Backgrounder:
Why the Runway
Project Is a Financial Quagmire

The Sea-Tac third-runway project has been described as a “financial quagmire”. Here's why:

• Official cost estimates have ballooned from an initial $229 million to the present $1.3 billion.
• There is no solid funding in place for completion of the work – a shortfall of $700 million.
• Airport revenues are not adequate for a pay-as-you-go construction program.
• Plans to increase airport revenue by huge increases of fees paid by airlines are encountering stiff resistance from the very airlines that supposedly would benefit from the project.
• The seemingly bottomless pot of Federal money is running dry.

The Port faces a very real risk that construction will come to stop in a year or two for lack of ready cash to pay the firms hauling fill to the site. And the Port is getting extraordinarily deep in debt as the following chart from the Port demonstrates.

How did the Port of Seattle get into this mess? The regular method of funding runway construction assumes a sort of partnership of the willing between the airport, the tenant airlines, & the Federal Aviation Administration. All parties assume that the runway's cost will be reasonable. The airlines, in particular, have no wish to accept huge added operating costs as the price for using a runway whose cost is out of sight – especially if there is no particular benefit to them from the project.

But the cost of the third runway is so great that neither the FAA nor the airlines are willing to bear their usual share of the costs, and the Port of Seattle has very little money of its own.

Why the Runway Is So Pricey

Costs are grossly excessive because the runway is being built in the wrong place.

A runway needs a flat, firm space over a mile long. Airport operators normally do not try to build runways in wetlands, in the headwaters of salmon-bearing streams, on the sides of hills. They choose dry land, that is not environmentally sensitive.

Sea-Tac chose to expand into wetlands, without considering the costs of mitigating the destruction of wetlands or the massive cost of creating the largest fill–dirt embankment since the Grand Coulee Dam. And because the fill is going into wetlands, it has to be clean, so as not to contaminate local water resources – another additional cost factor, which would not be necessary if the runway were in a suitable place.

Costs are grossly excessive because the Airport has never included required environmental protections in its plans, until forced to by regulatory agencies.

The Airport disregarded legal requirements to protect local streams from drought & flooding, failed to consider the costs of regulating stream flow. This one single omission caused a $150 million underestimate in project costs. Airport senior staff also chose to disregard expert advice that there might be as much as 100 acres of wetlands in the construction area – they blithely assumed (on no factual basis at all) that only 10 acres would be involved. When outsiders checked, more than 20 acres were implicated, & the cost of wetlands mitigation suddenly doubled.

This cavalier attitude pervaded the Airport's whole approach to environmental requirements. Even after prolonged negotiations with the Department of Ecology as to what was required for a certificate under sec. 401 of the Clean Water Act, the Port's plans provoked comments by Ecology reviewers such as, “didn't do what we asked”, “incomplete information”, “not good enough”. Translation: Ecology told the Airport & its consultants what to do, but the Airport decided to try to do less than required, time after time. A lot of money was spent in this process, having consultants try again & again to prepare plans that could skate under the legal requirements - & the Airport tacks it all onto the cost of the runway - & expects other people to pick up the tab.

A Workable Financing Plan Requires
Confidence Among the Partners

Major runways at civilian airports are built for the benefit of scheduled passenger airlines, & to a lesser degree, for freight carriers. So, it is only right that the airlines make a significant contribution to the costs. They do this through payment of agreed-on landing fees & space rentals to the airport. If an airport attempts to jack up those fees too high, to pay for too-costly projects, the airlines begin to balk. No airline is required to serve any particular airport. If landing fees & rentals are so high that an airline loses money serving an airport, that airline will soon be among the missing. Example: St Louis is waking up even now to the fact that its excessive charges for reckless expansion have helped drive American Airlines away from Lambert Field.

To pay for the runway, the Port of Seattle plans to use its monoply increase its charges to airlines so that in 2009 the airlines will be paying 250 percent more in fees & rentals than in 2004. The Port proposes to increase its charges to airlines from $151 million this year to $378 million in 2009, as the Port's financial forecast below shows.

