Little Rock Nat'l Lays Financial & Operational Groundwork for New Terminal

Despite plans brewing for a new $175 million terminal at Little Rock National Airport (LIT), there's more talk of debt reduction and airline fees than carpet swatches and paint samples.

Executive director Ron Mathieu refers to it as "getting the financial house in order" and considers it a vital precursor to any significant infrastructure improvement at Arkansas' largest commercial airport. "We just can't go forward until we address the financial side," Mathieu stresses.

That doesn't, however, mean LIT is hamstrung while working toward balance sheet nirvana. In January, crews began $53.6 million of improvements to the airport's existing facilities. Primary Phase 1 projects include a new two-story baggage matrix building and terminal renovations ($20.1 million), a new inline baggage screening system ($14.8 million), system upgrades to make the current terminal more energy efficient ($9.1 million) and surveillance enhancements ($5.9 million). All of the improvements will also provide benefits to the new terminal when it's built.

Smaller-ticket projects including a security checkpoint expansion, new communications center and flight information display system follow the same dual-purpose theme.

Importantly, notes Mathieu, the Phase 1 projects won't incur any debt. Nearly half their cost, $23.5 million, will be paid for with passenger facility charge (PFC) funds. Federal stimulus funds via the Transportation Security Administration will cover another $17.4 million, while future PFCs are slated to fund $9.6 million. The airport itself is paying for almost 6% with $3.1 million in cash.

LIT's Phase 2 plans to add a new terminal largely hinge on longer-term funding - predominantly bonds predicated on $7 PFCs and 1.5 million enplanements. (Last year, the airport enplaned 1.1 million passengers.) Fully $140 million of the $175 million total projected cost is planned from such bonds. The remaining $35 million is expected to come from a capital fund stoked by operating profits and the reallocation of debt service from 2010 to 2020.

factsfigures Project: Terminal Renovation/Addition Location: Little Rock (AR) National Airport Phase 1 Estimated Cost: $53.6 million Funding: Current PFCs ($23.5 million), Federal stimulus funds ($17.4 million), future PFCs ($9.6 million), cash from airport ($3.1 million) Planning: Leigh Fisher Design: Architectural Alliance Int'l Construction Manager at Risk: Parsons Key Suppliers Baggage System Design: Parsons/Vic Thompson Co. IT Support Consultant: The Solution Design Group Technology/Security Consultant: Faith Group Seismic Analysis/Structural Engineering: Simpson Gumpertz & Heger Conceptual Cost Estimating: Beck Group Local Partners Civil/Mechanical/Structural Engineering: Garver Engineers Architectural Support & Design Implementation: Woods Group Architects; Polk Stanley Wilcox Architects Phase 2 Projected Cost: $175 million Funding: Bonds ($140 million), airport capital fund ($35 million)

The $35 million piece is what showcases Mathieu's financial background. Eliminating LIT's debt service - currently $4 million per year - is an objective he's passionate about achieving by 2016. Currently, the airport has four bonds worth $44.5 million on its books. A $24.7 million bond issued in 1999 with a maturity date in 2019 is first on Mathieu's hit list, because it doesn't include a prepayment penalty. Accelerated payments on two 2007 bonds totaling $12.7 million can begin in 2016 without penalty. "We're making aggressive efforts to eliminate debt," explains Mathieu. "After we're debt-free, we'll continue to put money from operating profits away to fund Phase 2 (the new terminal)."

Shifting the Paradigm

Mathieu identifies 2008 as a pivotal point in the journey to getting LIT's financial house in order. That's the year the airport allowed its standing lease agreements with air carriers to expire. The calculated risk - a strategy sanctioned by the Little Rock Municipal Airport Commission - didn't result in any loss of service. It also allowed the airport to revamp its revenue sharing agreements and renegotiate airline rates and charges.

"We wouldn't be talking about expansion now if we hadn't done what we did then," he says matter-of-factly.

Some speculate that the lack of alternative airports in the area helped diminish active "pushback" from the airlines.

