New Denver Airport: Impact of the Delayed Baggage System (Briefing
Report, 10/14/94, GAO/RCED-95-35BR).

The automated baggage handling system at the new Denver International
Airport has been plagued by 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. The
contractor is making changes to the system to overcome these problems.
However, the airport is installing an alternative, conventional baggage
handling system that can be used until the automated system is
operating. The alternative system is estimated to cost about $51
million. This briefing report discusses (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 running the facility and to service
its debt.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-35BR
     TITLE:  New Denver Airport: Impact of the Delayed Baggage System
      DATE:  10/14/94
   SUBJECT:  Airports
             Air transportation operations
             Facility construction
             Construction costs
             Baggage (personal effects)
             Airline industry
             Construction contracts
             Debt held by public
             Freight transportation operations
             Future budget projections
IDENTIFIER:  Denver International Airport (CO)
             Stapleton International Airport (Denver, CO)
             Airport and Airway Trust Fund
             FAA Airport Improvement Program
             FAA Facilities and Equipment Reporting System
             
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Cover
================================================================ COVER


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

October 1994

NEW DENVER AIRPORT - IMPACT OF THE
DELAYED BAGGAGE SYSTEM

GAO/RCED-95-35BR

New Denver Airport


Abbreviations
=============================================================== ABBREV

  AIP - Airport Improvement Program
  DIA - Denver International Airport
  FAA - Federal Aviation Administration
  F&E - facilities and equipment
  O&M - operations and maintenance
  PFC - passenger facility charge
  RAP - risk analysis process
  SIA - Stapleton International Airport

Letter
=============================================================== LETTER


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. 


   BACKGROUND
------------------------------------------------------------ Letter :1

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.)

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. 


--------------------
\1 We 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). 

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


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

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 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
------------------------------------------------------------ Letter :3

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. 

In addition to developing the alternative system, Denver has
negotiated with BAE to make substantial modifications to the
automated system.  These modifications include changing the routing
of the telecarts so that more of them serve United at Concourse B. 
As part of this agreement, United will contract directly with BAE for
these modifications.  On September 29, 1994, BAE, United, and the
City reached agreement on the modifications to be made to the
automated system.  The estimated cost to Denver for the modifications
is about $35 million. 

Excessive time to move baggage can affect the efficiency of an
airline's operations by creating scheduling problems and disrupting
the efficient use of its aircraft fleet.  The original automated
baggage system was designed to deliver bags from the terminal to the
aircraft within 20 minutes.  Recent Denver Airport System studies
indicate that transit times will only be moderately longer with the
alternative system--up to 5 minutes longer.  The airlines have
challenged this estimate as being overly optimistic.  United believes
it could take up to 50 minutes for baggage to reach the most remote
gates on Concourse B.  Airlines on Concourse C claim that transit
times to and from Concourse C will be 27 to 31 minutes.  Transit
times for the modified automated system are not yet available.  (See
sec.  3 for more detailed information on the automated and
alternative baggage systems.)


   THE DELAYED OPENING HAS CAUSED
   SIZEABLE INCREASES IN TOTAL
   COSTS OF THE NEW AIRPORT
------------------------------------------------------------ Letter :4

The Denver Airport System began to experience operating deficits
after January 1, 1994, when debt payments began.  By the end of
February 1995, the operating deficit will total about $230 million. 
The Denver Airport System has used the 1993 operating surplus from
Stapleton, contributions from the airlines, bond proceeds, and other
moneys set aside in various reserve accounts to cover the deficit. 
As of September 1, 1994, the Denver Airport System had about $467
million available--including proceeds from its recent bond issue--to
cover the airport system's future deficits.  However, according to
bond analysts to whom we spoke, not all of these funds, especially
those in the bond reserve fund, could be committed to debt coverage
without compromising the new airport's credit rating.  Precisely how
much could be spent from these funds before the credit rating could
be affected is not known. 

Operating deficits are only part of the cost of the delayed opening. 
The total cost of the delays to the airport and the airlines might
reach $360 million by February 1995.  In addition to the deficit,
other costs are $37 million in lost income that the new airport would
have generated if it opened on January 1, 1994, $86 million for the
alternative baggage system and the modifications to the automated
system, and $8 million in fees associated with issuing the additional
bonds.  (See sec.  4 for additional details on the costs of the delay
and available revenues.)


   THE NEW AIRPORT'S ABILITY TO
   MEET OPERATING AND DEBT SERVICE
   COSTS IS LINKED TO CURRENT
   TRAFFIC PROJECTIONS
------------------------------------------------------------ Letter :5

To evaluate whether the current delays and added costs would
materially affect the airport's ability to meet operating and debt
service costs when it opens, we reviewed current projections of the
airport's traffic, revenues, and costs.  A simulation model,
developed by Hickling Corporation,\3 was employed to identify how
different traffic forecasts affected the airport's financial
situation.  The model included recent information on the traffic
forecasts, project costs, financing plan, and financial statements
for the airport. 

Air traffic at Denver has recovered from the depressed level of 13.7
million enplanements in 1989.  Traffic at Stapleton has grown to 16.3
million enplanements in 1993.  The 1993 traffic level was used as a
base for projecting future airport revenues in the most recent bond
prospectus, and traffic was projected to increase to 18.3 million in
2000.  If these forecasts materialize, the new airport should produce
sufficient revenues to cover expenses and service the debt. 
Projected traffic would have to be 20-25 percent lower than what is
now forecast for the airport to experience a high probability of
sustained revenue shortfalls. 

The new airport will be a relatively expensive facility, as airline
user fees will be about 3 times higher than those at Stapleton.  The
agreement between the airport and the airlines limits the amount that
the airlines will 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
traffic, revenue, and cost estimates are accurate, airlines' user
fees should be below the cap--about $14.50 in 1990 dollars.\4 (See
sec.  5 for more information on the financial outlook of the new
airport.)

The accuracy of the Denver Airport System's revenue and cost
projections is dependent on several important assumptions:  (1) that
$121 million will be saved from 1995 through 1999 by restructuring
and refinancing 1984/85 bonds, (2) that Continental Airlines will
provide $273 million from 1995 through 1999 for use of the airport,
(3) that the airport will receive $95 million from 1995 through 1998
in discretionary funds from FAA's letter of intent, and (4) that the
airport will achieve an operational baggage system. 


--------------------
\3 Hickling Corporation, a consulting firm that specializes in risk
assessment for airport investment projects, assisted us in our
evaluation.  Hickling also provided assistance during our 1991 review
of the Denver airport project.  Hickling has developed a risk
analysis model applicable to a wide range of subjects; the model has
been used for airport infrastructure projects in Minneapolis/St. 
Paul, Minn., and in Vancouver and Toronto, Canada. 

\4 Because the cap is in 1990 dollars it rises over time.  The cap in
current 1994 dollars is about $22.50 and actual fees per enplanement
are estimated to be $17-$18. 


