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Selecting Appropriate Techniques for Air Service Development 107 2. Travel banks or ticket trusts also help new entrants over- come other market barriers to entry, such as incumbent Redmond, Oregon's travel bank carriers' price cutting and the effect of the incumbent's loyalty (i.e., frequent flyer) programs. Redmond and Bend lie in the heart of central Oregon, the fastest-growing area in the state. Risks or Disadvantages of Travel Banks It is also an important vacation spot in the Pacific 1. Travel banks require a significant amount of local effort to Northwest. The area offers a wealth of natural organize and implement. For travel banks to be effective, beauty and recreational activities, along with more they require a motivated business community, as well than 300 days of sunshine per year. The primary as grassroots organization, planning, and coordination. airport for this region is Roberts FieldRedmond Putting together a travel bank requires a commitment of an Municipal Airport (RDM). airport staff's resources and time (or that of a consultant) In recent years, RDM had enjoyed healthy year- to meet with community business leaders and convince over-year increases in traffic, but the catalyst for them to commit to travel with the carrier during the period. propelling RDM's growth was the start of nonstop Depending on how the travel bank is structured, those service between Redmond and Salt Lake City by contributions may or may not be refundable if the travel Delta Connection (SkyWest Airlines) in 2005. does not actually occur. Businesses and the traveling public responded 2. Airline acceptance of travel banks is not uniform. Accord- positively to the new service, and passenger ing to a report on small community air service from enplanements soared. GAO, most--but not all--airline officials were unfavor- ably disposed toward travel banks, citing the difficulty RDM used a travel bank to convince Delta to in administering them and their poor track record of commence the service. Local businesses, economic success (14). development agencies, and tourism agencies 3. Beginning in 2005, U.S.DOT announced that it would deposited $629,000 in committed funds into the not support travel banks for SCASDP grants. travel bank, with a minimum deposit of $2,000. Travel bank participants then had 12 months to use their funds or the airline retained the money. What cost-related ASD techniques Within three months of Delta's beginning service are available? on the Redmond to Salt Lake City route, the Cost-related ASD techniques are intended to eliminate or 120 participants had used 70 percent of the travel offset some of the start-up costs that carriers experience when bank's funds. they begin new service or enhance existing levels of service The travel bank proved successful because the ASD (perhaps by adding service to a new hub). Taken as a whole, team was able to secure the business community's the cost to begin service in a new market can be substantial. commitment early in the process. This commitment In 2003, Meadows Field (Bakersfield, California) Airport provided immediate passenger demand on the new estimated that the equipment costs alone (e.g., electronics, service, which helped mitigate Delta's financial telephones and data, furniture fixtures and equipment, etc.) exposure and uncertainty. In the end, Delta's service associated with station start-up costs for new Continental was so successful that the airport had to return the service there approached $500,000. $500,000 SCASDP grant, which was never tapped. The success of that program helped RDM attract Cost Subsidies (Including Start-up Costs) nonstop service to Los Angeles, Las Vegas, and Subsidies are a broad category of financial incentives that Phoenix. generally offset some aspect of an airline's costs of operation. Economics or business textbooks define a subsidy generally as an economic benefit (such as a tax allowance) or financial aid (such as a cash grant) provided by a government to support a desirable activity (such as exports or, in this case, air service to small communities). The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Subsidies can include waivers of fees or discounted landing (or other fees) during a promo- tional period. Cash subsidies are paid without regard to the amount of revenue that a carrier may
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108 Passenger Air Service Development Techniques generate during the agreed-upon period. Subsidies are generally a fixed amount, often with no con- nection to the eventual profitability of the route. Depending on how they are structured, subsidies may require no obligation on the part of the airline to use the funds to promote the new local serv- ice. Technically, the Essential Air Service program provides a "revenue subsidy" that is designed, in part, to assure the operating carrier of a set minimum-percentage operating margin. Examples of different types of subsidies include the following: · Fee waivers (e.g., landing fees, terminal rents, gates, jet bridges). These are very common and may include waivers of landing fees and terminal rents for six months. Waivers may be for all fees or costs, or some fraction thereof. Waivers can vary depending on the size of aircraft. Charles M. Schulz Sonoma County Airport waived terminal rents and landing fees for 12 months for Horizon Air. The airport valued that waiver at just under $100,000. · Ground station costs. Airports can cover ground station costs for airlines as well, relieving them of the need to take on those costs themselves. For carriers