When his company was vying for a piece of the construction work from the immense rebuilding project at the Los Angeles International Airport, contractor Norm Shane knew his bid – about $40 million – wouldn’t make him much profit.
But like other contractors, his Fremont-based Walters & Wolf was hungry for a job.
“People are taking work just to keep going. There’s not much money in these jobs at all,” Shane said.
Indeed, thanks to surprisingly low bids from construction contractors such as Walters & Wolf, coupled with today’s extremely low interest rates on bonds to pay for all the work, LAX stands to save more than $1 billion on its estimated $8.1 billion improvement project.
Of course, that’s good news for the airport, along with the airlines and the travelers who ultimately pay the costs through fees. But it’s bad news for the construction companies.
Airport contractors say they are bidding for jobs anywhere from 10 percent to 30 percent less than in 2005 and 2006.
“We’re working at prices that we haven’t seen in almost 20 years,” said Bill Klorman, chief executive of Klorman Construction in Woodland Hills, a subcontractor working on the expansion of the Tom Bradley International Terminal. “If you have money, now is the time to build. You’ll never see prices this low again.”
Airport officials acknowledge they have little more than luck to thank for the windfall. Because of years of delays and community opposition in the past to the airport’s improvement plans, the work didn’t get started until recently – at a time when recession-whacked contractors were willing to slash their prices and borrowing costs had plunged to historic lows.
“We’re doing these improvements anywhere from 15 to 20 years later than they should have been done,” said Ryan Yakubik, director of capital development and budget for Los Angeles World Airports, the government agency that operates LAX. “Without a doubt, we’re quite fortunate as to the timing of these projects.”
Lower margins
The airport represents by far the biggest opportunity for contractors in Los Angeles.
The wide-ranging improvements range from automating baggage handling systems and installing new flooring, elevators and escalators in domestic terminals 5 and 6. Significantly, the Tom Bradley International Terminal is getting $1.5 billion worth of work, including 140,000 square feet of restaurants and shops, as well as 18 new gates.
All told, LAWA plans to spend about $4.1 billion on construction and renovation between 2009 and 2014. Financing charges were expected to add $4 billion.
The project, championed by Mayor Antonio Villaraigosa, started moving ahead in 2006 after previous expansion and renovation plans pushed by former Mayors Richard Riordan and James Hahn were tied up by nearby cities and community groups that objected to the noise and traffic an expanded LAX would bring. Villaraigosa cut back on the size of the project.
Elements of the development, including work on the Bradley terminal, began going out for bid in 2009 in the midst of the recession.
“In 2006, 2007, we’d be talking about getting one or two bids and at very high cost because there wasn’t a lot of competition in the market,” said Yakubik.
Indeed, during last decade’s housing and construction boom, only a few contractors might have been interested in installing the exterior glass walls of the expanded Bradley terminal, said Shane, vice president at Walters & Wolf’s La Verne office.
“I’d be surprised if you’d have gotten four bidders back in 2007,” he said. “But in 2009 or 2010 when we bid this, there were around eight bidders. That’s a lot.”
That competition is driving prices down. Shane estimated he is winning contracts with bids that are about 30 percent lower than in 2006 and 2007.
Mark Troyer, president of Troyer Contracting Co. in Santa Fe Springs, said he is winning contracts with bids that are 10 percent to 20 percent lower than those of the last decade.
Troyer, whose company is installing Bradley terminal roofing, said the savings are coming out of his and other contractors’ profit margins.
“Seven years ago, when your margins were 40 percent, you had room in there for little setbacks. When your margin is 15 percent, you protect it like crazy,” he said.
While that’s a big benefit for LAX, an official total estimate of how much the airport is saving because of the lower bids is not available, since internal engineers’ estimates are available only on some projects. However, those estimates indicate the savings are significant.
In 2009, the airport awarded a $23.7 million contract for elevator and escalator work at all terminals that airport engineers had estimated would cost $28 million – a savings of 15 percent.
While that percentage is less than what some contractors have estimated for other projects, if it were applied to the entire $4.1 billion construction cost, the airport would conservatively save $615 million.
Lower rates
But the airport will get even bigger savings – about $700 million – because of low interest rates on the bonds used to pay for the projects. That’s off the total $4 billion in interest costs over three decades that had been estimated in 2009.
Bond yields have been relatively low for years, but since the airport started selling bonds for the improvement projects in 2008 and 2009, they’ve dropped even more. The nominal yield on 30-year U.S. Treasury bonds is 2.76 percent, down from 3.97 percent in October 2009.
LAWA and other public agencies pay higher rates, but their bonds typically follow trends in U.S. Treasury yields.
“You couldn’t have a more favorable interest rate environment,” said Russell Goldsmith, chief executive of City National Bank in Los Angeles and chairman of a group advocating LAX improvement projects. “This is a perfect time for them to lock in 30-year debt and invest in the infrastructure of the airport, which is so sorely needed and overdue.”
A 2009 bond prospectus to fund the modernization showed the airport expected to pay just under $243 million annually toward bond debt for the next 30 years. A bond prospectus last year showed that number dropped to $219 million, a savings of $23.5 million every year from 2016 to 2046, or about $700 million.
Yakubik said he expects that number won’t change much next year when the airport begins selling about $700 million more in construction bonds, the last big chunk needed to finance the modernization, including renovation of terminals 5 and 6.
“There’s very little to indicate that rates would be going up significantly,” he said.
Airlines helped
Lower construction and interest costs should mean lower fees for airlines. About 70 percent of the cost of LAX modernization and expansion projects will be paid by airlines through per-passenger fees.
Travelers and concessionaires may be helped, too. That’s because most of the remaining 30 percent will come from parking and concession fees, and from other airport funds.
Airlines pay on average about $11 per passenger now, but airport officials have said fees could rise to $20 per passenger. While that’s dependent in large part on how many passengers fly through LAX, Yakubik said it’s clear that fee increases should be smaller than initially anticipated.
Jack Keady, president of Keady Transportation Consulting in Playa del Rey, said he has heard reports that fees might go up to as little as $16 but no more than $18 per passenger. But even if rates go up less than initially expected, he doesn’t think it will change airlines’ plans at LAX.
“Airlines don’t make their decisions based on the cost of the airport facility,” he said. “They base their decisions almost solely on putting planes where the passengers are.”