---------------------------------------------------------- Letter :5.1

We performed our review between May 1994 and September 1994 in
accordance with generally accepted government auditing standards. 
Because the analyses presented in this report are based on traffic,
revenue, and cost forecasts that depend on key assumptions, caution
must be used in arriving at conclusions regarding the experience of
the airport in the first few years of operation.  The extent to which
these assumptions materialize will be important ingredients in the
near-term financial experience of the new airport.  The details of
our scope and methodology are contained in appendix I. 

At the end of our field work, we discussed the facts contained in
this briefing report with senior officials from the Department of
Transportation, including the Department's General Counsel, and the
City of Denver, including the City's Director of Public Works and the
Denver Airport System Finance Director.  They generally agreed with
the information presented, and we have incorporated their comments as
appropriate. 

Unless you publicly release its contents earlier, we plan no further
distribution of this briefing report until 3 days from the date of
this letter.  At that time, we will send copies of this briefing
report to the Secretary of Transportation; the Director, Office of
Management and Budget; the City of Denver; and interested
congressional committees.  We will also make copies available to
others on request. 

Please contact me at (202) 512-2834 if you or your staff have any
questions concerning this briefing report.  Major contributors to
this briefing report are listed in appendix II. 

Sincerely yours,

Kenneth M.  Mead
Director, Transportation Issues


TOTAL COST OF DENVER INTERNATIONAL
AIRPORT
============================================================ Chapter 1



                          Table 1.1
           
             Cost of Denver International Airport

                    (Dollars in millions)

Cost category                                           Cost
--------------------------------------------------  --------
Costs to Denver Airport System
Airport planning, land, and construction              $3,214
Capitalized interest                                     919
Bond discounts and issuance expense                      136
Total costs to Denver Airport System                   4,269
Costs to others
FAA facilities                                           224
United Airline's special facilities                      261
Continental Airline's special facilities                  73
Rental car facilities                                     66
============================================================
Total costs to others                                    624
============================================================
Grand total costs of Denver International Airport     $4,893
------------------------------------------------------------
Legend

FAA = Federal Aviation Administration. 

If Denver International Airport (DIA) opens by February 28, 1995, we
estimate that the costs of the airport, including facilities funded
by airlines, rental car companies, and FAA will be about $4.9
billion.  Of this amount, the Denver Airport System (airport system)
has funded $4.269 billion, including capitalized interest and Airport
Improvement Program (AIP) grants.  Details on AIP grants and FAA
facilities and equipment funds are in table 2.1, page 12.  FAA, the
airlines, and rental car companies have contributed another $624
million for their facilities. 

The total cost encompasses all projects approved as of September 1,
1994.  It excludes costs for a sixth runway, which has not yet been
authorized, and other potential costs or recoveries arising from
future legal settlements between the airport system and its
contractors.  Since September 1, 1994, Denver has agreed to build an
alternative baggage system estimated to cost $51 million and has
agreed to further modifications to the automated baggage system,
which will cost an estimated $35 million. 


FEDERAL FUNDS FOR DIA
============================================================ Chapter 2



                          Table 2.1
           
               Summary of Federal Funds for DIA

                    (Dollars in millions)


                                              Facilit
                                              ies and
                                              equipme
Fiscal        Entitlemen  Discretiona              nt
year             t funds     ry funds  Total    funds  Total
------------  ----------  -----------  -----  -------  -----
1988               $ 0.2          $ 0  $ 0.2      $ 0  $ 0.2
1989                34.2         25.8   60.0      4.2   64.2
1990                31.0         59.0   90.0     39.2  129.2
1991                   0         25.0   25.0     60.0   85.0
1992                 2.2         42.3   44.5     41.7   86.2
1993                 5.9         42.0   47.9     24.0   71.9
1994                 2.9         32.0   34.9      1.2   36.1
1995                 6.0         31.0   37.0        0   37.0
1996                 6.0         25.0   31.0     12.4   43.4
1997                 6.0         25.0   31.0     19.2   50.2
1998                 6.0         25.0   31.0     18.0   49.0
1999                 6.0         22.9   28.9      1.3   30.2
2000                   0            0      0      2.4    2.4
============================================================
Total             $106.4       $355.0  $461.   $223.6  $685.
                                           4               0
------------------------------------------------------------
In 1988, the federal government began funding DIA through the Airport
and Airway Trust Fund.  As of September 1, 1994, FAA planned to spend
$685 million from the Trust Fund; $472.8 million has already been
transferred to DIA.  Moneys for DIA have come from two major Trust
Fund accounts--the Airport Improvement Program (AIP) and Facilities
and Equipment (F&E). 

The majority of the federal funding, $461.4 million, for DIA comes
from the AIP.  Not all of this amount has been transferred to DIA. 
As of September 1, 1994, about $302.5 million had been
transferred--$132.1 million under a letter of intent and $170.4
million in other AIP grants.\1 The remainder will be distributed by
the end of 1999.  The AIP moneys have been used at DIA for such
things as land acquisition, the construction of runways, taxiways,
and aprons, and installation of a rail passenger transportation
system.  Federal funds will not be used to fund the automated baggage
system.  In 1990, FAA gave DIA a letter of intent for $351 million;\2

however, this was significantly reduced because the airport system
imposed a passenger facility charge in January 1992.  By law, a
portion of certain AIP moneys must be turned back if airports impose
a passenger facility charge. 

In addition to the AIP moneys received under the letter of intent,
DIA received $170.4 million in other AIP moneys.  Most of this
amount--$150.2 million--was granted prior to the 1990 letter of
intent.  In fiscal years 1992 and 1993, DIA also received separate
AIP grants (not under the letter of intent) totaling $20.2 million to
procure incursion lighting, conduct a light rail study, and begin
work on a sixth runway.  DIA expects to receive an additional $50
million in AIP funds to complete the sixth runway.  An FAA official
told us, however, that FAA has not yet formally committed this
amount.  On September 22, 1994, congressional appropriators approved
an amendment to the 1995 Department of Transportation Appropriations
bill to prohibit the planning, engineering, design, and construction
of a sixth runway at DIA unless the runway is needed to improve
safety or performance. 

DIA will receive about $223.6 million of F&E moneys through 2000. 
Since 1989, the Congress has appropriated $170.3 million in F&E funds
for DIA.\3 This money has been used for new air traffic control
facilities; equipment such as an airport surveillance radar system,
instrument landing systems, approach lights, weather sensors, and
navigational aids; and transition operations from Stapleton
International Airport (SIA) to DIA. 


--------------------
\1 A letter of intent is a mechanism used to support projects at
primary and reliever airports that will significantly enhance
systemwide airport capacity.  Typically, letters of intent allow
airports to begin project development sooner and receive multiyear
funding. 

\2 These funds are not guaranteed.  They must be appropriated each
year. 

