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August 25, 2008
San Jose hopes to save flights by reducing airport rents
Silicon Valley / San Jose Business Journal - by Cathy Weselby
Airlines are getting a rent reduction at Mineta San Jose International Airport to help persuade them not to reduce flights in the face of rising fuel costs.
The San Jose City Council on Aug. 19 approved taking as much as $2.17 million from a rate-stabilization fund to offset revenue the airport won’t get as a result of the lower rents.
San Jose Airport Director Bill Sherry said the city could help by providing the best business environment possible.
“If air carriers leave, they may never come back,” Sherry said.
Three airlines — JetBlue Airways, Continental Airlines Inc. and United Airlines Inc. — plan to cut flights after Labor Day, as reported by the Business Journal on Aug. 8.
San Jose Mayor Chuck Reed said he met with Southwest Airlines executives last week and was told that cost is a critical factor in selecting where to add flights.
“We are in competition locally, and airlines have choices between other airports,” Reed said.
A majority of the flights at the San Jose airport are with Southwest Airlines. The Dallas-based airline has not been hit as hard as other air carriers because it hedged its fuel costs and pays only $51 per barrel versus the July peak of $147 per barrel. Yet Southwest plans to cut a flight from Mineta San Jose to Chicago’s Midway airport as of November.
Airport spokesman David Vossbrink acknowledged that most of the pain is in fuel, with half of an airline’s costs in fuel and 40 percent spent on labor.
“Terminal fees are minimal for airlines, but it’s one way to control costs,” Vossbrink said.
The council’s decision reduces average terminal rental rates from $206.76 to $193.14 per square foot.
Vossbrink said the airport moved to a new lease agreement structure last year where airlines pay for the time used at the airport, instead of by gate. He said the new agreement is a little riskier because there’s less cushion, but it increases flexibility and the ability to attract more airlines.
Airport officials project an $8 million loss in revenue for fiscal year 2008-09 because of reduced passenger traffic. Sherry said he and his staff would continue efforts to lure carriers to provide international flights, with Tokyo and London as first choices.
The rent reductions would not affect the $700 million modernization project under way. It’s funded through bonds and is scheduled for completion in 2010. Phase two, the airport expansion, however, is triggered by growth and is on hold until the airport has an average of 217 daily flights. The airport now averages 170 daily flights.
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