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CHAPTER 9 Making a Compelling Case to Airlines Communities and airports are often convinced that their region will "obviously" support new service. How they go about communicating that belief to airlines--which are naturally skeptical of any uncertainty--can substantially influence the carrier's decision to operate there. Having defined their goals, identified resources, involved stakeholders, selected ASD techniques, and built the business case, the task now is to communicate the results in a compelling manner. This chapter discusses some ways in which ASD teams can approach this near-final step. What should ASD teams and communities expect? Just as it takes time for a community to prepare its ASD analysis, it can also take a long time to successfully make the case to an airline. It can even be a multi-year effort. Communities and stakeholders need to understand that the airlines are making decisions about where and how to deploy assets worth millions of dollars. Their planning horizon is relatively long, and decisions to move assets involve complicated financial and operational assessments. Decisions to add or expand service are not made lightly or hastily. Airlines frequently revise their rankings of cities to add to (and often subtract from) their net- works. Airports have several opportunities throughout the year to present their cases to the air- lines. Besides meetings at airline headquarters, airports have the chance to make their case to the carriers at several industry events throughout the year. Presenting your case to the airlines is not a "one-shot deal." Moreover, presentations will differ depending on the nature of those meet- ings (e.g., industry conferences or headquarters meetings) and whether the target airline is an incumbent or new entrant. What information do other airports present to airlines? In the survey of airport officials, the study team found that most airports presented basically the same types of information to airlines. As illustrated in Figure 9.1, almost all airports surveyed reported that they presented a "business case" to targeted airlines. Small hub airports consis- tently tended to present more information than non-hub airports. What data and information do the airlines want to see? Virtually all U.S. airlines have O&D, departure, and enplanement data that are at least as detailed and timely as anything that an airport can provide to them. Thus, the airlines are less interested in this readily available data. What they really want to see is information that they do not usually collect or to which they do not have easy access. This could include items such as local 122

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Making a Compelling Case to Airlines 123 Business case to airlines Route analysis Projections or forecasts Demographic and Economic Data Research on Leakage Business Travel Information Other 0 20 40 60 80 100 Percent Small hubs Non hubs Total Figure 9.1. Information that airports present to carriers. economic and demographic data, details about local businesses and their travel habits, informa- Airlines want to tion about local civilian and military government facilities, and local tourist attractions that drive inbound leisure traffic. see information The survey asked airlines about what mattered to them when examining small markets for that they do not new or additional service. They identified their highest priorities from a flight-scheduling and usually collect or to route-planning perspective, as shown in Figure 9.2. which they do not High Low have easy access. Priority Priority Category of information 1 2 3 4 5 Economic & demographic data Actual or potential market demand Airport operating cost data Airport infrastructure (e.g., gates, runways) Slots or congestion Incentive programs Figure 9.2. The kinds of information carriers are interested in according to survey results.

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124 Passenger Air Service Development Techniques Local Economic and Demographic Information Airlines gather and analyze significant amounts of data, but they generally do not have in-depth demographic information on smaller markets. Some of the demographic data that the airlines usually want to see include specifics about changes in population, population density, average household income, and effective buying income. Business Activity The most important information about a community that most airlines want to see is the strength of local businesses together with their travel habits. Because business travel is the most desirable (i.e., profitable) component of the overall travel market for all of the legacy carriers and many of the LCCs, it is clear why this type of information is so valuable to them. Of course, there are exceptions to this concept as a few LCCs focus almost exclusively on leisure travel. The most important business information that a community can supply to the airlines includes the following: The names and descriptions of the community's largest and most prominent businesses Total employment at each of those businesses Inbound and outbound travel demand, especially to an airline's hubs and major cities Travel patterns of particular businesses/corporations The ratio between domestic and international travel in the aggregate as well as for individual businesses Information on existing corporate contracts and the willingness to enter into new contracts with the target airline Business feedback about the quality and desirability of current service The availability of financial support from the business community The existence of a business-backed airport support organization (such as an ASD task force) If the proposed new market is heavily oriented toward business travel, it is valuable to high- light the potential business travel patterns between both endpoints of the route. For example, a company that is headquartered near the ASD team's airport and has a large office or plant near the airport being targeted for nonstop service presents a compelling business synergy. Tourism Tourism information also can be useful to the extent that it details potential support from major tourism organizations. The most important tourism information that a community can supply to the airlines includes the following: The names and descriptions of the community's largest and most prominent hotels and resorts The number of rooms and the number of annual conventions at those hotels and resorts The names and descriptions of the community's largest and most prominent tourist attractions The inbound travel demand for those attractions, especially the ratio between domestic and international demand The names and descriptions of the community's largest and most prominent members of the local convention and visitors bureau The availability of financial support from the tourism industry For example, Hailey, Idaho, near the famous Sun Valley ski resorts, used a SCASDP grant to win service from Horizon Airlines to Los Angeles. After the grant expired, a local resort funded a min- imum revenue guarantee to Horizon. Horizon now offers the service without a grant guarantee. In addition, the grant helped convince Horizon to add another flight to a new destination-- Oakland, California.

