RCED-95-35BR New Denver Airport: Impact of the Delayed ...

GAO

October 1994

United States General Accounting Office

Briefing Report to the Honorable Hank Brown, U.S. Senate

NEW DENVER AIRPORT

Impact of the Delayed Baggage System

GAO/RCED-95-35BR

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Background

United States General Accounting Office Washington, D.C. 20548

Resources, Community, and Economic Development Division

B-258641

October 14, 1994

The Honorable Hank Brown United States Senate

Dear Senator Brown:

This briefing report responds to certain issues in your May 5, 1994, letter concerning delays in the opening of the new Denver International Airport. It documents the briefing we provided to your office on September 22, 1994, and specifically addresses three areas regarding the new airport: (1) problems with the baggage handling system that delayed the airport's opening, (2) the added costs resulting from the delay, and (3) the adequacy of expected revenues at the new airport to cover the cost of operating the facility and to service its debt. This report addresses issues you identified as requiring an immediate response. We will meet with your staff to discuss the other, longer-term, issues raised in your letter.

The new Denver International Airport was built to replace Stapleton International Airport, a facility that has experienced serious air traffic congestion and noise problems.1 The new airport is the first major airport to be built in the United States since 1974. Spread out over 50 square miles, it has the capacity to expand eventually to 12 runways. On opening, the airport will have a terminal building and three concourses, the farthest of which will be about 1 mile from the terminal. Concourse A will serve Continental Airlines, Continental Express, GP Express, and a variety of international carriers. Concourse B will serve United Airlines and United Express. American, Delta, Frontier, Markair, Northwest, TWA, and USAir will use Concourse C.

On the basis of cost estimates as of September 1, 1994, the total cost to build the new airport will be about $4.9 billion, of which the Federal Aviation Administration (FAA) has committed $685 million from the Airport and Airway Trust Fund. Most of the money needed to build the airport has come from revenue bonds issued by the Denver Airport System.2 (See sec. 1 for details on the total cost of the airport and sec. 2 for a breakdown of federal funds.)

1We addressed other issues relating to the new airport in two prior reports: New Denver Airport: Safety, Construction, Capacity, and Financing Considerations (GAO/RCED-91-240, Sept. 17, 1991) and New Denver Airport Followup (GAO/RCED-92-285R, Sept. 14, 1992).

2Denver Airport System is headed by the Manager of the Department of Aviation, who reports directly to the Mayor of the City of Denver.

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Results in Brief

Because the airport is so large, airport planners decided that a state-of-the-art automated baggage handling system, capable of moving bags much more quickly than conventional tug-and-cart/conveyor belt systems, would be needed. BAE Automated Systems Incorporated was awarded a $193 million contract to design, build, and test an automated baggage handling system. This system was designed to move baggage from the check-in areas to the aircraft within 20 minutes. However, the baggage handling system installed at the new airport has had many problems and does not yet work satisfactorily. Originally, the airport was scheduled to open in October 1993, but problems with the baggage handling system have caused several postponements.

The automated baggage handling system has had serious mechanical and software problems and has yet to successfully pass the tests necessary for it to be certified operational. In previous tests of the system, bags were misloaded, were misrouted, or fell out of telecarts, causing the system to jam. BAE is modifying the automated system to correct these problems. However, the airport is installing an alternative, conventional baggage handling system using conveyor belts, tugs, and carts that will be used at the airport at least until the automated system is operating. The alternative system is estimated to cost about $51 million.

Although Denver airport officials believe that this alternative system can be completed in time to allow the airport to open by February 28, 1995, the airport cannot open until an operating baggage system has been successfully tested. In addition, the contractor responsible for the conventional system has only recently started to make the structural modifications necessary to operate the system. Airport officials hope that Concourse B, serving United, will have the automated system operating at the targeted opening date. If the automated system is not yet operational, United will also be served by the conventional system. Whether the automated system will eventually serve all areas of the airport or whether some parts will continue to be served by the conventional system is yet to be resolved.

The airport was originally scheduled to open in October 1993; however, debt service did not begin until January 1, 1994. Up to that date, revenues from Stapleton were sufficient to cover the operating costs at Stapleton as well as the costs associated with the new airport. After January 1, 1994, the costs of operating both airports, combined with the debt service requirements, exceeded the revenues generated by Stapleton. The deficit

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currently is between $18 million and $19 million each month. If all the costs of delay are counted, including foregone net income, the total cost of the delay will be about $360 million if the airport opens at the end of February 1995.

The airport should be able to meet its financial obligations once it opens if current traffic forecasts are realized and if cost estimates are correct. Traffic projections are based on current levels at Stapleton, which has about 16 million enplanements annually, and are expected to increase to 18.3 million in 2000. The agreement between the airport and the airlines limits the amount that the airlines pay in user fees to $20 per enplaned passenger (in 1990 dollars). These user fees are calculated after all other revenues are applied to cover operating costs and debt service. If current traffic, revenue, and cost projections are accurate, the airlines' user fees should be several dollars under the cap.

The accuracy of the Denver Airport System's forecasts depends on several assumptions: (1) savings from bond refinancing, (2) Continental Airlines' revenues at projected levels, (3) FAA discretionary funds' being awarded, and (4) an operational baggage system in place.

Problems With the Baggage Handling System Have Delayed the Opening of the New Airport

Significant mechanical and software problems have plagued the automated baggage handling system. Denver airport officials are still uncertain of how long it will take to correct all the problems. In a recent report, BAE listed 72 tasks that must be completed before the system is ready for testing. Then, the baggage system will be put through a series of tests before it is certified as operational. It is possible that these tests could reveal additional problems.

To open the airport by the end of February 1995, Denver has decided to install a conventional baggage system to serve as an alternative to the automated system. The alternative system, using conveyors, tugs, and carts, will handle baggage between the terminal and all three concourses until the automated system is operating properly. The automated system will be operating first at Concourse B, which will serve United, and within 6 months at Concourse A, which will serve Continental and international carriers. When the system for Concourse A becomes operational, airport system officials will decide whether Concourse C will receive the automated system or whether airlines on that concourse will continue to use the conventional system. The alternative system is scheduled to be ready by January 1995.

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