said Mark K. Knight, BAA Maryland's president. "It's hard to speculate on what it will be when we are done, but it will significantly exceed $7.84."

It was, ironically, Pittsburgh that served as the model for BWI's revamped retail operation. It was the first mall-style setup, created by BAA, with space leased to national and local stores offering the same wares, at the same prices, as the shopping center down the street.

Knight said revenue is about the same at both airports, but sales per passenger are now at an industry peak of $13 in Pittsburgh. Knight said total revenue there dropped with the number of passengers, but the sales per passenger increased.

He said Pittsburgh's shops don't tend to have long lines because the airport has fewer passengers and the stores are in a single area that is available to all travelers. At BWI, shops are dispersed among terminals and separated by security gates.

At BWI, passenger numbers continue to climb. In 2005, 9.7 million passengers passed through the new Southwest terminal, about half the airport traffic. Numbers are expected to grow this year, with traffic in the first three months rising about 3.5 percent. The numbers were up 13 percent at the Southwest terminal, the airport said.

BWI is Southwest's fourth-largest hub after Phoenix, Las Vegas and Chicago.

Robert L. Harrell, president of Harrell Associates, an industry consultant, said Southwest seems like a sure-fire bet now -- just as US Airways might have looked in Pittsburgh at one time -- but it is unclear at what pace the carrier can continue growing at BWI or elsewhere. The nation's most profitable airline will have to cope with fuel costs eventually.

And the number of obvious low-cost places to launch service has shrunk. Southwest began service in Denver this year and plans to launch service at Dulles in the fall, which could siphon off some BWI traffic. It plans to increase its service to Chicago, Nashville, Tenn., Las Vegas, New Orleans and Philadelphia, which is taking business away from BWI.

"They'll have to be very careful about where else they go into," Harrell said. "They can go into just about any market because everyone wants them and everyone will do what BWI did, build a new terminal."

meredith.cohn@baltsun.com

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