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Making a Compelling Case to Airlines 125 Government and Military The government and military component of a local economy tends to have a relatively lower impact on most communities' travel demand than business and tourism components, but it gen- erally tends to be fairly steady in volume. The most important government and military infor- mation that a community can supply to the airlines includes the following: The names and descriptions of the community's largest civilian and military facilities The staffing levels at both types of facilities The growth plans at those facilities, including the impact of the government's military base realignment and consolidation process The government- and military-related corporate inbound travel The government and military outbound travel to other facilities and bases, especially to an air- line's hubs and major cities Some communities such as Norfolk (see Figure 9.3) can have a large number of military and government installations in their areas, which can contribute to substantial demand for air service. Actual or Potential Demand Airlines the study team spoke with were quite clear: the most important information concerns the actual or potential demand at a community. While these data are generally available to the Figure 9.3. Norfolk is surrounded by government and military installations.

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126 Passenger Air Service Development Techniques airlines, communities and airports need to present this type of data to a target airline in the most favorable way. Doing so will give a target airline a better understanding of the airport's overall service levels and indicate how a target market fits in with the airport's other service offerings. Four primary statistical areas should be covered: current service, current O&D market rankings, current onboard data, and passenger seasonality. Current Service These statistics will provide a target airline with (1) the number of airlines currently operat- ing at the airport; (2) the total number of destinations served, both domestic and international; (3) the number of flights offered by destination and by airline; and (4) the aircraft types flown in each market. Current O&D Market Rankings These market-specific statistics (see for example Figure 9.4) will provide a target airline with O&D rankings by route and by airline. The rankings can be based upon any number of items, such as airport name, airport code, passengers, passengers per day each way (PDEWs), revenues, average fares, and yields. Multi-quarter or multi-year trends for any of these items can also be shown. Current Onboard Data These operational statistics provide a target airline with data by route and by airline. The data can be sorted based upon any number of items, such as destination airport name, airport code, O&D Passengers Per Day Each Way 250 200 150 100 50 0 A X TL T A A N H A S X L W W N D E X S L CO W D R I BW SA FL ST JA LA LA CL O PH N TP SE LG SA IA R DE PV EW D DF DT A B O B M M Note: Data are for the 12 months ending March 2008. Figure 9.4. Example of top 25 O&D markets for Norfolk, Virginia.

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Making a Compelling Case to Airlines 127 passengers, departures, RPMs, ASMs, and load factor (see Figure 9.5). Multi-month, multi-quarter, or multi-year trends for any of these items can also be shown if important long-term trends can be established. Passenger Seasonality These statistics will provide a target airline with month-by-month variations in passenger totals. The information is useful in helping suggest any possible needs to change service levels in a target market during the year to reflect seasonal variations in passenger figures. This analysis can be performed using either onboard data or airport enplanement data. (See Figure 9.6.) Airport Costs Airport-related costs are one of the most important elements of a proposal for the airlines. Airlines need to know what costs they will incur at an airport in order to better match revenues to expenses. In addition to the absolute costs, your airport also needs to provide information on cost trends and benchmarks against competing airports. Target airlines usually want to understand the cost trends at your airport. These trends are influenced by many factors including national and even international events, as well as those fac- tors more specific to individual airports, such as passenger enplanements, concession income, other airport rental income, federal and state grants, and borrowing costs. It is also important that the target airline be aware of an airport's plans that would impact its cost levels, most likely to cover terminal and runway expansion, or both. At both current and projected airport cost Load factor 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% R A) W A) D ) ) VG L ) S ) ) K ) CO ) S A) TL ) ) U ) L ) A S) L ) T ) A ) S) RD L) ) W N) IA ) R ) ) ) LT ) A ) IA AA FW A C (AA JF WN BO (US M (CO A WN CO N R (US PI US D (US PH (DL O ST NW B (WN C WN SP L LG (DL JA (CO M W C (D O (D M (D O (A D (U (U DT (A TP (U LA (U M (W M I (W EW (C (N ( ( ( ( ( ( D H LE X W C D IA D Note: Data are for the 12 months ending March 2008. Figure 9.5. Example of load factors by market for Norfolk, Virginia.