\3 The congressional appropriation was $170.3 million; however, FAA
has reprogrammed about $2 million to other projects. 


DIA'S AUTOMATED BAGGAGE HANDLING
SYSTEM
============================================================ Chapter 3



   (See figure in printed
   edition.)

The automated baggage handling system, with a contract price of $193
million, will be one of the largest and most sophisticated systems of
its type in the world.  It was designed to provide the high-speed
transfer of baggage to and from aircraft, thereby facilitating quick
turnaround times for aircraft and improved services to passengers. 
Baggage will travel between the terminal and concourses through
interconnecting tunnels.  The most distant concourse is located about
a mile from the terminal. 

Even after modifications are complete, the automated baggage handling
system will have two main components:  (1) high-speed, bag-carrying
telecarts mounted on tracks and (2) connecting conveyor belts to load
and off-load baggage.  The tracks are suspended from the basement
ceilings of the terminal and concourses.  Electric motors and
synchronous drives move the telecarts along the tracks at varying
speeds.  Photocells and radio frequency reading devices direct each
telecart to the right location.  In total, the original system
included over 17 miles of track; 5.5 miles of conveyors; 4,000
telecarts; 5,000 electric motors; 2,700 photocells; 59 laser bar code
reader arrays; 311 radio frequency readers; and over 150 computers,
workstations, and communication servers.  The automated system was
originally designed to carry up to 70 bags per minute to and from the
baggage check-in and baggage claim areas at speeds of up to 24 miles
per hour.  This would allow the airlines to receive checked baggage
at their aircraft within 20 minutes. 



   (See figure in printed
   edition.)


   PROBLEMS WITH DIA'S AUTOMATED
   BAGGAGE HANDLING SYSTEM
---------------------------------------------------------- Chapter 3:1

Significant mechanical and software problems have plagued the
automated baggage handling system.  In tests of the system, bags were
misloaded, were misrouted, or fell out of telecarts, causing the
system to jam.  Video cameras were installed at several known trouble
spots to document problems, such as the following: 

  The baggage system continued to unload bags even though they were
     jammed on the conveyor belt.  This problem occurred because the
     photo eye at this location could not detect the pile of bags on
     the belt and hence could not signal the system to stop. 

  The baggage system loaded bags into telecarts that were already
     full.  Hence, some bags fell onto the tracks, again causing the
     telecarts to jam.  This problem occurred because the system had
     lost track of which telecarts were loaded or unloaded during a
     previous jam.  When the system came back on-line, it failed to
     show that the telecarts were loaded. 

  The timing between the conveyor belts and the moving telecarts was
     not properly synchronized, causing bags to fall between the
     conveyor belt and the telecarts.  The bags became wedged under
     the telecarts.  This occurred because telecarts were bumping
     into each other near the load point. 

Although the contractor--BAE Automated Systems Incorporated--believes
that these problems have been resolved, other problems remain.  To
resolve these problems and make the system operational, a number of
critical tasks must be completed.  A recent BAE system status report
listed 72 hardware, software, and testing activities that must be
completed, such as the following: 

  The telecarts' front bumpers have to be replaced so that they will
     not slip under the back bumpers when telecarts collide.  These
     collisions have caused telecarts to lock together. 

  Additional track, synchronous drives, and related software changes
     must be installed to improve "empty car management," that is,
     allocating the correct number of telecarts to specific locations
     at appropriate times. 

BAE and City of Denver officials recognize that the system's testing
might uncover additional problems. 



   (See figure in printed
   edition.)


   MODIFICATIONS TO DIA'S BAGGAGE
   HANDLING SYSTEM
---------------------------------------------------------- Chapter 3:2

Because of continuing problems with the automated system, the City
decided to build an alternative (i.e., conventional) baggage handling
system and make substantial modifications to the automated system. 
The alternative system will use conveyor belts, tugs, and carts to
move bags to and from the terminal and concourses.  The alternative
system will be the primary system until the automated system comes
on-line.  Once the automated system is operational, the alternative
system will serve as a backup system if the automated system
malfunctions. 

With facility modifications and equipment, the alternative system is
currently projected to cost over $51 million, which includes the cost
to procure tugs and carts.  The system is scheduled to be completed
by January 15, 1995, and testing completed about February 15, 1995. 

To build the alternative system, major modifications to the physical
structures must be made.  Five areas of the third floor parking
garage will be enclosed and converted into staging areas for
airlines' baggage.  The terminal building will be modified by the
cutting of holes in walls at the third level to allow conveyor belts
to enter from ticket counters and from curbside check-in to the
staging areas. 

Extensive use of tugs and carts to transport bags will be necessary. 
Tugs and carts will move bags from the terminal through existing
tunnels to the concourses.  To do this, the ventilation systems in
tunnels will have to be modified to keep the level of exhaust fumes
from the tugs at acceptable levels.  The City plans to purchase tugs
powered by natural gas to minimize exhaust emissions.  Inbound
baggage will be transported from the aircraft on carts to the
terminal basement, where they will be loaded onto conveyors leading
up to the baggage claim area.  Bags for passengers on connecting
flights will be transferred between aircraft on carts operating via
the tarmac. 

The automated system also will undergo substantial modifications. 
The City and United entered into an agreement that allows United to
contract directly with BAE to modify portions of the automated system
to provide a separate outbound automated baggage system for United by
February 28, 1995.  These modifications include changing the routing
of the telecarts so that more of them serve United at Concourse B. 
The inbound portions will not be completed until later.  The
agreement also includes a requirement for BAE to complete an
automated baggage system for Concourse A by August 31, 1995.  The
City will evaluate the need for an automated system for Concourse C
carriers within 6 months after the airport opens. 

On September 29, 1994, BAE, United, and the City reached agreement on
the modifications to be made to the automated baggage handling
system.  These modifications are estimated to cost the City about $35
million.  BAE will be paid $17.5 million on February 28, 1995,
assuming that the system is operational, and the remainder after the
system is substantially completed.  If the automated system is not
operational by opening day, United will be served by the conventional
baggage system. 



   (See figure in printed
   edition.)


   REMAINING UNCERTAINTIES
---------------------------------------------------------- Chapter 3:3

A number of outstanding, unanswered questions surround the baggage
handling system.  Among the remaining uncertainties are the
following: 

  Timing.  The automated system is undergoing modifications, and
     construction of the alternative system is just getting under
     way.  Both systems must still be tested before the airport can
     open.  Prior tests have not gone well. 

  Performance.  The original automated system was designed to
     transport outbound baggage from the terminal to the aircraft
     within 20 minutes.  It is not yet known whether the modified
     automated system will meet design standards.  The City estimates
     that bags can be delivered using the alternative system in 20 to
     25 minutes.  United and carriers on Concourse C have expressed
     concern about whether the conventional system can deliver bags
     in the times estimated by the airport system.  United believes
     that using the alternative system may take up to 50 minutes to
     deliver bags to aircraft at DIA's most remote gates.  Airlines
     at Concourse C believe that it will take 27 to 31 minutes to
     deliver bags using this system. 

