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Passenger Air Service Development Techniques (2009)

Chapter: Part I - Overview of Air Service Development

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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
×
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Suggested Citation:"Part I - Overview of Air Service Development." National Academies of Sciences, Engineering, and Medicine. 2009. Passenger Air Service Development Techniques. Washington, DC: The National Academies Press. doi: 10.17226/14309.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Overview of Air Service Development P A R T I

17 What is the purpose of this guidebook? Developing additional air service is a priority for many communities. In fact, with market forces compelling air carriers to continually trim service and capacity, simply retaining existing service can be a significant priority. Yet air service development (ASD) teams—especially in smaller communities—often have lit- tle practical guidance on what techniques exist and which techniques have been effective for other airports. Currently no single resource document summarizes experience to date in ASD or offers guidance as to when and how different techniques should be used. This guidebook is meant to help fill that void and assist the airport community in better understanding how to approach air service development. ASD encompasses attracting, initiating, expanding, retaining, or improving any aspect of air service to a particular airport. It includes considerations of changes in pricing, frequency, capacity, hub connectivity, and the number of destinations served to improve service and thereby increase passenger demand. ASD techniques can include incentives; subsidies; guarantees; changes to rates and charges; marketing; cost-reduction measures; airport/community/airline partnerships; reduction of third-party costs, such as ground handling or fuelling services; or any other approach taken to encourage development of air service. Clearly this is a complex topic within an extremely dynamic industry. This guidebook, how- ever, is intended as an easy-to-read discussion of the various facets of air service development. It explains what techniques other airports have recently used to attract or retain air service. Although this guidebook is based on solid analysis, statistical evidence, and decades of collective professional experience and insight, it is intentionally not presented as an academic journal. Interpretation and examples are emphasized rather than intensive statistical data and economic analysis. The aim is to keep this publication readable, practical, and useful yet still appropriately comprehensive and rigorous. Who should use this guidebook? This guidebook is intended for airport professionals and business or community officials interested in preserving or enhancing their commercial air service. It is intended to be useful to both those who have been working in air service development for some time, and those for whom ASD may be relatively new. The aim is to spur new thinking and ideas for experienced airport professionals, while providing enough information to enable officials less familiar with ASD to plan and execute an ASD strategy. C H A P T E R 1 Using this Guidebook In this market, retaining existing service can be a significant priority.

Further, airport officials may find that sharing this guidebook with key local stakeholders will help them better understand exactly what’s needed for a community to attract and retain air service. Local businesses and government officials need to understand that air service is a busi- ness like many others (and unlike still others). For the business to be viable, revenues have to exceed costs. They need to understand how they can influence both sides of the equation. How is this guidebook organized? This guidebook is organized into three general parts. The first part—comprising Chapters 1 through 4—provides an overview of air service devel- opment and why it’s important for many communities, given the financial and risk realities of the commercial airline industry. Certainly at this point in the industry’s business cycle, U.S. air- lines are hemorrhaging cash in response to soaring fuel prices and their inability to recover those costs through fare increases. Airlines are deciding that if they operate aircraft, they lose money, and if they don’t operate aircraft, they still lose, but they lose less. As a result, carriers are cutting operations. That often means smaller communities are losing service—frequencies from incum- bent carriers, all service from some carriers, or both. Part I highlights the existing strain on air- line financials, but in the context of longer term profitability cycles. The part also provides an overview of the regulatory parameters established by the Federal Aviation Administration (FAA) concerning airport rates and charges, and what’s generally allowable in terms of the financial and non-financial assistance that airports and communities can provide airlines. Part II breaks down the process of air service development into discrete components. It system- atically outlines how communities that have been successful with ASD efforts have approached the task: • The process starts with a diagnosis of the airport’s competitive strengths and weaknesses, as well as an assessment of the physical facility’s limits. This analysis includes key fundamentals of understanding the airport’s catchment area and the markets of most interest to the airport’s traveling public. • The guidebook then examines the various resources that communities may have at their dis- posal for attracting and retaining air service. Those include financial and non-financial (e.g., in-kind) resources, as well as human resources. • Next, airports and their stakeholders should focus on exactly what their air service goals ought to be. These are likely to differ depending on whether the focus is incumbent carriers (e.g., preserving service, re-timing operations, or perhaps upgrading aircraft) or new entrant carri- ers (e.g., attracting a niche carrier to serve a particular market, or attracting a different net- work carrier to provide new nonstop service to a hub that would improve directional flow). Reflecting the realities of passenger leakage, many airports are concerned about addressing the issue of high airfares. Even with carriers raising fares to cover part of their fuel costs, airports still ought to be conscious of the fares charged locally in relation to those at nearby compet- ing airports. • The next chapter discusses how to develop a compelling business case for the carriers. When the airlines are sharpening their pencils looking for every nickel of cost saving or dime in addi- tional marginal revenue, the airport must present a realistic and defensible case. • Part of making the case includes understanding the contribution that the airport and com- munity can make to the airlines. The guidebook examines the revenue- and cost-related incen- tives that smaller airports should consider extending to attract new or retain existing service. Airlines no longer look at such incentives as incidental niceties; they are fundamental require- ments. Airports at smaller communities that don’t offer incentives simply do not attract air- lines’ attention. 18 Passenger Air Service Development Techniques Sharing this guide- book with key local stakeholders will help them better understand exactly what is needed for a community to attract and retain air service.

• Once the information is assembled, it must be presented to the airlines. The guidebook briefly discusses the best ways to make this presentation. Though each situation is unique, certain tactics are typically more effective than others. • Finally, the guidebook briefly discusses how the airport should assess and re-evaluate its efforts. Air service development is a long-term effort, particularly during difficult financial times. The airport should plan on re-examining its goals and strategy and making needed adjustments along the way. Each step includes examples of how other airports across the United States have approached that aspect of ASD, and what their results have been. Part III includes a glossary of important terms and a series of Frequently Asked Questions. This part is intended as a point of reference for readers. The guidebook also includes an anno- tated bibliography for readers looking for additional information on particular topics. How was the research conducted? The scope of this ACRP research project was limited to those airports that serve locations that U.S. law defines as “small communities”—generally, those with airports classified by the FAA as small hubs and non-hubs. These communities tend to need greater assistance in obtaining or enhancing commercial air service. There are 426 non-hub and small hub communities in the United States, including those in Alaska, Hawaii, and U.S. territories. Note that the FAA’s defini- tions of hub airports are based on statutory definitions and are not the same as the more operational definition of hubs that are applied by airlines. Federal law defines hub types at 49 USC 47102. The study team began with an extensive literature review of topics related to air service devel- opment. (Major related articles are summarized in the annotated bibliography included in the appendix.) Critical among the materials reviewed were several reports written by the federal government, particularly the U.S. Department of Transportation (U.S.DOT) and the U.S. Government Accountability Office (GAO), both of which have produced numerous documents about air service at smaller communities. The study team also drew on its own expertise in air service development, which collectively amounted to several decades. The study team also reviewed material posted in the libraries of various industry trade groups, such as the American Association of Airport Executives (AAAE). As part of that review, the study team examined materials submitted to the U.S.DOT by smaller communities applying for grants from the Small Community Air Service Development Program (SCASDP). This federal program provides grants to small communities to help them achieve sustainable air service. Those submissions provided a rich source of descriptions of the fundamental air service problems that small communities confront and how they intended to address them. Based on that information, the study team created a categorization of ASD problems com- monly faced by small communities. These almost universally included relatively high airfares. However, the issue with the airfares is in part a reflection of the extent of competition at the air- port in particular markets, the type of competition present at the airport [i.e., network carriers versus low-cost carriers (LCCs)], the proximity of the airport to network carrier hubs or other larger airports served by a low-cost carrier, the airport’s geographic isolation, and the economic strength of the community. The study team excluded airports in Alaska, Hawaii, and the territo- ries because of the fundamentally different and unique challenges those communities confront. The study team then added information on the different types of ASD techniques that vari- ous airports and communities have used over the last several years. These include various types Using this Guidebook 19 The research supporting this Guidebook focused exclusively on those airports serving locations that U.S. law defines as “small communities.”

of financial and non-financial incentives, such as revenue guarantees, cost subsidies, guaranteed ticket purchases, and marketing. The study team thus had a framework of information about fundamental air service problems and techniques used to address them at small community airports. The study team then designed a survey questionnaire to gather additional information from a number of those airports. Forty- one airports were selected to survey. This number was appropriate because it allowed the study team to interview both non-hub airports and small hub airports from around the country that face the full array of competitive challenges. It also allowed the study team to interview multiple airports that had implemented similar ASD approaches. Figure 1.1 shows the airports that were surveyed. The survey covered three basic topics: • A profile of existing service at the airports, along with the airport directors’ sense of what their major deficiencies were; • A review of the ASD techniques that had been used; and • The airport directors’ evaluations of those techniques’ effectiveness. The study team pre-tested its surveys with a small number of airports and made subsequent adjustments based on the outcomes. The study team also interviewed a number of air carriers to get their opinions on ASD prior- ities at smaller communities. The carriers included both network (United Airlines, Delta Air Lines, and Continental Airlines) and low-cost carriers (AirTran Airways and Frontier Airlines), along with a niche carrier (Allegiant Air). The study team also obtained information from American Eagle Airlines and ExpressJet Airlines. 20 Passenger Air Service Development Techniques State of North Carolina MOB IPT LIT STS FAT PSP BFL IDA RFD HDN HVN GNV ABY PAH AZO FAR YNG ITH LNK RDM TYS LAW TYR VCT RUT ALW CAK BTV COS GRR MDT LBB PNS SRQ HSV DIK DAB TRI BTR Figure 1.1. U.S. airports surveyed.

