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CHAPTER 3 Understanding the Context for Air Service Development Air service development is not done in a vacuum. Before embarking on an ASD program, air- ports and communities must understand fundamentals of the U.S. commercial airline industry, the role of smaller communities within airline networks, and the business models of the carriers that serve those locations. The fundamental challenge to any commercial operation is to generate enough revenue while controlling costs in order to earn a return on investment. Commercial airlines earn revenue prin- cipally through passenger ticket sales. Passenger ticket revenue has to be sufficient not only to cover the direct costs of operating the route, but also to contribute to overall network profitabil- ity. From a passenger's perspective, the question is whether the airline provides the service needed (flights to where the person wants to go) at the times required, at an affordable price. Only when value, price, and costs align adequately can a market exist. Smaller communities present particular challenges to airlines. Passenger demand is limited by the amount of economic activity in the community. To better match the number of seats offered with passenger demand, airlines use smaller aircraft often in those markets. Smaller aircraft help carriers control their costs. However, there are fewer available seats to generate revenue. The difference of a few passengers can make one market profitable and cause another to consistently lose money. Communities argue that demand would be greater "if only the airline flew to [insert name here]" or used a "nicer" aircraft or charged less for their tickets. These views--while understandable-- reflect a common lack of understanding about the underlying economics that drive the industry. How do smaller communities connect to the national aviation system? For the most part, smaller cities in the United States are connected to the national aviation system by legacy network carriers' hub-and-spoke systems. These carriers transport passengers on nonstop flights from spoke cities into their hubs, and then redistribute them to connecting flights for their final destinations. The airports in the small spoke communities include the small- est airports in the nation's commercial air system. Depending on the size of those markets (i.e., the number of passengers flying nonstop between the hub and the spoke communities), the legacy airlines may operate their own large jets or use regional affiliate carriers to provide ser- vice, usually with regional jet or turboprop aircraft. Figure 3.1 illustrates the regional service provided by the hub-and-spoke system that Delta operates at Salt Lake City (SLC). This system allows, for example, a traveler to fly from Rapid City, South Dakota (RAP), to Medford, Oregon (MFR), with a single stop. SkyWest Airlines provides this service as a Delta Connection with 50-seat regional jets. Passengers in that market also have 31

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32 Passenger Air Service Development Techniques Figure 3.1. Spokes served from Delta's Salt Lake City hub. the option of flying with United Airlines, connecting over its Denver hub (DEN). United's Denver to Medford segment uses 70-seat regional jets. Hub-and-spoke These hub-and-spoke networks underscore the important role played by regional airlines in connecting smaller communities to the national aviation network. Regional airlines provide networks under- short- and medium-haul scheduled service connecting 635 U.S. communities with larger cities score the important and hub airports, using aircraft that range in size from 9 to 108 seats. Figures 3.2 and 3.3 illus- role that regional trate two such aircraft--one of Horizon's Q-400s at Kalispell, Montana, and one of SkyWest's Brasilia Embraer 120s at Bakersfield, California. airlines play in Almost all regional airline passengers travel on code-sharing regional affiliates. That is, the connecting smaller regional airlines fly on behalf of larger legacy network carriers rather than under their own name, communities to the such as SkyWest flying as a United Express or Delta Connection carrier. The network carrier national aviation determines the markets that these carriers operate in, along with the flight times and fares. The experience of Independence Air and ExpressJet operating not as legacy regional affiliates but system. under their own brand vividly demonstrates the financial and marketing difficulties that regional airlines face when trying to operate on their own. Independence Air lasted 18 months before fail- ing. ExpressJet's branded operations lasted only three months longer. ExpressJet returned to fly- ing as a regional affiliate only in September 2008.

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Understanding the Context for Air Service Development 33 Figure 3.2. Horizon Airlines serves Kalispell, Montana, with a Bombardier Q-400. Small Communities and Low-Cost Carriers LCCs such as Southwest, AirTran, Frontier, JetBlue, and Virgin America use a different busi- ness model, providing mostly point-to-point service. These carriers focus on business travel in denser markets, but tend to avoid using congested hubs, flying instead to and from secondary airports in or near major metropolitan areas. LCCs do not operate hubs per se, although they offer connecting opportunities for many passengers through "focus" airports like Baltimore/Washington International Thurgood Marshall, Hartsfield-Jackson Atlanta, or Dallas Love Field. Figure 3.3. SkyWest provides United Express service to Bakersfield, California, with an Embraer 120.