As the U.S. airline industry has consolidated and shrunk itself to profitability over the last 15 years, airports in mid-sized cities were some of the biggest losers. Nearly a dozen U.S. airports have lost major airline hubs, while once-busy reliever airports are now virtually empty.
With major airline tenants shrinking or leaving altogether, these airports have had to become more creative in order to balance their budgets. Some have turned to the movie business. LA/Ontario International Airport in Southern California has been used for numerous major films, including Argo and Saving Mr. Banks.
Pittsburgh International Airport also has a big budget hole to fill -- but it's far from Hollywood. However, airport officials recently discovered a new source of income that takes advantage of a major local industry: drilling for natural gas. In August, CONSOL Energy (NYSE:CNX) began drilling on the airport's property in a project that could ultimately include 45 wells.
Pittsburgh International Airport's budget gap
In 1992, Pittsburgh International Airport opened up a brand-new, expensive mid-field airport terminal. The terminal was built specifically to the needs of US Airways, which operated its largest hub there.
At its peak in 1999, the terminal handled 633 daily departures, serving more than 20 million passengers annually. When it was designed, officials expected traffic to exceed 40 million passengers by 2012. However, the airline industry downturn after 9/11 led to big cutbacks by US Airways.
This created a catch-22 for the airport. It had to maintain revenue to pay off the bonds it had issued for the terminal project. So it raised the fees paid by airlines in order to close its budget hole. After filing for bankruptcy, US Airways threatened to leave unless its fees were lowered. In 2004, it followed through on that threat.
Today, Pittsburgh International Airport has fewer than 200 daily departures. Last year, fewer than 8 million passengers moved through the airport. The state has had to step in to cover some of the airport's costs in recent years -- further airport fee increases would have only driven more airlines away.
Fracking to the rescue
In other words, Pittsburgh International Airport could really use a new revenue stream to help balance its budget. Fortunately, it sits in the middle of the Marcellus Formation, a geological formation rich in natural gas.
The development of hydraulic fracturing (popularly known as fracking) and horizontal wells has made the Marcellus shale a highly profitable place to drill for natural gas. CONSOL Energy is one of the major players in the Marcellus Shale. By drilling for natural gas there, it has successfully diversified away from its original focus on coal production.
Moreover, Pittsburgh International Airport has tons of extra land. The airport owns about 9,000 acres of land, making it the fourth largest airport in the U.S. by area. By allowing CONSOL to drill on its property, the airport hopes to bring in $500 million in royalties over the next 20 years.
Considering that the airport's debt service charges total $67.1 million annually, this revenue could go a long way toward closing the budget hole. Moreover, these debt service payments are scheduled to drop to $22.7 million in a few years. That could allow the airport to fund most of its costs with gas royalties, helping it to dramatically reduce the costs charged to airlines.
Fracking could be a game-changer for Pittsburgh
In the long run, this could be a game-changer for Pittsburgh air travel. Pittsburgh lost most of its air service over the last 15 years due to high costs. Indeed, there is huge variation in costs between different airports.
Charlotte has a disproportionate amount of air service compared to its size because it offers a cost per enplanement (fees paid by the airlines) of roughly $1/passenger. Pittsburgh has been above $10 in recent years, and some congested airports have a cost per enplanement above $20.
If natural gas royalties from CONSOL pay for most of the airport's costs, Pittsburgh International Airport could potentially match Charlotte's $1 cost per enplanement. Dirt cheap landing fees and gate rentals could encourage more airlines to expand their operations in Pittsburgh -- benefiting everybody traveling to and from the Steel City.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.