Indianapolis Airport Gets Aggressive at Lowering Airline Costs

Regular Cranky readers know that Indianapolis is an airport that matters to me a lot. Since that’s where my in-laws live, I go out at least a couple times a year, so I pay close attention to what happens there. Indianapolis has also been a poster-child for overspending. The new terminal, though nice, was overbuilt and cost too much. The airlines had to absorb the burden and that has hampered growth. But things are changing, and now there’s good news. The airport and airlines just came to a new agreement that will end up lowering costs fairly significantly over the next five years. That being said, there is a lot that has to go right for this deal to work.

North Ticket Counters

This year, airline costs per departing passenger (CPE) are set to be around $10.50. That was supposed to climb as high as $13 in the current ten year agreement. In a place like Indianapolis, that’s a lot of money. Much of this is because of the enormous new terminal which though nice and functional was also overbuilt and very costly. But that mistake has already been made and it can’t be changed now. Those airport costs made growth in Indianapolis a non-starter for many, and to its credit, the airport has, under new management, finally made an effort to tackle those costs directly.

The new Airline Use Agreement (PDF) is a five year agreement that will now see CPE drop down to $8.86 by the end of the now-five year term. That’s a huge improvement over the projected $13, but, how are they going to do this? They can’t just magically lower costs when their own costs aren’t going anywhere, right? I spoke with the airports Director of Communications Susan Sullivan about it.

The first big piece of good news is that the airport is refinancing its debt at lower rates and that will help take a big chunk out of the substantial debt service costs. There is also a commitment that the airport will not seek new debt during the agreement period. Operating and maintenance costs are being cut $65 million over the lifetime of the agreement as well. This is really just an effort to do things more efficiently, something you don’t often see at airports, which many cities end up viewing as jobs programs.

But the biggest piece of the long term project here is the effort to turn Indianapolis into an “Aerotropolis.” Yeah, I know. I hate the term. It sounds like something a consultant made up to sell the concept to the locals (what’s it called? monorail!). But the basic idea is a sound one in theory. It’s to make Indianapolis Airport a center for commerce surrounded by business, industry, and more. Every airport likes to talk about this concept, but I actually think Indianapolis is better equipped to make it a reality than most. Here’s why.

  • Indianapolis is already a major hub operation for FedEx, so commerce flows through this airport. Under this agreement, cargo fees will also be dropping, good news for FedEx.
  • Indianapolis has a ton of land. The airport is working on a land use study right now, but there is a lot of land with opportunity to develop as it sees fit.
  • Indianapolis (the metro area) is cheap. It has one of the lowest costs of living in the country, and that’s good for business.
  • Indianapolis is in a great, central location that makes sense for logistics.

Let’s talk more about that last point. There’s a reason they call Indianapolis the cross-roads of America. Look at this map:

Indianapolis Interstates

When the interstate highway system was built, Indianapolis was built as a hub. It’s an easy ride in six different directions with straight shots to places like St Louis, Louisville, Cincinnati, Columbus, and the all-important Chicago, the hub of rail transportation in the US. From a logistics perspective, Indianapolis is a great place to locate. If you can co-locate with an airport as well where rents are low and cost of living is cheap, it’s a very compelling case all around. But admittedly, this idea is the weakest link in the agreement. Airlines are still pretty happy.

The airport has to be particularly concerned about its relationship with Southwest right now since it will be taking over AirTran, which has a large presence in the city. Southwest sent the airport director John Clark a letter saying that it “is pleased with the new lease at IND. We appreciate you partnering with the airlines to create such a realistic and business-minded deal.” Southwest continued, “Prior to your tenure, the project and its related business deal caused a great deal of tension between the Authority and the airlines.”

So, now we have a good framework in place for making Indianapolis a much more airline-friendly airport, but is it realistic? The airport expects a 1.5 percent increase in passengers with non-airline (of which land use is a big piece) revenue increasing 2.2 percent. That seems relatively modest, but if it doesn’t materialize, then costs will go up for the airlines again. But I give Indianapolis credit for really trying to work with the airlines. This is a big change for the airport, and it’s welcome.


19 Responses to Indianapolis Airport Gets Aggressive at Lowering Airline Costs

  1. Mark Wheatley says:

    I like what you have to say about Indianapolis being a hub, but I’d argue it’s only a regional hub not a nationwide hub at least as far as ground transportation goes. For that you need to go to Oklahoma City with its crossing of I-35 and I-40.

    • The US population is weighted toward the east, so Okalahoma City is too far west. All the overnight shippers have their hubs right through the same latitudes.

      • I’m not talking overnight shipment though but ground transportation. Port of Los Angeles is the busiest in the US by container volume. Long Beach is second busiest. Oakland fifth. To get back east those goods are going to travel by truck and rail.

        • Well the west coast ports are bound to be higher volume because of Chinese goods, a vast majority of which have enough lead time that you’ll want it as cheap as possible, which means ship and rail, not airplane.

          Also I’d argue that the west coast ports are really more an O/D location than a hub. Most freight goes into or out of it. There probably isn’t much transferring and sorting to a different location.

  2. A says:

    Indy might be a hub/crossroads for freight in terms of trucking & rail but it’s not a crossroads in terms of passenger traffic. While FedEx can probably grow at IND, I’m just not seeing how they can grow passenger air traffic. It’s not a huge city for O&D traffic. No major airline runs a hub operation there. With a still weak national economy I don’t see major organic growth in local passenger air travel for either leisure or business in any city, let alone Indy. I’m all for lowering costs, but I think they’ve got an uphill battle here.

