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James R. Spensley, for the Board and Members of the South Metro Airport Action Council
Minnesota Senate Transportation Committee, January 11, 2005.

Testimony: The Legislature’s broad view of Minnesota’s economic and transportation needs rightfully should be compared in two spheres with Northwest Airlines’ (NWA’s) business plans One sphere is NWA’s very large business operations in Minnesota: a substantial part of our economy and valuable differently, not as transportation, but rather as payrolls, direct purchases, direct taxes, employee purchases, employee taxes, etc. If expansion of the terminal at MSP displaces the skilled jobs and industrial purchases related to aircraft maintenance, and adds mostly jobs paying wages much lower, as seems likely, it is an economic contraction. But you have other witnesses testifying about this.

SMAAC has for over 30 years been concerned with the peripheral costs of MSP and the trade-offs made with neighbors, businesses, and taxpayers supposedly as an investment to support economic growth in Minnesota. It seems to us, frankly, that NWA received as much or more help from Minnesota as any other large corporation doing business here, and on top of that additional aid: competitive advantages and cost subsidies from State, MAC, and local government contributions to their MSP hub. Many folks have a stake in NWA’s business plan, and you are rightfully looking over MAC’s shoulder at the costs and benefits to us and to the Minnesota economy. What gains can Minnesota expect compared to the risks?

NWA forecasts increased demand for passenger and cargo flights from MSP, but their proposal is not so much airport (air operations) expansion as hub expansion. Financing hub expansion is more speculative for Minnesota and for MAC than airport expansion. Both hub expansion and airport expansion are capital intensive, both require up front spending, and both hypothesize increased air transportation demand. However, hub expansion relates to overall demand, not local demand. Business success at MSP for NWA assumes a good share of the international market, competing with other nations, other legacy airlines, and, to some extent with communications and the Internet as business alternatives to overseas travel. Business success at MSP for NWA assumes a good share of the US domestic market, competing against low-cost and legacy airlines, ground transportation, and corporate, timeshare, charter, and air-taxi services. Business success at MSP for NWA assumes some share of the local market, where NWA now controls more than 72% of supply and proposes to further increase their dominance to more than 90%.

In the current MSP expansion, NWA added gates and increased flights 35% since 1996, and the new runway is under construction. More gates allowed NWA to increase the number of flights operating at peak-use hours (banks), that is, flights serving connecting passengers at least as much, probably quite a bit more than local passengers.

NWA revenue projections and their money available for investments here and at other airports (and for equipment) are possibly overly optimistic. NWA is losing market share and around a billion dollars a year and desperately slashing operating costs. NWA is large enough to have different tactics for different markets, but rarely change its competitive tactics. Their basic business strategy is unchanged: they are a high-cost, major-hub airline. So, what if the additional expansion proceeds; and A] NWA prospers or B] NWA fails to prosper?

Alternative B is a risk. If you had no conflict of interest, would you go out and buy NWA revenue bonds or shares in Pinnacle or Mesaba? I certainly haven’t. I wouldn’t do it with public money either.

Alternative A is not all that rosy. NWA’s contributions to our economy outside the transportation sphere could be reduced. Airline crews, purchased services, or maintenance might be re-located. Salaries are being cut. Expenditures and tax revenues might be reduced. Breaking even is prosperity for Corporations in or near bankruptcy.

SMAAC represents neighbors who would be negatively impacted by more flights, particularly more peak-hour flights. Noise and pollution would be increased – proportionally more than operations. More airliners would be flying closer together, we understand twice as close. Most air crashes are near airports, many caused by following too closely. We do not favor hub expansion, especially not at our expense.

You represent people living further away, but many of them fly from MSP. Because of the hub, terminal congestion at peak hours increases their inconvenience and requires more patience and more staff and equipment cost at MSP. They would board crowded airliners piloted by less experienced officers, and taxi faster in a cramped field populated by more planes, tow vehicles, baggage trains, and snow plows. I doubt you or your constituents want MSP expanded as cheaply as possible or even at the low cost-share NWA can afford under adverse circumstances.

SMAAC also represents Minnesota small-business people. They look at air transportation as providing access to markets and suppliers in a global economy. The service needed is affordable business – short notice – travel, compared to our competitors in other States and other countries. This is no different than resort businesses, who want tourists to have a little pocket money left after flying to MSP. And what is MAC giving us and them?

I went to NWA’s web site this morning and found the best business fare available to Tokyo next Monday, round trip: $8,027. The fare from Indianapolis to Tokyo, connecting with my flights at MSP on the same days, was $7,823. Either traveler could have saved over $5,000 if they could wait until March for the trip and flew Economy Class. Of the money MAC would spend on Northwest’s behalf at MSP, $35,000+ would in effect subsidize out-of-state businesses on a single international flight every day?

At Indianapolis, NWA recently added direct flights (to Denver) because another domestic airline added that service, and now "competes" with them – and with itself because a fair amount of Indianapolis-to-Denver traffic used to fly via MSP. But it makes more room for those guys headed to Tokyo.

MAC says low-cost airlines can come into MSP. If they do, at the MAC’s minimum 20 to 25 flights a week for a gate, a single airline -- with, say a 75% load factor, a 150-seat airliner and $200 fares would have $25,740,000 annual revenue. Since NWA fares are 30 % higher and the hubbing factor is supposedly 1:1, the competitor would reduce NWA’s remaining revenue by ($25.74 million X 0.50 X 1.30) $16.7 million dollars. Why would NWA want this? Would a bank loan NWA $92 million in this situation? In other words, it must not work that way. Some of the "facts" are wrong:

Leasing, improving, and staffing a gate at Humphrey could cost more than at Lindbergh, and MAC isn't offering move-in loans to Southwest or Jet Blue. The hubbing factor could be 3:2 favoring connecting passengers. NWA might match fares and make connecting to their Denver flight easier or harder to book, manipulating the hubbing factor for this one leg, making the NWA load-factor higher and the competitors' lower. [This has happened before, MAC's unused new gates cost us, not NWA.]

The NWA business plan is to keep local seats scarce compared to demand, charge us more, pay MAC less for services, and somehow cover the fuel and crew costs expended to fly every connecting passenger 300 or 400 miles out of the way to compete with low-cost domestic (direct) routes. Worse than being unfair, it isn’t likely to work.

We don’t think MAC can fix it up, or even that they should try. Only so many flights can be safe and affordable at a site as small as MSP. It’s one thing to have 700 flights a day for us and 800 for connecting passengers; it’s another thing entirely to have 500 for us and over a thousand for hub users.

 

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