Cover Image

Not for Sale

View/Hide Left Panel
Click for next page ( 116

The National Academies of Sciences, Engineering, and Medicine
500 Fifth St. N.W. | Washington, D.C. 20001

Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement

Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 115
Selecting Appropriate Techniques for Air Service Development 117 Clearly, FAA policies and actions on airport incentive programs are topics that could fill their own guidebook. The study team cannot claim to offer unambiguous legal guidance on the topic. Questions should be directed to the FAA's Airports Compliance Division or an aviation attorney. Which techniques should the airport use? There is no easy answer to the question of which technique(s) a particular airport should use in approaching ASD. As this guidebook has attempted to illustrate, there are numerous factors that the community should weigh in making this decision. The two remaining factors to be dis- cussed are the preferences of the air carrier(s) the community is targeting and what has worked in similar communities. Every air carrier has certain preferences regarding incentives. That is information that the community (or its consultant) needs to understand when considering meeting with an air carrier. At an air service conference in 2008, an official from American Eagle offered one way to look at the range of incentives. As shown in Figure 8.3, his award-themed hierarchy built on the most basic, fundamental types of incentive offers: fee or cost waivers (a "bronze medal"). The value of the incentive rose to a "platinum medal" for a revenue guarantee. The different levels also reflect the amount of risk that the community is willing to share. Techniques Used by Other Airports Each of the ASD techniques discussed has been used by one or more of the airports surveyed. As shown in Figure 8.4, the most commonly used ASD techniques are marketing techniques, used in an effort to promote new air service to the community and to address problems with pas- senger leakage to other airports. Most airports also provide direct subsidies to reduce carriers' costs. Most also have hired ASD consultants to provide some analytic and presentation support. About half of the airports surveyed used minimum revenue guarantees. Interestingly, more non- hub airports than small hub airports used MRGs. This situation likely reflects those communities' recognition that they need to share in the carriers' financial risk of serving smaller markets. Conditions Where Minimum Revenue Guarantees Might Be Effective Evaluations of revenue guarantees have been cautiously positive. The U.S.DOT Inspector General noted that, of all types of incentives reviewed, revenue guarantees tended to be the most success- ful (11). The Inspector General also pointed out that revenue guarantees were much more success- ful when applied to the introduction of new service rather than the expansion of existing service. More Revenue Guarantees Platinum Risk Gold Ground and customer service Sharing Silver Start-up costs Bronze Fee / cost waivers, marketing funds Less Figure 8.3. Differing levels of incentives reflect different levels of risk sharing.

OCR for page 115
118 Passenger Air Service Development Techniques Revenue guarantees Guaranteed ticket purchase Direct subsidies Marketing Assistance -- No Carrier Match Marketing Assistance -- Carrier Match Hired consulting firm Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Non hubs Small hubs Total Figure 8.4. ASD techniques used by small airports. Industry officials believe that revenue guarantees can be used more effectively to target service from a true new entrant into a market rather than supporting new service from an incumbent (e.g., service to a new hub to improve directional passenger flow). Recall that the amount of funds needed to support a revenue guarantee has increased significantly over time. It is not uncommon now for airports to offer $1 million in guarantees, depending on the airline, aircraft type, frequency, and destination (stage length) at issue. Conditions Where Guaranteed Ticket Purchase Programs Might Be Effective The primary goal of the travel bank is to overcome certain barriers to entry and reduce the time it takes for a new entrant carrier into a market to break even. The key barriers to entry in small markets are usually marketing related. Key barriers include name/service/brand awareness and the established frequent flyer base that incumbent carriers have. Incumbents also may have purchase agreements in place with major local employers. Because the travel bank contract with individual businesses usually includes a "use it or lose it" provision, early use of travel bank funds (i.e., ticket sales) is promoted. A consultant with experience in travel banks noted that 80 percent of travel bank funds are typically used in the first three months of service. For travel banks to succeed, the local economy must be solid or the community will be focused on more pressing issues. In addition, because travel banks are a businessairline proposition, the business community needs to have a sense of urgency about air service. If the business community is well organized and has that sense of urgency, it can create a travel bank. Organizing the travel bank also requires a local "champion." Travel banks have typically been organized by chambers of commerce or economic development councils, but they still need strong individual leadership

