Mark Green: Like the airline industry, CVG has had ups and downs the past decade as the industry contracted but air freight activity increased. How do you describe CVG’s current status?
Candace McGraw: CVG is doing quite well. We’re moving in the right direction. In 2014, we had our first year-over-year increase in passengers in nine years. That was 3 percent. For 2015, we’re up over 6 percent in overall passengers year-to-date. In local passenger growth, we’re up 16.1 percent year-over-year, and more than 20 percent year-over-year for the past four months. In terms of passenger growth, we’re definitely moving in the right direction.
We had airline consolidation. When I started in the industry over 25 years ago, there were more than a dozen airlines, and now we’re down to three legacy carriers, Delta, American and United, and then Southwest. Those four passenger carriers carry over 85 percent of all U.S. traffic. It’s a markedly different industry.
MG: What is the financial model for airports?
CM: The majority of airports in this country are self-sustaining entities and operate off of three primary revenue sources. We generate revenue through landing fees, concessions, those sorts of things. We receive some federal grant funds. And we receive a Passenger Facility Charge user fee of up to $4.50 per passenger that exits your airport; that’s on the ticket price. We don’t operate off of any local revenue base. We are a tax revenue generator in terms of property taxes, payroll taxes, etc. So we operate much like a private business, but in a public realm.
We have an operating budget of about $126 million annually. We have about 400 direct employees under the Airport Authority Board. We have about 7,500 acres we’re responsible for. Just like every other business, we need to operate safely, securely, efficiently and generate more revenue than our expenses.
Next year, under our new (airline lease) use agreement, we’ll operate even more like a private business. Currently, at the end of 2015 under the existing use agreement, if we generate a profit everything goes back to the signatory carriers. Starting in January, we’ll keep a portion of the profits, and the carriers will get a portion.
MG: You mentioned 400 direct employees. Is that number stable, up or down?
CM: Since I’ve been here, it’s been consistent. We’re blessed to have a very long-tenured staff. For full-time employees, we have an annual turnover rate of less than 4 percent including retirements. We make an effort to hire the right folks, empower them and seek to have them stay over the course of time.
MG: How does the revenue streams pie slice?
CM: About half our business is reliant on airline revenue streams, and the other half is focused on land development, parking, concessions, etc. We, like all airports, are looking at how to generate what’s called non-aeronautical revenue – how can we not be as reliant on airline revenue streams? We’re at about a 50/50 split, which is very strong. We’re trying to diversify our revenue base.
MG: What are the key changes in CVG new lease or use agreement with its airlines?
CM: We’ve been operating on a use agreement – that’s our rates and charges, our business arrangement with our carriers – that’s been the same since 1972, with a few minor modifications. Years ago that model, called a residual agreement, was very standard. If the airport made money, the airlines received the profit; if the airport lost money, the airlines were obligated to pay any deficiencies. Therefore they had a certain amount of control over the airport’s expenditures and capital program. Right now, we have to get airlines’ approval for our capital program, anything over $50,000.
In the 1970s, pre-deregulation, the airlines had a stronger credit rating than the airports. They were viewed to be the stronger business thinkers. There was thought that maybe local airports didn’t have the business acumen to run it like the business that it is.
The new agreement, effective January 1, 2016, running for a five-year period, which is fairly standard now, will allow the airport greater control over its destiny. We’ve negotiated changes so we operate more like a business. We’ll have a revenue split with the carriers and keep some for ourselves over which we’ll have control. There are a number of significant changes.
MG: You have overseen development of a new strategic plan for CVG. Why was this necessary and what are its key elements?
CM: We’re actually taking a crack at our second strategic plan since I’ve been here. When I took my role as CEO in July 2011, we had a strategic plan to take us through 2015 that focuses on operational excellence, customer service, those types of things, efforts doing what we call the reinvention of CVG. We were going from a dominant single-carrier hub to a more multicarrier, locally based airport.
Working around our master plan, looking at our facility needs through 2035, we’re now working internally and with our board to finalize the next iteration of our strategic plan from 2016 through the end of 2020. Mirroring the continuing evolution of CVG, we’ll focus on wanting to be the best airport to fly from or for and to do business with.
MG: What facilities or infrastructure changes will take place?
