Effects of Airline Industry Changes on Small- and Non-Hub Airports (2015)

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73 C H A P T E R 5 5.1 Selection Process The research team used a data-driven approach to develop the list of case study airports. Spe- cifically, using the data on changes in air service at small- and non-hub airports (see Chapter 3), the research team identified small- and non-hub airports that both gained and lost scheduled service during the research period, which covered the 2001–2012 period. The research team looked at variables such as the percent change in available seats, flights, and number of air carri- ers. Using the literature review of incentives as a point of departure, the research team evaluated the most successful and least successful airports in retaining or attracting service for evidence of the use of innovative incentive programs. This allowed the team to follow best practices in case study research by identifying both unique and representative case sites (Yin 2003). In response to ACRP Project Panel comments, the research team also considered geographical diversity and the presence of Allegiant Air when developing the list of case study airports. The research team also included consideration of statewide programs designed to provide incentives for air service development at multiple airports. 5.2 Case Study Airports Based on the described selection process, the researchers developed the following list of case study airports: • Small-hub airports – Burlington International Airport (BTV)—Vermont – Akron-Canton Airport (CAK)—Ohio – Northwest Florida Beaches International Airport (ECP)—Florida – Phoenix-Mesa Gateway Airport (AZA)—Arizona – Bozeman Yellowstone International Airport (BZN)—Montana – Hector International Airport-Fargo (FAR)—North Dakota • Non-hub airports – Toledo Express Airport (TOL)—Ohio – Redding Municipal Airport (RDD)—California – Augusta Regional Airport (AGS)—Georgia – Charles Schulz-Sonoma County Airport (STS)—California – Monterey Peninsula Airport (MRY)—California – Asheville Regional Airport (AVL)—North Carolina • Statewide programs – Kansas Affordable Airfares Program (Wichita-ICT) Case Studies

74 Effects of Airline Industry Changes on Small- and Non-Hub Airports The case study airports have the following characteristics: • Service changes from 2001 to 2012 – 7 with increased traffic – 6 with decreased traffic • Geographical distribution – 1 Northeast – 3 Southeast – 2 Midwest – 3 West – 1 Southwest – 2 Central – 1 Mountain West • Allegiant Service – 7 with Allegiant Service – 6 without Allegiant Service The selected airports are shown in Exhibit 5-1, with indicators for 2012 hub status and the change in seats from 2001 to 2012. Five of the 13 case study sites received additional review. For these five sites, the research team also used a focus group method. In this report, discussions of sites are broken into case study sites and focus group sites. Case study sites (i.e., sites that were not explored through the use of focus groups) are presented in the rest of this chapter. These case study sites are as follows: Burlington International Airport (BTV), Akron-Canton Airport (CAK), ECP, AZA, BZN, AGS, MRY, and ICT. Focus group sites—Toledo Express Airport (TOL), Charles M. Schulz— Sonoma (STS), Redding Municipal Airport (RDD), Hector International Airport (FAR), and Asheville Regional Airport (AVL)—are presented in Chapter 6. 5.3 Case Study Data Collection Process The research team used various data sources to compile the ASD case studies. The researchers conducted and transcribed a series of interviews with airport managers to gain insights into their ASD efforts. Four interviews were conducted in-person and eleven interviews were Exhibit 5-1. Case study airports.

Case Studies 75 Opening Questions 1. Could you please give a brief descripon and history of the level of air service at your airport? a. How has the level of service changed in recent years? b. How has the shi from mainline to regional carriers and smaller regional jets affected the level of air service at your airport? c. What have you idenfied as the main factors that have led to the increase or decrease in service at the airport? Location 2. What is your proximity to other, larger airports and do your fares and level of service compare to those other airports? 3. What strategies have you employed to keep both fare prices and leakage rates low at your airport? Federal/State Funding 4. Has your airport applied for or received a DOT SCASD Grant? a. If no, what are some of the reasons you have not applied for the grant? b. If yes, did you find the grant to be helpful in trying to a‡ract or retain service at your airport? Were the reporng requirements for the grants overbearing or restricve? 5. Do you receive state grants/funds, markeng grants/funds, or community grants/funds, and how do you allocate this money? Airport Revenue Incentives 6. What types of financial incenves does your airport offer using “on-airport” revenue? (i.e., block hour guarantees, reduced operaonal costs, waived landing fees, or reduced moving costs) a. Do you find the FAA’s AIP grant assurances to be burdensome in how you can structure your incenve programs? b. How much revenue do you allocateto either/both your financial incenve program or markeng program, and how do these costs weigh in to your airport’s overall budget? c. Are your airport’s incenves aimed at incumbent carriers, new carriers, or carriers preparing to cease their services with your airport? 7. In your conversaons with carriers, what incenves have they idenfied as most a‡racve? a. Were you able to offer these incenves to try to retain or a‡ract air service? 8. What mediums do you use to proliferate your airport’s adversements and services or surveys? 9. In what ways have you specifically marketed toward/retained your frequent flyer or business clientele? 10. How has ridership been affected by your specific incenve program (or absence of an incenve program)? Have you been able to increase your market share relave to other airports in the area? informaon, i.e.,: TV, radio, internet – Facebook/Twi‡er, newsle‡ers, blogs, Exhibit 5-2. Sample interview protocol. (continued on next page) conducted via telephone. Each interview was recorded using the Notability App for iPad and transcribed to ensure that the statements given by participants were accurately captured. Interviews were conducted in a semi-structured fashion. Interviewers used the same set of questions for each interview (Exhibit 5-2), but did not necessarily ask each question during the interview because questions were often answered naturally during the conversation. Each interviewee was assured that confidentiality would be maintained, so each interview has been de-identified.

76 Effects of Airline Industry Changes on Small- and Non-Hub Airports To ensure the accuracy and validity of the interviews, the research team triangulated the data contained in the interviews with several other sources of data including Small Community Air Service Development (SCASD) grant applications, FAA enplanement data, news accounts of air service changes at airports from LexisNexis, publicly available consultant reports, and public documents that outline agreements between airports and air carriers. The triangulation of the data helped to provide a rich historical examination of ASD efforts at each airport. An attempt was made to solicit a review of each case from the manager of the airport described in the case. The research team allowed airport managers to make factual (but not editorial) changes to the case write-ups. The demographic and firm data were derived using a mapping system from Research 360, Decision Data Resources. Research 360 uses several sources of federal, state, and academic eco- nomic and demographic information to populate its database. The research team used a 25-mile radius around the airport to keep a consistent format as opposed to using actual documented catchment areas that would vary in size from airport to airport. The changes in flights and seats from 2001 to 2013 were derived from OAG data from October of each of the years. OAG includes scheduled flights of U.S. and foreign air carriers. The enplanements and air carrier departures come from BTS Air Carrier Summary Data (T3: U.S. Air Carrier Airport Activity Statistics) and include T-100 traffic data reported by U.S. air carri- ers. Enplanements reflect revenue passengers enplaned and departures reflect revenue aircraft departures performed. Both enplanements and departures include scheduled service only. The key data for each airport are presented below, along with a description of the airport’s air service development history. d. How did the group instuonalize the effort? What resources did they commit to the retenon or aracon effort? e. What were the advantages or disadvantages of using a community-based incenve program compared to an airport revenue incenve structure? f. How did the group aempt to gain buy-in from the larger community to ensure the sustainability of the service? 13. How has ridership been affected by your specific incenve program (or absence of an incenve program)? Have you been able to increase your market share relave to other airports in the area? Requests for More Information 14. Would you be willing to put us in contact with local economic development, state or local officials, or private-sector firms who you have worked with in developing incenve programs? Community-Based Incentive Programs 11. Could you provide some basic informaon on the major economic enes in the community? 12. Has your airport explored working with local economic development agencies, governments, chambers of commerce, or the private sector to offer incenves such as revenue guarantees or travel banks? a. If no, what have been the barriers to iniang such efforts? b. If yes, how did this effort begin? What was the catalyst for exploring “off airport” incenve programs? c. What were the challenges associated with developing the community based incenve program? Exhibit 5-2. (Continued).

