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Prosperity or Predicament; The Prospective Future of Miami International Airport

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Prosperity or Predicament; The Prospective Future of Miami International Airport
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Horowitz, Aaron
Denslow, David ( Mentor )
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Gainesville, Fla.
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University of Florida
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English

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University of Florida
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Prosperity or Predicament; The Prospective Future of Miami
International Airport
Aaron Horoviitz

ABSTRACT
Online reservation web sites for airline flights and use of the Internet for communication may reduce travel at the
massive international airport hubs. Particularly, Miami International Airport, one of the largest hubs in the country,
may experience fiscal instability due to its distinctive circumstances. The Latin American market's influence, an
increasingly competitive nearby airport, and an expensive incomplete expansion project may contribute to a potential
fiscal threat for Miami International Airport.

MIAMI INTERNATIONAL AIRPORT: FACTS AND SITUATION

Miami International Airport as a Hub

Miami International Airport (MIA) is by any measure a major
hub. Serving as an international gateway, MIA links South Florida to
the majority of the United States. It is also a yearly
international destination for millions of passengers from all over
the globe. MIA provides access to and from 200 cities on
four continents, resulting in MIA handling 70% of the
international passenger flights that pass through the United
States (Wing). In addition, MIA is ranked the number one airport in
the United States for international cargo traffic by weight.

Connecting approximately 1500 flights per day, MIA is the 19th
busiest passenger airport in the world, as well as the 3rd busiest in
the United States for international passengers. During an
average weekday MIA facilitates an impressive 85,000 passengers
in transit (Miami International Airport). Under normal
operating conditions, MIA carries 100 scheduled airlines as well as
40 non-scheduled airlines, a number larger than any other airport
in the western hemisphere (Beacon Council). MIA also serves the
Latin American community more than the "Orlando, Houston,
New Orleans, Atlanta, Tampa, and New York's Kennedy
airports combined " (Beacon Council)





The Current Situation of Miami International Airport


The airport is currently undergoing a structural transformation,
working on a $4.8 billion expansion program scheduled to be
completed near the end of the next decade. If and when construction
is completed, it will be one of the largest construction projects ever
to be completed in the air passenger and cargo market. The
expansion will add an auxiliary 2.7 million square feet to the
already existing 4.7 million square feet of terminals and
concourse areas. The expansion will also enhance the cargo
and international shipping areas by 3.3 million square feet
(Miami International Airport).

However, the decision to commence expansion may ultimately
reduce the airport's already dwindling profits. This is partly due to
the fact that the expansion plan was implemented before
September 11th and the resulting decrease in passenger air traffic.
In order to build a fourth runway, a plan that was created in the
90's, MIA had to request aid from the federal
government. Consequently, Norman Mineta, the U.S.
Transportation Secretary, recently set aside over $16.2 million for
the runway project and increased security (Hoag).

MIA's fiscal troubles may become exacerbated when $180 million
in bond payments related to the overall expansion come due in
2005; the hub may not have the ability to recover funds when
they become due. A potential dilemma exists because MIA is
not expected to recover pre-September 11th passenger volume
until 2006 (Cordle). Furthermore, the 2006 passenger volume
estimate may be too optimistic as competition from other
airports becomes greater.

In 1997, MIA boasted 34.5 million passengers a year. In 2001,
this number fell to 31.7 million, and then down to 30.1 million in
2002 (Cordle). Facing a potential fiscal disaster, airport
representatives plan to cut costs and raise prices in areas unrelated
to flying. However, MIA could also exercise the option of scaling
down the massive expansion project in lieu of increasing prices.





Another fiscal threat to MIA is competition from nearby
international gateways. The Hollywood/ Fort Lauderdale
International Airport (FLL) is located approximately 45 minutes north
of MIA. FLL is a smaller airport that charges an average of $5.03
per each departing customer. MIA on the other hand, charges
$14.66 for the same services. This price increase results in
more passengers opting to fly out of FLL (Cordle). Although MIA is
a larger airport, its higher prices are not solely due to its
large overhead. The Dallas/Fort Worth Airport, which is comparable
in size to MIA, charges only $4.18 per flight (Cordle). MIA's
higher prices may become more of a deterrent in the future, as
FLL may gain more hub characteristics and draw new passengers.