  Final system configuration.  It has not been decided whether
     Concourse C will eventually be reconnected to the automated
     system.  This could result in lower levels of baggage service to
     airlines and their passengers on Concourse C. 

  Resource requirements.  The conventional system is much more
     labor-intensive than the automated system.  United told us that
     it currently has about 1,100 employees working the baggage
     system at SIA; an additional 600 people would be needed to
     handle baggage using DIA's alternative system.  The usefulness
     of the conventional tug-and-cart operation as a backup system
     after the automated system becomes operational is also in
     question because of the additional standby employees required. 

  Unresolved claims.  The final cost of the baggage system is
     uncertain because of the potential for litigation after the
     baggage system is completed.  The City has not paid BAE $22
     million of the $193 million contract for the automated baggage
     system.  On September 29, 1994, BAE, United, and the City
     reached an agreement for modifying the automated baggage system. 
     The agreement calls for the City to pay BAE $17.75 million of
     the unpaid $22 million but reserves the rights of both parties
     to assert claims for alleged damages.  They agreed to attempt to
     resolve their claims through mediation, but if unsuccessful,
     they agreed to file any unresolved claims in court. 


COST OF DIA'S DELAYED OPENING
============================================================ Chapter 4



   (See figure in printed
   edition.)


   CUMULATIVE DEFICIT THROUGH
   FEBRUARY 28, 1995
---------------------------------------------------------- Chapter 4:1

On the basis of current monthly deficits, the total operating deficit
incurred by the airport system from January 1, 1994, through February
28, 1995, will be $230 million.  Financial data are available through
June 30, 1994.  For the period after July 1, 1994, the deficits must
be estimated.  Our projection of the total deficit included the $80
million through June 30, 1994, and the projected deficit of $150
million for the period July 1, 1994, through February 28, 1995. 



                          Table 4.1
           
             Actual Deficit of the Denver Airport
            System--January 1, 1994, Through June
                           30, 1994

                    (Dollars in millions)

                                       Revenue and
                                              cost   Revenue
Deficit                                  breakdown  and cost
------------------------------------  ------------  --------
Operating revenues generated at SIA
Landing fees                               $ 23.64
Terminal complex rentals                     22.33
Concessions                                  24.24
Aviation fuel taxes                           6.06
Other                                         2.66
Total SIA operating revenues                           78.93
Less: SIA's operating costs
Personnel & professional svcs.               16.28
Cleaning & utilities                          9.62
Maintenance, supplies, materials              6.70
Other                                         3.42
Total SIA operating costs                              36.02
SIA's operating surplus                                42.91
Less: SIA's net debt service                           17.19
Surplus produced by SIA                                25.72
DIA's costs
Operating costs
Personnel & professional svcs.               10.86
Cleaning & utilites                           6.41
Maintenance, supplies, materials              4.47
Baggage system maintenance                    1.83
Other                                         2.28
Total DIA operating costs                              25.85
Debt service requirements on bonds          122.35
Less: passenger facility charges           (20.89)
Interest income                            (16.51)
Continental's payments                      (5.00)
Net debt service costs                                 79.95
Total DIA costs                                       105.80
Net deficit                                            80.08
Average monthly deficit, Jan.                        $ 13.35
 through June 1994
------------------------------------------------------------

   ACTUAL DEFICIT OF THE DENVER
   AIRPORT SYSTEM--JANUARY 1,
   1994, THROUGH JUNE 30, 1994
---------------------------------------------------------- Chapter 4:2

The airport system incurred a net operating deficit of $80.08 million
from January 1, 1994, through June 30, 1994--an average of $13.35
million each month.  This deficit occurred because the revenues
generated by SIA did not cover the debt servicing requirements and
operations and maintenance (O&M) costs at both airports.  For this
same period, DIA officials had earlier estimated a net monthly
deficit of $16.4 million; however, they took a conservative approach
that led to the understating of SIA revenues and the overstating of
operations costs at the two airports.  Our calculations were based on
actual monthly deficits.  There was no deficit prior to January 1,
1994. 

The following were key elements of our calculations: 

  Operating costs at SIA and DIA are based on total obligations
     recorded in the airport system's accounting records for January
     1 through June 30, 1994.  The airport system's accountants
     allocated costs between the two airports according to which
     airport benefitted from the expenditure of those funds. 

  Passenger facility charges (PFC) are generated from a special $3
     fee that was added to the price of a ticket for each enplaned
     passenger at Denver airport starting in July 1, 1992.  The
     airport system's bond ordinance requires that PFCs be used to
     pay debt service requirements. 

  Interest income is generated from several investment pools managed
     by the airport system, principally the bond reserve fund. 

  Depreciation was excluded as a cost category because SIA will not
     be an airport after DIA opens, and depreciation is an expense
     requiring no cash outlay. 



   (See figure in printed
   edition.)


   SOURCES OF FUNDS USED TO COVER
   $80.08 MILLION DEFICIT--
   JANUARY 1, 1994, THROUGH JUNE
   30, 1994
---------------------------------------------------------- Chapter 4:3

The airport system used funds from five sources to cover the $80.08
million operating deficit for the first 6 months of 1994, as follows: 

Payments from airlines.  During the 6-month period, United and
Continental airlines paid $36.53 million to the airport system to
cover delay costs.  The airport system applied $31 million of this
amount against the $80.08 million deficit.  United's $23.9 million
contribution came from special facility bond funds that remained from
a construction project for its maintenance hangar at DIA.  The
airport system's agreement with United stipulated that these funds
would be used to offset facility upgrades to Concourse B requested by
United. 

In April and May 1994, both United and Continental paid $6.63 million
and $6 million, respectively, to help offset delay costs from March 9
to May 15, 1994.  United also agreed to pay an additional $9.9
million and Continental an additional $1.4 million before December
31, 1994.  The airport system does not plan to compensate the
airlines for these payments. 

Aviation fuel tax fund.  On January 1, 1994, the airport system had
about $36.6 million in the aviation fuel tax fund, a special purpose
fund established to retire SIA's portion of 1984 and 1985 revenue
bonds.  The airport system used $25.92 million from this fund to
cover the net operating deficit; $10.8 million from the proceeds of
the 1994A bond issue has been transferred back into this fund. 

Capitalized interest.  Capitalized interest is money from the
original bond proceeds set aside to pay debt service payments during
the airport's construction period; $11.96 million was used to cover
part of the deficit. 

Surplus in bond reserve fund.  Under the bond ordinance, the airport
system is required to set aside enough money in a bond reserve fund
to pay debt service requirements for a full year.  The funding
requirement for Denver's bond reserve fund was $304.63 million,
excluding the 1994A bonds.  On January 1, 1994, the airport system
had $315.11 million in the fund, leaving a surplus of about $10.5
million; $6.45 million of this surplus was used to cover the deficit. 