Mathieu characterizes the changes as a shift in the airport's business model - away from the traditional residual system that predominates the industry to a hybrid format with "engineered rates."

The airside is still largely residual, he explains, emphasizing that the airport has not increased landing fees from 2009 to 2011. "As far as I know, we're the only small hub airport in the United States that has managed that," he notes.

The airport also decreased its cost per enplaned passenger (CPE) rate - from $6.90 in 2008 to $6.60 in 2009, where it has held steady since. While still operating under the residual system, LIT raised its CPE from $4.68 in 2007 to $5.89 in 2008 and eventually $6.90 in 2008, largely due to some airline debt and the amortization cost of past projects, explains Matheiu. If LIT had continued to operate under a full residual system, Mathieu estimates its CPE rate would currently be about $7.

To balance the increases, the airport issues "discretionary credits" to the airlines. "The new system allows us to remain financially competitive and provides us with maximum flexibility," explains Mathieu. Last year, LIT issued more than $2.5 million in discretionary credits. In 2009, the first full year after the switch, it issued nearly $1.6 million.

Significant changes also occurred on the landside as LIT transitioned from a residual to compensatory format. Because the airport is not asking airlines to bear the financial risk or burden of building a new terminal, it shouldn't continue to share such a large portion of the revenue produced at the terminal, reasons Mathieu.

In 2010, for instance, the airport earned a record $8 million in profits. Under the previous full residual system, fully $6.5 million would have been distributed to the airlines. Under the new hybrid system, LIT keeps it all.

A broad group of relatively small changes contributed to the airport's best profits ever. "Tweaking revenues" is how Mathieu describes it. Daily parking rates at the terminal were raised from $8 to $13; long-term parking increased from $6 to $10 per day. Despite the rate hikes, net revenue from parking dropped from $7.6 million in 2008 to $7.2 million in 2009 before jumping to more than $8.8 million last year because initial proceeds were used to purchase new automated systems to increase efficiency and decrease personnel costs. Agreements with off-airport parking providers were also updated to capture more revenue. According to Mathieu, some hadn't been changed in 18 years.

Other tweaks include a new $3.50 per day passenger facility charge for rental car transactions and the implementation of a $1 fee for each taxi dispatched to the airport.

With no major changes to the concessions program, restaurant and lounge revenues largely mirrored enplanement trends - dipping from $988,000 in 2008 to $947,000 in 2009 and rebounding to $960,000 last year.

Not surprisingly, the airport encountered resistance from airlines, airport vendors and local media as it developed a new model for business as usual. LIT's former full residual system, explains Mathieu, made more sense before the advent of ticketing fees, the Airport Improvement Program and passenger facility charges. "Now airports can fund themselves," he notes, stressing the importance for LIT to "control its own destiny."

Some of the resistance to Phase 2 may stem from an understanding gap regarding the purpose of the expansion. While one local newspaper questions the need for a new terminal by citing a "whopping 25% decline in traffic" between 2000 and 2009, Mathieu cites the ongoing creativity it has taken to "squeeze out efficiency" from a terminal built in the 1970s.

"The (current) terminal was designed to accommodate 400,000 enplanements, and we're making it work for almost 1.2 million," he explains. "I think the commission has done an outstanding job modifying the terminal to accommodate traffic growth throughout the years. But at some point, you have to take a new approach. That's where we are now."

Design objectives for Phase 2 consequently focus on serving current levels of traffic more efficiently and accommodating projected traffic growth through 2030 - potentially up to 2 million.

In the meantime, Mathieu remains undaunted by critics who call the new terminal a "Potemkin village."

"This is a long-term process - a marathon, not a sprint," he relates. "It's important to stay true to the vision and direction of the commission, and deal with the financial, political and operational issues that arise along the way."

The Southwest Swing

As consultants develop plans for Phase 2, the impending final expiration of the 1979 Wright Amendment introduces an unknown variable to the design process. The federal law currently restricts commercial passenger service originating from Dallas Love Field to other airports in Texas and four neighboring states, including Arkansas. Many fliers consequently perform the "Wright shuffle" by connecting to their final destinations at one of the allowed airports, including LIT.