Case Studies 77 5.4 Burlington International Airport (BTV) Key Attributes Hub Designation: Small hub Airport Governance: City Department % Change in Seats (2001–2013): -23% % Change in Flights (2001–2013): -34% Enplanements (2013): 603,786 (-1.5% from 2012) Air Carrier Departures (2013): 11,242 Competing Airports: Boston Logan (BOS), Manchester (MHT), Albany (ALB) Allegiant Airport: Yes SCASD Grant Recipient: Yes (2012) Tourism or Business Destination: Tourism Major Employers (25 mile radius): Simmonds Precision Products, IBM, Georgia Pacific LLC and Vermont State Colleges Population: 90,477 (2013 estimate) Population % change (2000–2013): +9.2% Median Household Income: $58,618 Incentives Offered: Revenue Guarantees (SCASD), Marketing, Waived Landing Fees and Terminal Rents BTV Route Map (as of July 1, 2014) Red-Delta, Blue-United, Navy-US Airways, Yellow-Allegiant, Cyan-Porter, Green-JetBlue

78 Effects of Airline Industry Changes on Small- and Non-Hub Airports 5.4.1 About BTV Burlington International Airport (BTV) is a small-hub airport in Chittenden County, Vermont, and owned by the City of Burlington. Serving the Northern New York, Northern New Hampshire, and Greater Burlington areas, BTV has a core market population of 302,000 residents. BTV’s primary catchment area serves approximately 50% of Vermont’s population (BTV 2012). BTV has non-stop service to nine destinations on six carriers: Delta (Atlanta and Detroit), US Airways (Washington DC-DCA, Philadelphia, and New York-LGA), JetBlue (New York-JFK), United (Cleveland, Chicago-ORD, Washington DC-IAD, and New York-EWR), Allegiant (Orlando- SFB), and Porter (Toronto). Historically, the airport has faced competition and leakage to three larger airports within a 215-mile radius: Albany (ALB—150 miles southwest), Manchester (MHT—175 miles south- east), and Boston (BOS—215 miles southeast). Drawing not only on its strengths as a gateway to Vermont’s prospering Greater Burlington area (an area supporting over one-third of the state’s employment), Burlington International Airport also benefits as a gateway to Vermont’s four-season tourism industry. BTV attracts students from the University of Vermont and SUNY College at Plattsburgh; avid skiers and snowboarders looking to enjoy winter resorts such as Smuggler’s Notch, Stowe Mountain, and Sugarbush; and Canadian tourists (mainly from Montreal). 5.4.2 Looking Beyond Borders and Catering to Existing Markets to Reverse Downward Trends The period from 2000 to 2008 was marked by significant growth and upward momentum for Burlington International Airport. The period was marked by a 53% increase in the number of available seats and a 62% increase in passenger enplanements to a high of 759,000 in 2008. In an effort to secure the growth at BTV, airport officials applied for (but did not receive) a SCASD grant from the U.S. DOT in 2007. BTV’s 2007 SCASD Grant Application requested $500,000 for a comprehensive advertising campaign to attract new service and promote awareness of the airport. With regard to new service, BTV aimed to attract non-stop service to one of their top O&D markets, predominantly served by an LCC. To promote awareness of the airport, BTV offi- cials focused on marketing to a broader catchment area, with great emphasis placed on attracting Canadian passengers from across the border. In 2007, BTV estimated that 20% of its travelers originated from Quebec Province; therefore, seeking additional service attractive to Canadian residents was a cornerstone of BTV’s 2007 SCASD Grant Application. The Canadian population of interest to BTV resides in Montreal, which is Canada’s third largest metropolitan area. Only 108 miles from Burlington, this proximity to an expansive Canadian market makes BTV unique as a small airport. With no prior “formal marketing” directed across the border, BTV proposed an “aggressive informa- tion and awareness campaign” to lure new Canadian air travelers. This proposed campaign would initiate multilingual outreach to eight community newspapers within Montreal, such as La Tribune and Le Regional, and the four main radio stations within Montreal, such as CFGE and CITE. Despite BTV’s growth and prime tourist location, 2008’s end saw a substantial decline in both passenger enplanements (-14%), and available seats (-20%) at BTV—a decline that would per- sist through 2012. This decline was blamed in part on the economic recession, high jet fuel costs, and leakage to nearby hubs. BTV was losing (and continues to lose) travelers within its catchment area to three larger airports: Albany, Manchester, and Boston-Logan.

Case Studies 79 To combat these downward trends from 2008 through 2012, BTV officials have focused on building rapport the “old fashioned way”—by being on the ground in the local community and by sustaining positive relationships with incumbent airlines. BTV has an active relation- ship with the local Rotary Clubs, regularly attending meetings—even in Stowe, which is 45 minutes from Burlington. BTV officials also regularly meet with local business groups such as IBM and Nationwide, updating them about what’s happening at the airport and the value of BTV for business travelers. Also, BTV is in constant contact with the Lake Champlain Regional Chamber of Commerce and the Greater Burlington Industrial Corporation (GBIC), a non-profit economic development agency. Finally, officials at BTV noted that they find it is increasingly important to cater to the needs of their incumbent airlines, including US Airways and Delta. In an example of BTV’s catering to incumbent airlines, BTV officials applied for and received a $450,000 SCASD program grant from DOT in June 2012 to attract an existing carrier to begin new non-stop service. BTV’s goals for the SCASD grant included creating better access to either Atlanta or Charlotte and connecting markets in the Southeast via Delta or US Airways, reversing declining passenger traffic, reducing their higher than average airfares, and reduc- ing their dependence on congested airports in the Northeast Metropolitan area (BTV 2012). BTV’s SCASD grant application proposed short-term (12–18 month) revenue guarantees, a new service marketing campaign, and landing fee waivers. The $450,000 grant would be supplemented with $45,000 in marketing support from the State of Vermont and another $50,000 in marketing funds from the airport. Using this package of incentives and repeated personal meetings with Delta’s chief of planning, BTV was able to obtain non-stop service to Atlanta in June 2013 (BTV 2012). On February 19, 2014, BTV’s Aviation Director and Allegiant Air representative, Micah Lillard, celebrated Allegiant Air’s inaugural flight to Orlando Sanford International Airport (SFB), which also marked the first time Allegiant Air has serviced BTV. 5.5 Akron-Canton Airport (CAK) Key Attributes Hub Designation: Small hub Airport Governance: Airport Authority % Change in Seats (2001–2013): +50% % Change in Flights (2001–2013): -5% Enplanements (2013): 847,281 (-6.4% from 2012) Air Carrier Departures (2013): 12,218 Competing Airports: Cleveland Hopkins (CLE), Youngstown (YNG), Pittsburgh International (PIT) Allegiant Airport: No SCASD Grant Recipient: Yes (2002) Tourism or Business Destination: Business Major Employers (25 mile radius): Timken, University of Akron, and Goodyear Corporation Population: 1,103,576 (2013 estimate) Population % change (2000–2013): +0.3% Median Household Income: $47,032 Incentives Offered: Marketing, Waiver of Landing Fees, Revenue Guarantee (SCASD)

80 Effects of Airline Industry Changes on Small- and Non-Hub Airports 5.5.1 About CAK Akron-Canton Airport (CAK) in North Canton, Ohio, is a small-hub airport in northeastern Ohio that serves as an alternative airport to Cleveland Hopkins International Airport (CLE) in the Cleveland metropolitan area. CAK is in a highly competitive market served by not only CLE (55 miles to the northwest), but also Pittsburgh International Airport (110 miles southeast) and Youngstown-Warren Regional Airport (65 miles to the east). The airport is served by four airlines (i.e., Southwest, US Airways, United, and Delta) and has non-stop service to 13 destinations. 5.5.2 Airport-Centric Marketing and Branding Pays Off Prior to 1997, CAK had the reputation in the region of an airport whose flights were too expensive and whose planes were too small. The airport was served by four carriers, but only had service to four destinations. In 1996, the airport hired a marketing director to help generate community support to attract a little-known low-cost carrier to CAK, AirTran Airways. AirTran was looking for proof from CAK that the community could sustain service to Orlando. In 1996, AirTran took the risk and started service from CAK to Orlando. Also, another LCC, ValuJet, began service from CAK to Atlanta in April of 1997. After AirTran and ValuJet merged, they continued to operate their flights to Atlanta and Orlando under the AirTran name. While the airport was successful in attracting these LCCs, increasing air service would require the airport to develop a unique brand and to market the airport to the Greater Cleveland region. Initially, CAK focused on affecting the dominant air ticket distribution system at the time, travel agencies. The airport launched an incentive program called Check CAK First, where the airport would give away $200 per month to travel agents who checked for a flight from CAK. These initial efforts paid off—AirTran’s load factors on its ATL flight were at 86% in the first month (compared to a 39% systemwide load factor). However, as the travel agency model began to wane in the late 1990s and early 2000s, CAK had to evolve its strategy. CAK Route Map (as of July 1, 2014) Blue-Delta Airlines, Red-US Airways, Purple-Southwest Airlines, Black-United Airlines

