As airports across America languish under diminished demand, the Palo Alto Airport continues to attract flocks of aviators to its aging hangars. More than 500 aircraft use the 102-acre facility as their base.
Though the number of operations at Palo Alto Airport dropped from about 200,000 three years ago to nearly 160,000 in 2009, most other municipal airports would envy these numbers, an airport expert told a City Council committee Tuesday night (Oct. 19).
These statistics are looming large in the minds of Palo Alto's elected officials, who are now positioning themselves to enter the airport-management business. The airport has been managed by Santa Clara County since 1967 under a lease that will expire in 2017. County officials have indicated that they do not intend to extend the lease or make any major investments in the aging facility. This means that at some point between 2012 and 2017 Palo Alto will have to assume the risks and reap the rewards of airport management — whether the city wants to or not under FAA regulations.
This week, the council's Finance Committee began preparing for this takeover when it discussed an independent business analysis for the airport. The study, by the Kentucky-based firm R. A. Wiedemann & Associates, found that the city could generate a hefty profit by either managing the airport in-house or by hiring a private company to manage it on its behalf.
The committee unanimously agreed that the city should take the airport over from the county as soon as possible, rather than wait until 2017. Committee members set the wheels in motion by directing staff to come back in December with a plan for an early takeover.
For the council, the airport represents both an opportunity and a burden. The city is obligated to take over management of the airport at a time when airports nationwide are struggling to keep their services intact. R. A. Wiedemann, the consultant who performed the business analysis on Palo Alto Airport, told the committee that most airports saw significant losses in usage because of the Great Recession. This has led to a decrease in revenues and services.
"There is an economic squeeze now," Wiedemann told the committee. "Generally, aviation is the first to get hit and the last to recover."
The risk is particularly troublesome because of stringent Federal Aviation Administration regulations. The FAA, which provides grants for airport maintenance and improvements, has requirements prohibiting agencies from closing airports even if they're losing money. In Chicago, officials decided to close its Meigs Field airport without properly notifying the FAA, and ended up spending $1.6 million on fines and legal costs. Since then, the fine for closing an airport without notifying the FAA has been raised from $1,000 per day to $10,000 per day, according to Wiedemann's report.
Furthermore, the process of converting airport land to other uses requires FAA approval, which could take years, if not decades.
But the facility doesn't have to be a financial drain, Wiedemann told the committee. The Palo Alto Airport has many upsides, he said. Its tie-down rates, which range from $129.50 to $188.50 a month, are among the highest in the state and the country. The Reid-Hillview Airport in San Jose charges between $120.50 and $157, while the San Carlos Airport charges $118.
"It's hard to screw this airport up," Wiedemann told the Finance Committee Tuesday. "It's a very successful cash-cow airport that has a lot of principles working for it.
On paper, and in every other kind of way, it makes the grade of being a good investment."
The investment, however, isn't without risks. Despite its high level of activity, Palo Alto Airport has been losing money for years, county documents show. According to a business plan the county approved in 2006, the county's investment in the airport has exceeded airport revenues by $808,000 in the first 39 years of the lease. The business calls its existing arrangement with the city "awkward and untenable for the County."
This is largely because the county doesn't have control over land-use decisions at the Palo Alto Airport like it does at the Reid-Hillview and the South County airports. The city's land-use plans, which bar intensification of development in the Baylands, make it all but impossible for the county to add hangars or pursue any other revenue-creating capital projects.
"The airport faces a structural financial problem in that operating costs are rising faster than revenue and additional capital investments in the airport infrastructure will be required, yet future opportunities to generate additional revenue will be extremely limited," the business plan states.
Wiedemann said about 90 percent of general-aviation airports don't make money, but argued that Palo Alto Airport could be an exception because of its heavy activity. Despite its historic losses, the airport has been making a small profit in recent years. In fiscal year 2008, Palo Alto Airport's operating revenues exceeded its operating expenses by $119,653, according to county data.
"A hundred acres is a postage stamp of an airport, but you have 400 to 500 airplanes on it," Wiedemann said. "That's highly unusual. A lot of airports are happy with 50 airplanes."
Wiedemann's report estimates that if the city were to take over the airport by 2012 and manage it in-house, it could make a cumulative profit of $13.5 million by 2037. If a third party manages Palo Alto Aiport, the profit could be $16.2 million by 2037 because of greater efficiency in controlling costs.
Councilman Larry Klein pointed out at Tuesday's meeting that the council really has only two options: taking over the airport in 2017 or to doing it sooner. Given these options, the committee agreed that sooner is better. The committee unanimously directed staff to come back with a time line and a list of staff resources that would need to be expended.
David Creemer, chair of the Joint Community Relations Committee for the Palo Alto Airport, said his committee and other members of the Palo Alto's vocal airport community would be happy to help city leaders as they transition into airport management, particularly if this means improving the local facility.
"We are extremely enthusiastic to help this process one way or another," Creemer said.