The study team interviewed individuals with a number of industry and government organi- zations. These included the FAA, U.S.DOT, Regional Airline Association, AAAE, National Association of State Aviation Officials, and manufacturers. Along with the data from these surveys, the study team examined data submitted by all air- lines to U.S.DOT covering enplanements, operations, markets served, and fares. The study team discussed changes in these major factors with airport directors to get confirmation from them on what they considered their major air service deficiencies to be, as well as how service at their airports had changed over time. Finally, the study team would be remiss if it did not include this disclaimer: As everyone in the industry well knows, there are no guarantees in this business. The industry is subject to external forces that will ruin the best business models, and the approaches outlined in this guidebook can- not guarantee success. That being said, there are strategic, proven ways to approach the issue of attracting new service—or simply retaining existing service. This guidebook is intended to help airport and community representatives build and execute an ASD strategy. Summary • ASD teams—especially in smaller communities—often have little practical guidance on what techniques exist and on which techniques have been effective for other airports. Currently no single resource document summarizes experience to date in ASD or offers guidance as to when and how different techniques should be used. • This guidebook is meant to assist small communities (generally, those with airports classified by the FAA as small hubs and non-hubs) to better understand how to approach air service development. • The results are based on an extensive review of ASD-related literature, interviews with indus- try professionals, and a survey of small community airports and the airlines that operate there. Using this Guidebook 21 This guidebook is intended to help airport and community representatives build and execute an ASD strategy.

ASD requires understanding the flexibility an airport has in extending financial and non-financial incentives to carriers. Air service generates significant economic activity in a community. But good air service—an array of flights appealing to travelers—doesn’t just happen. In fact, market and industry forces (discussed in detail in Chapter 3) tend to discourage airlines from expanding air service, partic- ularly to small communities. However, by taking an active, professional approach to air service development, those smaller airports and communities can often provide the information and conditions to encourage airlines to retain or expand air service to that community. For many communities, investing in air service development significantly improves their return on investment in airport infrastructure. Further, involving a broad base of community leaders in air service development assists the community in understanding what is required to support existing or new air service. What is air service development? “Air service development” is a broad term that encompasses a variety of activities with the ulti- mate goal of retaining existing air service or improving air access and capacity in order to develop the economy of a community or region. For the purposes of this guidebook, ASD involves all activities directly related to enhancing commercial passenger service at an airport. It includes understanding the local community, what drives its economy, and recruiting community and business leaders to participate in efforts to “sell” the community to the airlines. It includes understanding the air service and fares that air- lines offer, and how the service, fares, and facility compare to those of nearby airports. It also involves understanding the cost and revenue issues that influence carriers’ decisions on which markets to serve. ASD requires understanding the flexibility an airport has in extending finan- cial and non-financial incentives to carriers—both those already serving the facility (incumbents) and those being recruited. ASD encompasses understanding what carriers value most and what they want to know about the community. It includes knowing how to make and present a sound business case to airlines. And it includes understanding how to evaluate ASD efforts and revise them as needed. Why is air service development important? Commercial air service is valuable as an economic driver in the community. Adequate air service is a prerequisite for attracting investment and generating employment. Air travel also brings new visitors and incremental spending in local hotels, attractions, and other businesses. Air service is directly related to the amount of economic activity in an area, and additional flights contribute 22 C H A P T E R 2 Understanding the Role of Air Service Development

to a community’s economic well being. The FAA has reported that, in 2006, civil aviation activ- ity within the overall economy contributed 11 million jobs, $1.2 trillion in economic activity, and 5.6 percent of the gross domestic product (1). On a local level, it has been estimated that one narrowbody flight can produce the equivalent of $4 million annually in gross domestic product and more than 50 person-years of employment. For an overview of the relationship between overall economic activity and the demand for air transportation, see, for example, Airline Management: Strategies for the 21st Century by Paul Stephen Dempsey and Laurence E. Gesell (Coast Aire Publications). Competition for air service increases during difficult economic times. Airlines are grounding certain older aircraft because they are costly to operate and because there is inadequate demand to fill the planes at price levels that are sustainable (see discussion in Chapter 3). Older legacy air- lines are fine-tuning their networks to leave only the profitable markets. Marginal markets— which may often include smaller cities or those dominated by another carrier—are being targeted for cuts. Those communities need to understand the fundamental drivers of air service and what they can do to convince airlines that their location still represents an opportunity. Communities have to aggressively compete for air service. In addition, airline mergers and bankruptcies are affecting service to many communities. For example: • When Mesa Air Group, Inc., decided to cease operation of its Air Midwest subsidiary in June 2008, service to 20 cities was affected. Although other operators replaced the service from Air Midwest at some locations, Mesa Air Group’s decision to terminate service to Prescott and Kingman, Arizona, resulted in the termination of all scheduled services at those two airports, which had been previously linked with intrastate service to Phoenix. • When Billings, Montana–based Big Sky Airlines ceased operations in March 2008, it ended a history of service to many smaller communities in Montana. Big Sky had connected five small cities—Glasgow, Glendive, Havre, Miles City, and Wolf Point—to Billings through the Essential Air Service. As of November 2008, service to those locations (along with Lewiston’s service to Denver) was still on hiatus until Great Lakes Aviation could ramp up its new service. • Similarly, the merged Delta and Northwest Airlines may “rationalize” their combined net- works. In situations where both carriers serve smaller communities, the merged carrier may drop one of those routes. This occurrence is especially likely if a small community is relatively close to hubs for either Delta or Northwest, because the cost of operating aircraft over short distances is high. During upswings in the industry, smaller cities compete for service from a limited number of aircraft. If an airline deploys an aircraft to one small community, it may mean that another small community does not get that service. To address such changes in the industry, many small communities operate ASD programs. ASD efforts can help communities design strategies to retain their existing service or develop new service in existing and emerging markets. ASD programs provide the interface between the air- lines, airports, and the community. They work with the major businesses and other economic drivers in the local community and region to help ensure that travel needs are met and to help the airlines better understand the existing market opportunities. They help ensure that the air- port serves as an effective economic engine for the community and region. Because of the intense competition among small communities for limited airline resources, small communities likely need to offer some form of financial incentives to attract targeted airlines to the community. Participation by community leadership in air service development initiatives establishes the credibility of the financial incentives offered to target airlines. Understanding the Role of Air Service Development 23 Communities have to compete aggressively for air service— particularly during difficult economic times. During upswings in the industry, smaller cities compete for service from a limited number of aircraft.

Airline officials, community officials, industry trade groups, and consultants all told the study team that reducing financial risk has become a key factor in establishing effective work- ing relationships in small communities. Sharing the financial risk of commercial air service between airlines and the communities they serve has become an accepted approach within the industry. Airlines can only serve communities successfully over the long term if they are in a partnership with the community. Because of the size of the capital investment, the airlines believe that communities must share part of the risk of committing expensive aircraft to a given market. This is true in “normal” economic times, but especially during periods of severe financial stress. ASD programs help orchestrate and coordinate the risk sharing between the community and the airline. How do air carriers decide which airports they will serve? This question is deceptively difficult. The simple answer is: Airlines serve markets in which they can generate profits. In making those determinations, airlines consider many factors. If a community does not rank highly according to those factors, it may not receive service. And the factors that an airline considers may or may not coincide with issues that are important to the local community. Airlines are not motivated by altruistic concerns about local economic development. Like any business, airlines seek to maximize profitability, and do so by establishing and oper- ating routes that make a positive contribution to their bottom line. (Airline profit maximization, yield management, and route planning are complex topics beyond the scope of this guidebook.) Decisions are governed by an internal process that starts with route planners. These planners make their initial assessments before examining more in-depth considerations of market size and forecasts. Airlines also have to take other internal factors into consideration, such as frequent flyer needs. Route planners and senior managers evaluate competitive route opportunities and select those expected to provide the greatest return, giving consideration to the cost of deploying a specific aircraft on each route. At the most basic level, a carrier’s air service decisions are based on weighing the revenue that it can generate in a market versus the cost of providing service to that market. Depending on the airline, another consideration is the extent to which a local community may be willing to share the airline’s risk involved in deploying an asset as expensive and valuable as a commercial aircraft. Passenger Demand/Operating Revenues On the revenue side of the equation, airlines focus on the size of the actual and potential under- lying market. Two general aspects of passenger demand are important: the volume of passengers willing to get on the aircraft and the “quality” of the revenue mix that the market generates. For example, there are always plenty of passengers looking for a low fare to Las Vegas or Orlando, but that is seldom sufficient for airlines. Network carriers need business passengers flying at higher rates. Further, network airlines are increasingly concerned with attracting enough business trav- elers who want to connect onto international routes. Market entry—when a new carrier begins to offer service at a particular airport—can cause passengers to shift away from existing travel patterns (fly on the new airline as opposed to an incumbent carrier). Market entry can also stimulate new traffic (passengers who would not have otherwise flown). Generating new travel is often preferable, because it is less susceptible to being lost back to the previous carrier through competitive offerings. A high percentage of new traffic allows carriers to build brand loyalty. 24 Passenger Air Service Development Techniques A carrier’s air service decisions are based on weighing the revenue that it can generate in a market versus the cost of providing service to that market.