CM: This airport is going through a huge metamorphosis. We had three terminals, Terminals 1, 2 and 3, and two Concourse A and Concourse B buildings. Terminal 1 closed prior to my arrival; administrative offices were there but no passenger operations. Terminal 2 had eight gates, and carriers – everybody but Delta – operated out of Terminal 2. Delta vacated Concourse A in 2010 and now uses only Concourse B.
In May 2012 we realized we needed to grow our other carriers. We negotiated an agreement with Delta where we took over Concourse A, renovated it from eight gates to 16 and moved the carriers from Terminal 2 into Concourse A. Recently we activated another three gates. We knew that growth was necessary. We have adequate gate space.
We recently moved administration out of Terminal 1. It and Terminal 2, which is closed, will be demolished beginning in January. After we take down Terminals 1 and 2, a consolidated rental car facility will be built in their place. It will be more customer service friendly and accessible for the rental car companies. The area on which the rental car companies are currently located will see some cargo development. After Terminals 1 and 2, four older outbuildings also will be demolished to make way for new development, and we’ll continue to evolve the facilities.
MG: In November, the Kenton County Airport Board gave you a five-year contract extension and a raise. Two years ago, though, former board members attempted to dismiss you. What has changed in 2 years?
CM: There’s no sense revisiting the past. We’ve evolved over time. We work very closely with the airport board; they’re all very good, qualified business thinkers. I was pleased they offered me a contract extension. I have one year left on my current contract and with another five I’ll be here through the end of 2021 at least, which is good because we’re going into new strategic plans and that will give us the opportunity to carry those through.
MG: How much of CVG’s property is developed and how much is left?
CM: Of our 7,500 acres, a lot is within the fence and is for the airfield. We have, though, hundreds of acres currently available for development. When the extension of Wendell Ford Boulevard is completed by the end of 2017, we’ll have additional acreage for development. One tenet we operate under is that we only lease land for long-term development; we’re not going to sell any land. It’s important for us to develop non-aeronautical revenue streams, and leasing gives us a sustainable revenue stream now and in the future.
We’re just in the infancy stage of our potential development. We recently signed a long-term lease with Dermody Properties, which is developing a 52-acre site to be a distribution center for Wayfair; a 900,000-s.f. facility is under construction. That was really our first foray into the development business. We’re marketing a number of sites.
MG: DHL has been growing, and FedEx is expanding. Was it a strategic goal of the airport to develop cargo further?
CM: Under our master plan, we’ve looked at areas for development that are best for aviation purposes – areas closer to the runways – for hangars, cargo facilities, those sorts of things. Farther out there are sites suited for warehousing, distribution, etc., and light industrial or commercial purposes. We’ve looked at what are the highest and best uses of land.
Cargo now is about 51 percent of our overall land use. It’s huge. DHL has gone through a tremendous expansion the past few years – since 2009, three expansions totaling $281 million worth of improvements. DHL has three global super-hubs, and CVG is their North American super-hub. We’d love to do some end-of-runway development that will bring in customers that want to locate near or adjacent to DHL. It would bolster their business and support our business.
MG: Does CVG, with its DHL facilities, look to Louisville International Airport and its UPS experience as a model?
CM: Sure. We’ve taken some tours and looked at some best practices, and we’re always happy to borrow some best practices from other airports, including our friends at UPS in Louisville.
MG: CVG reportedly has had the highest landing fees in the United States. Why was this and has this changed?
CM: Thank you for asking because this is a common misunderstanding. We’ve had some of the highest (italics)airfares(end ital.), which have no correlation with landing fees. Our landing fees are at or below all of our regional competitors. Airfares have been high because we had one dominant carrier; it was monopolistic. As we’ve become more multicarrier, our airfares have dropped. Competition brings lower prices. The most recent Department of Transportation statistics ranked us number six in airfare prices; traditionally we were number one. We’ll drop further when new statistics are released. It’s about growing competition, adding carrier diversity. An industry rule of thumb is that an airport’s (landing fee) cost as part of an airline’s budget is 4 to 6 percent. Airlines’ main cost is always fuel and labor. The landing fees here are very, very low.
MG: Does having significant air freight operations contribute to keeping overall airport operational costs down, thus making it more attractive to new commercial carriers?
