Airlines don’t like Denver’s $1.3 billion upgrade plan

Denver International Airport wants to spend more than $1.3 billion to rebuild its main entrance area, a plan dubbed the “Great Hall Project,” rearranging security checkpoints and adding new concessions to the facility. Not surprisingly, the airlines operating at Denver are opposed to the plan, mostly based on expectations that they will ultimately be forced to pay for the renovations in the form of higher landing fees and other costs. And, after reading the complaints raised, it is easy to see the airlines’ points.

The costs of the project are split in two parts. The up front costs are split between the airport and the development groups in a public-private partnership. The airport would pay approximately $400 million to start the construction with Madrid-based Ferrovial Airports and Centennial-based Saunders Construction sharing the cost burden and responsibility for project completion. That’s a huge chunk of cash for rebuilding just part of the terminal. DEN management replied simply that “The design and construction costs for this project are not unreasonable given the scope of the project.”

Beyond the up front costs, however, is where things start to get strange. The airport’s contract with Ferrovial calls for a $30mm payment to be made annually by the airport to the Spanish company to handle “management” of the facility and concessions. Ferrovial would also pocket 20% of the retail revenue share paid to the airport as part of the concessions leases. At the same time, the airport authority expects that the new layout will result in just under $5mm in incremental concessions revenue to the airport. It is not entirely clear what the other $25mm “investment” by DEN is going to return. Maybe some of it is in lieu of other maintenance costs the terminal would otherwise carry, but the numbers look shady on the surface.

The scope of the construction project is significant, moving one of the two security checkpoints up a level and rebuilding concessions in the recovered space. The concessions are supposed to bring the not-quite-enough incremental revenue back to the airport, with most of the new shops inside security but in the main building, before passengers take the train out to the concourses with the gates. I’ve yet to see a scenario where travelers willingly hang out and shop in a central area rather than go to the terminal where the flight will depart from. Some European airports do a decent job holding passengers in a central shopping area but that really only works when gates/terminals are unknown. In the case of DEN the airlines all have dedicated areas and passengers know where to go. Management assures the airlines that additional concessions development will happen out in the concourses. The plans “specifically to allow for an expansion of our offerings on the concourses as we know very well that we need to meet the needs of our passengers and be able to offer new and innovative concepts as the airport market continues to evolve.” But that’s not where the bulk of hundreds of millions will be spent based on what can be gleaned thus far.

The new security checkpoint will offer 34 lanes with a projected throughput of 300 passengers per lane per hour. Except that those same lanes only handle ~240/hour at other airports according to the airlines. Airport management also seems to presume that the TSA will full staff all the lanes all the time. JetBlue made the same mistake when it opened its flagship T5 facility at JFK 9 years ago. It still has never been consistently fully staffed. Great to build for growth, of course, but unless the terminals can handle the increase in flights and passengers building the extra lanes now rather than just provisioning space for them is a wasteful expense. And a volume of 10,000 originating passengers per hour at DEN seems mighty optimistic for an airport that had 80,000 passengers departing on an average day in April (most recent data available), including connections (35% in 2016 per DEN stats). That’s about 52,000 originating daily. Call it 65k to account for peak season and then spread it across the whole day and you probably top out at 8k in an hour at the absolute peak times. Which is why the TSA would never fully staff the checkpoints.

It is worth noting that Denver is showing strong growth in passenger numbers. It is drawing new international service (London-Gatwick on Norwegian and Zurich on Edelweiss start in the coming year) and already handling more passengers annually than it was designed for. And the security checkpoint is routinely a mess. But it is unclear that spending $1.3 billion over the next 34 years fixes that.

And then there’s my favorite part of the whole mess. DEN management is concerned that the contracts will not be approved in time to avoid paying a $9mm penalty to the construction and management vendors. Airlines want more time to negotiate on the changes. And the City Council has to approve the deal. But, from the Denver Post, it seems that those Councilmembers haven’t seen the contracts yet either:

“It’s definitely a concern to us, because we’re going to have to approve a contract … and we haven’t even seen it yet,” said Councilman Wayne New. “We feel the same way — that we’re being rushed. It’s just not ready, in my opinion. We just need more time.”

Sounds a lot like the US Congress these days, skipping over the part of reviewing the laws they are passing. What ever happened to actually planning everything out, coming up with a budget that all stakeholders agreed on and then moving forward rather than just making a bunch of crap up and hoping to convince people that the end result will probably be fine. Because that never works the way it should and consumers always get screwed.

Header photo by Tyler via Flickr/CCBY2.0