Latin America and its Influence on Miami International Airport

One of the most dominant forces behind MIA's profits is the
existence of the Latin American community. Latin Americans amount
to 60% of the total passenger traffic through the airport (Inter
Airport). Furthermore, Latin American destinations account for 70%
of the outgoing cargo traffic, and 81% of the incoming cargo
traffic (Inter Airport). MIA's various connections with the
Latin American community has made it the number one Latin
American airport in the United States (Wing). However, the
current negative economic situation within Latin America is a
main cause of MIA's declining passenger rate since the mid
90's (Cordle). This declining passenger rate may also explain
why American Airlines, the dominant airline utilizing MIA for
Latin American travel, is facing severe financial difficulties.

THE INTERNET: ONLINE RESERVATION WEB SITES AND ACCESS TO INFORMATION

Although the decline in traffic at MIA may be attributed to the
general economic downturn following September 11th, increased
online reservation usage may have also been a significant factor.


Business or Pleasure?




The history of online reservation Internet sites has certainly
been tumultuous. One of the first Internet sites to take advantage
of the travel market was priceline.com. Implemented in early 1998, the
site soon registered $10 million in sales (CNN, "Priceline.com").
Similar sites, such as Orbitz.com, Travelocity.com, and Expedia.com
soon began to inundate this new market. Although these sites increase
the ease of traveling, they may prove to have adverse consequences to
the financial stability of the larger airlines in the long run.

One of the principal ways that airlines produce profits is through
the booking of business travelers. In general, the airlines charge
higher prices for business travelers due to their unique requirement to
fly on immediate notice. Traditionally, airlines would identify
a pleasure traveler, as opposed to a business traveler, as someone
who books in advance and agrees to weekend stays. However, it is
becoming increasingly more difficult to monitor customers'
buying habits. The airlines cannot easily find out if a customer is buying
a ticket for business or pleasure because the airlines have less
control over the purchase of the tickets (Keen).

The reservation Internet sites were initially implemented to fill
empty seats. This had been a problem that the airlines had
been complaining about for decades. The airlines would attempt to
fill up the flights with early reservations. Empty seats were
then usually filled by lowering ticket prices. The Internet site
creators saw a potential to make a profit by providing the airlines with
an efficient solution to filling up the empty seats.

Typically, the sites operate by monitoring the fullness of
individual flights and adjusting ticket prices accordingly. However,
a large number of business flyers now use the sites that were originally
meant for pleasure travelers (Isidore). Their use of these sites has
altered the business to pleasure ratio that the airlines were trying
to keep standard. Overall, seats are increasingly being filled by use
of the Internet sites. Consequently, the airlines are losing control
of the passenger ticket prices.

This "new" business traveler can now easily find the most




inexpensive and convenient flight by use of the Internet.
Therefore, the business elasticity of demand for travel on particular
flights is increasing. Airlines will now have less cross-subsidization of
the flights from the business travelers. A potential outcome involves
a primary revenue source for the major airlines becoming price
conscious and blending with their secondary revenue source, the
pleasure flyer, leading to declining profits. These weakened
profits trickle down to the businesses that are most effected by the
major airlines, including the major hubs such as MIA.

Better Flight Information

Online reservation Internet sites enable travelers greater access to
flight opportunities. In the past, a price-conscious passenger traveling
to a small city would book the flight through the airline, at the airlines
discretion for stops. Generally, the ticket would involve a connection
between two hubs, the hub closest to the departure point and
destination. Once at the destination hub the passenger would then fly
to the small city's local airport. These "stop-overs" are common
because they allow the airlines to maximize profit per flight. This is
due to the need of many passengers who need to fly from one hub to
another en route to their destination, yet few who need to fly from
their closest airport to the destination's local airport.

However, since the advent of online reservation sites, passengers can
now easily find direct flights that connect between the pair of cities in
which they wish to travel. The direct flights are found by "cherry
picking" airlines that serve the cities with smaller airports, therefore
removing interaction with a hub. These smaller flights between the
cities are often operated by smaller airlines. Examples of these
airlines are JetBlue, Frontier, and Southwest. They are able to provide
flights between smaller airports for lower ticket prices. Decreased
costs allow these airlines to have fewer passengers per flight causing
their presence in local airports to grow tremendously in recent years.
At FLL, Frontier increased in passenger size by 167.9% between 2002
and 2003, while JetBlue increased by 30.5% (Fort Lauderdale/
Hollywood Int'l Airport).