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128 Passenger Air Service Development Techniques Passengers (000s) 400 Annual average 350 300 250 200 150 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Note: Data are from Norfolk, VA, for 2007. Figure 9.6. Example of airport passenger traffic seasonality. levels, a cost per enplaned passenger figure should be provided to the target airline, ideally with comparative figures for similarly situated airports. Airport Infrastructure An airline needs to be shown that the new service being proposed can be operated based on an airport's current infrastructure (e.g., runways, tarmacs, holding areas, jetways, gates) or improvements that are now planned or under way. The airlines the study team spoke with did not consider this to be a major priority, because it was largely considered a "given" that small communities would have adequate available runways and gates. However, information on any planned or potential construction would be important to convey to a target airline. Availability To begin service in a targeted market, an airline must know what facilities will be available on an immediate basis (i.e., prior to and at the inauguration of service), and, to the extent that changes to the available facilities are contemplated, on a near-term (perhaps three to six months) and medium-/long-term basis (beyond three to six months). Communicating facility availabil- ity to a target airline is critical because aircraft allocation, staffing, advertising, and financing of the operation must be planned and must occur at specific intervals to ensure the successful start of the new route. Construction Plans If airport infrastructure improvements are planned or under way, the target airline must be aware of those activities so it can understand the likely impact of those activities on its potential new service. The issues to be discussed with the airline include (1) the timing and location of the

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Making a Compelling Case to Airlines 129 improvements; (2) the impact of the improvements on the target airline's operations; (3) over- all funding availability; (4) the target airline's contributions to the improvements; and (5) total other carrier contributions. Airport Slots If the airport is proposing new service into a slot-controlled airport, it should recognize that the targeted airline will face an additional complication beyond the normal route forecasting issues. For every flight added at such an airport, another one must be removed, thus making the route's forecast financial results much more critical--an airline will not replace a more profitable flight with one that is less so. Fortunately, there are only a few slot-controlled airports in this country, and with the exception of the New York City area, they are located in regions that have other major non-controlled airports nearby that could meet a small community's service needs almost, if not equally, as well. Incentives Incentives or fee waivers have become an accepted fact of life for airports of all sizes trying to attract new service. For example, an airport may waive landing fees and terminal rental fees for the first year of service to defray start-up costs. Clearly, the type of service being sought and the size of the airport will directly affect the amount of waivers that target airlines will want to receive. These waivers are usually offered during an airline's first year of service in a target market, and they pro- vide help to offset some of the financial risk that the airline assumes while the market grows. The airport should include as part of its presentation a discussion of the incentive program or the greater ASD effort and whether the service being sought would qualify. Detailed Route Forecast The route forecast is a critically important part of any proposal that will be presented to a tar- get airline. It represents the culmination of the analysis that the ASD team has completed. It is an airport's best estimate of how successful the new service will be. It essentially tells the airline how the new service could be operated, how it would compare to similar services by that or another airline, what the operational and financial assumptions and results would be, and whether it would be a meaningful contributor to an airline's bottom line. Thus, the final major component of building a realistic and compelling case to present to the airlines requires ASD teams to prepare the detailed route forecast. There are eight critical ele- ments of that forecast: the proposed schedule, the aircraft type, a comparison to similar new mar- kets, operating assumptions, financial assumptions, forecast operating results, forecast financial results, and a financial sensitivity analysis. Proposed Schedule To illustrate the community's desired departure and arrival times and indicate a basic under- standing of the target airline's operations, the route forecast should include proposed times of each flight in the target market (in both directions), as well as any potential connections at a hub airport, if appropriate. Figure 9.7, for example, illustrates the potential connections--with departing times--of a flight from Baton Rouge Metropolitan Airport (BTR) to Denver International Airport (DEN). Aircraft Type This part of the route forecast should include the aircraft type, the seating capacity, and the seating configuration (classes of service) of the aircraft projected to operate in the target market.