Operating surplus from 1993 SIA operations.  Net revenues from
operations at SIA are held in an operating fund, which had a balance
of $7.65 million on January 1, 1994.  During the first 6 months of
1994, $4.75 million was used to cover the deficit. 



                          Table 4.2
           
           Projected Deficit of the Denver Airport
            System--July 1, 1994, Through February
                           28, 1995

                    (Dollars in millions)

                                       Revenue and
                                              cost   Revenue
Deficit                                  breakdown  and cost
------------------------------------  ------------  --------
Operating revenues generated at SIA
Landing fees                                 $31.0
Terminal complex rentals                      29.0
Concessions                                   32.0
Aviation fuel taxes                            8.0
Other                                          4.0
Total operating revenues                               104.0
Less: SIA's operating costs
Personnel & professional svcs.                26.2
Cleaning & utilities                          15.5
Maintenance, supplies, materials              10.8
Other                                          5.5
Total operating costs                                   58.0
SIA's operating surplus                                 46.0
Less: SIA's debt service                                23.0
Surplus produced by SIA                                 23.0
DIA's costs
Operating costs
Personnel & professional svcs.                17.6
Cleaning & utilities                          10.4
Maintenance, supplies, materials               7.3
Other                                          3.7
Total operating costs                                   39.0
Debt service requirements on bonds           182.0
Less
Passenger facility charges                  (27.0)
Interest income                             (17.0)
Continental's payments                       (4.0)
Net debt service costs                                 134.0
Total DIA costs                                        173.0
Net deficit                                            150.0
Average monthly deficit, July 1994                     18.75
 through Feb. 1995
------------------------------------------------------------

   PROJECTED DEFICIT OF THE DENVER
   AIRPORT SYSTEM--JULY 1, 1994,
   THROUGH FEBRUARY 28, 1995
---------------------------------------------------------- Chapter 4:4

We estimate that the net deficit projected from July 1, 1994, through
February 28, 1995, will be about $150 million--an average of $18.75
million each month.  The monthly deficit increased from $13.35
million for the first 6 months of 1994 because of increased O&M costs
and debt service requirements from the $257 million 1994A bond issue. 

The following were key elements of our calculations: 

  We assumed that the pattern of revenues for 1994 will follow the
     pattern of revenues experienced in 1993, when the revenues were
     split evenly between the first and second halves of the year. 
     Total revenues at SIA for the first half of 1994 were $78.9
     million, or just over $13 million a month. 

  Operating costs at SIA and DIA are based on recently completed
     budgets for the airport system, which estimated monthly
     operating costs of $12.1 million at both airports for the last
     half of 1994. 

  The debt service requirement on the 1994A bond issue has increased
     by about $2 million a month. 



   (See figure in printed
   edition.)


   FUNDS AVAILABLE TO FINANCE
   FUTURE DELAY COSTS
---------------------------------------------------------- Chapter 4:5

The airport system has $467.2 million available to cover further
delay costs to DIA. 



                          Table 4.3
           
             Reserve Funds in the Denver Airport
            System and Amounts Available to Cover
                      Future Delay Costs

                    (Dollars in millions)

                                             Total  Availabl
Source                                      amount         e
-------------------------------------  -----------  --------
Bond reserve fund                           $308.6    $209.5
New 1994A bond issue                       192.6\a     119.6
Capital fund                                 167.7     128.2
United's delay cost payments                   9.9       9.9
============================================================
Total                                       $678.8    $467.2
------------------------------------------------------------
\a The total amount shown for the new bond issue excludes $64.4
million transferred to the capital fund. 


      BOND RESERVE FUND
-------------------------------------------------------- Chapter 4:5.1

The bond reserve requirement for DIA is now $308.6 million.  Under
the terms of the bond ordinance, funds can be withdrawn from this
account only if they are needed to meet debt service requirements. 
Funds withdrawn must be paid back at the rate of 1/60th of the
amounts owed each month.  Given this requirement, $209.5 million of
the $308.6 million could be used before outside sources would have to
be tapped.  However, according to bond analysts to whom we spoke,
drawing on these resources before DIA opens could affect the
airport's credit standing. 


      CAPITAL FUND
-------------------------------------------------------- Chapter 4:5.2

All of the airport system's surpluses are paid into a capital fund
after O&M costs, debt service requirements, and O&M reserve account
requirements are made.  The capital fund can be used to pay capital
costs, extraordinary costs, or bond requirements.  The projected
balance in the capital fund as of December 31, 1994, was $167.7
million, of which $128.2 million is available. 


      MONTHLY PAYMENTS ON DELAY
      COSTS BY UNITED AIRLINES
-------------------------------------------------------- Chapter 4:5.3

In accordance with an earlier agreement with the airport system,
United will make monthly payments of $1.7 million during the last
half of 1994, which cumulatively totals $9.9 million.  This amount
will cover United's share of the airport system's delay costs for the
period March 9 through May 15, 1994. 



                          Table 4.4
           
            Application of Proceeds of the Series
                         1994A Bonds

                    (Dollars in millions)

Application                                         Proceeds
------------------------------------------------  ----------
Available for funding delay costs                     $119.6
Fund costs of alternative baggage system                50.6
Transfer to capital and project funds                   64.4
Transfer to aviation fuel tax fund                      10.8
Transfer to bond reserve fund                            3.3
Underwriters' discount and cost of issuance              4.4
Original issue discount                                  3.9
============================================================
Total proceeds                                        $257.0
------------------------------------------------------------

   APPLICATION OF PROCEEDS OF THE
   SERIES 1994A BONDS
---------------------------------------------------------- Chapter 4:6

The airport system sold $257 million in airport system revenue
bonds--Series 1994A--with an effective date of August 30, 1994.  The
airport system plans to apply these proceeds as follows: 

  $50.6 million to install an alternative baggage handling system. 

  $64.4 million for other capital projects, including funds to cover
     the costs for modifications to the automated baggage system. 

  $10.8 million to partially replenish funds used to cover earlier
     deficits.  Airport officials told us that the $10.8 million will
     bring the total in this fund to the amount needed to retire
     SIA's 1984 and 1985 revenue bonds. 

  $3.3 million to increase the bond reserve fund to its new minimum
     requirement. 

  $4.4 million for costs associated with selling the bonds. 

  $3.9 million for the original issue discount on the bonds. 

After satisfying these requirements, $119.6 million of the $257
million in bond revenues will remain for future delay costs.  The
airport system classifies this money as capitalized interest, which
is money set aside to pay debt service requirements before DIA opens. 



   (See figure in printed
   edition.)