Source: Port of Seattle Budget PowerPoint
Presented to Port Commission June 9, 2004

Not one airline serving Sea-Tac can make a profit when faced with such rates – unless passenger fares are greatly increased. If fares get much higher than at present, it becomes attractive to drive down to Portland, or to take QuickShuttle up to Vancouver, to catch a cheaper flight. And it becomes attractive for airlines to shift to those other cities. Regional service might shift even closer--to Boeing and Paine Fields.

The Borrowed-Money Trap

In all discussions of third-runway financing, the Port of Seattle has been very careful not to mention the cost of borrowing money for construction. Most runways can be built on something very close to a pay-as-you-go basis. Most runways the length of “our” third runway would cost between $80 million and $215 million. No long-term borrowing is needed to cover amounts in that range. But a “sticker price” of $1.3 billion cannot be handled on a pay-as-you-go basis, even at the slow pace of the Port's work on this project.

And so we have to consider borrowing money, & the cost of borrowing. As any homeowner knows, paying off a 20-year mortgage will cost well over twice the face amount of the borrowing. Maybe three times or more, depending on the interest rate. The magic of compound interest makes the cost of borrowing jump up dramatically as the term of the borrowing lengthens, from 20 to 25 to 30 years.

The Port of Seattle plans to increase its bonded indebtedness to $4.7 billion by the year 2013, mostly for the Airport ($3.9 billion).

Source: Port of Seattle Budget PowerPoint
Presented to Port Commission June 9, 2004

The Interest Rate Trap

But sooner or later, borrowed money must be repaid – or one must default (& for public agencies like the Port, that means bankruptcy). The Port's financial staff is very adept at shuffling debt. In the last three years of non-inflation and very low interest rates, they have masterfully replaced high-interest loans with lower-interest short-term debt. This debt will come due over the next few years (the exact details have not been released). But does any reasonable person believe that interest rates will always been down at the present very-low levels? When present debt must be rolled over in coming years, almost certainly the interest rates will be much higher. Even a modest increase in ordinary interest rates will drive that $267 million debt-service figure up by a factor of two or three. Where will the Port find the money to pay increased interest in 2010, 2013, 2015?

The Quagmire

The prospect is this: the FAA will not provide any significant new money; the airlines serving Sea-Tac will refuse to pay the huge increases in fees & rents demanded by the Port; debt will increase, at higher & higher interest rates. Other airports – Paine Field, for example – will see a glorious market opportunity, & will open up to commuter & regional traffic, at rates far, far below what Sea-Tac charges – some airlines will migrate to Paine, or perhaps Boeing Field. Others will simply abandon the Central Puget Sound market. The worst-case scenario is that the major tenant airlines will go broke and simply disappear. The Port of Seattle will be stuck with a shiny almost-new terminal, mostly empty, & a new runway, hardly ever used, & a mountain of debt that it cannot pay.

Back to Page 1 of Newsletter

Federal Airport Funding
The Federal Aviation Administration provides grants for airport construction through its Airport Improvement Program (AIP). The AIP is not an open-ended program: it is limited to the proceeds from specific Federal aviation taxes. The AIP will only provide a fraction of an airport's construction budget, & airports all across the country are clamoring for aid. In theory, AIP money may only be used for airfield improvements – not for terminals, people movers, highways. And, the work supposedly must either increase capacity or reduce delay significantly. Finally, the project must pass complicated cost-benefit analysis rules.

See-Tac Airport expects that AIP funding will account for 12% of funding for the third runway. This is rather lower than the FAA's usual ratio of participation, but the project is far more costly than normal runway costs, & the gains from the runway are the subject of continued debate. RCAA believes that the cost-benefit analysis conducted by the regional FAA office is not consistent with. FAA policy (the benefits are wildly exaggerated, & the costs are largely ignored).