Given the dominance of Southwest Airlines at Love Field and its current 34% market share at LIT, airport officials are eager to learn how the Wright Amendment expiration in 2014 will affect routing. Southwest's acquisition of AirTran Airways last year makes the situation even more noteworthy.

Officials at LIT's project planning firm, Leigh Fisher, predict that post-Wright fallout will be less troublesome at LIT than at other airports. Director Greg Detmer, AIA, cites the airport's stable of carriers (Delta Air Lines, American Eagle, Continental Express, United Airlines and USAirways Express) as a distinct advantage.

"Little Rock has a strong variety of airlines," says Detmer, "so it's less volatile than airports with one dominate airline."

The airport recently secured another buffer when Vision Airlines announced new service from LIT to Northwest Florida Regional Airport three times per week, beginning in March.

The nature of Southwest's service at LIT further fuels optimism. In addition to numerous daily flights connecting to/from Love Field, it also has direct flights to/from Phoenix, Las Vegas and St. Louis.

"The market drives air service, not the other way around," Mathieu notes. "The paint on the aircraft may change, but the market will still be there."

Despite positive indicators, extra flex is being built into Phase 2 planning to accommodate potential flux or ripple-effect changes.

The International Factor

The need to add a Federal Inspection Services (FIS) facility could also alter LIT's plans, perhaps adding an intermediate step to the airport's current two-phase strategy. "The outlook for the international market is very positive over the next five years," reports Mathieu, noting opportunities to the north and south.

Tyson Foods and other local companies, for instance, regularly bus several hundred international guest workers from central Mexico to northwest Arkansas. Although the airport is a two- to three-hour bus ride from the plants, flying workers into LIT would substantially abbreviate the current three-day bus rides. A significant local Hispanic population and a new Mexican consulate in Little Rock further bode well for demand. Canadian companies with existing ties to the area could similarly offer a steady stream of corporate travelers.

Mathieu also foresees potential international traffic from companies relocating to Arkansas because of the state's low cost of living, right-to-work laws and constitutional requirement for a balanced budget. "That makes corporate taxes and other costs of doing business very predictable," he explains, citing Hewlett-Packard, Caterpillar and Unilever as examples of large companies operating in the area.

Despite such potential, Mathieu does not advocate an "if we build it, they will come" approach. "We can't talk to carriers now, because it would take about two years to add an FIS. We need to know the service will be there to support anything we build," he says. "It's a very delicate balance."

Work in Progress

While airport officials weigh the costs and benefits of adding infrastructure to support new international business, crews continue to work on $53.6 million of improvements at the existing terminal. With contract documents nearing completion in January, expansion to accommodate the new baggage system was expected to begin in March.

Executives at the project's lead design firm laud LIT's senior management and airport commission for their "strategic long-term vision" regarding the upgrades and expansion. "They're demonstrating more foresight than most airports," notes Eric Peterson, AIA and principal of Architectural Alliance International. "The plans include all the traditional master plan elements such as size, gate capacity and configuration, but they also go beyond programming issues to take a more holistic approach, including a vision of what the airport should portray."

"Their approach is definitely different," agrees principal and project manager, Stuart Stephens, AIA. "There are strong elements of civic development and area pride to the project."

Toward that end, the firm is translating the airport commission's goal of reflecting the "character of Arkansas" into tangible architectural elements and spatial characteristics - an important step that usually comes later in the process, notes senior associate/terminal designer Ashley Ilvonen. "We're in pre-design, and they're already looking to understand the character of the space and how it will convey their vision," Ilvonen relates. "Often, we have to encourage airports to flesh that out, but they're leading the way."

Having grown up in the Little Rock area, Peterson brings a distinctly local perspective to the process.

Senior associate and interior designer April Meyer is resolute about avoiding "visual one-liners" to achieve the commission's design directive. "We're working on a more abstract level, with color, scale and local materials instead of relying on literal interpretations," she explains.