At all communities, but especially in smaller markets, airlines want to make sure that the mar- kets are self-sustaining. That is, there should be sufficient passenger demand to allow the carrier to operate the route profitably without being subsidized or otherwise financially underwritten. Airlines know that financial support programs such as grants or incentives eventually end. If the market cannot sustain the service without assistance, it may not be worth the investment in time, effort, and personnel. At the same time, however, many carriers look for—and now expect—a community to offer some form of financial risk-sharing in association with new service. The airlines recognize the value of new service to communities. Yet they also recognize that committing an aircraft to a market is a decision that involves a major asset and potentially a large risk—particularly if the airline does not have a history with a community. The study team surveyed carriers on whether incentives were valuable in deciding about serving a community. Figure 2.1 summarizes the results of that survey. Some carriers, such as Frontier and AirTran, thought that incentives were very important. Others, such as Continental and Delta, were less interested in incentives as a prerequisite for operating at a small community. The level of local support and commitment to air service can be a key factor in airlines’ deci- sions to work with a local community. Support can take many forms. Communities may be will- ing to underwrite a sustained marketing campaign announcing the new service. The local cham- ber of commerce and major employers can be active in an ASD task force. Local hotels and tourist destinations may be willing to work with a carrier to develop packages. Local coopera- tion and involvement—especially on the part of the area’s major employers—is noticeable to many carriers. Chapter 5 discusses many incentives in greater detail. Air Carriers’ Costs On the cost side, airline costs fall into two broad categories: direct operating costs (e.g., salaries and fuel) and airport costs. In addition, carriers also absorb other costs associated with starting new service at a location. In late 2008, soaring operating costs made many markets too costly to serve. Direct operating costs are those immediately associated with operating the aircraft. They include crew salaries, capital costs (i.e., the cost of owning or leasing the aircraft), insurance, and fuel. Because smaller aircraft require relatively fewer crew, cost less to purchase or lease, and burn Understanding the Role of Air Service Development 25 Especially in smaller communities, airlines want to make sure that there will be enough passenger demand for them to operate the route profitably without being subsidized. 0% 20% 40% 60% 80% 100% Co nti ne nta l De lta Un ite d All eg ian t Air Tra n Fro nti er Figure 2.1. Percentage of markets served where financial incentive is offered.

less fuel than larger aircraft, their hourly operating costs are usually less, as shown in Figure 2.2. However, operating costs per unit of service provided—a seat available for sale—are less on larger aircraft simply because there are more seats available. (See Chapter 3 for more informa- tion on airline costs.) However, high fuel prices have driven operating costs up drastically compared to historic levels. In some cases, even if an airline has a steady source of business passengers from a small community, aircraft oper- ating costs can make the market unprofitable. Profitability is a function of both the revenue that can be generated on a particular market segment with a given aircraft, and the costs of operating that aircraft. Airport costs are those directly associated with operating at a particular facility. They include landing fees, gate fees, counter and office rentals, and perhaps the costs of servic- ing aircraft at the airport. The importance of these costs can- not be underestimated. Airport costs can be very significant for certain carriers, and the importance that carriers attach to airport costs can vary widely. Higher than usual airport costs can make the difference between a profitable route and an unprofitable one. 26 Passenger Air Service Development Techniques $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 ERJ140 ERJ145 CRJ100/200 CRJ700 CRJ900 A319 Notes: Block hours are a common measure of aircraft usage and generally are measured from the time that an aircraft pushes off a departure gate until it parks at its arrival gate. Data represent the 12 months ending March 2008. Data for CRJ aircraft operations are from SkyWest Airlines. Data for ERJ aircraft operations are from American Eagle. SkyWest and American Eagle were the largest regional operators in the United States in 2006 in terms of passenger enplanements. Data for A319s are for all aircraft used in the United States. Figure 2.2. Illustrative differences in costs per block hour. Explanatory example of business market losing service due to operating costs In June 2008, Delta announced that it was discon- tinuing service between its hub at Salt Lake City and Bakersfield, California. The airline’s decision to leave was part of a 13 percent cut in domestic capacity announced in 2008 and was based on indi- vidual flights’ passenger loads, profitability, and how much money Delta makes on Bakersfield air travelers’ flights to their ultimate destination, such as New York City. Despite all those factors, a Delta spokesperson said, “Ultimately it comes down to operational costs directly related to fuel.”

Costs associated with launching service at a new community can be difficult for carriers to absorb, particularly in difficult economic times. Start-up costs include repositioning equipment, renting space, and hiring and training person- nel. Entering a new market also involves changing passengers’ existing travel pat- terns and loyalties. Routes may take a year or more to mature and become self- sustaining. Today, airlines may not be as able to afford such losses while building a customer base. GAO provided some insight into these costs in a 2003 report. Regarding the costs of serving small communities, the agency noted: “Another major part of the expense of providing air service is ‘station’ costs, according to airline offi- cials. These stations require staff to handle passengers, bags, and cargo. One air- line official estimated that it can cost as much as $200,000 to set up a station for new service, and annual station operating costs can range from $370,000 to $550,000” (depending on the size of aircraft used) (2, p. 12). In the survey of carriers, the study team asked carriers to identify the top priorities they take into account in examining small markets for new or addi- tional service. The results (highest to lowest) are as follows: 1. Actual or potential market demand (e.g., traffic, yields, competition) 2. Demographic/economic data (e.g., catchment area population, per capita income, employment growth) 3. Airport costs 4. Congestion at the carrier’s hubs 5. Incentives 6. Limits on the potential community’s airport gates and runway How can an airport or community influence air service decisions? Airports and communities can help carriers decide whether to serve a mar- ket or not by providing them with information that they might not otherwise have had. Airlines have limited numbers of route planners, and they tend to focus more on larger markets. Airline staff may be relatively unfamiliar with changes in a local area’s economy or the existing air service. New or expanded businesses in an area can generate the amount and types of employment that can make air service viable. If a community does not make the effort to bring that sort of news to an airline’s attention, the carrier may never learn of the opportunity or the community’s unmet air service needs. Not everyone agrees with this approach. Research revealed that a minority of small airport directors do not think it is useful to attempt to influence an air carrier’s decision about whether to serve a market. They hold that these decisions are purely market driven, that the carriers know better than anyone else whether the market will work for them, and that the airport has no place interfering with a carrier’s business. However, such a passive position assumes that airlines have perfect information about a community’s current and future passenger demand, as well as the amount and quality of service provided by other carriers. That is simply not the case with smaller markets. What can an airport or community control? First, the airport can make every effort to control the local costs associated with starting and operating new service. Even more importantly, the community and the airport can influence the carriers’ decisions by providing information on the Understanding the Role of Air Service Development 27 Additional explanation of importance of containing airport costs Myrtle Beach (South Carolina) International Airport is aware of the need to keep airport costs down. “Airlines tell us that whatever we do, we must maintain efficient, low- cost service.” The airport manager noted that, “Our airlines aren’t excited about temporary rebates or incentives. They want a long-term plan that shows a partnership. . . . Our overriding priority is to build a terminal that will lower costs for current and future airlines. We’re a seasonal market, but one of the fastest-growing ones in the Southeast. We know that airlines look at Myrtle Beach as a seasonal market, so we hope to encourage airlines to stay year-round.”(3). In August 2008, the airport announced that it would cut its landing fees from $1.97 to 50 cents per 1,000 pounds of landed weight for all flights. The cuts equate to approximately $1.2 million in sav- ings for airlines. The airport also waived landing fees entirely for all scheduled flights for December through the first two months of 2009—the months when seasonal traffic is lowest.