   FORECAST OF CUMULATIVE
   OPERATING DEFICITS
---------------------------------------------------------- Chapter 4:7

The deficit likely will continue to accumulate by $18 million to $19
million each month if the opening of DIA is delayed beyond February
1995.  If DIA does not open in 1995, the total deficit will grow to
$415 million by December 31, 1995.  However, if the airport is not
open by October 1995, the City will need to tap the bond reserve fund
to pay for the operating deficit. 



   (See figure in printed
   edition.)


   SUMMARY OF TOTAL DELAY COSTS
---------------------------------------------------------- Chapter 4:8

If DIA had opened by January 1, 1994, and operated in accordance with
its final 1994 budget, the airport system would have incurred a $37
million surplus instead of a $230 million deficit through February
1995.  (See table 4.5.) This means that the real costs from the
delayed opening of DIA will total about $267 million by February
1995.  In addition, the airport system would not have had to incur
$8.3 million for underwriting costs and issue discounts from the
1994A bond issue.  Furthermore, about $86 million for modifications
to the baggage handling systems would have been avoided.  Therefore,
the true delay costs are about $361 million. 



                          Table 4.5
           
           Comparison of Budgets for the January 1,
            1994, to February 28, 1995, Period for
                    Two DIA Opening Dates

                    (Dollars in millions)

                                     Jan. 1,
                                       1994,
Revenues and costs to Denver         opening  Feb. 28, 1995,
Airport System                          date    opening date
-------------------------------  -----------  --------------
Revenue from airlines\a              $ 313.2         $ 106.0
 (landing fees and terminal
 rent)
Other operating revenues                92.8            62.9
 (mostly concessions)
Nonoperating revenues (PFCs,            91.9           104.5
 interest, aviation fuel tax)
============================================================
Total revenues                         497.9           273.4
O&M cost\b                           (171.3)         (158.9)
Debt service cost                    (289.8)         (344.5)
Net surplus (deficit)\c               $ 36.8        $(230.0)
------------------------------------------------------------
\a Revenue from airlines, mainly through landing fees and rents,
would increase substantially at DIA compared with revenue from
airlines at SIA. 

\b O&M costs in DIA's budget included about $6 million for the 14
months for residual operations at SIA.  Until disposal of SIA occurs,
it will remain part of the airport system.  The airport system's
funds will be used to pay any costs at SIA, but those costs will not
be included in airlines' rates and charges.  Instead, SIA costs will
be paid from DIA's net revenues.  After SIA closes, airport system
officials expect to spend about $25 million on capital projects
through 1998 for environmental cleanup, demolition of structures, and
structural repairs.  Airport system officials are currently
developing a master plan for the disposition of SIA and have begun a
5-year leasing program for SIA facilities.  Ultimately, airport
system officials expect that the disposition of SIA will produce $75
million in net proceeds. 

\c Airlines receive 75 percent of net revenues produced from
operations at DIA. 


IMPACT OF DELAYED OPENING ON DIA'S
ABILITY TO MEET OPERATING AND DEBT
SERVICE COSTS
============================================================ Chapter 5



   (See figure in printed
   edition.)

In September 1991, we reported on the likelihood that DIA would earn
sufficient revenues to cover its operating costs and meet obligations
to bondholders.  We estimated the probabilities of various factors,
such as alternative traffic levels, and then calculated whether
revenues would be adequate to cover all costs.\1

The 1991 risk analysis found that the probability that the airport
would experience a shortfall in revenues was low.  We updated our
analysis to take into account a number of recent events that could
affect the airport's ability to meet its operating and debt service
costs. 

The new analysis is based on the models developed for the 1991
report.  Modeling risk assessment is highly sensitive to the
assumptions made governing key variables.  We paid particular
attention to traffic estimates, as they are critical to predicting
airport revenues.  The details of the approach are discussed in
appendix I. 


--------------------
\1 We contracted with Hickling Corporation, a consulting firm that
specializes in risk assessment for airport investment projects, to
assist us in this evaluation. 


   PASSENGER TRAFFIC VOLUME
---------------------------------------------------------- Chapter 5:1

Passenger traffic is a direct source of revenue to DIA via the $3.00
PFC per enplanement.  More importantly, in accordance with the
agreements between the City of Denver and the airlines, all costs not
covered through other means such as PFCs and rents from airport
concessionaires must be paid by airlines' user fees.  The agreements
between Denver and the airlines specify that these charges are not to
exceed $20 per passenger enplaned at DIA in 1990 dollars.  The cap is
allowed to rise with inflation, so that today, the maximum charge to
the airlines per enplaned passenger is $22.50 in current dollars.  If
airline payments combined with revenues from other sources are not
sufficient to cover an airport's operating costs and repay debt, the
airport has a shortfall. 

Airlines' passenger traffic in Denver rose steadily after 1970,
peaking in 1986 at slightly over 16 million enplaned passengers. 
Traffic declined to below 14 million enplanements in 1989 and 1990
and our September 1991 study used this lower base in developing
traffic forecasts and revenue projections.  However, traffic grew by
2.8 percent in 1991 and recovered strongly in 1992 and 1993, when
enplanements grew by 8.9 percent and 5.7 percent, respectively.  In
1993, there were 16.32 million enplanements at SIA. 



                          Table 5.1
           
           Annual Enplanements at DIA Between 1994
             and 2000 Under Low, Median, and High
                      Traffic Forecasts

              (Enplaned passengers in millions)

                                 Lower                 Upper
                                 bound    Median       bound
Year                          estimate  estimate    estimate
--------------------------  ----------  --------  ----------
1994                            14.573    16.192      17.002
1995                            14.719    15.962      17.451
1996                            14.866    16.422      17.900
1997                            15.014    16.882      18.349
1998                            15.165    17.343      18.798
1999                            15.316    17.803      19.247
2000                            15.469    18.263      19.697
------------------------------------------------------------
Note:  Actual enplanements in 1993 were 16.32 million. 


   ANNUAL ENPLANEMENTS AT DIA
   BETWEEN 1994 AND 2000 UNDER
   LOW, MEDIAN, AND HIGH TRAFFIC
   FORECASTS
---------------------------------------------------------- Chapter 5:2

To forecast traffic for 1994 and beyond, the current analysis took,
as a starting point, recent projections made by the consultant to the
airport system prior to the latest bond prospectus.  Those
projections indicated no growth in 1994 and a decline to 16 million
enplanements in 1995.  Traffic is then expected to increase and reach
18.3 million annual enplanements in 2000.  FAA also projected traffic
at Denver, but while it also assumed no growth in 1994, FAA estimates
that enplanements will increase to 17 million in 1995 and to 21.9
million in 2000.  The present analysis is based on the more
conservative estimates developed for the bond prospectus as a median
forecast. 