Case Studies 81 Due to the initial success of AirTran, Delta began offering service to Atlanta at CAK in 2001. Officials at CAK began to realize that to maintain this new service, they would need to market the airport not only to the 1.1 million people in the CAK region, but also to the 4.2 million peo- ple in the Cleveland metropolitan area. CAK decided to market itself as the low-cost, no-hassle alternative to CLE. Working closely with AirTran and other carriers using various media outlets including billboards, newspapers, and radio, the airport reached out to the region. Focusing on Price + Experience = A Better Way to Go®, CAK was able to differentiate itself from the dominant hub in the region. Also, the marketing team touted the terminal’s compact layout with cheaper parking, shorter lines through security, and quicker access to gates that was difficult to match at the much larger and busier terminal at CLE. The marketing effort was largely implemented by airport staff and not local economic development or business organizations. In 2002, CAK officials partnered with AirTran to pursue a SCASD program grant from the DOT to offer marketing assistance and a revenue guarantee for new service. Initially, AirTran wanted to offer service from CAK to its Baltimore-Washington International (BWI) hub. How- ever, AirTran decided to take a risk and offer service to LaGuardia (LGA) to serve business passengers traveling from CLE and CAK who were paying over $1,000 for a round-trip ticket to LGA. DOT awarded CAK a $950,000 grant to pursue the LGA service. AirTran decided to ini- tially offer $49-each-way fares to LGA. CAK spent $350,000 of the grant priming the market for the LGA service through print, radio, and television advertisements. Again, much of this market- ing was done by airport staff and their creative agency, rather than local economic development or business officials. The LGA service was so successful that the DOT allowed CAK to work with AirTran on service to Boston on the same grant. From the SCASD grant, CAK received non-stop service to LGA and BOS and returned $230,000 in unused revenue guarantees to DOT. CAK officials decided to use their success with AirTran to attract westbound service with another LCC. In 2006, Frontier Airlines began twice-daily service to Denver (DEN). The airport also expanded its Florida flights by partnering with AirTran to market new service to Fort Myers (RSW). In 2009, the airport expanded options for business travelers by adding daily service from CAK to Ronald Reagan National Airport in Washington DC (DCA) on US Airways. AirTran expanded its network from CAK in 2010 by offering direct service to Milwaukee (MKE). In May 2011, Southwest Airlines announced that it was purchasing AirTran Airways for $1.4 billion. In late 2011, Southwest announced that it would fly AirTran-operated flights to DEN. However, the merger of the two LCCs left many analysts wondering if Southwest Airlines would make CAK part of its route structure, given the airport’s size (smaller than a typical Southwest destination) and its proximity to a larger airport (Cleveland) that it already served. In 2012, CAK became solidified in the Southwest route structure when the airline announced that it would add twice-daily service to Chicago Midway (MDW) (although the carrier announced that it would drop the service to MKE) (Mutzabaugh 2012). Since 2012, the airport’s ASD efforts have focused on promoting existing service and prepping the market for the conversion from AirTran, which had significant brand recognition and loyalty in northeast Ohio, to Southwest Airlines. The marketing campaign was viewed as particularly impor- tant because Southwest Airlines does not advertise its fares on aggregate travel sites commonly used by travelers. The airport applied for a second SCASD grant in 2011 for $350,000 to “help CAK customers fall in love with Southwest Airlines” (CAK 2011). While the grant application was unsuccessful, the airport continued its efforts to market Southwest Airlines to the region with the assistance of local business groups including the Canton Regional and Greater Akron Chambers of Commerce, the Stark Development Board, and the Akron/Summit and Canton/Stark Conven- tion and Visitor’s Bureaus. Although the Akron-Canton Airport Authority has traditionally not partnered with the local business community on ASD efforts, the scope and grassroots nature of the outreach for the Southwest conversion necessitated significant outreach. The local convention and visitors’ bureaus see benefits from growing the route map of Southwest to bring more visitors to the region while saving residents of the region over $1 billion in air fares since 1997 (CAK 2014).

82 Effects of Airline Industry Changes on Small- and Non-Hub Airports The result of the partnership between the airport and the business community is the #LUVCAK campaign (LUV is Southwest’s airline stock ticker code while CAK is the FAA airport identifier for the airport). The purpose of the campaign is to build brand loyalty for Southwest and remind trav- elers to check Southwest.com when booking travel. Southwest Airlines donated sixty $100 LUV vouchers and four round-trip tickets to be awarded to selected travelers who enroll in their Rapid Rewards loyalty program. The #LUVCAK campaign was advertised on both traditional (e.g., radio and television) and social (e.g., Twitter, Facebook, and web) media in northeast Ohio. 5.6 Northwest Florida Beaches International Airport (ECP) Key Attributes Hub Designation: Small hub Airport Governance: Special Airport District % Change in Seats (2010–2013): 58% % Change in Flights (2010–2013): -40% Enplanements (2013): 391,271 (-7.4% from 2012) Air Carrier Departures (2013): 4,757 Competing Airports: Tallahassee (TLH), Pensacola (PNS), and Northwest Florida Regional Airport (VPS) Allegiant Airport: No SCASD Grant Recipient: No Tourism or Business Destination: Tourism Major Employers (25 mile radius): U.S. Dept. of the Navy, St. Joe Company, and Ingersoll-Rand Company Population: 179,997 (2013 estimate) Population % change (2000–2013): +15.1% Median Household Income: $46,407 Incentives Offered: Revenue Guarantee (Private Company), Waiver of Landing Fees, Marketing (Airport and Community) ECP Route Map (as of July 1, 2014) Orange=Southwest Airlines, Red=Delta Air Lines

Case Studies 83 5.6.1 About ECP Northwest Florida Beaches International Airport (ECP) is a small-hub commercial airport in Panama City, Florida. The airport opened for commercial service on May 23, 2010, making it the first international airport to open in the United States following the September 11, 2001, attacks. The airport replaced the Panama City-Bay County International Airport (PFN), which lacked the land necessary to expand runways or terminal facilities. ECP is owned and operated by the Panama City-Bay County Airport and Industrial District (the Airport Authority), which consists of seven members appointed by the Panama City Commission, the Bay County Commission, the Panama City Beach Commission, and the Walton County Commission. Currently, ECP has non-stop service to five destinations and is served by two carriers: South- west Airlines (HOU, STL, BWI, and BNA) and Delta Air Lines (ATL). In 2013, the airport recorded over 408,000 enplanements, down from about 439,000 enplanements in 2012 (a 7% decrease). However, these enplanement figures are much larger than enplanements at PFN, which were consistently between 150,000 and 200,000 from 2000 to 2008 (ECP 2012). While traffic was up on Delta Air Lines (+4% over 2012), enplanements on Southwest Airlines fell by 15% between 2012 and 2013 (ECP 2013). The airport handles about 25% of air passenger traffic in the Florida panhandle (which is served by Pensacola-PNS, Northwest Florida Regional-VPS, and Tallahassee-TLH, in addition to ECP) compared to about 9% prior to the opening of the new airport (St. Joe Company 2012). 5.6.2 Donating an Airport and a Revenue Guarantee —St. Joe Company and Air Service Development at ECP In 2002, the St. Joe Company (St. Joe), a private land developer with a portfolio of over 700,000 acres, donated 4,000 acres to the Panama City-Bay County Airport and Industrial Dis- trict to develop a new airport to replace PFN (Pittman 2002). St. Joe owned 71,000 acres of land adjacent to the 4,000-acre site for the new airport and hoped that the introduction of low-cost air service to the region would make the region more accessible to a broader market and signifi- cantly enhance the value of the adjacent lands, as well as other St. Joe properties in Northwest Florida (St. Joe Company 2009). Although the new airport itself might have been able to spur more demand to fly from ECP, there were limited flight options at the new airport. St. Joe Company knew that in order for its investment to succeed, it would need to work with the airport authority and local business leaders to develop an incentive plan to attract a new carrier to the region. In October 2009, St. Joe Company entered into a Strategic Alliance Agreement for Air Service with Southwest Air- lines to provide two flights per day to four different destinations in the Southwest network upon the opening of the new ECP airport. In exchange, St. Joe Company agreed to make quarterly pay- ments to Southwest to cover revenue shortfalls during the first 3 years of service (up to $26 million over the first 3 years). St. Joe had the option of ending the agreement if it paid out $14 million in the first year or over $12 million in the second year while Southwest could end the agreement if its revenues were below thresholds established in the contract. Also, if Southwest received a payment from St. Joe Company during the 3-year period, it was obligated to share its profits on the routes in subsequent years with St. Joe (St. Joe Company 2009). In addition to the monetary guarantees in the agreement, Southwest agreed to not commence new air service at any airport within 80 miles of ECP, which includes Northwest Florida Regional Airport (VPS). Southwest also agreed to pay a 10% penalty on its revenue guarantee from St. Joe if it started service at an airport between 80 and 120 miles from ECP, which includes both Pensacola (PNS) and Tallahassee (TLH). Finally, Southwest’s participation was conditioned on receiving all available incentives (e.g., deferred landing fees and terminal rent relief) from the airport author- ity as well as the establishment of an agreement with the Panama City Beach Convention and Visitors Bureau (CVB) and the Beaches of South Walton Tourist Development Council (TDC)