local market. They can organize efforts to gather, analyze, and present that information. They can organize efforts to influence the local demand for travel. They can organize efforts to develop financial incentives to offer the carrier as a way to share the risk of starting new service. They can develop and implement strategies for approaching airlines, including ensuring that high-quality information is provided to carriers. Airports and communities can also actively contribute to incentive programs and provide marketing assistance to airlines. The airport is the natural central stakeholder in any ASD effort. The airport is in the best posi- tion to understand passenger traffic, service levels, air fares, and industry costs. Passenger and carrier activity directly affect airport revenues and provide the basis for its capital and operating budget. But beyond those immediate effects, it can be the role of the airport to educate other community stakeholders on the benefits of the new services and to demonstrate that their com- mitment is a sound investment. The airport manager or ASD officer thus becomes crucial for organizing the local effort and coordinating other stakeholders. What other stakeholders can be involved? The airport should not be the lone entity in an ASD ini- tiative. However, because the airport is a conduit for eco- nomic activity in the region, it is often best positioned to coordinate the community’s efforts to retain existing and attract new air service. In any community large enough to support commercial air service, there will be a relatively short list of stakeholders with whom the airport should partner: • Major employers. Major employers are the principal driver of air service demand in the area. Their travel demands need to be met by the carriers. They may have distinct inbound and outbound needs. • The local chamber of commerce/tourism board. The chamber of commerce represents all businesses in the area and thus can help obtain information on travel demand and marshal resources to help. The tourism board may be more concerned about inbound traffic. Local hotel asso- ciations and resorts also can be important contributors to an ASD strategy. • The local economic development agency and/or other parts of the local municipal government. Local govern- ment has an obvious interest in assisting its business community to develop and prosper, as it forms the back- bone of the region’s economy and tax base. Each of these stakeholder groups can play critical roles in influencing airlines to operate in the community. They can be sources of information that are otherwise unavailable to either the airport or the airlines (e.g., business expansions, sales of existing homes, planned local infrastructure improvements). They can also be important sources of financial assistance. 28 Passenger Air Service Development Techniques Explanatory discussion on involving local stakeholders Palm Springs International Airport (PSP) serves eight resort cities in the California desert—Cathedral City, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, and Rancho Mirage. Air traffic at PSP is “unbalanced,” in that approximately 70 percent of its passenger traffic is inbound tourism. Many local residents may be more likely to fly from Ontario International Airport, 75 miles to the west, in part because of the large presence of LCCs there. To promote additional inbound traffic, PSP coor- dinates with local tourism authorities and the convention and visitors authority. The airport is owned by the City of Palm Springs, so it naturally works with the local government’s Bureau of Tourism. The airport also works closely with the Palm Springs Desert Resort Convention and Visitors Authority (CVA). The CVA’s board of directors includes representatives of all eight cities, Riverside County, and the Hospitality Industry Business Council (representing lodging, restaurants, and attractions). These groups proactively engage air- lines in partnership with the airport and member communities to promote air travel and tourism; direct stakeholder investment has approached $450,000. Airport staff systematically supports sales teams at the large hotels and resorts with information that those facilities use to help attract individuals and meetings/convention groups. Because of its high average temperatures, the sum- mer months are the area’s “low” season. The airport, Bureau of Tourism, and CVA are working to attract additional travel during the “shoulder seasons.” Airports and communities can influence carriers’ air service decisions by providing information on the local market that they cannot otherwise find.

However, their willingness to support an ASD program will depend on whether they believe that it will generate a positive return on their investment and whether new service meets business objectives (e.g., new nonstop service to a major business destination, direct service from a key inbound tourist market). If proposed new service has been thoroughly ana- lyzed and meets the fundamental criteria, then major stakeholders should be able to under- stand the business reasoning behind the need for an incentive package, and the need for their involvement. State and federal government agencies can also be stakeholders. Both can contribute to ASD efforts. Consider: • State governments invest more than $800 million annually in planning, operations, infrastruc- ture development, maintenance, and navigational aids for the nation’s 3,000 public-use air- ports. For example, both Kansas and Wyoming supported programs to bring more affordable air service to commercial airports in their states. The Kansas legislature in 2006 committed to a five-year, $25 million program. Wyoming has provided $3 million per year since 2002 for air service development. • The federal government contributes direct financial assistance to support air service at small communities. – First, under the Essential Air Service program, U.S.DOT subsidizes service to 102 commu- nities in the continental United States and another 39 in Alaska. In 2009, Congress provided $110 million to fund the program. – Second, the SCASDP provides grants to help small communities achieve sustainable air service. As established, an additional goal of the program was to generate creative ASD pro- posals that could be implemented in other small communities. Through fiscal year 2007, U.S.DOT has issued over 200 SCASDP grants totaling approximately $100 million to small hub and non-hub communities. SCASDP grants have ranged from $20,000 to $1.6 million and have funded a wide range of air service initiatives. Congress has recently been providing $10 million per year for the SCASDP. What factors are not within an airport’s control? To begin with, the broad economic forces at work in the nation and a community—such as changes in its population and economic activity—affect the local demand for air service. Locally, if a company that generates a significant amount of travel either decides to expand or to relocate, such decisions will directly influence carriers’ willingness to serve a community. Similarly, as evidenced by the soaring costs of jet fuel during 2007 and 2008, the loss of demand following the Gulf War, and the industry’s near collapse following the events of September 11, 2001, any major external shock is completely outside of a community’s control. Some of those factors affect carriers’ costs (e.g., oil prices) and others affect carriers’ revenue (e.g., loss of demand during an economic downturn). Both have similar ultimate effects on a carrier’s financial bottom line, so both can influence airlines’ decisions. What is the ASD process? Effective ASD follows a relatively straightforward and logical process. In general, the process begins by identifying key service deficiencies, then flows into setting goals, marshaling resources, selecting a strategy, implementing the plan, and evaluating outcomes. Figure 2.3 illustrates the steps in the process, which is described in greater detail in subsequent chapters. Understanding the Role of Air Service Development 29 Stakeholders’ will- ingness to support an ASD program will depend on whether they believe it will generate a positive return on invest- ment or meets key business objectives.

Summary • “Air service development” refers to the organized activities that an airport and/or its affiliated communities undertake with the ultimate goal of retaining existing air service or improving air access and capacity in order to develop the economy of a community or region. • ASD is important for communities because of the relationship between air service and local economic vitality. Communities compete for air service; those that do not actively compete are at a disadvantage. • Understanding how carriers make decisions on which communities they will serve is funda- mental to developing an ASD program. • Communities should draw on all available local resources for data and support, especially major employers and local economic development authorities. 30 Passenger Air Service Development Techniques Identify Available Resources Assess Existing Service; Identify Deficiencies Identify Major Stakeholders Establish and Validate Goals Select ASD Strategy and Techniques Evaluate Present a Compelling Case to Airlines Figure 2.3. Overview of the ASD process.

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 C H A P T E R 3 Understanding the Context for Air Service Development

the option of flying with United Airlines, connecting over its Denver hub (DEN). United’s Denver to Medford segment uses 70-seat regional jets. 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 short- and medium-haul scheduled service connecting 635 U.S. communities with larger cities and hub airports, using aircraft that range in size from 9 to 108 seats. Figures 3.2 and 3.3 illus- trate two such aircraft—one of Horizon’s Q-400s at Kalispell, Montana, and one of SkyWest’s Brasilia Embraer 120s at Bakersfield, California. Almost all regional airline passengers travel on code-sharing regional affiliates. That is, the regional airlines fly on behalf of larger legacy network carriers rather than under their own name, such as SkyWest flying as a United Express or Delta Connection carrier. The network carrier 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 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. 32 Passenger Air Service Development Techniques Figure 3.1. Spokes served from Delta’s Salt Lake City hub. Hub-and-spoke networks under- score the important role that regional airlines play in connecting smaller communities to the national aviation system.

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. Understanding the Context for Air Service Development 33 Figure 3.2. Horizon Airlines serves Kalispell, Montana, with a Bombardier Q-400. Figure 3.3. SkyWest provides United Express service to Bakersfield, California, with an Embraer 120.

They may also serve smaller communities like Burlington, Vermont; Wichita, Kansas; or Pensacola, Florida; but those are the exceptions rather than the rule. LCCs tend not to serve smaller communities because their focus on business traffic in larger markets means they do not operate aircraft appropriate for small communities. Table 3.1 shows the fleets of the main U.S. LCCs. Except for JetBlue’s 100-seat Embraer ERJ 190 aircraft and Frontier subsidiary Lynx Aviation’s 74-seat Bombardier Q-400s, LCCs do not operate smaller regional aircraft. Small Communities and Niche Airlines Airlines that cater to a particular market segment—or niche—sometimes provide specialized services to small communities. Niche airlines serve major leisure destinations such as Orlando, Las Vegas, or the Caribbean and may also fly to other major U.S. cities, usually in southern states (e.g., Phoenix or Tampa). Depending on the airline, they may operate from smaller airports that are nonetheless close to substantial populations. U.S. niche airlines include Allegiant Air, Spirit Airlines, and USA 3000 Airlines. Allegiant focuses on flying travelers from 51 smaller cities to leisure destinations such as Las Vegas, Nevada; Phoenix, Arizona; and Fort Lauderdale, Orlando, and Tampa/St. Petersburg, Florida. The carrier operates a low-cost, high-efficiency airline offering air travel both on a stand- alone basis and bundled with hotel rooms, rental cars, and other travel-related services. During the second quarter of 2008 Allegiant Air announced new service, including the following: • Bellingham, Washington, to San Diego and San Francisco • Santa Barbara, California, and Monterey, California, to Las Vegas • Wilmington, North Carolina, to Orlando • Grand Forks, North Dakota, and Casper, Wyoming, to Las Vegas Spirit and USA 3000 operate mostly from larger cities to destinations in the Caribbean and Latin America. What are the most significant recent trends in the airline industry? Since deregulation, commercial airlines have struggled to find business models that are viable over the long term. Airlines have consistently labored to control their costs while gen- erating enough revenue to earn a return on investment. According to the Air Transport 34 Passenger Air Service Development Techniques LCCs tend not to serve smaller communities. Their fleets are not appropriate for the amounts of passenger traffic that those communities generate. Airline Aircraft Type Seating Capacity Southwest B737 122–137 JetBlue A320 150 E190s 100 Frontier A318 114–118 A319 132–136 A320 162 Q-400 (Lynx) 74 AirTran B737s 137 B717 117 Virgin America A319 122 A320 149 Table 3.1. LCC fleets (as of September 2008). Since the industry was deregulated in 1978, commercial airlines have struggled to find business models that are viable over the long term.

