T.F. Green Airport is spending $83.5 million in borrowed money on renovations that are nearly complete. Officials say they expect revenues to increase next summer when new restaurants and shops open for business.

The Providence Journal / Andrew Dickerman

WARWICK — These were supposed to be heady times at T.F. Green Airport.

The ambitious terminal renovation is in its final stages, bringing upscale clothing shops and restaurants to an airport that only a decade ago was considered an aviation backwater. A $242-million transportation hub, linking Boston travelers to Green Airport, is finally moving forward. And airport leaders are pushing a runway expansion to allow for transcontinental flights.

But steep declines in passenger traffic are taking a toll on the airport’s finances, threatening to complicate its plans for growth.

In the last fiscal year, the airport suffered a revenue drop for the first time this decade, brought about by a 9-percent decline in passengers. The year’s total was 5.2 million, the lowest since 2003.

The revenue decline, about $300,000, was slight, given the size of the airport’s budget. Total revenue from July 1, 2006, to June 30 of this year dropped to $48.7 million, from $49 million, according to the most recent financial audit.

It would have been more severe, however, had airport officials not raised a raft of fees on passengers and air carriers. Those maneuvers, though they stabilized airport revenue, may be jeopardizing the airport’s long-term growth, analysts say.

Southwest Airlines, the dominant carrier in Rhode Island, has already protested the move. “In order to keep fares low, we have to keep costs low. Low fares increase traffic,” Southwest spokeswoman Paula Berg said. “Whether it’s going into a new airport or choosing where to grow, it’s something we have to look at.”

Airport officials say they will survive the turbulence, in part by conjuring new income through the terminal upgrade.

“It’s important,” Patti Goldstein, spokeswoman and vice president of air service marketing for the Rhode Island Airport Corporation, the agency that runs Green Airport, said. “The airlines look to the airports to be creative and look for other revenue sources.”

But Green’s fiscal challenges have coincided with a sluggish U.S. economy that offers little promise of increased air travel.

Last week, for example, several major carriers — including Southwest and Delta Airlines, the fourth-most active carrier at Green Airport — announced plans to reduce domestic service.

Although passenger traffic at Green rose in September and October, officials project an overall decline this fiscal year. Last month Goldstein said that she expected a total of 5 million passengers this year, a 4-percent slide.

That trend is the result of decisions made far from Rhode Island.

In January 2006, Independence Air stopped operating at Green. Next, American Airlines ended its service from Providence to Dallas and Chicago. In June, Southwest announced plans to cut one of six daily flights from Providence to Philadelphia, and one of two daily flights to Phoenix.

The impact of those cuts, as well as a shift toward smaller jets, has had a cascading effect on the finances of the state’s major airport.

Parking revenue is down $2.1 million. Revenue from concessions dropped $167,000.

Airport car-rental agencies are suffering, too, bringing declines in the daily customer-facility charge the airport adds to rental bills. That revenue dropped to $4.86 million in the last fiscal year, from $4.94 million the year before.

The cost of running airports, meanwhile, continues to grow. For the past seven years, the airport corporation has increased spending about $2.7 million per year, to $47.2 last year, from $28.5 million in 2000.

As Green attempts a turnaround, it will do so without its director, Mark P. Brewer, who is decamping this month for Manchester-Boston Regional Airport, a significantly smaller airport in New Hampshire that will pay him less than he makes in Rhode Island.

A replacement for Brewer, says Kathleen C. Hittner, chairwoman of the airport’s board of directors, must be “very interested in the challenge.”

Airport officials, however, are not panicking.

This month, the airport ended valet service at one of its parking garages, freeing 750 spaces for general use. That decision, coupled with the favorable terms of the contract with the new parking operator, Chicago-based Standard Parking Corp., will inject $3 million into airport revenue, according to Brian C. Schattle, the airport’s chief financial officer.

“Our revenues will go up this year,” he said.

Airport officials are also looking to the new shops and restaurants, scheduled to open next summer, as a powerful antidote.

The renovation was not cheap. Including upgrades to accommodate post-2001 security procedures, the airport is spending $83.5 million in borrowed money. It will begin paying debt service on those loans this year. (Last year, it paid $19.2 million in debt service. Payments for the transportation hub will begin when construction ends, in about three years.)