proposing a relatively small number of operations, this can be a significant source of cost savings. (See sidebar.) Ground station costs at Mobile, Alabama Prior to leaving the Mobile Regional Airport (MOB) would pay a three-part charge to cover the pro- market after September 11, 2001, United Express not gram's costs. This charge includes a per-passenger only ground handled its own flights to Chicago fee, a per-departure fee, and rental fees mainly O'Hare and Washington Dulles, but also those of US for the use of ticket counters, gate areas, and Airways Express to Charlotte Douglas International baggage carousels. MOB used a $450,000 SCASDP Airport. Once United announced that it would leave grant to purchase equipment, hire and train Mobile, US Airways faced a quandary--it would be staff, and set up a management system for the losing its MOB ground handler but did not want (or program. could not afford) to provide the service itself. To MOB can tie Station Services into its incentives pro- avoid losing its US Airways flights in addition to the gram by waiving a portion (or all) of the fees for a United service, MOB decided to enter the ground- period of time not to exceed one year, with the handling business. amount and duration of the waiver determined by the MOB developed the Station Services program to pro- level of new services being offered. vide complete ground-handling services to any carrier, US Airways has used the Station Services program current or new, that would rather not do such work continuously since its inception at the end of 2001 for itself. In addition to covering flights by a new carrier at its three daily RJ flights from MOB to Charlotte MOB and new flights by a current MOB carrier, this Douglas. In addition, when American Eagle began program allowed simply taking over a current carrier's service to MOB from its Dallas/Fort Worth hub in MOB ground-handling operation. The program was 2005 (replacing service that had been discontinued offered to all of the carriers that served MOB at that by Delta earlier that year), it decided to use the pro- time--Continental Airlines, Delta Air Lines, Northwest gram as well. American Eagle continued to use the Airlines and US Airways--but only the latter carrier program even as it expanded its MOB service to accepted the offer. include nonstop flights to its Chicago O'Hare hub in MOB developed a program that would cover all 2007. In March 2008, American Eagle decided to ground-handling functions at the airport--ticket operate, equip, and staff its station and discontinue counter, baggage claim, gate and ramp services. use of the Station Services program, because, with MOB would own, operate, and staff the carrier's five daily nonstop flights, its level of operation entire station operation, and in return the carrier allowed economics of scale to be realized.
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Selecting Appropriate Techniques for Air Service Development 109 · Fuel into plane costs. Some airports reported subsidizing fuel costs for new entrant carriers during a limited start-up period, up to a maximum dollar amount. · Staff training. Staff training costs can be significant especially for new markets during the start-up phase. Carriers often require new employees hired locally to undergo a significant amount of training in company policies and procedures. The cost of this training--includ- ing staff time, materials, meals, and lodging--can run in excess of $100,000 depending on the number of staff to be trained. · Crew lodging. New service often means that at least one crew member will spend the night in the community. Several airports surveyed had worked with local stakeholders to arrange discounted lodging for crew members. Advantages of Fee Waivers 1. Waivers have a direct measurable effect on a carrier's bottom line. Start-up costs can be signif- icant (upwards of $200,000), so anything that lessens those costs contributes to shifting some of the market entry risks off the carrier. 2. Waivers are easy to administer. They can be handled largely through the airport's finance or administrative office, which would be responsible for tracking operations and enplanements anyway. 3. Waivers that involve off-airport stakeholders can help unify the community in supporting air service development. Risks or Disadvantages of Fee Waivers 1. Cost waivers by themselves will not differentiate an airport from any other airport seeking a carrier's attention. Most airlines regard some level of cost subsidy as a requirement for enter- ing a market. Providing cost waivers is a necessary aspect of attracting new service but is only one part of an incentive package. 2. Crew lodging-cost offsets require an airport to work with off-airport stakeholders, which intro- duces factors outside the airport's control. Hotels may be able to offer some significant discounts (most major chains do), but this inevitably introduces incremental administrative burden. Marketing and Advertising Smaller communities' airports usually face significant challenges in marketing their services to the populations in their catchment area and marketing their catchment area to inbound trav- elers and airlines. If those efforts are less than completely successful, travelers in the airports' catchment area may fly from other airports in the vicinity. When that happens, the airlines dis- cover that they can serve those same travelers without actually operating at the small airport. Most airlines do not advertise in small, local markets. Rather, they limit their efforts to major mar- kets (e.g., Chicago, San Francisco, New York, Washington) and