    • CF says:

      I agree with you there. I don’t see Indy growing tremendously and certainly not into a passenger hub. My point was that it’s a commerce hub and because of that, Indy might be able to develop the airport into more of an “aerotropolis” to serve business. That could result in marginal increase in passenger flights but what it really does it keep costs lower for airlines.

  3. DGS says:

    Any ideas on what destinations could be added?

    They seem well covered other than long/thin routes to the west coast that would probably be tough for any airline to make work…

  4. This blog was good because you mentioned the fee airlines pay each airport for a departing passenger. I sure most of the people who fly don’t know that.

    Maybe airlines should list all the fees for each city they serve on their website. Passengers might get a better feeling for the cost of running an airline if they knew that the $39 fare they had to buy already has $10.50 (for IND as an example) taken right off the top that the airline must give to the airport. That’s not counting all the other costs that $39 ticket must pay for. If people saw a detailed break down they would know the airline more then likely didn’t get to keep any part of that $39 fare as profit, which would explain having bag fees, meal fees, change/cancel fees, assigned seat fees, etc.

    It’s also a good example that airports need to offer airlines lower costs to entice the airlines to grow at their airport. I don’t know how it all works, but offering airlines different fees by the number of passengers flown could help. Like if they fly less then 200 people a day the cost is $10 a person, 200-300 $8, and so on. That gives an airline a reason to add more service when their costs are lower. Is ONT paying attention to here :-)

    • To clarify, the “cost per enplanement” is NOT an airport charge to the airline on a per-passenger basis. It is simply a performance metric that takes all of the airlines’ costs to operate at a given airport and divides it by total enplanements. Again, it is NOT a per-passenger fee.

  5. Allan says:

    Cranky hates new terminals. It’s actually quite funny/interesting how many posts there have been over the years going off on new terminal projects. Maybe he’s so use to the 3rd world airport that is Long Beach that even the worst terminals seem like the taj mahal so he sees no need for new buildings.

    Me, I love new terminals and think the added cost is worth it. Especially at airports that serve international routes. It’s nice to know that when foreigners step off the plane their first impression of our county is an awesome terminal and not some run down 3rd world trash dump (Long Beach).

    • Jason H says:

      I think Cranky’s thesis is spot on. New terminals often mean higher landing fees, which in turn often means reduced service. Sure new terminals are nice to look at, but there is a cost-benefit analysis that is often lacking when they are built.

      My recent trip to Kona reinforced that. KOA has a very serviceable, very Hawaiian terminal structure with a lot of outdoor openness and flow (and for plane geeks we get to board 767s and 757s via air stairs), but they are building a new enclosed 2 story monolith. That cost will be passed on to the airlines even though the airport is very serviceable right now and is indeed served by several different major carriers. If costs are not controlled (which as Cranky points out they usually aren’t) some carriers will leave and the airport will be forced to raise rates even more to compensate. Thereby starting a spiraling problem.

      As for foreigners entering the US, I think our bigger issue is the first impressions they get from our surly customs agents rather than the terminal they go to if/when they are allowed through customs.

      • Allan says:

        I can’t disagree with your assessment of custom officials.

        • Chris M says:

          As a former airline director (with a green card and UK passport), I find that most re-entries into the US are facilitated by immigration folks, rather than the reverse. Even with the new fingerprint and photo checks, the agents are usually very welcoming; unlike the UK immigration officers who are frequently surly and less than welcoming. Perhaps it’s my acquired American accent.

      • In a way that to bad about Kona building a enclosed terminal. The last time I was at Kona standing outside by the gate (and its a real gate gate) here comes in a JAL 747 and it pulls up right in front of you. Nothing like being up close and personal like in the old days to hear how much noise a 747 makes and to see it looming about you. Guess those days will be gone.

        • Jason H says:

          Talking to the locals they aren’t happy with the new terminal either. They like the “collection of huts” that evoke a very Hawai’i experience. Sure people might get rained on, but it’s Hawai’i and the rain is warm and fresh.

    • CF says:

      I love getting comments from people who think they know my thoughts but clearly don’t even read the blog.

      I hate unnecessary terminals or overly expensive terminal projects. I do not hate new terminals. As I’ve said here many times, I love the new Long Beach terminal project. The current situation is completely inadequate and the management has figured out a way to build the new project without having a significant impact on costs. I also loved the new JetBlue terminal project. The airline clearly needed a new terminal and made an efficient one that was quite cost-effective.

      Indianapolis built an unnecessary palace as is Sacramento today. Those are the projects I hate, but I give the new managers at Indy a lot of credit for working to lower costs given the hand they’ve been dealt.

      • Interesting that the two you like are JetBlue driven in some way. Perhaps JetBlue is more serious than others about reducing service at an airport than others. If you ask me it can be a weakness of SWA that they despise pulling out of airports, airlines know they’re saber rattling with less of a potential for followthrough.

        • CF says:

          That’s a great point. And an interesting one. Of course, JetBlue built the JFK terminal and drove the project itself. In Long Beach, it’s the airport doing it but clearly because of JetBlue’s requirements. I think the reality is that it isn’t JetBlue but rather any airline. If an airport works with an airline, then it’s going to be a project that’s more beneficial to the airlines. It’s when airports go against what airlines want that it becomes a big problem.

  6. james says:

    I love open and airy facilities, but with regard to this specific photo – without the check in area it could easily stand in for any suburban Costco warehouse.

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