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130 Passenger Air Service Development Techniques Flight Origin Destination Depart Arrive 9901 BTR DEN 600 745 9003 BTR DEN 1430 1615 9002 DEN BTR 1035 1400 9004 DEN BTR 1900 2225 PDX 0825 SEA 0825 SFO 0825 SNA 0825 ABQ 0830 BOI 0830 GEG 0830 LAS 0830 BTR DEN LAX 0830 PHX 0830 SJC 0830 SMF 0830 ELP 0835 0600 0745 TUS 0835 SAN 0845 SLC 0845 Figure 9.7. Potential connections for new service. This level of detail indicates to the target airline that the community has researched the appro- priate capacity/frequency mix for the target market and understands the airline's operating phi- losophy in markets with similar traffic and operational characteristics. Comparison to Similar New Markets This part of the route forecast should include a comparison of the proposed route to similar routes flown by the target airline to strengthen the case for the target market. This route com- parison would show the frequency of service offered, the aircraft type flown in each market, the destinations served from each market, and the load factors achieved in each market for the rel- evant time period to emphasize the strength of the proposed service. In essence, a community would be asking the target airline to apply the same fundamental operating formula to the proposed market that it uses in similar communities. The theory is that it is usually easier to convince an airline to replicate the type of service that it has in place in similar markets than it is to successfully argue that a new operating formula should be devised. Operating Assumptions This part of the route forecast should include multiple critical operating assumptions so that the airline understands the basis for the ASD team's estimates and can better compare those assumptions with those it makes internally. These assumptions should include the following: The base year for O&D traffic The forecast year for O&D traffic (reflecting the first year of operations in the target market) Projected market growth rates Any "stimulation rates" (reflecting growth beyond normal rates due to the start of new or additional service and/or the introduction of lower fares, in the target market) Any adjustment to account for traffic in international markets carried on foreign carriers that is not reported to the U.S.DOT The projected departure completion factor--that is, the percentage of all departures that the ASD team projects that the airline will complete during the year

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Making a Compelling Case to Airlines 131 Financial Assumptions As with the operating assumptions, this part of the route forecast should describe the critical financial assumptions made so that the airline understands the basis for the ASD team's estimates and can better compare those assumptions with those it makes internally. These financial assumptions include the following: The base year for fares The forecast year for fares (reflecting the first year of operations in the target market) Any fare adjustment factors (such as a fare premium for a market's first nonstop service or a fare reduction to reflect the introduction of new LCC service in the market) The source of the data (e.g., U.S.DOT's Form 41 database) and base year for direct and indi- rect costs Any cost adjustment factors (such as revisions to one or more cost elements--such as fuel or salaries--to account for known or expected cost changes since the base year) Forecast Operating Results This part of the route forecast shows the projected summary operating results for the target market. Key elements include the following: Local and connecting passengers Departures flown Revenue passenger miles (RPMs) and available seat miles (ASMs) Projected load factor (percentage of seats filled) Target airline's route market share Traffic diversion off of existing flights or services, if any Forecast Financial Results This part of the route forecast shows the projected summary operating results for the target market. Key elements include the following: Daily and annual passenger and freight/cargo revenues Daily and annual direct and indirect expenses Daily and annual operating profit Projected yield (passenger revenue per RPM) Passenger revenue per ASM (RASM) Cost (total operating expense) per ASM (CASM) Breakeven load factor (percentage of seats required to be filled for passenger revenues to equal operating expenses) Contributory beyond revenues, that is, revenues associated with additional passengers carried on connecting market sectors as a result of new service in the target market Financial Sensitivity Analysis The final part of the route forecast should include the impact of potential changes in the forecast RASM and/or CASM on the airline's forecast operating margin in the target market, if the actual operating and financial results should differ from the forecast. For example, as shown in Table 9.1, the "base case" assumption is that a carrier's CASM will be 13.85 cents, and it will earn an average yield of 20.39 cents, producing an estimated operating margin of 11.0 percent. The sensitivity analysis shows that if the CASM rose 5 percent to 14.54 cents and the yield did not change, the estimated operating margin would fall to 6.6 percent. If CASM was 14.54 cents and yield fell 5 percent to 19.47 cents, the operating margin would drop to an estimated 1.9 percent.