their hubs, and to promoting the brand nationally (one hears George Gershwin's "Rhapsody in Blue" and thinks of United Airlines). Marketing is the most common form of incentive used in ASD. It is designed to build awareness for a new service and to develop demand to the point that the service can become self-sustaining. The ASD marketing incentive is most commonly advertising and promotion conducted by the airport/community on behalf of the airline's new service (for either an outbound or inbound market). Less commonly, an airport/community will provide funding to the airline to offset mar- keting costs; network airlines seldom do "destination marketing," focusing instead on the brand. Marketing programs may or may not require a carrier match. [Note: A separate ACRP study on marketing small communities' air service (ACRP Project 01-04) is currently in progress.] Marketing can cover any medium--TV, radio, print (newspapers and magazines), bill- boards, Internet, or direct mailing. To market its Delta Connection service to Atlanta, the LawtonFort Sill (Oklahoma) Regional Airport hired a professional advertising firm to help
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110 Passenger Air Service Development Techniques Walla Walla's experience with non-hub flying Walla Walla Regional Airport (ALW) in southeast in Figure 8.a, passenger loads were unexpectedly Washington serves a catchment area of approxi- low. Once the federal funds ran out, the carrier ter- mately 58,000 people. The closest competing airport minated the service. is Tri-Cities Airport in Pasco, Washington, 52 miles to Airport officials reported that the experience left the northwest. them somewhat disillusioned, and they were reluc- Walla Walla has long been served by Horizon Air, tant to seek service by another carrier. ALW officials with multiple daily flights to Seattle. In 2006, ALW felt taken advantage of by Big Sky, which exhausted used a $250,000 SCASDP grant to support Big Sky the SCASDP funds and then left, creating the impres- Airlines' efforts to commence nonstop service to sion that it had not been committed to the service Boise using 19-seat turboprop aircraft. The federal from the start. In contrast, Horizon has served the funds were used to pay for landing fees, pilot wages, community for a number of years, and that commit- fuel, and hotel costs. Unfortunately, the twice-daily ment is rewarded by the local community. service proved to be commercially unviable. As shown Departures Load Factor 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 6 7 6 6 6 7 06 6 06 6 6 07 7 5 06 06 6 07 -0 -0 -0 -0 -0 -0 -0 -0 l-0 -0 -0 -0 n- b- n- p- n- b- ay ay pr pr ug ov ar ar ec ct ec Ju Ju Ja Fe Se Ja Fe O M M A A M M D D N A Departures Performed Load Factor Figure 8.a. Big Sky Airlines' service from Walla Walla to Boise lasted little more than one year.
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Selecting Appropriate Techniques for Air Service Development 111 Source: LawtonFort Sill Regional Airport Figure 8.1. Marketing example from LawtonFort Sill Regional Airport. with a marketing campaign that it used on billboards near the airport, TV, radio, the local news- paper, and the airport website. On the day service was inaugurated, the airport hosted a party that was attended by local media, various VIPs, and Delta officials. Figure 8.1 shows one of the marketing advertisements used at Lawton to promote its new service to Atlanta. Advantages of Marketing 1. Marketing is always a good way to create awareness among the traveling public about new service. 2. Involving local advertising or marketing firms, along with the local media, as part of the ASD team or task force helps ensure some publicity for the airport's successes. Those firms also may Internet marketing at Fargo Hector International Airport (FAR) serves the could vote for which destination they would like to FargoMoorhead area of North Dakota and see added at the airport. Even though the carrier Minnesota. It has long been dominated by Northwest would make the ultimate decision, the website Airlines, which has multiple frequencies to its became a useful tool for the Airport Authority to MinneapolisSt. Paul hub. The airport has service from keep the community interested in the final selected Northwest, United Airlines, Allegiant Air, and Frontier destination. FAR representatives staged an event Airlines. where they opened up a sealed box and revealed The airport gained service by Allegiant Air in 2005 that the new destination would be PhoenixMesa. and prides itself on being a contender for expanded Two people received free roundtrip tickets as a result services by the carrier. In July 2007, Allegiant of their participation. Allegiant has since added ser- announced that it would open up new bases in Fort vice to Orlando Sanford International Airport. LauderdaleHollywood (Florida) International This marketing tool generated additional information Airport and PhoenixMesa (Arizona) Gateway on the potential market prior to a route launch, was Airport. FAR representatives worked closely with the low budget and creative, and produced results. The airline to generate interest in the community about direct link between the targeted audience and the new potential service to both of these locations. commencement of sales on the new route bene- To help get the message out to the community about fited both the airport and airline. Both also used potential new service, FAR created a website, www. the event to create an e-mail list of targeted passen- AllegiantAirFAR.com, where community members gers for the route for future communication.