84 Effects of Airline Industry Changes on Small- and Non-Hub Airports to establish a collaborative marketing plan for the new service. One ECP official noted that while the airport authority was peripherally involved in marketing Southwest service, it was critical to have the local CVBs involved in marketing the Panama City region in the Southwest destinations. As the official remarked, “The airport does not stimulate travel, the community has to stimulate travel.” To fund the marketing effort for Southwest, the Bay County Commission enacted a 1% hotel bed tax to fund marketing for LCCs through the Bay County TDC, which contracts with the Panama City Beach CVB. In exchange for the marketing agreement, Southwest agreed to operate two flights a day to four destinations for the first 3 years. In May 2010, Southwest began service at ECP by offering twice-daily service to Nashville (BNA), Orlando (MCO), Houston Hobby (HOU), and BWI. The inception of Southwest service in May 2010 led to record enplanements at ECP for 2010 (325,000), 2011 (411,000), and 2012 (439,000). The service was so successful that in July 2012 both Southwest and St. Joe announced that they were ending their agreement a year early due to the fact that St. Joe had not “paid a dime to Southwest.” Because St. Joe had not made a payment to the carrier, Southwest was exempted from profit- sharing requirements with St. Joe on future routes from ECP. Officials from Southwest and St. Joe supported the agreement because it helped bring people to the Panama City region and reduced airfares for residents (Mason 2012). Shortly following the end of the agreement with St. Joe, Southwest announced that it was end- ing its service to Orlando while adding a seasonal flight to St. Louis. However, Southwest still had an agreement with the CVBs for marketing of the service—the cessation of the Orlando service resulted in a renegotiation of the agreement with the air carrier. The amended agreement dedi- cated half of the 1% hotel bed tax to Southwest, down from the full 1% that had been allocated. In the months following the ending of the St. Joe agreement, ECP officials have focused their efforts on keeping cost per enplanement (CPE) costs low to attract a new carrier to the region. How- ever, officials noted that because of the seasonality of the Panama City region coupled with the relatively small population of the area, it will be difficult to attract a new carrier without business involvement in an incentive package. Officials at ECP noted that at this time, there have been no discussions with St. Joe regarding another revenue guarantee for a carrier. 5.7 Phoenix-Mesa Gateway Airport (AZA) Key Attributes Hub designation: Small Hub Airport Governance: Airport Authority % Change in seats (2001–2013): N/A % Change in flights (2001–2013): N/A Enplanements (2013): 679,588 (-2.0% from 2012) Air Carrier Departures (2013): 4,670 Competing Airports: Phoenix Sky Harbor (PHX) Allegiant Airport: Yes SCASD Grant Recipient: No Tourism or business destination: Tourism and Business Major employers within a 25-mile radius of airport: Arizona State University, General Dynamics, and Agilent Technologies Population: 488,661 (2013 estimate) Population % change (2000–2013): 26.8% Median household income: $52,969 Incentives offered: Waived landing fees, Marketing (Airport and Community), Reduced fuel rates

Case Studies 85 5.7.1 About AZA Phoenix-Mesa Gateway Airport (AZA) is a small-hub airport in the southeastern area of Mesa, Arizona, and is currently functioning as a reliever airport for Phoenix Sky Harbor International Airport (PHX). Rather uniquely, AZA has its beginnings not as an airport, but as Williams Air Force Base (WAFB)—the U.S. Air Force’s foremost pilot training facility from 1942 to 1993. During that time, WAFB graduated more than 26,500 men and women and supplied 25% of the Air Force’s pilots annually1. Closed in 1993 due to high operational costs, WAFB re-opened as the Williams Gateway Airport in 1994, with regular scheduled service commencing in October, 2007, via Allegiant Airlines. The Phoenix-Mesa Gateway Airport Authority—the owners and operators of AZA— applied for but did not receive a $500,000 SCASD grant from the DOT in 2009 to obtain east- bound service to a major hub such as Dallas-Ft. Worth (DFW) so as to provide air service to an underserved catchment area of about 563,000 travelers in the East Valley Phoenix Area, and 2.6 million travelers in the greater Mesa area. However, given that AZA is only 28 miles from the tenth largest airport in the country, Phoenix Sky Harbor International Airport (PHX), AZA has struggled to obtain service in addition to Allegiant Airlines while within the shadow of Sky Harbor. 5.7.2 Push and Pull Factors at AZA—a “Blank Canvas” Within the Shadow of Sky Harbor—and AZA’s Rallying for Service Given its history as an Air Force base, AZA was largely a blank canvas, ready to be converted to use as a commercial airport in 1994. AZA had three 10,000 foot runways, 3,020 acres of AZA Route Map (as of July 1, 2014) Blue-Allegiant 1AZA Website: http://www.phxmesagateway.org/AboutGateway.aspx