OCR for page 115
Selecting Appropriate Techniques for Air Service Development 119 to make them work well. Getting businesses and individuals to put their money behind an airline is a tricky task. Conditions Where Cost or Fee Waivers Might Be Appropriate Cost waivers are always appropriate when trying to attract service from a new entrant or to introduce service that would require local passengers to change established travel patterns. As noted previously, airlines consider subsidies to be prerequisites for new entry into any markets where the profitability of a service is uncertain. This is a simple matter of risk-sharing between the airline and the community. Airports and communities must be ready to offer cost waivers of 6 to 12 months to offset the carrier's risk. Subsidies may also be considered appropriate in cases such as inbound charter operations, in which a local tourism development agency may wish to subsidize a loss-making air service, knowing that the subsidy amount will be made up for with additional tourist spending. Conditions Where Marketing and Advertising Might Be Appropriate In its analysis of the SCASDP, the U.S.DOT Inspector General noted that airlines operating in small communities typically have limited resources to invest in marketing designed to stimulate demand. The Inspector General reported that using funds for marketing programs in support of other programs like revenue guarantees or cost subsidies can stimulate demand by increasing awareness and reversing leakage. Using ASD funds for marketing without other efforts may not be as effective. That is difficult to say with certainty, however. Huntsville (Alabama) International Airport and community believe that enplanements and revenue increase each time they undertake a new media effort. Huntsville has relied extensively on various marketing campaigns over the years to combat traffic leakage to Birmingham, Alabama, and Nashville, Tennessee. All three cities are located on the same interstate highway, which provides easy access for Huntsville passengers to drive to alternative airports. Huntsville is located approximately 100 miles north of Birmingham and 120 miles south of Nashville. Huntsville devoted $100,000 to its "Rocket City to Motor City" campaign announcing new service to Detroit on Northwest Airlink in 2002, $50,000 to announce new nonstop service to New York on US Airways in 2003, and $100,000 to support its "Say Hello to Lower Fares" campaign. Conditions Where Consultants Might Be Appropriate Almost without exception, the air carriers surveyed as part of this study agreed: smaller com- munity airports should retain a knowledgeable ASD consultant. The well-known air service consulting firms in the United States all have staff with airport and airline experience. They under- stand how airlines make decisions in markets; they are familiar with the information that airlines want to see; they have contacts at most if not all of the airlines that serve smaller communities; and they have experience in analyzing markets realistically. These firms also have conducted leak- age surveys, and they've worked with community stakeholder groups. They speak the language of air service development on a daily basis. Another option is to engage ASD consultants for only certain aspects of an ASD effort, such as completing leakage studies or route traffic and profitability forecasts. Using consulting firms is almost always appropriate if airports do not have the data and analytic expertise available in-house. For most smaller communities, that is usually the case. Techniques Peer Airports Have Used Tables 8.1 and 8.2 indicate what percentage of the 41 airports that participated in the project survey applied various ASD techniques. Table 8.1 shows what percentage of airports applied the ASD technique to the major underlying competitive problems that the airports identified. Table 8.2

OCR for page 115
120 Passenger Air Service Development Techniques Table 8.1. Percentage of respondents who used ASD techniques to address their air service problems. Revenue Travel Cost In-kind Hired Guarantee Bank Subsidy Contributions Consultant Identified Air Service Problems (%) (%) (%) (%) (%) Fares too high 61 14 71 46 71 Lack of an LCC 56 17 72 28 72 Service unreliable 67 17 56 44 50 Top destinations not served with 50 17 67 28 72 nonstop flights Circuitous flights 89 11 78 44 56 Difficult connections at hubs 80 13 80 53 67 Service not with mainline (i.e., 63 25 88 50 50 large) aircraft Service not with RJ 86 29 71 36 57 Inadequate capacity 65 29 82 41 65 Other 59 18 47 35 53 Total respondents = 41 shows what percentage of airports applied the ASD technique in an effort to advance their highest priority ASD goals. Basic "marketing and advertising" were excluded as one of the ASD techniques, because virtually every airport applied some form of marketing and advertising--TV, radio, print, promotions, billboards, and/or Internet. For example, Table 8.1 shows that, of the airports that regarded inadequate capacity to be one of their key air service problems, 29 percent used a travel bank to try to attract new service. Similarly, Table 8.2 shows that, of the airports that regarded service to a new hub as one of its top priorities, 13 percent used a travel bank. As noted with each of the ASD techniques described previously, there are numerous examples of airports that achieved their objectives of retaining their existing service, lowering pricing, increasing frequencies, or adding service to a new hub or location. For example, LawtonFort Sill Regional Airport is an example of an airport that has successfully implemented a revenue guar- antee to support service to a new hub. Obviously, just because a technique might have worked at one location--for example, Redmond, Oregon's successful use of travel banks or Daytona Beach's success with revenue guarantees-- does not ensure that it would work at any given airport. Each airport's situation is different. Fundamental economic conditions have certainly changed now compared to when these airports planned and implemented their ASD efforts. Further, just because an airport was successful with one ASD technique does not necessarily mean that the airport would not have achieved the same result with a different technique. Table 8.2. Percentage of respondents who used ASD techniques to advance their air service goals. Revenue Travel Cost In-kind Hired Highest Priority Guarantee Bank Subsidy Contributions Consultant ASD Goals* (%) (%) (%) (%) (%) Retain existing service 59 18 68 45 64 Lower pricing 58 17 58 42 75 Improve reliability** 50 17 17 0 50 Need to upgrade service** 0 50 50 50 50 Add frequencies 46 15 62 46 69 Add service to a new hub 80 13 80 53 73 *Goals limited to those identified by airports as being their first or second priority. **Fewer than 10 airports identified these goals as among their first or second priority.