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112 Passenger Air Service Development Techniques be willing to provide services at costs well below standard commercial rates. In-kind contri- butions can be very valuable. Small communities could leverage the marketing and public rela- tions expertise resident in some of their other key stakeholder organizations, such as the local chamber of commerce, economic development agency, or tourism board. 3. Internet-based marketing may allow the airport or carrier to build a mailing list of people who are interested in the services at the airport based on their visits to the airport's website. Burlington (Vermont) International Airport, for example, actively marketed its services to potential French-speaking passengers in southern Quebec. The airport engaged a local pro- fessional marketing firm to put together a campaign that ran in Quebecois newspapers and on Canadian radio stations. Internet ads in French were also created. Figure 8.2 shows one such ad; a partial translation of the copy into English follows: "Our rank is high. Our fares? LOW. Much lower prices on fares compared to Canada. For more information or to book a flight, go to flyBTV.com." In 2004, the Huntsville, Alabama's "Lower Fares" campaign directed passengers to its fly- huntsville.com website. Hits on the site increased by 417 percent. A SCASDP grant later sup- ported the "Huntsville Hot Ticket" program. Passengers sign up for a fare alert program. That program sends e-mail alerts to customers when fare specials are announced. From the airport's web site, they can then view the fares and book tickets directly. Customers can also participate in an airport frequent flyer program that offers incentives for passengers based on number of trips. Risks or Disadvantages of Marketing 1. Effective marketing and media campaigns require specialized knowledge that most small air- ports do not have in-house. Marketing is a complex topic with multiple dimensions (e.g., branding, packaging, and timing), particularly where services such as air travel are concerned. Airports may need to undertake specific types of marketing activities to create, maintain, or Source: Burlington International Airport Figure 8.2. Internet marketing ad from Burlington International Airport focused on attracting French-speaking Canadians.
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Selecting Appropriate Techniques for Air Service Development 113 alter the attitudes and/or behavior of target audiences. Developing the media campaign, determining what and where the target audience is, and ensuring the campaign reaches the target audience are all challenging tasks. 2. Because many smaller airports do not have in-house staff with all the necessary skills, resources, and capabilities to conduct effective marketing campaigns, they usually need to contract this out. Media campaigns can be costly. 3. The effects of marketing can be difficult for many communities to quantify with precision. What should be measured? What are the best metrics to use? (See Chapter 10 on evaluating ASD efforts.) Non-Financial (in-Kind) Assistance A community's major stakeholders--especially any involved with the ASD program--may be in a position to contribute various types of non-financial or in-kind assistance. In-kind assistance refers to products, goods, or services that otherwise might have to be paid for, but which can be donated by third-party providers instead. In the case of new air service, various types of in-kind assistance can represent a significant value for the carrier and can contribute toward creating and/or sustaining demand. Perhaps the most common form of in-kind assistance is publicity provided by local media. This publicity can include billboards and coverage in the local newspaper. If a carrier or airport had to pay for these at full market value, the cost could be quite significant. The value to the carrier can be much more than just the cost of the advertising if it helps create or sustain demand. Another valuable non-financial tool is reliable market information, which also can be used to reduce carriers' risks. Airline planners tend to know less about small communities than larger ones, so the amount of incentive they require to operate there has to be larger to offset the uncertainty. By funding detailed professional research and providing airlines with the type of comprehensive market analysis they require, airport operators can drastically reduce an airline's risk of making an uninformed decision and potentially a multi-million-dollar mistake. The U.S.DOT Inspector General's report on small community air service makes the same point (11). Advantages of in-Kind Assistance As noted above, involving local stakeholders--whether marketing, advertising, media, or other firms--as part of the ASD team or task force helps broaden the community's involvement and improve the odds of the service's success. Small communities could leverage the marketing and public relations expertise resident in some of their other key stakeholder organizations, such as the local chamber of commerce, economic development agency, or tourism board. Local resorts or hoteliers may also be willing to accommodate crew at a discount above and beyond those normally made available. Risks or Disadvantages of in-Kind Assistance In-kind assistance has very little in the way of risks and disadvantages, although airports need to be aware that they may surrender some of their control over advertising placement and content. Getting Help from ASD Consultants Consultants on air service development can prove to be extremely valuable for smaller airports that lack their own in-house ASD staff. Using the types of data discussed in Chapter 5, consultants can provide significant amounts of information on the industry to the airport manager, the ASD team, the airport board, and other local stakeholders. They can analyze changes in the local market over time and match that with developments in the industry. They can suggest strategies. ASD consultants also can prepare information and presentations for the airport to take to meetings