Upper and lower bound estimates of enplanements were then developed. 
The lower bound projection assumed that traffic in 1994 would be 10
percent lower than the current forecast, or about 14.6 million
enplanements annually.  Traffic, thereafter, is assumed to grow by
only 1 percent per year, yielding 15.5 million enplanements in 2000,
nearly 1 million fewer than in 1993.  It is assumed that there is a
90-percent probability that this lower bound forecast will be
exceeded.  The upper bound forecast assumes that traffic in 1994 is 5
percent higher than projected in the prospectus and grows linearly,
so that it reaches 90 percent of FAA's forecast for 2000.  It is
assumed that there is only a 10-percent chance that traffic growth
will exceed this forecast. 



                          Table 5.2
           
           Mean Cost per Enplaned Passenger if DIA
                    Opens by March 1, 1995

                                        Current         1990
Year                                    dollars      dollars
--------------------------------  -------------  -----------
1995                                     $17.35       $14.46
1996                                      19.50        15.57
1997                                      18.08        13.83
1998                                      18.47        13.54
1999                                      17.64        12.41
2000                                      19.32        13.01
------------------------------------------------------------


                          Table 5.3
           
           Mean Cost per Enplaned Passenger if DIA
                    Opens by July 1, 1996

                                        Current         1990
Year                                    dollars      dollars
--------------------------------  -------------  -----------
1996                                     $20.62       $16.47
1997                                      19.43        14.89
1998                                      19.60        14.37
1999                                      18.96        13.30
2000                                      20.68        13.89
------------------------------------------------------------
Note:  The calculations for these tables are based on assumed
enplaned levels of 14.6 million to 17 million enplaned passengers in
1994 and subsequent years as shown earlier in this section.  These
levels are associated with the median of the forecast.  The airport
recently announced its intention to accelerate principal repayment on
the 1994A bonds, and this could increase the cost per enplaned
passenger by about $1 between 1995 and 2000. 


   MEAN COST PER ENPLANED
   PASSENGER FOR TWO OPENING DATES
---------------------------------------------------------- Chapter 5:3

The Mayor of Denver has announced a new opening date of February 28,
1995, but there is no guarantee that DIA will, in fact, open then. 
Therefore, we examined the impact on operating revenues and debt
service costs if the airport is not open until July 1, 1996.  On the
basis of information provided by the airport system, we assumed that
any further delays in opening DIA will cost at least $18 million per
month and would be debt financed.\2

If current traffic forecasts materialize and if the current
projections of the airport's operating costs are accurate, then
regardless of whether DIA opens by March 1, 1995, or by July 1, 1996,
expected revenues appear to be sufficient to allow the airport to
meet scheduled debt payments.  Despite the fact that airlines' user
fees will be almost 10 percent higher than they would have been had
the airport opened on time, the cost per enplaned passenger will be
several dollars below the $20 cap in 1990 dollars.  With a 1995
opening, the cost per enplaned passenger will peak at about $15.57 in
1996 (in 1990 dollars) and then decline.  With a 1996 opening, the
peak again occurs in 1996 at $16.47 in 1990 dollars. 

Our analysis depends on cost and revenue forecasts that were
developed for the recent bond prospectus.  Those projections, in
turn, depend on several key assumptions made by the Denver Airport
System.  First, the airport assumes that it will be able to refinance
the 1984 and 1985 bonds in 1995 and to restructure debt service. 
Doing so will reduce the airport's debt service by $121 million over
the 1995-99 period.  If the airport does not refinance and
restructure this debt, debt service costs will be higher and the
airport will need to find alternative revenue sources or to raise the
fees paid by the airlines. 

Second, the revenue projections to the year 2000 are based on
Continental Airlines' agreement to lease 20 gates over that period at
a cost of $273 million.  However, Continental is reducing its
presence at Denver.  The airport's projections account for a reduced
presence by Continental after the year 2000, when it will have a
commitment for only four gates, but assume that Continental will
either pay for the space or will sublet the space to another airline. 
Third, the airport's projections assume that $95 million committed by
FAA in its letter of intent from the discretionary account of the AIP
will be funded as planned.  Finally, airport financial forecasts were
based on an assumption that a baggage system with sufficient
operational reliability would permit the airport to open. 

Another key element of the airport's cost is its debt service, and
there are differences in various reports on debt service
requirements.  An analysis of 1996 debt service requirements can
illustrate the problem.  The audited financial statements for the
Denver Airport System prepared by Deloitte & Touche as of December
31, 1993, reported a 1996 debt service requirement of $302.5 million. 
The latest Denver Airport System plan of finance shows a 1996 debt
service requirement of $289.6 million.  The bond prospectus financial
analysis prepared by Leigh Fisher Associates, the airport's
consultant, reported a 1996 debt service requirement of $243.7
million.  Denver Airport System officials and their consultants
provided the following rationale to reconcile these differences. 

  The audited financial statements did not include debt service on
     the 1994A bonds, amounting to $24.4 million in 1996, because
     these bonds were issued after the last audit which was done as
     of December 31, 1993. 

  Denver's plan of finance assumes a $30.5 million debt service
     reduction in 1996 based on the refinancing in 1995 of the 1984
     and 1985 airport system revenue bonds. 

  The bond prospectus debt service requirement was inconsistent with
     those in the other two reports largely because it excluded $40.5
     million of passenger facility charges (PFC) in 1996.  It assumed
     that PFCs would be a revenue source that should be offset
     against total debt service. 

  DIA, in its plan of finance and in its bond prospectus, reduced
     debt service requirements from the audited amount by $10.7
     million in 1996 to account for estimated market rates of
     interest on variable rate bonds.  The audited financial
     statements were prepared assuming maximum rates of interest on
     variable rate bonds. 

  Several other variables that involve smaller dollar amounts were
     included in the reconciliation. 



                          Table 5.4
           
             Reduced DIA Enplanement Estimates to
                Levels Where There Would Be a
             Significant Risk of Costs Exceeding
                           Revenues

                  (Enplanements in millions)

                                 Lower                 Upper
                                 bound    Median       bound
Year                          estimate  estimate    estimate
--------------------------  ----------  --------  ----------
1994                            11.075    12.306      12.921
1995                            11.186    12.131      13.263
1996                            11.298    12.481      13.604
1997                            11.411    12.831      13.945
1998                            11.525    13.180      14.287
1999                            11.640    13.530      14.628
2000                            11.757    13.880      14.969
------------------------------------------------------------
Note:  Actual enplanements in 1993 were 16.32 million. 


--------------------
\2 The debt service figures used in our analysis were provided by the
Denver Airport System in August 1994. 


   REDUCED DIA ENPLANEMENT
   ESTIMATES TO LEVELS WHERE THERE
   WOULD BE A SIGNIFICANT RISK OF
   COSTS EXCEEDING REVENUES
---------------------------------------------------------- Chapter 5:4

The financial risk model was run by using different assumptions of
depressed levels of traffic in order to determine the sensitivity of
DIA's financial situation to the traffic forecast.  We undertook this
analysis partly because Continental, one of the principal airlines
expected to operate a hub at DIA, is scaling back its scheduled
operations substantially.  Today, Continental handles about 24.2
percent of the traffic at SIA and United handles about 57.4 percent. 
No other airline handles as much as 5 percent, although Delta and
American handle 4.1 percent and 3.7 percent, respectively. 
Continental plans to reduce the number of daily flights out of Denver
from 94 to 23 by the end of October 1994.\3 United plans to increase
its daily departures from 277 to 300 by the end of 1994. 