Association, since the industry’s inception, it has failed to generate a long-term positive net operating profit. Despite these challenges, the industry has attracted new entrants that believe they can operate successfully. New competition forces a competitive response from incumbents. The net result has been that most consumers have enjoyed long-term decreases in ticket prices when adjusted for inflation. Consumers also have more choices of airlines that are competing in more markets, allowing them to fly to more destinations on either a nonstop or one-stop basis. New entrants have also brought new technology to in-flight entertainment, with live television programs and satellite radio. However, many small communities have great difficulty attracting and retaining service. Congestion and delays are much worse than in years past. Many U.S. carriers have not been able to invest in new aircraft in a number of years, and passengers’ on-board perceptions reflect that wear and tear on the equipment. Older equipment needs more maintenance. Some legacy air- lines are charging fees for items that were formerly included in the price of a ticket. How did the industry come to this point? The industry has a long-term record of growth in total capacity and enplanements. The demand for air travel is closely related to growth in national economic activity (as measured by the Gross Domestic Product). As shown in Figure 3.4, the total amount of capacity offered by commercial airlines and the total number of passenger enplanements have risen relatively constantly, except Understanding the Context for Air Service Development 35 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 (000s) RPMs ASMs Pres. Reagan fires air traffic controllers Gulf War Sept. 11 Note: Capacity is expressed in available seat miles (ASMs)—a measure of the number of seats available for purchase and the total number of miles those seats are flown. Passenger demand is expressed in terms of revenue passenger miles (RPMs), which counts the number of ASMs for which a passenger has paid. Figure 3.4. Capacity and traffic have grown over time.

for times of significant economic downturn (often precipitated by major external shocks, such as the first Gulf War; the events of September 11, 2001; and the 2008 spike in fuel costs). Commercial aviation has historically experienced pronounced business cycles. As the indus- try has grown, so too have the peaks of profitability and troughs of losses. Figure 3.5 illustrates the swings in net operating profits since the industry was deregulated. It highlights the five years of losses that began with the first Gulf War, followed by the six-year period of profitability in the late 1990s, and the significant losses that severely crippled the industry beginning in 2001. The increasing penetration of LCCs has contributed to the industry’s difficulties in generating “enough” passenger revenue to earn net operating profits. LCCs’ abilities to offer lower airfares force network carriers to offer competitive fares as well. For many years, the major network air- lines were able to fend off start-up LCCs. Many of those new entrants suffered from strategically questionable business plans and/or a lack of sufficient capital to withstand a prolonged competi- tive response from incumbents. Carriers like Air South, Kiwi International Air Lines, Legend Airlines, Western Pacific Airlines, and Vanguard Airlines briefly competed in various markets. Beginning in the late 1990s, however, other new entrants were able to adopt the Southwest model more successfully. They came into the industry with considerably more capital and bet- ter management. These carriers managed to compete head-to-head with the legacy network air- lines and survive both the downturn associated with the “dot.com” bust and the events of September 11, 2001. These LCCs—Southwest, AirTran, Frontier, Virgin America, and JetBlue— have slowly expanded their overall market penetration. According to the GAO, these carriers compete in about 40 percent of the nation’s largest 5,000 markets (which account for more than 90 percent of total passenger traffic) (4). Bombardier reported that LCCs’ share of U.S. domes- tic capacity has grown to 27 percent (see Figure 3.6) (5). 36 Passenger Air Service Development Techniques -14.0 -9.0 -4.0 1.0 6.0 $ Millions Reagan fires air traffic controllers Gulf War "Dot.com" bust Sept. 11 2007 Figure 3.5. Cyclicality of U.S. commercial airlines’ net operating profits.

Markets are becoming more competitive. GAO’s 2008 report indicated that the average num- ber of competitors in the largest 5,000 city-pair markets has increased since 1998. The increased competition—especially from LCCs—added pressure on all airlines to keep airfares as low as possible. As a result, average fares have fallen over time. Between 1998 and 2006, the round-trip average airfare in the top 5,000 markets fell from $198 to $161 (in 2006 dollars), a decrease of nearly 20 percent. Expressed in terms of passenger yields (that is, fares paid divided by the total miles flown), airlines have had difficulty raising fares. See Figure 3.7. Increased fare competition has pressured airlines to reduce their operating costs to improve their financial positions and better insulate themselves from the industry’s boom and bust cycles. Excluding fuel, unit operating costs for the industry [typically measured by cost per available seat mile (CASM)] have decreased 16 percent since reaching peak levels around 2001. Despite the efforts made by legacy carriers, the cost gap between legacy and low-cost airlines still exists. In the difficult years immediately after September 11, 2001, many airlines achieved dramatic cuts in their operational costs by negotiating contract and pay concessions with their labor unions, through bankruptcy restructuring, and through personnel reductions. For example: • Northwest Airlines pilots agreed to two pay cuts—15 percent in 2004 and an additional 23.9 percent in 2006, while in bankruptcy—to help the airline dramatically reduce operating expenses. • Frontier used its recent bankruptcy protection to break ties with its regional partner Republic Airways. Republic flew the 76-seat Embraer 170 in its code-sharing relationship with Frontier. Frontier subsidiary Lynx Aviation will replace that capacity with its Q-400s, which burn 30 percent less fuel. Understanding the Context for Air Service Development 37 0.50 0.51 0.54 0.57 0.60 0.64 0.66 0.69 0.27 0.26 0.23 0.22 0.21 0.19 0.18 0.16 0.23 0.23 0.23 0.21 0.19 0.17 0.16 0.15 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 Q1 2006 2005 2004 2003 2002 2001 2000 Regional Low Fare Mainline Source: Bombardier Corp. Figure 3.6. Capacity shares held by mainline, regional, and low-cost carriers. Increased competi- tion has pressured airlines to reduce operating costs.

• Legacy airlines cut personnel as another means to reduce costs. The average number of employees per legacy airline decreased 26 percent from 1998 to 2006. • Several airlines also used bankruptcy to significantly reduce their pension expenses, as some airlines terminated and shifted their pension obligations to the U.S. Pension Benefit Guaranty Corporation. As is now well known, fuel costs soared over the last few years before collapsing in the second half of 2008. In early 2008, jet fuel climbed to over $2.85 per gallon. By comparison, jet fuel was $1.11 per gallon in 2000, in 2008 dollars. As shown in Figure 3.8, despite the downturn in jet fuel costs, total industry fuel expenses in 2008 approached $60 billion—nearly four times total indus- try expenses in 2003. As a result, cost savings that the industry achieved from labor have been more than offset by increases in the cost of fuel. (See Figure 3.9.) Historically, fuel expenses ranged from 10 percent to 15 percent of U.S. passenger airline operating costs. Now, those costs are between 35 percent and 50 percent. Many industry experts believe that airlines simply are not able to raise fares sufficiently to cover the costs of increased fuel charges, at least not at this point in time, without losing consid- erable portions of their passengers. For example: • “The industry can attempt to pass on its higher fuel costs in the form of multiple fare increases, but given the elasticity of demand, only so much can be done without substantially reducing domestic capacity. We continue to believe that there is likely to be another large cut to domes- tic capacity in 2H 2008 if the industry does not see any relief from record high fuel prices.” —Merrill Lynch Equity Research (6) • “[R]aising airfares isn’t like raising the price of milk at the grocery store. Consumers have almost perfect information for price comparisons—the Internet can hunt the cheapest fare 38 Passenger Air Service Development Techniques 0 2 4 6 8 10 12 14 16 Yield (cents) Nominal Dollars Constant Dollars Source: InterVISTAS analysis of U.S.DOT data. Figure 3.7. Average yields have declined.