86 Effects of Airline Industry Changes on Small- and Non-Hub Airports space, easy access to the Loop 202 and US 60 freeways, and a “true market” catchment area of about 2.6 million travelers. AZA is now within a rapidly growing area known as East Valley, a segment of the Phoenix-Mesa metropolitan area that saw 25% growth from 2001 to 2010 (Phoenix-Mesa Gateway Airport 2009). East Valley has long been known as a vibrant economic and tourism center, with major corporate employers such as Boeing and Banner Health, and a recent opening of an Apple manufacturing plant, as well as 15 million tourists for spas and golf courses in 2007 alone. According to the U.S. Census Bureau, Mesa has swelled to a population of 439,041 people in 2010, making it the 38th largest city in the United States, larger than cities such as Pittsburgh, Miami, and Cleveland (US Census Bureau 2010). With 20 million square feet of office and industrial space within the City of Mesa, there is room to grow (Phoenix-Mesa Gateway Airport 2009). Yet, despite these factors pulling “in-bound” traffic to AZA—about 70% in bound and 30% out bound at Allegiant’s initiation in 2007—AZA has had a difficult time obtaining additional out-bound service, and especially service to a major eastbound hub. This difficulty in obtain- ing service and traffic out of AZA was due both to a lack of community knowledge and airlines’ potential assumed risk of setting up an operation at AZA, which is only 28 miles from Phoenix Sky Harbor International. In 2005, AZA officials conducted a community survey to gauge interest in commercial air service out of AZA; with only 648 responses, it was clear to AZA officials that the community did not know that Phoenix-Mesa Gateway Airport wanted to be a commercial airport. Thus, AZA officials developed a marketing campaign, “We Need You,” to create awareness about AZA’s potential as a commercial airport, and asked Mesa area residents where they would like to travel; with 13,500 responses, AZA determined Mesa residents wanted essentially the same service that Sky Harbor offered—service to Los Angeles, Las Vegas, San Diego, Chicago and Denver. Furthermore, airlines were hesitant to initiate regular scheduled service out of AZA due to its proximity to Sky Harbor. Prior to Allegiant, three different airlines attempted chartered service out of AZA: Vision Airlines, Sky Value, and Western. Each was unsuccessful, so AZA officials turned to Allegiant and used the consulting partner Mead and Hunt to engage in route proposals and analytics for AZA service. As an LCC targeting leisure travelers, Allegiant pros- pered from October 2007 onward at Phoenix-Mesa Gateway Airport. AZA officials “incentiv- ized” Allegiant to grow, offering waived landing fees, waived terminal rents, reduced jet fuel rates for 12-months, and a 24-month discount on the same rates and charges for every new city Allegiant added. Yet, by 2009, AZA did not have service to any of their top 25 origin-destination markets, and AZA officials recognized that Allegiant was not offering what Mesa residents still needed: service to a con- necting hub. Therefore, in 2009 AZA officials applied for a $500,000 SCASD grant from the DOT for a revenue guarantee to establish eastbound service to a major network carrier hub. The airport and its community partners pledged $238,000 in in-kind and cash contributions for marketing assistance, reduced landing fees, fuel flowage fees, and terminal rents. AZA’s plan was to approach American Airlines for Dallas/Ft. Worth service first, followed by United Airlines (Denver), Conti- nental (Houston), Delta Air Lines (Salt Lake City), and Frontier Airlines (Denver). Airport officials and community leaders said the new route to DFW on American Airlines would generate earnings of $4.5 million annually after the first year (Phoenix-Mesa Gateway Airport 2009). Phoenix-Mesa Gateway International Airport was not awarded this SCASD grant, however, and AZA officials believe that they were not awarded a grant due to their proximity to Sky Harbor. Spirit and Frontier did enter AZA’s market shortly thereafter in 2011, but due to intense competition between the two airlines, consolidation, and operational challenges, both airlines left the airport.

Case Studies 87 Despite this seemingly bleak outlook for air service at AZA, and challenges encountered due to AZA’s proximity to Sky Harbor, AZA saw enplanements increase from 521,437 in 2011 to 744,685 in 2012—a 43% increase.2 Much of this growth could be attributed to Mesa’s burgeon- ing economic and tourist environment, with the opening of an Apple manufacturing plant and potential for 1,400 jobs, the future opening of Grand Canyon University—a 10,000 student campus, and the completion of Eastmark—Mesa’s 15,000 home, master planned community. AZA officials note that they have a strong relationship with their Convention and Visitors Bureau (CVB). Prior to the start of new service, airport officials coordinate with CVB staff mem- bers to canvas each new destination that will be served by Allegiant from AZA. Specifically, CVB members advertise to these cities’ travel agencies and conduct promotions, radio advertising, and free trip giveaways. AZA officials also focus on increasing the visibility of new service within the Mesa region, spending about $300,000 to $500,000 a year on marketing. Officials also work with the Chamber of Commerce and the City of Mesa to attract business travelers on Allegiant, which is known as more of a tourism-centered airline. AZA is involved at both the mayoral level and with the City of Mesa’s Office of Economic Development to highlight the benefit of AZA’s air service to the local economy. AZA serves 35 cities with non-stop service via Allegiant Airlines and contributes $1.3 billion annually to the Arizona economy. AZA is also working to attract another low-cost carrier such as Frontier Airlines or Sun Country. Officials believe that with their ability to grow, strong economic and tourist environment, and responsiveness to community needs, Phoenix-Mesa Gateway Airport will “continue to be the fastest growing airport over the course of the next 5 years.” 5.8 Bozeman Yellowstone International Airport (BZN) Key Attributes Hub Designation: Small-hub Airport Governance: Airport Authority % Change in Seats (2001–2013): +18% % Change in Flights (2001–2013): +11% Enplanements (2013): 439,787 (1.8% from 2012) Air Carrier Departures (2013): 6,732 Competing Airports: Billings (BIL) Allegiant Airport: Yes SCASD Grant Recipient: Yes (2011) Tourism or Business Destination: Tourism Major Employers (25 mile radius): Montana State University, Bozeman Deaconess Health Services and Oracle Population: 56,254 (2013 estimate) Population % change (2000–2013): +26.6% Median Household Income: $49,854 Incentives Offered: Revenue Guarantee (SCASD/Community), Marketing (Community), Waived Landing Fees 2ACAIS. Commercial Service Airports, based on Calendar Year 2012 Enplanements. 2013.

88 Effects of Airline Industry Changes on Small- and Non-Hub Airports 5.8.1 About BZN Bozeman Yellowstone International Airport (BZN) is a small-hub airport in Gallatin County in Southwestern Montana. BZN serves a nine-county market area with a population of over 233,000. BZN has been one of the fastest growing airports in the United States, with enplane- ments increasing from 242,000 in 2000 to over 433,000 in 2013. BZN is a seasonal market with enplanements highest in July and August (55,000) and March (39,000). Five carriers serve the airport with a mix of both regional and mainline jets: Alaska Airlines (SEA and PDX), Allegiant (LAS and AZA), Delta Air Lines (MSP, SLC, LAX, ATL, and LGA), Frontier Airlines (DEN), and United (ORD, DEN, IAH, LAX, EWR, and SFO). In 2013, Delta had the highest market share at BZN (41%) followed by United (32%) and Alaska (9%) (BZN 2013). BZN is the gateway to the Yellowstone Region, which is a major tourist destination and a popular location for second homes. BZN is a 90-minute drive from Yellowstone National Park and a 60-minute drive to several well-known ski resorts including Big Sky and Yellowstone Club. Unlike many airports in the United States, BZN is 2.5 hours from the next primary service airport (Billings, MT) and suffers little leakage to other markets. A study commissioned by the Montana DOT in 2009 found that BZN supported over 3,900 jobs and had a total direct eco- nomic impact of $100 million (Montana DOT 2009). 5.8.2 Collaboration Among Ski Resorts and Results in Increased Service at BZN As recently as 2005, BZN only had service to four destinations (i.e., SLC, DEN, MSP, and SEA) with no additional services in peak winter or summer months. Prior to 2005, ASD efforts in the Bozeman/Yellowstone region were initiated by individual ski resorts who met with air carriers to discuss routes to specific markets. In 1994, the Big Sky Resort worked closely with Horizon Air to start seasonal non-stop service to Seattle (the service became daily in 1996). In 2005, the Big BZN Route Map (as of July 1, 2014) Blue-United, Red-Delta, Cyan-Frontier, Green-Alaska, Orange-Allegiant

Case Studies 89 Sky Resort provided a revenue guarantee for Delta to begin seasonal service to Atlanta using 737 and 757 jets. The winter seasonal service was so successful that Delta initiated summer seasonal service without a revenue guarantee from the Big Sky Resort in 2006. The change in the ASD approach at BZN came in 2007 when the airport approached Fron- tier Airlines to begin a new non-stop daily service to DEN on Dash-8 Q-400 and Embraer E170 aircraft. Although Big Sky Resort had been comfortable funding seasonal service that directly impacted its business, a broader coalition of business and local community organizations was necessary to guarantee the riskier daily service to DEN. Therefore, the airport and the Big Sky Resort worked to form a coalition of business and economic development leaders including the Bozeman Area Chamber of Commerce, the Bozeman CVB, and a private ski resort, Yellowstone Club. The community formed a coalition to produce a revenue guarantee and marketing package for Frontier Airlines for the DEN service. In 2008, Frontier began the service and used much of the marketing money and in-kind contributions from the coalition to advertise the service in both the Bozeman and Denver markets. The service has remained self-sustaining and Frontier never used the minimum revenue guarantee due to the success of the route. The marketing funds given to Frontier were particularly important in BZN—the airport authority has limited funds available for marketing because the airport has focused on keeping its cost structure as low as possible ($3 cost per enplanement). Airport officials commented that they work with their private-sector partners including the Bozeman Area Chamber of Commerce, the Bozeman CVB, and the ski resorts to actively market the air service options at BZN. In 2011, the Yellowstone/Big Sky Air Service Coalition, composed of Yellowstone Club, the Big Sky Resort, the Economic Development Council of Bozeman, the airport authority, and Montana Tourism, Inc., submitted an application for a SCASD grant from the U.S. DOT. The request was for $1 million to support a revenue guarantee for a carrier to provide non-stop service to one of the New York area airports. The air service coalition secured a minimum of $725,000 in local pledges for a revenue guarantee, resulting in a total revenue guarantee of $1.725 million. The proposal called for all revenue guarantee payments to be withdrawn from the project fund account and apportioned at a 58% federal/42% local share. The group also pledged to develop a destination marketing and promotional support package upon evaluation of the service. The coalition was awarded the SCASD grant for $950,000 in 2012. In 2012, United began Sat- urday weekly service from BZN to EWR on an Airbus A319. The service has been very successful for BZN and United, and the airport is anticipating that it will return $650,000 of the $950,000 in federal funds to DOT. Additionally, in 2013, United added twice weekly at-risk (no revenue guar- antee) flights to EWR during the summer and winter months and plans to move to three times weekly for the 2014 summer. Finally, due to the success of the United service, Delta announced (at-risk) summer seasonal Saturday flights on Airbus A319s for 2014 to New York LaGuardia. 5.9 Augusta Regional Airport (AGS) Key Attributes Hub Designation: Non-hub Airport Governance: City Department % Change in Seats (2001–2013): +20% % Change in Flights (2001–2013): 0% Enplanements (2013): 256,354 (-4.7% from 2012)

