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OCR for page 105
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