Understanding the Context for Air Service Development 39 0 5 10 15 20 25 0 10 20 30 40 50 60 70 2000 2001 2002 2003 2004 2005 2006 2007 2008 Billion gallonsBillion dollars Expenses Consumption Figure 3.8. Fuel costs have soared over the past five years. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Percent of operating costs Fuel/Oil Labor Figure 3.9. Fuel costs now exceed labor.

worldwide in seconds. If one carrier has some empty seats to fill, it will have to cut the price because getting something for that seat is better than flying it empty. And there’s lots of com- petition in the industry—some airlines have lower cost structures than others, or better fuel hedges, and can absorb more of the higher costs than others.” —Scott McCartney, The Wall Street Journal (7) In conjunction with a 2008 slowdown in the U.S. national economy causing consumers to reduce discretionary spending, carriers have begun to take extraordinary measures to reduce fuel costs and cut capacity. For example: • US Airways announced that it will reduce its domestic mainline capacity by 6 to 8 percent in the fourth quarter compared with a year earlier, and slash capacity in all of 2009 a further 7 to 9 percent. It will return 10 narrowbody aircraft to lessors by 2009 and cancel leases of two widebody aircraft. The carrier announced that it will cut 300 pilots, 400 flight attendants, 800 airport employees, and 200 staff and management employees. • Continental will reduce its domestic capacity by 11 percent. Continental’s capacity in Cleveland will drop 13 percent and it will cut service to 24 cities. • United announced that it would reduce its mainline domestic capacity after the summer travel season, eliminating 30 older 737s from its fleet. At the end of 2008, United’s domestic capac- ity will have decreased by 6 to 7 percent. • Ten airlines have filed for bankruptcy or ceased operations since December 2007, with many citing the significant increase in fuel costs as a contributing factor. The airlines that filed for bankruptcy or ceased operations in 2008 included Air Midwest, Aloha Airlines, ATA Airlines, Big Sky Air, Champion Air, EOS Airlines, Frontier Airlines, MAXjet Airways, Skybus Airlines, and Sun Country. • ExpressJet suspended its “branded flying” (i.e., flying not as Continental Express or Delta, but as ExpressJet). The regional carrier connected many smaller communities with its 29 ERJ 145s. Despite flying 503 million revenue passenger-miles (RPMs) and a load factor of 71 percent in the second quarter of 2008, record-breaking fuel prices forced the airline to abandon those operations on September 2, 2008. The Cost and Revenue Challenges of Operating Small Aircraft Over time, U.S. carriers have been flying more capacity and more passengers in increasingly smaller aircraft. Carriers now operate very few widebody aircraft in domestic service. Since 2003, the number of departures by widebody aircraft has decreased 46 percent. On the other end of the aircraft spectrum, the use of turboprop aircraft has also decreased. Figure 3.10 illustrates the change in the use of turboprop, regional jet, and narrowbody aircraft since 2003. It indicates that regional jet usage remains slightly higher than 2003 levels. Turboprop departures, on the other hand, have dropped by nearly 25 percent. Airlines have moved toward smaller aircraft in part because those aircraft are operated by regional affiliates, which have a lower cost structure than mainline operations. In larger markets, using smaller aircraft gives network carriers an option to offer additional frequencies spread throughout the day, which allows passengers—especially business travelers—more flexibility in when they can travel. In other communities, using smaller aircraft also allows carriers to offer service because the capacity is better suited for smaller markets. The Regional Airline Association (RAA) notes the importance of regional aircraft to the U.S. national aviation system. In 2007, regional airlines: • Operated a fleet of 2,462 aircraft, with an average size of 52 seats; • Completed nearly five million departures, with an average stage length of 464 miles; and • Provided the only scheduled service at 70 percent of the U.S. airports that received commer- cial service. 40 Passenger Air Service Development Techniques U.S. network air- lines have moved toward using regional partners’ smaller aircraft, because of cost reasons. Smaller aircraft also allow for greater frequencies.

Over recent years, the average size of the regional fleet has slowly increased. The number of 19- to 37-seat turboprop aircraft in the regional fleet has slowly dwindled, replaced by larger regional jets. Now, the most widely used aircraft in the regional fleet are the 50-seat regional jets manufactured by Bombardier and Embraer (Table 3.2), and more flying is now being done in 70- and 90-seat jets. The popular tide began to turn against small regional jets (RJs) in the last few years. As net- work airlines replaced mainline flying with RJs and began deploying RJs over longer routes, pas- sengers became less enamoured with the aircraft. Passengers complained about their cramped interiors and relatively poor ergonomics compared to the larger narrowbody aircraft in which they were accustomed to flying. RJ costs have also risen recently, making them less attractive to mainlines. Fuel costs have been even more important to RJs. The critical difference between the two types of aircraft is that regional jets simply have fewer seats across which an airline can spread uncontrollable costs— such as fuel. So as fuel costs have risen, so have RJs’ unit costs. Fuel might account for 25 percent of the cost of flying a mainline jet, but it can be 40 percent or more of the cost of flying a regional jet. With American Eagle’s Embraer 145 operations, fuel costs have risen from 26 percent of operating costs to nearly 50 percent. See Figure 3.11. In response to the increase in fuel cost and airlines’ inability to pass all of those costs through to passengers because of slackening demand, carriers had little choice except to reduce their capacity. Figure 3.12 summarizes the cuts that carriers announced for the last quarter of 2008. The reductions allowed the airlines to remove some of the more inefficient aircraft from their fleets, but it also meant decreases in services and competition at many communities. Understanding the Context for Air Service Development 41 -30% -20% -10% 0% 10% 20% 30% 40% Narrowbodies Regional Jets Turboprops Source: InterVISTAS analysis of DOT data. Figure 3.10. Percent change in use of aircraft since 2003. Because of rising fuel costs and their inability to pass those costs on to passengers in a declining market, carriers had no choice except to decrease capacity.

Continental, for example, announced a total capacity reduction (mainline and regional) of 6.4 percent compared to the prior year, beginning in September 2008. It plans to reduce regional operations from Cleveland to 24 cities, most of which were served by its Continental Connection regional partners. Some of the smaller cities losing service included Toledo, Des Moines, Tulsa, and Green Bay. Delta expects to cut service to smaller markets by eliminating 60 to 70 regional jets by the end of 2008 and reducing the number of regional carriers it uses. According to Credit Suisse, Delta is cutting service in markets where there is no direct competition, such as in Cincinnati and Salt Lake City. Another target for cuts is regional nonstop flights that bypass hubs, which the carrier does not believe are economical in this fuel environment. Very Light Jets and Air Taxis—an Emerging or a Dying Niche? Generally speaking, very light jets are jet aircraft with a maximum take-off weight of 10,000 pounds, certified for single pilot operations, equipped with advanced avionic systems, and priced below other business jets. Two models of VLJs—the Cessna Citation Mustang and Eclipse 500 (See Figure 3.13)—received FAA type and production certification and began delivering aircraft. Market conditions in 2008 and 2009 have seriously hampered the development of this niche. DayJet Corporation operated a fleet of Eclipse 500 aircraft in the U.S. Southeast, connecting 42 Passenger Air Service Development Techniques Company Aircraft Type Average Seats Number in Service Total Seats Bombardier CRJ 100 / 200 50 748 37,400 Embraer EMB 145 50 524 26,200 Bombardier CRJ 700 70 230 16,100 Embraer EMB 135 37 157 5,809 Embraer ERJ 170 70 137 9,590 Saab Saab 340 35 135 4,725 Bombardier DHC-8 100 / 200 37 125 4,625 Bombardier CRJ 900 86 110 9,460 Raytheon Beech 1900 19 79 1,501 Embraer EMB 120 30 68 2,040 Bombardier DHC-8Q-400 74 58 4,292 ATR ATR 72 60 51 3,060 Cessna Cessna 402* 9 49 441 Bombardier DHC-8Q-300 50 39 1,950 Bombardier DHC-6 19 20 380 Cessna 208-Caravan 10 13 130 Britten Norman BN Islanders 9 8 72 Embraer ERJ 190* 106 8 848 Fairchild/Dornier Metro 19 6 114 Piper Chieftain* 9 4 36 Reims-Cessna 406 9 4 36 ATR ATR 42 48 2 96 Raytheon B200 9 2 18 Embraer EMB 110 15 1 15 Convair 340/440 50 1 50 *Includes only aircraft for RAA members. Source: Regional Airline Association 2008 Annual Report Table 3.2. U.S. regional fleet (as of July 2008).

Understanding the Context for Air Service Development 43 0% 10% 20% 30% 40% 50% 60% Percent of operating expenses Figure 3.11. Fuel costs represent nearly half of American Eagle’s Embraer 145 operating costs. 0% 2% 4% 6% 8% 10% 12% 14% United American Continental Delta Northwest US Airways Airtran Decreases in Available Seat Capacity Figure 3.12. Announced airline capacity reductions, fourth quarter 2008.

more than 60 community airports across Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. In late September, however, DayJet notified FAA that it planned to halt its air taxi operations for economic reasons. Former American Airlines CEO Robert Crandall, who planned to launch a charter operation called Pogo using the Eclipse, has also decided to ground those plans. What are the key relevant regulatory issues? The Airline Deregulation Act phased out federal control over airline pricing and routes in 1978, but the federal gov- ernment continues to maintain some regulatory control over the industry, particularly in terms of economic licens- ing and safety. Describing these federal responsibilities thor- oughly would require volumes. For example, airport rates and charges are governed by a large body of federal laws, regulations, agreements, and court decisions. Moreover, those policies are changing frequently. (As an example, the FAA proposed a policy that would allow operators of con- gested airports to use landing fees to provide incentives to airlines to operate at less congested times or to use alternative airports.) This guidebook does not offer definitive guidance on what may or may not be permissible under all situations. Questions about whether specific policies or charges are con- sistent with FAA guidance should be referred to an attorney. A few permissible policies and charges are highlighted in the following paragraphs. The U.S.DOT regulates who may operate commercial airlines in the United States. To provide interstate or foreign passenger and/or cargo service, carriers must obtain a “cer- tificate of public convenience and necessity” from the Office 44 Passenger Air Service Development Techniques Source: Image courtesy of Eclipse Aviation Figure 3.13. VLJ aircraft. Explanatory example of U.S.DOT’s ability to revoke a carrier’s certificate Boston-Maine Airways Corp. (BMAC) began flying in 2001 with a fleet of seven 19-seat Jetstream 3100 aircraft. BMAC conducted business as “Pan Am Clipper Connection” and flew scheduled passenger service between various small cities. At various times, BMAC served Portsmouth, New Hampshire; Bedford, Massachusetts; Cumberland, Maryland; Tunica, Mississippi; and Trenton, New Jersey; among other locations. In April 2008, acting under its authority to ensure that air carriers are “fit, willing, and able” to pro- vide service, U.S.DOT revoked BMAC’s operating certificate. U.S.DOT concluded the carrier did not possess the (1) financial wherewithal to continue or expand its operations without posing an undue risk to consumers and their funds, (2) managerial com- petency to oversee its current and proposed opera- tions, and (3) proper regard for laws and regula- tions concerning safety standards and acceptable consumer relations practices.