90 Effects of Airline Industry Changes on Small- and Non-Hub Airports 5.9.1 About AGS Augusta Regional Airport (AGS), in Augusta, Georgia, is a non-hub airport that serves the Central Savannah River Area (CSRA). In 2013, AGS had annual enplanements of 270,800, down from 279,000 in 2012 (a decrease of 3%). However, these enplanement totals are much higher than the annual enplanements in 2006, which bottomed out around 140,000.3 Currently, AGS has non-stop service to two destinations on two carriers: Delta (ATL) and US Airways (CLT). AGS is the primary airport that serves several key events in the Augusta region including the Master’s golf tournament and the Aiken Triple Crown horse races. AGS serves Fort Gordon, a U.S. Army base that houses 30,000 military personnel. The airport is 150 miles (2.5 hour drive) from two major hub airports: ATL and CLT. In addition to experiencing leakage to these two hubs, AGS also loses passengers to Columbia Metropolitan Airport (CAE). Air Carrier Departures (2013): 5,761 Competing Airports: Atlanta (ATL) Charlotte (CLT), Columbia (CAE) Allegiant Airport: No SCASD Grant Recipient: Yes (2002) Tourism or Business Destination: Business Major Employers (25 mile radius): John Deere, Kellogg, Bridgestone, P&G, T-Mobile Population: 413,290 (2013) Population % change (2000–2013): +10.7% Median Household Income: $44,104 Incentives Offered: Airport-provided ground handling, Waived landing fees and terminal rents, marketing assistance (airport) AGS Route Map (as of July 1, 2014) Red-Delta Air Lines, Blue-US Airways 3AGS Enplanement Statistics.

Case Studies 91 5.9.2 Innovation in Reducing Start-Up Costs Leads to Increased Service at AGS The recent history of air service development at AGS begins in 2001 when the airport engaged the local community to try to attract Continental Airlines to AGS to provide service to Newark Liberty International Airport (EWR). The airport created a group of private-sector champions called the “AGS Air Service Knights” who worked with the Augusta Metro Chamber of Com- merce’s Air Service Task Force to establish the Continental Challenge. The Continental Chal- lenge was a ticket bank program designed to have local businesses put travel funds in a local bank (earning 3.5% interest) as a show of support to Continental. In 10 days, the group raised over $500,000 in ticket deposits (AGS 2002). In addition, the airport and community applied for and received a $759,000 SCASD grant in 2002 to market the new service and reduce the carrier’s start-up costs by waiving terminal rents and landing fees and doing a partial renova- tion on the new carrier’s facilities at the airport. Despite the strong show of community sup- port, Continental still would not commit to service due to the high cost of establishing a new station at AGS. Officials from Continental sent AGS officials a letter detailing the $528,000 in costs it would need to cover to begin service. In September 2002, AGS officials started a 2-week Continental Challenge II program designed to raise $528,000 in donations from local businesses (Eckenrode 2002). The Continental Challenge II program was a success and in October 2002, Continental announced service to not only EWR, but also to Houston Intercontinental Airport (IAH). Local officials celebrated victory and noted the hard work and time spent on attracting Con- tinental to the Augusta region. However, in August 2004, Continental announced that it was pulling both the EWR and IAH flights from AGS due to a lack of support from the business com- munity. The press release from Continental noted that despite the hard work of local leaders, only 10% of the 6,000 travelers from the five largest companies in Augusta flew with Continental, leading to the unprofitability of the routes (Continental Airlines 2004). One current AGS official noted that one possible reason the service ultimately failed was that so much work was put into getting the service, that there was less energy dedicated to consistently encouraging the business community to use the flights. Following the announcement, airport and local leaders refocused their attention on expand- ing service from Delta, a major employer in the State of Georgia. While Delta has roots in the region, officials at AGS noted fares from AGS and other small Georgia communities were very high and the Delta service was unreliable, which led to a lack of support from the Augusta com- munity. Officials also noted that the State of Georgia continued to provide support for Delta as it emerged from bankruptcy protection. Because of the support the State was providing Delta, officials at AGS partnered with other small airports from Georgia served by Delta to discuss improvements to reliability and lower fares. The airport officials requested a meeting with Delta executives to discuss their concerns. AGS officials noted that Delta refused to meet with the airports as a group, but did agree to individual meetings with each airport to discuss reliability and fares. There was already tension between Delta and AGS officials over a previous meeting with the mayor of Augusta and local business leaders where the mayor had “pointed fingers” at Delta over their lack of support for Georgia communities. The meetings with Delta did not result in new service, but did help to promote AGS to Delta officials. As one AGS official noted, It seems that every time you visit an airline the employees you sit down with say, yes we know your num- bers. But, what I’ve found is yes they have access to our numbers but we are a small market, they don’t really pay a lot of attention and don’t look at our numbers frequently. I think it behooves all of us to make sure we stay in front of them and we show them our numbers especially if there is something going on in our market.

92 Effects of Airline Industry Changes on Small- and Non-Hub Airports Officials at AGS turned their attention to attracting westbound service and direct service to Washington, DC. Officials at AGS decided not to engage the local community through a travel bank or revenue guarantee program. Many on the aviation commission were leery of actively involving the community following the experience with the mayor of Augusta and local business leaders at Delta. As one AGS official noted, “I guess because of that issue between the mayor and Delta officials, the aviation commission was concerned that grassroots groups might become overly involved in negotiations best left to the airport professionals.” While AGS officials were hesitant to engage the community for money, they were active in engag- ing the community by meeting with local business leaders and civic organizations to encourage them to check fares at AGS. Also, AGS officials partnered with the Georgia Department of Eco- nomic Development to host red carpet tours of the state during the Master’s tournament to attract new businesses to the state. Finally, AGS officials noted that they have worked collaboratively with the Fort Gordon alliance to try to attract new service to the region due to the location of the Army Cyber Command headquarters at the base, which will bring 4,000 new jobs to the region. AGS officials decided to target American Airlines service to Dallas/Fort Worth (DFW) by offer- ing above and below-the-wing ground-handling services as well as innovative cost structures for new service at AGS. Given that American did not have a station at AGS, it would incur start-up costs similar to those Continental experienced. Therefore, the airport changed their airport-owned Fixed-Based Operator (FBO) services by hiring an ex-airline station manager to manage a ground- handling service that would allow American to operate at AGS without significant station start-up costs. In June 2010, American Airlines began twice-daily service from AGS to DFW on Embraer EMB-145 50-seat regional jets. Because American only had two daily flights at AGS and was shar- ing counter and office space with other carriers, officials developed a unique hourly rate schedule so that American would not incur daily costs for using the shared space after their 1-year fee waiver expired. Despite this focus on cost reduction, American announced that it was ending service to AGS in January 2012. Airport officials noted that during American’s time at AGS, the airport’s main 8,000-foot runway underwent a complete rebuild, which lasted approximately 5 months. This meant that American’s EMB-145 was forced to use the airport’s 6,000 foot runway and could only carry 30 passengers due to weight restrictions, which contributed to the unprofitability of the route. In July 2012, US Airways announced that they would expand their presence at AGS by offering daily service to Ronald Reagan National Airport (DCA) in Washington, DC. The airport offered US Airways an incentive package that included pro-rated (because of US Airways flights to CLT) terminal rent and landing fee waivers for the first year as well as a small marketing package. Although the service was successful, the merger of US Airways and American Airlines in 2013 resulted in the divestment of several operating slots at DCA. In March 2014, American announced that Augusta was one of the communities that would lose its DCA service in June of 2014, leaving the airport with service to ATL and CLT. 5.10 Monterey Regional Airport (MRY) Key Attributes Hub Designation: Non-hub Airport Governance: Special Airport District % Change in Seats (2001–2013): -33% % Change in Flights (2001–2013): -54% Enplanements (2013): 200,599 (3.0% from 2012)