But the anticipated success of the new businesses — including Brooks Bros., Borders, Providence Oyster Bar and a restaurant to be run by chef Wolfgang Puck — is expected to compensate for the added debt service and other losses, airport officials say.

Green Airport shares revenue with the terminal businesses — operated by The Paradies Shops, an Atlanta-based company, and Maryland-based HMSHost Corp. — under a contract that guarantees the airport a portion of sales or a minimum rent payment, whichever is higher.

The new terminal will include two Starbucks cafes, including one on the lower level to serve “meeters and greeters,” Goldstein said. After the renovation, she said, annual revenue from the terminal concessions is expected to increase by $500,000 a year. (This year, as construction continues, revenue from airport businesses is projected to drop an additional $200,000.)

In September, the Fitch ratings agency affirmed the airport’s A bond rating. In its report, it praised the airport’s “strong financial margins” despite plunging passenger traffic.

“We do a very good job of managing our business,” Schattle said. “We are making very good decisions.”

Some of the methods the airport has used to stabilize revenue, however, may be undermining the long-term health of the facility and its important economic contributions to a state gripped by chronic budget deficits.

In July, for example, state tourism officials revolted when the airport announced a new fee on the shuttles that ferry visitors from the terminal to local hotels. The fee, $2 per trip, could result in higher room rates that would discourage visits, the officials argued.

Travelers to Rhode Island are already bearing a portion of the burden of the airport’s fiscal challenges and expansion.

The passenger-facility charge, incorporated into airline tickets, jumped to $4.50 last year, from $3, to make up for the slowdown in air traffic. The customer-facility charge, included in car-rental bills, rose to $4.25 from $3.75, its first increase since 2001.

Air carriers, too, are sharing the pain, a risky strategy that analysts say could ultimately limit expansion in Rhode Island and discourage potential newcomers.

“We have seen some pullback at some of the regional airports,” Bill Hochmuth, an airline analyst for Thrivent Investment Management, said. “There is unquestionably a concern of the airlines to reduce every cost possible. Any increase in cost coming from an airport is going to catch the attention of the airline.”

In the fiscal year that ended in June, airlines paid $61.07 per square foot to rent space in the Green Airport terminal, up from $59.08 in 2006 and $59.08 in 2005. The airlines signed off on that hike — an endorsement of the terminal-expansion project.

More significant, however, have been the dramatic increases in landing fees. In the last fiscal year, airlines paid $3.60 per 1,000 pounds of “landed weight,” up from $2.28 in 2005, a 58-percent jump in two years. The fee was as low as $1.84 in 2003.

Those increases have kept landing-fee revenue growing even as the runways accommodate fewer and smaller planes. Total landing-fee revenue reached $15.5 million in the last fiscal year, a $3.1-million jump from 2005.

Airport officials argue that the fees are small relative to the cost of personnel and the skyrocketing price of jet fuel. But those expenses, analysts say, are difficult to control, putting a larger focus on the airport charges.

“Airlines are very conscious of cutting costs in all areas and they definitely take that into consideration when they are considering a new market,” Jim Corridore, an airline analyst for Standard and Poor’s, said. “If there is a more competitive airport that makes more economic sense, they will take that into consideration.”

In Seattle and Los Angeles, airlines vigorously protested recently proposed fee hikes, arguing that the competitiveness of the industry makes it difficult to pass the costs along to customers, Corridore said.

In Rhode Island, Southwest is not pleased with the new cost of doing business.

That could be problematic. Keeping Southwest happy is essential to the health of Green Airport, where the airline accounts for half of all flights. In its September report, Fitch highlighted that reliance, calling it a “credit concern.”

The airline has celebrated the terminal improvements, but it regards the new landing fees as excessive. Every $1 rise in landing fees at Green Airport results in more than $1.5 million in annual spending by Southwest, according to Steve Sisneros, manager of properties for the Dallas-based company.

As a low-cost carrier, Sisneros said, Southwest’s profit margin was “narrow” before the fee hikes. “The landing fee is a big hit. It’s something that has been very challenging for us,” he said. “It’s a substantial charge that has raised our charge per passenger.

“When airport costs go up substantially, it could make the difference as to whether our operation at T.F. Green remains profitable,” Sisneros said. “It continues to add pressure on how Southwest Airlines will decide to add service.”

bgedan@projo.com