CM: Cargo business is about 50 percent of our landed weight, so that’s a great revenue source for the airport. The cargo carriers pay the same landing fee as our passenger carriers, but a rule of thumb is that one large cargo plane’s weight is equivalent to 11 regional jets. We have about 50 DHL planes in and out of here every night, so they’re a great source of ongoing, consistent business. As carriers have come or gone, or expanded or contracted, the cargo business has been consistent if not growing, therefore keeping our overall costs down.
MG: What low-cost passenger carriers has CVG been successful in recruiting?
CM: Frontier started about a year and a half ago with six flights a week; now they’re huge. Allegiant started here a year-plus ago, and we’re now one of their top five airports. We have been Allegiant’s fastest-growing airport in their history. Allegiant and Frontier are now about 20 percent of our business, helping us attract new passengers. We had an untapped demand for vacation and leisure travel.
In January, Allegiant’s going to base three aircraft out of CVG. Allegiant’s model is to start a crew in the morning and end them every night at the same airport, so they’ll at least originate and end those three here. We’re hopeful that will spawn more flights. PSA, a regional carrier for American Airlines, has leased a hangar and they’re going to be starting a base of operations in January as well, with a flight crew and a maintenance base.
MG: What is the divide nowadays between business and pleasure travel?
CM: We were predominantly business traffic when I started here, probably 75 percent, and now we’re almost 50/50 in terms of business and leisure travel. Now that we have some low-cost carrier options, our passenger base is changing and evolving.
MG: CVG markets itself as offering more nonstop flights than any airport in the region, including direct international service to Paris, Toronto, Cancun, Montego Bay and Punta Cana. What is its business sweet spot?
CM: We do have more daily nonstop destinations than any airport in this region. We try to maintain that. We know business travelers prefer a nonstop when possible, so that’s important. People like to be able to travel in and out the same day for business. For leisure travelers it’s all about convenience and price, so our low-cost carriers and vacation packages are very attractive. The daily service to Paris is the only transatlantic direct flight in all of Ohio, Kentucky and Indiana, and gives you one-stop access to anywhere in the world. And Toronto does the same; that’s also a one-stop world connection.
MG: U.S. airlines today are profitable after having collectively lost billions of dollars for several decades. Does airline profitability affect CVG?
CM: What really affects airports is airline consolidation. At one time there were dozens of airlines; now, with the mergers, the top three and Southwest together control 85 percent of the traffic. The airlines now are running a very smart business. They’ve constrained the supply and increased the price; that’s why they’re profitable. Airports are fighting over the service, looking at aircraft, trying to figure out how they can fit into the network.
We develop business cases for the airlines. We know which cities we believe should have service, which cities are underserved, cities where we think an airline could upgauge an aircraft. We were losing passengers traveling to Washington, D.C., and thought this made no sense. What’s the issue? Well, they weren’t leaving early enough in the morning. We went to the carriers and said if you start service this amount of time earlier, you will gain X amount of passengers. And sure enough, that was the case. We try to lay out the business cases in as simple a way as possible why it would make sense for an airline to use CVG.
MG: There has been an economic impact study for CVG about three years ago. What were the findings?
CM: We published a study in April 2013 based on year-end 2012 statistics. We generate $3.4 billion in economic impact annually for this region, including Ohio, Kentucky and Indiana. It’s a huge economic impact. In 2016 we will do the same and base it on either year-end 2015 numbers or mid-year 2016 numbers. I would think we’ll grow beyond that $3.4 billion annual economic impact.
MG: What should the business traveler of today know about air travel that they might not be aware of?
CM: That’s an interesting question. Security measures, for instance, are only going to increase, given the world in which we live. People should be mindful to go online and find some bargains direct themselves. Go to CVGAirport.com; we give you tips on how to find the best deals.
MG: Do you have a closing comment?
CM: One of the things we’re very proud of is that we’ve won the Skytrax World Airport Award as the best regional airport in North America five years in a row. I attribute that to our great staff; they’re devoted to safety, security, customer service. I often say we don’t do one particular thing very well, we do a lot of smaller things very well, and it all adds up, I think, for a great customer service experience. And that’s our goal here. A lot of our sort of brand platform, as we want to say, we have world-class professionalism with a Midwestern charm. And I think our staff demonstrates that.