Case Studies 93 5.10.1 About MRY Monterey Regional Airport (MRY), in Monterey, California, is a non-hub commercial service airport that serves a primary catchment area of over 420,000 residents including residents of Salinas and Elkhorn-Prundale, CA. Monterey Regional Airport serves the Monterey Peninsula and tourism destinations including Cannery Row and the Monterey Aquarium, Carmel by the Sea, Big Sur, and Pebble Beach Resort. The region is also home to an over $1 billion agriculture industry, a significant wine industry, the Naval Post Graduate School, and the Army Defense Language Institute. Over 80% of the Monterey catchment area is concentrated in the coastal cities close to MRY, but the airport does not retain a large portion of its local air travel demand. Historically, the airport has had leakage ranging from 65% to 75% to various airports including San Jose International Airport (a 1-hour drive), San Francisco International Airport (a 2-hour drive), and Oakland International Airport (a 2-hour drive). The airport has non-stop service to six destinations and is served by five carriers: Alaska Airlines (SAN), United (SFO, DEN, LAX), American Airlines (LAX), US Airways (PHX), and Allegiant (LAS). In 2012, the airport had over 196,000 enplanements, an increase of 8% over Air Carrier Departures (2013): 6,076 Competing Airports: San Francisco (SFO), San Jose (SJC), and Oakland (OAK) Allegiant Airport: Yes SCASD Grant Recipient: Yes (2005; 2009) Tourism or Business Destination: Tourism/Agriculture Major Employers (25 mile radius): Dole Food Company, Inc., Pebble Beach Company, Lone Cypress Community Population: 144,636 (2013 estimate) Population % change (2000–2013): 6.0% Median Household Income: $59.805 Incentives Offered: Marketing (Airport and Community), Waived Landing Fees, Revenue Guarantee (SCASD) MRY Route Map (as of July 1, 2014) Blue-United, Navy-US Airways, Cyan-Alaska, Red-American, Yellow-Allegiant

94 Effects of Airline Industry Changes on Small- and Non-Hub Airports 2011. However, enplanements have fallen since 2000 when the airport recorded approximately 235,000 passengers. The Monterey Regional Airport is governed by a Special Airport District created in 1941. Five directors elected by voters residing within the district’s area are responsible for overseeing operations at MRY. 5.10.2 Leakage, Marketing, and Slow Growth at MRY Following the events of September 11, 2001, MRY, like most airports, experienced signifi- cant decreases in air service. Specifically, total enplanements decreased from a high in 1999 of 253,000 to 187,000 in 2004. Due to the lack of available flight options at MRY coupled with the relatively close proximity of larger airports (SJC, SFO, and OAK) with more frequent service, the airport experienced a leakage rate of approximately 75% in 2004. However, the airport gained new air service in 2005, adding America West service to LAS on a 90-seat regional jet (RJ), United service to DEN on a 50-seat RJ, and Delta service to SLC on a 50-seat RJ. Despite this increase in service, airport officials were not convinced that the increase in seats in the market would lead to higher enplanements without a significant marketing cam- paign that involved community stakeholders, who had previously not been actively engaged in ASD efforts. Therefore, in 2005, MRY airport officials engaged the Monterey County Convention & Visitors Bureau (MCCVB), the Monterey County Hospitality Association (MCHA), and the Monterey Chamber of Commerce to form the Fly Monterey Committee. Later that year, the committee submitted an application to the SCASD grant program for $1 million to fund an advertising campaign in the Monterey region that was designed to reduce leakage by promoting the new and existing service at the airport. The Fly Monterey Committee provided a local cash match of $353,000 ($90,000 airport and $263,000 community) and in-kind advertising commitments of $4 million (MRY 2005). The SCASD funds would be used primarily to market Monterey in destinations served by air carriers at the airport (e.g., Denver). The U.S. DOT awarded MRY $500,000 of the $1 million requested. An MRY official noted that the community used the $500,000 to primarily market existing services to the local market to reduce leakage. The official noted that the MCCVB was reluctant to spend dollars advertising in destination markets because of the CVB’s historical view that Monterey was a drive-market for nearby San Francisco, San Jose, and so forth. The official noted that they viewed local marketing of service as the airport’s responsibility while destination marketing was the responsibility of the CVB. Many local residents of Monterey were reluctant to invest in more traffic at MRY. As one official noted, “They begrudgingly will take the dollars of those who visit, but they don’t like the traffic or anything that interferes with this quality of life that they have.” While the CVB and the community were reluctant to market Monterey in destination markets, they were able to successfully reduce leakage to 65% in 2008 by marketing the airport through the Fly Monterey campaign. Following the financial collapse of 2008, MRY, again like many other small- and non-hub airports, experienced a sharp decrease in enplanements (222,000 in 2007 to 191,000 in 2009). To combat these losses, MRY attempted to again engage the community in 2009 to apply for a SCASD grant to attract Horizon Air service to SEA. This time, the airport reached out to the Monterey County Business Council (MCBC), an alliance of business executives that provides leadership on countywide issues. The MCBC serves as the de facto economic development organization for Monterey County. However, there is reluctance toward large-scale economic growth in the region due to the high quality of life enjoyed by residents. One official went as far as saying,

Case Studies 95 Monterey has a majority percentage of people who live here that don’t want anybody else to come. We have this dichotomy here—we don’t have the same type of energy put into business development that you would have at a normal place where they want economic development. Despite the general reluctance to pursue economic development opportunities, the MCBC worked with MRY to develop an application for a $500,000 SCASD grant to provide a rev- enue guarantee to Horizon for the SEA service. The local community pledged a total of $223,000 in cash and in-kind resources to market the new service and to waive landing fees for the first year. The MCBC pledged $55,000 in cash toward the marketing effort for the new SEA service. Although airport officials recognized that a revenue guarantee was essential to remain competitive in attracting new carriers, there was reluctance to offer a revenue guaran- tee for new service. As one MRY official noted, “They don’t work. They are an addiction, and once you get addicted with a revenue guarantee, once the revenue guarantee goes away, so do your flights.” The community received their second SCASD grant in 2009 and has continued to pursue service to SEA. Even with a $500,000 revenue guarantee and over $200,000 in marketing available, Alaska Airlines has not started MRY-SEA service. One factor that has made this new service difficult is that the great-circle distance on this route is over 750 statute miles, which is at the outer edge of the maximum useful range for Alaska’s Dash 8-Q400 regional aircraft—the use of a larger mainline jet (737) likely would not be economically viable. MRY officials have successfully petitioned the DOT to reprogram the 2009 SCASD grant to include Salt Lake City as a potential destination that would be supported by the $500,000 revenue guarantee. Officials are currently focused on expanding the existing Alaska Airlines service to SAN in hopes that building brand loyalty in the Monterey region would lead to SEA service in the future. 5.11 Kansas Affordable Airfares Program (KAAP) Key Attributes Hub Designation: Small-hub Airport Governance: Airport Authority % Change in Seats (2001–2013): -3% % Change in Flights (2001–2012): -15% Enplanements (2013): 731,856 (0.1% from 2012) Air Carrier Departures (2013): 13,549 Competing Airports: Kansas City (MCI) and Oklahoma City (OKC) Allegiant Airport: Yes SCASD Grant Recipient: No Tourism or Business Destination: Business Major Employers (25 mile radius): Cessna Aircraft Company, Royal Caribbean Cruises, Beechcraft Corporation, Bombardier Inc. Population: 538,977 (2013 estimate) Population % change (2000–2013): +9.6% Median Household Income: $48,597 Incentives Offered: Revenue Guarantee (Community), Marketing (Community), Travel Bank (Community), State Subsidy