of the Secretary of Transportation. U.S.DOT may grant “economic” authority for a carrier to operate only after finding that it is “fit, willing, and able” to do so. Recently, not all airlines have been able to meet that “economic fit- ness” test. Applicants must then obtain a separate “safety” or “air- worthiness” certificate from FAA before the carrier is allowed to operate. FAA’s regulatory policy is premised on an “obligation of the air carrier to maintain the highest pos- sible degree of safety.” Before it will issue an operating cer- tificate, FAA must be satisfied that an air carrier is capable of operating safely and complies with applicable regulations and standards. The FAA exercises other safety responsibilities: (1) veri- fies that an air carrier continues to meet regulatory require- ments by conducting periodic reviews and (2) continually validates the operational safety performance of air carriers. It does so through regular inspections. FAA can revoke the operating certificate of airlines that do not meet safety requirements. In addition to its safety responsibilities, FAA oversees many aspects of airport operations, such as how airports can use their revenue. In a vast oversimplification, airports can use revenues generated by the airport only for capital or operating costs of the airport. Those operating costs include promotional costs. Federal policy generally holds that airport operators can use airport revenues to finance the promotion or marketing of the airport and/or the introduction of new air service, and to encourage competition at the airport. Airport opera- tors can also use airport revenues for “cooperative airport-airline advertising.” Airport opera- tors can use airport revenues to pay a portion of other advertising and promotional activities, but only if the airport is referenced in the materials. Airports’ incentive programs must be consistent with various legislative and regulatory requirements. There are several, but they notably include: • 49 USC 41713, which broadly prohibits any public organization from enacting laws, rules, or regulations that affect the price, route, or service of an air carrier; • 49 USC 47107, which requires the following with respect to incentives: – The airport be available for public use on reasonable conditions and without unjust discrimi- nation, and – Air carriers making similar use of the airport will be subject to substantially comparable charges [emphasis added]; and • 49 USC 47133, which generally prohibits the use of revenues generated from an airport from being used for anything except the capital or operating cost of the airport. Airports must follow particular grant assurances. Under the three that come into play most often with incentive programs, airport operators and/or sponsors agree generally to abide by the following: • Economic non-discrimination: to make the airport available as an airport for public use on rea- sonable terms and without unjust discrimination to all types, kinds, and classes of aeronautical Understanding the Context for Air Service Development 45 Safety rule that affected small community service directly One significant change in safety requirements that influenced small communities was the adoption of the Commuter Safety Initiative (or “Commuter Rule”) in 1995. This rule set a single level of safety for all travelers by applying the stricter standards of major airlines (Federal Aviation Regulations, Part 121) to commuter airlines that had scheduled passenger operations and/or used aircraft seating 10 to 30 passengers or propelled by turbojets. These stricter standards imposed new requirements on commuter air carriers relating to airplane per- formance and flight crew training and qualifica- tions such that small carriers’ operating costs increased. This cost hampered the ability of regional airlines to use small aircraft—especially 19-seat turboprops—in many markets. Now, air- craft that size is seldom used except in markets that are federally subsidized through the Essential Air Service program. Federal policy gen- erally allows airport operators to use airport revenues to finance ASD activi- ties and encourage competition at the airport.

activities, including commercial aeronautical activities offering services to the public at the air- port. • Exclusive rights: to permit no exclusive right for the use of the airport by any person provid- ing, or intending to provide, aeronautical services to the public. • Fee and rental structure: to maintain a fee and rental structure for the facilities and services at the airport that will make the airport as self-sustaining as possible. See Chapter 8 for additional information on airport incentive programs. Summary • Most small communities remain connected to the national aviation system through network airlines’ hub-and-spoke systems. While those systems may not provide as many nonstop opportunities as some travelers might want, they nevertheless generally offer competitive one- stop alternatives. • With the growth of the U.S. low-cost industry segment, increasing numbers of Americans have access to the competition in many larger markets. Leisure travelers in many markets also ben- efit from niche carriers’ service to major leisure destinations. • Increasing levels of competition—especially from LCCs—have helped push down average air- fares for the vast majority of U.S. passengers. • Even in “normal” times, providing service to smaller communities is a challenging proposi- tion for airlines because of the need to match limited passenger demand—and its correspond- ing limited revenue—with the right amount of capacity, while controlling operating costs. Network airlines provide service to small communities by extending service from their hubs with code-sharing regional carriers. Those regional airlines offer many advantages for legacy airlines in allowing them to extend their branded networks and provide seamless travel to communities that could not support service from larger aircraft. • Over time, the fleet used by regional carriers has tended to increase in size. Changing regula- tory safety requirements increased the costs of operating smaller aircraft. Evolving aircraft technology and provisions in airline-labor agreements led to a proliferation of regional jets in the late 1990s, which passengers tended to prefer over turboprops with visible propellers. • However, the cost of operating all these aircraft has soared in the last couple years because of the price of fuel. Coupled with the effect that energy costs have had on the economy as a whole, most major airlines have announced significant cuts in service beginning in late 2008. • Fuel costs dramatically influence the viability of RJ service to some smaller communities. As their operating costs have increased and passenger demand has dropped, markets that might have been marginally profitable have suddenly become very unprofitable. These changes have forced airlines to re-examine their service options. 46 Passenger Air Service Development Techniques

Each of the 426 small and non-hub airports in the United States operates under its own unique set of circumstances that present challenges to its ability to retain or enhance commercial air ser- vice. While each airport is unique, they share many common traits. In this chapter are described the common major challenges that small communities face in operating viable air service. How do local demographic and economic characteristics influence air service? Chapter 2 discussed some of the factors that airlines take into account in deciding whether to serve a particular location and the extent to which communities might be able to influence those decisions. The basic underpinning of those was passenger demand. There are fundamental and direct relationships between population, economic strength, the availability of competitive alter- natives, and the amount of air service that carriers believe a community can support. All else being equal, communities with more population, employment, and income will demand more air service. As passenger demand increases, the supply of air service will increase to meet that demand. Communities with greater levels of income and gross regional product and larger populations and employment levels will receive more substantial air service. A second key aspect of passenger demand at a smaller community is the availability of alter- natives. Travelers to or from smaller communities will demand more air service if the alterna- tives to that air service (e.g., service at another airport or the availability of interstate highways) are either costly or unavailable. In other words, communities that are farther from an airport with an LCC may receive “better” service. Research has statistically quantified the differences in air service accounted for by differences in these key variables. For example, a 2002 federal government study of how air service at small communities changed following the events of September 11, 2001, discussed the basic economic principles that affected commercial air service (8). In an economic analysis of changes in air ser- vice among 202 small communities, it reported the following: • For every additional $5,000 in per capita income, a community received 3.3 and 12.7 more jet and turboprop departures per week, respectively. In other words, if two small communities, A and B, were identical in every way except that Community A had $5,000 more in per capita income than Community B, then Community A had roughly 16 more total departures per week than Community B. This difference in the number of total departures was attributable to the difference in per capita income. • A community received 4.3 and 4.8 more jet and turboprop departures per week, respectively, for every additional 25,000 jobs in the community. 47 C H A P T E R 4 Understanding the Key Challenges to Viable Air Service at Smaller Communities There are funda- mental and direct relationships between popula- tion, economic strength, the avail- ability of competi- tive alternatives, and the amount of air service that carriers believe a community can support.

• A community with $250,000 more in manufacturing earnings received 4.8 more jet departures per week than an otherwise similar community. • A community received 4.7 more jet departures per week for every additional 50 miles separat- ing the airport from an LCC. The 41 airports surveyed had estimated average catchment area populations of about 600,000. Non-hub and small hub airports differed significantly in terms of those populations: an average of 395,000 versus an average of 950,000. An additional variable that influences demand at small airports is their association with regional or natural attractions that may cause significant seasonality in demand. For example, airports in or around ski resorts may receive significantly more service during the winter months, which drops off dramatically during the summer. Service to some southern resort locations—such as Palm Springs, California—can also be seasonal: average daily departures drop as the average temperatures soar. See Figure 4.1. What are small airports’ most common competitive challenges? Although small communities share certain fundamental economic characteristics, each is unique in terms of the size and economic characteristics of its catchment area; proximity to com- peting airports (perhaps a legacy carrier hub, an airport served by an LCC, or just a different air- port with service from other airlines); or physical limits, such as the length of its runways. Competitive Challenges Cause Passenger Leakage Because of these challenges, almost all small airports suffer from a phenomenon in which the passengers who might naturally use the local airport choose instead to fly from a different air- port. They may make that decision because they perceive that the fares are cheaper or because the other airport has service from a different airline, which may fly nonstop to a desired destination. 48 Passenger Air Service Development Techniques 0 20 40 60 80 100 120 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average daily high temperature Average daily departures Figure 4.1. Service in Palm Springs, California, is related to its temperatures.

