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.
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:
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.