Conversely, larger airlines like American, Delta and Continental
merely increased their passenger base by 6.1%, 6.6%, and negative
5.5% respectively at FLL (Fort Lauderdale/Hollywood Int'l Airport).
These increases are low compared to FLL's rapid growth, which is
encroaching MIA's market. The presence of smaller airlines may cause
a substantial problem for big commercial airlines by reducing profit
and increasing competition. Eventually, the giant hubs such as MIA
may become less utilized as their commercial airline use declines.
MIA'S FUTURE: THE INTERNET AND THE LATIN COMMUNITY

The Latin American community is increasing their Internet usage,
including travel reservation sites. This increase is leading to a more
price-conscious customer with a demand for specific flights. These
sites allow them to easily choose airports for travel. Currently, MIA is
a hub for a large number of flights to and from Latin America, but the
continued use of MIA for these flights may diminish as passengers
increasingly utilize smaller airports instead. These flights will not
involve a direct interaction with a hub such as MIA. Generally, the
hubs have a higher cost then the smaller airports that are also within
the flyer's proximity. As explained above, this is evident with
increasing traffic at FLL due to the lower costs offered to customers
and its solid relationship with the lower cost airlines. Recently, FLL
announces that their international passenger base, which is mostly
Latin American, has increased by 14.2% between 2002 and March of
2003 (Fort Lauderdale/Hollywood Int'l Airport). This increase is
notable because it occurred during a period of airport and airline
fiscal decline.

Another factor that may be contributing to MIA's reduced flights is the
current geographical growth of the Hispanic community throughout
the United States. This community is increasingly spread all over the
country, as opposed to the current core Hispanic centers within
Florida that required MIA to connect to Latin America. As this growth
increases there may be a downward shift in the demand for air travel
through MIA. Additionally, the Latin American community's demand
for air travel may be shifted over to the smaller, less expensive
airports throughout the United States.





CONCLUSION


Miami International Airport has an unmistakably strong presence in the
United States and the world. However, decrease of passenger profit
may pose fiscal problems in the future. Furthermore, the unfinished
expansion project, coupled with MIA's difficulty in paying back
investors, may also add to the fiscal troubles. Additionally, MIA's
financial situation may be exacerbated by the increased saturation of
the travel market by Internet reservation sites. MIA must adapt to the
proliferation of online ticket booking.


WORKS CITED

"Airlines face big change as business travelers rebel" June 5, 2002,
Houston Chronicle. August 1, 2003


"Airport Statistics" April 25, 2003, Fort Lauderdale/Hollywood
International Airport. August 20, 2003 htm>

"Broadband's Latin future" McKinsey Quarterly. August 1, 2003
ar=1127EtL2=38>

"Congestion at the Airports: The Economics of Airport Expansions"
May/June 2003, Federal Reserve Bank of St. Louis. August 29, 2003
Cohen_Coughlin. pdf>

"Crowded Flights a Boon To This Summer's Travelers" June 23, 1998,
University of Florida. August 22, 2003 edu/98news/airlines.htm>

"International Data : Miami International Airport" August 19, 2003,
The Beacon Council. August 19, 2003 com/010304.asp>





"Internet Substitution For Transportation: Evidence From A Survey In
RI, USA" October 2002
University of Rhode Island. July 27, 2003
working- paper. pdf>

"MIA gets $16.2M for upgrades" August 15, 2003, The Miami Herald.
August 19, 2003


"MIA looks to travelers, not airlines, to pay" March 2, 2003, The
Miami Herald. July 15, 2003


"Miami International Airport" October 15, 2002, Inter Airport. July
14, 2003


"Passenger Rankings" July 29, 2003, Miami International Airport.
August 2, 2003


"Priceline.com names Braddock new chairman" August 27, 1998,
CNN. August 14, 2003


"Walking on the Wild Side", Latin Trade. July 12, 2003
cfm>


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