Projected traffic levels would need to be nearly 20-25 percent lower
before the model found that there would be significant risk that
DIA's estimated costs might exceed revenues.  We are not making an
independent analysis of traffic at DIA; however, several points are
relevant to Denver's air traffic.  First, United will be handling
almost 60 percent of the enplanements, and that airline is committed
to DIA.  Second, approximately 46 percent of the traffic is
originating or ending in Denver, and that traffic is dependent on
factors such as Denver's economy, rather than on airlines' user fees. 
Third, in Continental's 100 largest markets connecting through
Denver, United offers competing service in 77.  In Continental's top
1,000 markets that connect through Denver (which account for more
than three-fourths of all Continental's traffic over Denver), United
offers competing service in 547.\4 Finally, while airlines' user fees
at Denver will be high, the costs of using alternative hub airports
can lead to higher airline operating costs, which in many cases
offset the higher fees at DIA. 


--------------------
\3 Although Continental is scaling back its operations, other
airlines may increase their operations at DIA to compensate for
Continental's reduction in flights.  DIA's revenue flow assumes
revenues from the reduced level of Continental's operations; however,
any additional change would affect the airport's revenues. 

\4 These data are for the first quarter of 1994, the most recent for
which data are available.  We define United as "competing" if it has
at least a 10-percent share of the market. 


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

To determine the problems with the baggage handling system, we
interviewed officials of the DIA management team, including
contractors, the airlines, an airline baggage consultant, and the
consultant hired by the City of Denver to evaluate the system.  We
reviewed the system's completion schedules including lists of tasks
remaining to be completed, specifications for the system, and other
contract documents such as agreements between the City, United, and
BAE; and we observed tests of the automated system. 

To determine the cost of the delayed opening of DIA, we reviewed cost
estimates and the resources available to pay these costs.  In
addition, we performed an analysis of projected revenues and
operating costs to determine the reasonableness of those projections
and to identify the financial effects of continued delays.  For our
analysis, we (1) interviewed appropriate officials of the Denver
Airport System and the City Treasurer's Office, consultants
responsible for projecting airport revenues and debt service, and
airline representatives; (2) reviewed and analyzed DIA's accounting
records, documents, and procedures, including the audited 1993
financial statement; and (3) reviewed relevant financial information
contained in official statements for issued bonds.  We did not audit,
and do not express an opinion on, the data provided by DIA that are
used in our analysis.  We identified the underlying assumptions
included in DIA's revenue and cost projections.  We note the key
assumptions used in the analysis where appropriate. 

Certain information such as the airport system's 1993 financial
statement was independently audited by Deloitte & Touche.  The
auditor issued an unqualified opinion on the airport system's
financial position as of December 31, 1993. 

To address the financial outlook of the DIA project, we discussed the
costs, including delay costs and available funding sources to finance
those costs, with DIA officials, officials from the City's Revenue
Department, the airport's financial adviser at First Albany Corp.,
bond analysts, and officials from credit-rating agencies.  We also
contacted United and Continental--the two principal airlines serving
the airport--for their views on the proposed fees and charges.  As
part of these discussions, we collected relevant information on the
airport's costs, revenues, debt, user fees, and traffic levels. 

To determine whether expected revenues would be sufficient to cover
operating costs and service the debt, we contracted with Hickling
Corporation, an airport consulting firm, to perform a risk analysis. 
Hickling developed a risk assessment model to assist us in our 1991
study.  That model included six submodels:  traffic, O&M costs,
project costs, nonairline revenues, project finance, and airline
revenues.  We updated the analysis using the most recent information
on traffic projections, the project's cost, the financing plan, and
the airport's financial statements.  The model uses this information
to simulate possible outcomes and develops an estimate of the
probability that net revenues will be sufficient to service the debt. 

Modeling risk assessment is highly sensitive to the assumptions made
governing key variables.  The approach that was taken was to
construct a range of possible values for the key factors such that
there is only a 10-percent chance that the actual value will be
higher than the top of the range and a 10-percent chance that the
actual value will be lower than the bottom of the range. 

In addition to the assumptions surrounding traffic levels and traffic
growth discussed in section 5, several other assumptions were key to
the analysis.  According to the information we developed from the
airport system's provided data, the cost of further delays is assumed
to be about $18 million per month.  If DIA does not open by February
28, 1995, it is assumed at a 90- percent certainty level that
subsequent delay costs will be at least $17 million per month and it
is assumed that there is a 10-percent chance that they will exceed
$20 million per month.  It is further assumed that all costs
associated with delays after February 28, 1995, will require
additional debt financing.  The analysis assumes that the terms of
the new debt would be 30-year bonds with equal annual payments.  The
interest rate on the new debt issue is assumed to have a median value
of 7.8 percent.  The 80-percent confidence interval for interest
rates has an upper bound of 9.5 percent and a lower bound of 7.2
percent. 

Originally, the goal was to estimate the probabilities that DIA would
open on certain dates given as the best estimates of technical
specialists involved in correcting the problems with the baggage
system.  A questionnaire was developed to elicit responses on the
likelihood of failure of key subsystems of the baggage handling
system.  We received some response to our questionnaire, but several
key organizations did not wish to speculate on when the problems with
several subsystems would be corrected, even though their speculations
represented the best informed judgments.  When Denver's Mayor
announced that the airport would open on February 28, 1995, with an
alternative baggage handling system, we refocussed our analysis to
look at the impact on the airport's revenues and costs at different
opening dates. 

Hickling Corporation used its proprietary Risk Analysis Process (RAP)
software and modified it to represent DIA.  The RAP model is a Monte
Carlo simulation that uses the uncertainty ranges for key variables
to make repeated estimates of forecast outcomes in the form of
probability distributions. 

We did not review the documentation of the RAP model's internal logic
or attempt to verify the RAP model.  Therefore, we cannot attest to
its validity.  As with the output of other policy-assisting tools,
its outputs cannot be relied upon as exact predictors of the future. 


MAJOR CONTRIBUTORS TO THIS
BRIEFING REPORT
========================================================== Appendix II

Allen Li, Associate Director
Randall B.  Williamson, Project Manager
Francis P.  Mulvey, Assistant Director
Lowell E.  Hegg, Assistant Director/Denver Regional Office
Ted B.  Baird
Steven N.  Calvo
John Furutani
Stephanie K.  Gupta
Madhav S.  Panwar
Keith A.  Rhodes
Francis W.  Sutherland
Arthur D.  Trapp

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