This loss of nearby traffic to a competing airport is referred to as “leakage.” Smaller community airports often have difficulty with passenger leakage. Nearly half of the nation’s small commu- nity airports are within 100 miles of a large hub airport or another airport served by an LCC. Surveyed airports confirmed that they lose a significant share of their potential passenger traffic to competing airports that are, on average, between 75 and 100 miles away. As shown in Figure 4.2, the situation is much worse for non-hub airports compared to small hub airports and is com- pounded when competing airports have relatively good highway access. Airport managers and ASD officials believe that the primary reason they lose business passen- gers is the greater range of choices available at competing airports. This is particularly true of non-hub airports: Eighty percent of the airports surveyed thought that they lost passengers because travelers had more options with nonstops, arrival and departure times, and frequencies. (See Figure 4.3.) Easy highway access to those locations was also a factor. For business travelers, lower fares are also important (whether from legacy carriers or by LCCs), but are apparently not as critical as convenience. Leisure passengers use alternative airports for one essential reason: access to lower fares. Surveyed airport managers overwhelmingly agreed that they lost potential leisure traffic because better fares were offered either from an LCC or a network carrier at a competing airport. Leisure travelers also valued access to other destinations with nonstop service. Proximity to Legacy Network Hub Many smaller community airports are relatively close to a legacy network carrier’s hub. As shown in Figure 4.4, for example, Colorado Springs, Colorado, is less than 90 miles away from United’s hub at Denver International. As a result, passenger traffic that the airport might otherwise Understanding the Key Challenges to Viable Air Service at Smaller Communities 49 Smaller community airports usually have difficulty with passenger leakage, because most are within 100 miles of a large hub airport or another airport served by an LCC. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Nonhubs Small hubs Percent captured Percent leaked Figure 4.2. Non-hub airports capture less than 25 percent of their potential passenger traffic.

50 Passenger Air Service Development Techniques 0% 20% 40% 60% 80% 100% Jets not turboprops Frequent flyer programs Legacy carrier lower fares Larger aircraft Access to LCC More frequencies Easy access by highways Choice of arr/dep times More nonstop destinations Small hubs Nonhubs Figure 4.3. Why business passengers use other airports. Figure 4.4. Colorado Springs is less than 100 miles from United’s hub at Denver International.

have captured drives instead to the larger airport, which offers service to far more nonstop des- tinations, with multiple daily frequencies, often using larger aircraft. The ease with which pas- sengers can reach those airports can vary, depending on whether they are connected via inter- state highways. In addition, the distance travelers will consider driving to reach an alternative airport can vary significantly. Particularly in midwestern and western states, many people are willing to drive several hours to reach an airport served by a carrier offering lower fares. Attracting additional service to these locations can be challenging because carriers realize that passenger leakage to the hub will be difficult to reverse. What reasons do passengers give for using another airport? Business passengers leak to larger airports because of: • More nonstop destinations, • Frequencies, • Choice of arrival and departure times, • Ease of access by highways, and • Fares. Leisure passengers leak to larger airports because of: • Fares! Fares! Fares! Proximity to Airport with LCC Service Similarly, as LCCs have spread into more markets (albeit usually larger cities), many smaller communities are also close to an airport served by an LCC. As shown in Figure 4.5, Santa Rosa, California, for example, is less than 70 miles to either Oakland International Airport (served by Southwest, JetBlue, and Allegiant) or San Francisco International (served by Southwest, JetBlue, and Virgin America). Just as some travelers will drive relatively long distances to reach service at a hub airport, others will drive long distances to reach an airport served by Southwest, AirTran, or other LCCs. This phenomenon is particularly true for family leisure travel, because the fare Understanding the Key Challenges to Viable Air Service at Smaller Communities 51 Figure 4.5. Sonoma County Airport is close to airports in both San Francisco and Oakland.

differentials may be significant and leisure travelers do not always consider the value of their time, parking at the larger airport, and other expenses. Attracting more service to these airports can be difficult because the carriers realize that unless they can match the LCC’s fares, a portion of the passengers will continue driving for LCC service. Small Populations that are Geographically Isolated Some smaller communities have difficulty attracting additional air service simply because they draw from an area with a relatively small population and a limited amount of economic activ- ity. In addition, many of those communities may be in areas of the country that have tradition- ally been served by a single airline, such as many smaller communities in the upper Midwest long served by Northwest. If a smaller community has access to only one network, passengers have no competitive choices for reaching many points. Some of these communities may only receive service because the federal government subsidizes it through the Essential Air Service program. Attracting competitive alternatives to those communities can be difficult, because of the chal- lenges associated with overcoming the local passenger’s affinity to the incumbent airlines and because the small markets have difficulty supporting more air service. Aircraft capacity and the length of haul to another carrier’s hub can be hurdles. Fragmentation of the Local Passenger Traffic Base among Competing Nearby Airports Other smaller airports may not be in the figurative shadow of a hub or an airport served by an LCC, but they might be close to several other smaller airports that have commercial ser- vice. The result is that they compete among themselves for the available passenger traffic. The nearby airports usually are not served by the same network carrier, because that carrier under- stands that it can attract passengers to its service with its presence at just one of the locations. Attracting additional competition to one of those airports can be difficult because carriers believe that the overall catchment area is already quite competitive. As shown in Figure 4.6, passengers flying to or from the northern coast of the Gulf of Mexico have multiple choices among nearby airports. 52 Passenger Air Service Development Techniques Figure 4.6. Gulf Coast passenger traffic splits among several airports.

Predominantly Inbound Markets that Rely on Tourism Some small communities are located near natural attractions that tend to be seasonal in nature. These may include major national parks (such as Yellowstone or Glacier) or ski resorts (such as Sun Valley, Idaho; Steamboat Springs, Colorado; or Rutland, Vermont). Year-round residents of those communities may have abundant service during the “high” season (although it may be expensive), but far less service during the off season. Certain airports, such as West Yellowstone, may only have service during parts of the year. Attracting additional service—even if it is only more off-season capacity—can be difficult for many of these communities, because airlines may not understand the permanent level of economic activity. Many Small Communities Face Multiple Challenges Smaller communities’ airports often face more than one significant challenge. For example: • Harrisburg, Pennsylvania, is within a relatively short drive of several major airports, includ- ing Washington Dulles International (a hub for United also served by JetBlue, Southwest, and Virgin America), Baltimore/Washington International (Southwest’s largest East Coast oper- ation), and Philadelphia International (a hub for US Airways). • Bakersfield, California, is relatively close to Fresno Yosemite International to the north and Los Angeles/Ontario International and Los Angeles International to the southwest. • Lawton–Fort Sill (Oklahoma) Regional Airport divided its natural traffic with Will Rogers World Airport in Oklahoma City (88 interstate highway miles to the northeast, an airport served by Southwest) and Dallas/Fort Worth International Airport (American’s hub 182 miles to the south). Table 4.1 provides examples of smaller airports and some of the competitive challenges they faced. Each may also face additional competitive pressures from other nearby facilities as well, along with limits to their infrastructure (such as relatively short runways or obstructions). Understanding the Key Challenges to Viable Air Service at Smaller Communities 53 Major Competitive Challenge Communities Proximity to legacy network hub Logan, UT Kalamazoo, MI Toledo, OH Rockford, IL Harrisburg, PA Colorado Springs, CO Proximity to airport with LCC service Huntington, WV Daytona Beach, FL Santa Rosa, CA Mobile, AL Rockford, IL Harrisburg, PA Small, isolated communities Butte, MT Marquette, MI Idaho Falls, ID Victoria, TX Dickinson, ND Fragmented market Greenville, NC Ithaca, NY Mobile, AL Lawton, OK Florence, SC Stewart (Newburgh), NY Predominantly inbound (tourist) market Hailey, ID Hayden, CO Kalispell, MT Table 4.1. Competitive challenges at selected communities with smaller airports.

Summary • Smaller communities’ airports face a range of significant challenges to both retaining and enhancing their existing air service. • Much of the challenge stems from their proximity to competitive alternatives—service at another larger airport either from another network carrier or from an LCC—combined with relatively good highway access. • As a result, these airports may leak a significant portion of their “natural” traffic base to those other airports. • Although each community has its own unique circumstances, the competitive challenges they face can be summarized into a smaller number of categories. These categories include the following: – Proximity to a legacy network carrier’s hub – Proximity to another airport served by an LCC – Geographic isolation coupled with relatively small population bases – Passenger market fragmentation among multiple nearby airports – Predominantly inbound traffic 54 Passenger Air Service Development Techniques

Next: Part II - Best Practices for Air Service Development »
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TRB’s Airport Cooperative Research Program (ACRP) Report 18; Passenger Air Service Development Techniques explores the underlying competitive challenges that small communities face in retaining or enhancing their commercial air service, examines how communities can address those challenges, and describes the basic components and tools of an air service development program.

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