96 Effects of Airline Industry Changes on Small- and Non-Hub Airports 5.11.1 About ICT Wichita Mid-Continent Airport (ICT) is a small-hub airport in Wichita, KS. ICT’s large natural catchment area of 2.8 million people covers roughly two-thirds of the State of Kansas and a por- tion of northern Oklahoma. South central Kansas is home to a wide range of industries includ- ing a heavy concentration of aircraft manufacturers and related companies. The airport is over a 2.5-hour drive from the closest competing airports. However, ICT still experiences leakage of 32% to Kansas City (MCI) and Oklahoma City (OKC) due to a higher number of non-stop destinations offered from those airports (ICT 2013). ICT has non-stop service to nine destinations and is served by five air carriers: Allegiant (Las Vegas-LAS), American (Chicago-ORD and Dallas-DFW), Delta (Atlanta-ATL and Minneapolis-MSP), Southwest (Chicago-MDW, Dallas-DAL, and Las Vegas-LAS), and United (Houston-IAH, Denver-DEN, Chicago-ORD, and Los Angeles-LAX). ICT reached an all-time high in enplanements in 2008 with over 800,000 passengers. Since then the airport has seen its enplanements drop to 757,000 in 2013. 5.11.2 Fair Fares and the KAAP The story of air service development at ICT begins in September 2001 when Wichita Mayor Bob Knight, City Manager Chris Cherches, and Director of Airports Bailis Bell launched an initiative to recruit low-fare airlines to serve south central Kansas in response to outcry from the community over the prices of airfare at ICT. The Initiative, labeled Fair Fares, focused on recruiting three airlines simultaneously by asking businesses to pledge 25% to 50% of their travel to a travel purchase account to ensure passenger ridership during the crucial service start-up period. The three low-fare airlines targeted by Wichita were • AirTran Airways service to Atlanta • Frontier Airlines service to Denver • American Trans Air (ATA) to Chicago Midway ICT Route Map (as of July 1, 2014) Red-Delta, Navy-United, Blue-American, Orange-Southwest, Yellow-Allegiant

Case Studies 97 Businesses were asked to allocate their pledges among the three air carriers based on their usual travel schedule and the destinations served by the carriers. Once businesses committed their travel dollars and an air carrier began service, the pledged funds would be placed in an account and branded with a unique travel credit card. If the company did not spend the pledged amount of travel within a year, their account would be debited for the difference and they would be issued travel vouchers. The Pledge Drive Steering Committee set a total pledge goal of $15 million ($5 million for each carrier) to be raised from December 2001 to January 2002. The Wichita City Council also was working on assembling a revenue guarantee program to help offset initial losses incurred with offering new service at ICT. A local ad agency, Sullivan, Higdon & Sing, designed the brand- ing and advertising for the Fair Fares campaign including airsickness bags that asked local busi- nesses if they were sick of overpriced airfares (Brannigan 2002). Volunteers called 16,000 local businesses and mailed pledge forms to over 40,000 companies in 44 Kansas counties to drum up support for the effort. In January 2002, the City of Wichita approached AirTran Airways for service to Atlanta with 400 pledges from local businesses and $4.7 million in ticket commitments. While AirTran was impressed at the scope of the effort, they noted that they would need a revenue guarantee from the City of Wichita before they would start service (Brannigan 2002). In February 2002, AirTran announced that, beginning in May, it would begin service at ICT with three daily flights to Atlanta and two daily flights to Chicago. The City of Wichita offered to guarantee AirTran block hour passenger revenues of $3,000, up to $3 million in the first year and $1.5 million in the second year. The airport authority also committed $600,000 in marketing funds to promote the new service (USA Today 2002).4 During the first month of service from ICT, AirTran billed Wichita for over $730,000 in lost revenue due to a lack of passenger traffic on the flights. Within the first 4 months of service, AirTran had exhausted the $3 million in revenue guarantees offered by the city. In December 2002, AirTran announced that it was ending the Chicago service due to a lack of profitability (USA Today 2002). During the 2-year agreement period, AirTran used $4 million of the $4.5 mil- lion in revenue guarantees. The City of Wichita also agreed to subsidize Frontier Airlines service to Denver in September 2002 for up to $900,000 when load factors fell below 60%. However, Frontier left ICT in 2004, when the city did not offer a subsidy when the contract carrier, Great Lakes Airlines, decided to use turboprops instead of jets on the Denver route (Siebenmark 2004). From 2002 to 2004, airport officials estimated that fares at ICT dropped by up to 70% and saved passengers $75 million on airfare (TCJ 2004). In 2004, the City of Wichita agreed to offer AirTran another $2.5 million revenue guarantee. In 2005, the city offered another $2.5 million with another $1 million coming from Sedgwick County. Following the enactment of this guarantee, the FAA issued a notice to the City of Wichita that its revenue guarantees to AirTran violated FAA Grant Assurance #22 that prohibits economic discrimination against carriers at an airport. Delta, who also operated at ICT, claimed that the City of Wichita was the legal sponsor of ICT and therefore could not offer subsidies to AirTran without also offering them to Delta. Wichita argued that it was not the airport sponsor and that while it appointed members to the airport authority, the Authority itself was the sponsor. The FAA eventually dropped its inquiry because Sedgwick County, rather than the City of Wichita, began offering subsidies to AirTran in 2006 (McMillin and Lefler 2005). In 2006, the Kansas Legislature created the Kansas Affordable Airfares Program (KAAP) to provide state funding for ASD efforts across Kansas (House Substitute for Senate Bill 475 and 4Transportation Services Agreement Between AirTran Airways, Inc. and City of Wichita. February 28, 2002.

98 Effects of Airline Industry Changes on Small- and Non-Hub Airports Senate Bill 2968). The program would provide $5 million in state funds each year to be matched by a 25% local contribution. KAAP would be administered through a partnership between the Kansas Department of Commerce and the Regional Economic Area Partnership (REAP). REAP is an intergovernmental partnership of 37 south central Kansas cities and counties that guides economic development efforts in the region. Under the law, the Department of Commerce disburses the funds appropriated by the legislature to REAP and ensures that the local match is received. REAP then issues a request for proposals for grant funds each year and reports on the effectiveness of the program. Frontier Airlines began service to Denver in 2007 supported by an annual revenue guarantee of $500,000 funded by KAAP (via REAP), Sedgwick County, and the City of Wichita (McMillan 2012). From 2007 to 2011, REAP awarded $5 million to Sedgwick County, the only entity apply- ing for the grant (REAP 2011). In 2012, REAP awarded Sedgwick County $4.75 million while giving $250,000 to Garden City Airport to establish American Eagle service to Dallas. Follow- ing the merger of AirTran and Southwest in 2012, Southwest announced that it would end the AirTran service to Atlanta but begin Southwest service from ICT to Dallas-Love, Chicago Midway, and Las Vegas. Southwest made it clear to local officials that it expected to receive the $6.5 million in revenue guarantees that were previously given to AirTran. In the first quarter of fiscal year 2014, REAP paid $2.52 million to Southwest to operate from ICT. In addition, Sedgwick County applied for by did not receive a $500,000 SCASD grant to market the new Southwest service at ICT. Supporters and critics of the KAAP program and its predecessor, Fair Fares, have jousted pub- licly about the success of the program. Supporters cite a Kansas Legislative Post Audit Committee report issued in 2011 that concluded that the programs had had the desired effect of reduc- ing airfares and increasing the number of flights (KLPAC 2011). Also, a University of Kansas examination of the program found that airfares dropped 33% from 2001 to 2012 over expected airfares had the programs not been implemented (Hall 2013). However, critics of the program have argued that REAP has overstated the benefits of the program and that air carriers operate in similar communities without subsidies. In addition, critics have argued that KAAP is a subsidy program for Sedgwick County and not for other parts of the state.