Peterson credits airport executives for not allowing the largest and arguably most pressing element of Phase 1, the new inline baggage system and associated building modifications, to adversely affect the overall long-term vision for the facility.

"So many airports are rushing to put in new baggage systems," Peterson explains. "Little Rock actually paused the process for about a year in order to get it right - completely right. They took the time to develop their vision for Phase 2 so we could establish it with the new baggage building in Phase 1."

Despite their patience to date, airport executives are eager to unveil baggage screening/handling improvements. "When the restrictions for liquid carry-ons took effect in July 2006, we experienced a vast increase in checked luggage, which caused a choke point in the lobby," explains Mathieu.

The new $14.8 million system, which contains three inline screening machines, will replace four machines that currently reside in the lobby. "One of the new machines has better throughput than our four current units combined," notes Mathieu.

A $1.6 million security checkpoint expansion is expected to help further ease congestion.

Here & Now

LIT's $9.1 million energy efficiency project was well underway in January, with installation of two new generators and a new primary outside generator. In addition to significantly boosting the airport's backup readiness, the new system will allow the facility to go off-grid and prevent rolling brownouts when the electric company's system-wide usage peaks during the summer.

Replacing 40-year-old equipment with newer, more energy-efficient systems was the "right thing to do" financially and operationally, says Mathieu. Anticipated savings of $650,000 per year in water and energy costs illustrate his point. A projected 10-year return on investment also helped secure approval.

Upgrades to LIT's back-office systems managed by The Solution Design Group are expected to boost efficiency in areas such as accounting, property and revenue management, purchasing, etc. - in the existing facility and new terminal. "Airports typically get caught up in operational matters like common-use technology and CCTV (closed-circuit television), and they don't pay enough attention to behind-the-scenes systems that make things like billing happen smoothly," says company president/CEO Tom Strange.

Conversely, LIT's "progressive approach" to technology will pay dividends, says Strange. "They want the best available technology for their size and traffic because they know it will provide benefits to passengers, airlines and airport employees," he explains.

In January, Crowe Horwath began implementing the airport's new enterprise resource planning system, supported mainly by Microsoft Dynamics AX software. Completion is expected within the calendar year.

Other Phase 1 technology improvements could possibly lead to future revenue through the sale of data and connectivity services to tenants inside and outside the terminal, notes Faith Varwig, principal of the airport's technology and security consultant, The Faith Group, LLC. Currently, the airport provides only telephone service.

Installation of a multi-user flight information display system throughout the airport was complete in December. New equipment from Com-Net (now part of SITA) supplanted an InFax system installed in 1998. Adding a local area network (LAN) and installing a new CCTV system, voice over IP phone and public address system are next on the list of planned IT improvements. The addition of common-use ticketing stations and self-serve kiosks for airline and rental car check-in is expected within a year. Equipment that will allow passengers to tag their own bags is also being considered.

"The improvements will bring significantly more capacity to the airport - especially the LAN and new CCTV," notes Varwig. In general, she foresees the current switch to more integrated systems as being particularly valuable. "Instead of having five different camera systems for five different purposes, they'll have one top-down integrated system that will benefit many users and increase overall situational awareness throughout the airport. Security is a driving factor for CCTV, but other departments will use and benefit from the system as well. Maintenance supervisors can use it to inspect the cleanliness of the terminal; on the airside, it can be used to assess FOD (foreign object debris) conditions and help initiate cleanup. Cost per user decreases significantly with integrated systems."

Despite the volume of IT enhancements, Varwig notes that technology itself is not driving the projects. "Senior management (at LIT) really grasps the benefits of deploying advanced technologies to improve business and operational processes," she explains. "It's a refreshing viewpoint."

Continuing the overriding goal of improving efficiency and profitability, airport officials look ahead to Phase 2. In addition to a new terminal commons area that will envelop the former one, initial plans call for a 12-gate concourse with ready expansion to 17. A new baggage claim facility and inbound roadway and parking improvements are also part of the vision. It all, however, requires continued diligence regarding the airport's financial status, notes Mathieu.