The Economics of Airport Projects: Denver’s See No Evil Approach

The new Denver airport hotel and related train station project are so far over budget that the project’s independent watchdog is incurring a 137% cost overrun.

Yet the airport doesn’t think it’s fair for an independent auditor to claim current projected costs (which could still rise) of $721 million off of a $500 million budget. With some creative accounting they’re ‘only’ over budget by 17%.

Airport construction is financed by tax-exempt bonds (yet somehow Delta, United, and American claim only UAE and Qatar aviation receives subsidies) and the auditor ties their estimates to the airport’s own bond documents.

Nonetheless, the airport contends that

  • Costs that were added to the project ‘at a later date’ shouldn’t be included (isn’t that kind of the ‘definition’ of an overrun?)
  • Necessary work to roads and bridges around the hotel and station site shouldn’t be included, because they’re only necessary for the project and not part of the project (which might have been fair if they had been separately budgeted at the start)
  • And really you shouldn’t hold higher costs against them since they’re to “take advantage of the efficiencies of having the same contractor do this work” (no explanation of how efficient it is if it costs an extra quarter billion dollars
  • They could have done it for less but had to increase costs given “the need to get the station finished in time to meet an agreed-upon deadline” (again, the definition of an overrun if it’s more expensive to complete the project as agreed to)

The Denver airport contends that none of this should matter, after all they aren’t using taxpayer dollars, only tax-exempt bond financing (which is somehow not a tax expense) and will be paid for by airport passengers in the future.

And why criticize them since they already announced cost overruns last year?

United Airlines — which operates a hub in Denver and which is critical of Gulf spending on airports — is not quoted for the piece.

(HT: @joesentme)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. At this point, your hatred of those airlines is really clouding your writing. You took an accounting class at some point, right? Re: your final paragraphs, the airport/airlines are correct: by law the airport construction cannot be paid for out of local revenues. It is going to be paid for by UA (and WN) raising fares on DEN tickets for decades into the future.

    When Qatar starts flying nonstops to DEN, you may have something. Until then, you’re just being silly.

    Cut those final paragraphs from your blog, and your first paragraphs would be legitimate complaints.

  2. Incorrect use of “incurring.” If the independent watchdog incurred a 137% cost overrun that means the watchdog caused the costs. I think what you mean instead is that the watchdog is estimating a 137% cost overrun.

  3. @02nz a 137% overrun *in their expenses* ! Yes, that’s actually run. The independent watchdog is billing the project 137% more than budgeted. Crazy, huh?

  4. @Joseph N – that this is accordance with law isn’t a rebuttal of my point, it *is* my point. Tax exempt bond financing is a subsidy, of just the nature of one of the airline complaints about the big 3 Gulf carriers

  5. @Gary The difference is that the subsidy is for all carriers flying out of an airport. Economics says that companies should compete until economic profits reach zero (i.e. their profits are no greater than what money could earn doing something else).

    So in a competitive marketplace economic profits of the carriers will always equal zero. What the subsidy does is encourage people to fly more, not that it helps airlines make any more money (because profits always equal zero).

    With the ME3, since they are the only company and in many ways the monopolist tenant at their home airport, the subsidies have a different economic impact actually raising the airlines profit above the standard zero economic profit.

  6. @Andrew M – United is by far the dominant carrier in Denver, it’s not fair to say that “the subsidy is for all carriers flying out of an airport.”

  7. Is it wrong that I’m just pumped for a train to the Denver airport? Because I am very pumped to be able to hop a train to DIA.

    But yes, that is a lot of $$$.

  8. @Gary but all airports have the tax-free bond opportunity in the US. So all airlines, on net, receive the same subsidy.

  9. Some the comments on this reflect the thinking behind project over runs or estimate implosion. It will be cost increases for every train and air passenger. You wonder how airport fees get the level of LHR or others. This is part of the issue.
    On the other hand it will be nice to ride the train to the airport in Denver. Maybe this will make those secret underground trilateral commission meetings more accessible 🙂

  10. @Andrew M – thus all US airlines are subsidized, yet complain about the subsidy received by the Middle East carriers at their airports

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