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

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1 The objectives of this research were to identify and quantify the effects of recent changes in commercial airline service on small- and non-hub airports and the communities they serve and to help these airports develop strategies for achieving and maintaining desired commercial service. This guidebook covers various related topics. Chapter 1 provides an overview of each chapter and presents the following: • A review of literature about airline industry trends • Extensive data analysis of airline industry changes since 2001 • Discussion of common air service development (ASD) programs at small U.S. airports • Description and analysis of case studies conducted at 12 specific small- and non-hub airports • Description and analysis of detailed focus group studies at five of the case study airports • A synthesis of lessons learned from the case studies and focus group studies • New metrics for assessing changes in airport service • A self-assessment tool along with discussion of relevant strategies based on an airport’s specific responses to the tool. To help stakeholders quickly identify usable information relevant to their airports, the following subsections highlight specific findings that focus on ASD programs, lessons learned, a self-assessment tool, and recommended development strategies. Overview of ASD Programs Airports need to understand the forces driving the future of airline services in the United States. Small airports in particular need to understand what actions they and their com- munities can take to attract and retain air services, especially because these actions are con- strained by FAA policies on the allowable uses of airport revenues for airports that receive federal airport grants. Local economic development officials have brought various approaches and tools to bear in trying to attract air carriers to offer service in their communities. One of the most com- mon approaches to attracting air service has been the use of incentives. Although several studies have found that incentives do not guarantee achieving greater levels of air service, many carriers have come to expect that communities will offer some package of incentives to entice the carrier to begin service. As a result, many local and, in some cases, state eco- nomic development officials design and implement their own incentive programs to try to attract air carriers to their communities. Federal programs, such as the Essential Air Service (EAS) program and the Small Commu- nity Air Service Development (SCASD) program, provide financial assistance to communities S u m m a r y Effects of Airline Industry Changes on Small- and Non-Hub Airports

2 Effects of airline Industry Changes on Small- and Non-Hub airports to continue air service or to attract new air service. These programs can help to meet air ser- vice needs, but are subject to program restrictions and limited available funding. Some states also have similar programs. ACRP Project 03-29 focused on additional actions that an airport sponsor or the local community can take regarding air service development. Exhibit S-1 summarizes the types of ASD strategies executed by small- and non-hub air- ports according to a report issued by the U.S. Government Accountability Office (GAO) in 2003. The financial incentives were the most effective at attracting new service, but the new service often ended when the incentives ended. Lessons Learned As part of this research effort, 12 airports were initially identified as case study sites, and 5 of them were subsequently selected for more in-depth analysis based on focus group visits. A synthesis of the lessons learned from these case study and focus group analyses is presented in Chapter 7, along with analysis of important variables that appear to support the success of ASD efforts. Key findings from this part of the research include the following: • Air service development is relative. Air carriers do not choose new routes in a vacuum but through a comparative analysis of likely route profitability across communities. • Although incentive programs can influence air carrier decisions at the margins, local economic growth and market demand are the factors most likely to influence air carrier decision-making. • Many of the factors that determine whether an air carrier will start new service in a com- munity are out of the hands of airport and community leaders. • Given reductions in industry capacity and the competitive nature of air service develop- ment, a focus on retaining existing air service can be an effective strategy. • When deciding whether or not to initiate an ASD program, communities must weigh the cost of the initial investment in incentives for new air service with the likelihood that their market can sustain the service once the incentives end. • As communities look to evaluate and organize local air service efforts, the availability of alternative modes of transportation that take passengers to larger hub airports should be considered when attempting to build community support for the local airport. • A formal airline attraction committee is an effective governance structure to ensure the leadership and organization of community ASD efforts. • Community outreach and education are critical first steps to identifying local demand for service to a new destination and setting expectations. • Airport managers and consultants must identify and target an air carrier whose business model (e.g., route network, fleet, and regional presence) matches the local demand for service. • An incentive program for new service should focus on reducing short-term risk and costs to air carriers while protecting the interests of the community. Exhibit S-1. Air service development efforts of small- and non-hub airports. Type of Effort Non-hub Airports (81 airports) Small-Hub Airports (17 airports) Combined Total (98 airports) Number Percent of Total Number Percent of Total Number Percent of Total Studies 60 74% 15 88% 75 77% Marketing 60 74% 16 94% 76 78% Financial Incentives 33 41% 11 65% 44 45% Other 15 19% 0 0% 15 15% Note: Columns will not add to the total number of airports shown because some airports undertook multiple efforts.

Summary 3 • Community-driven incentive programs signal to air carriers a community’s commitment to and demand for new service. Therefore, incentives based primarily on SCASD funds are a signal of weak community support. • Incentives are a complement, not a substitute, for underlying local demand. There is no “silver bullet” incentive—communities should use a mix of incentives, including cost abatement, minimum revenue guarantees, ticket banks, and marketing assistance. • Once new service is started in a region, the community must work to market and support the flight to ensure its success. Self-Assessment Tool and Recommended Strategies Chapter 9 provides recommended ASD strategies for airport managers and community leaders in communities with small- or non-hub airports to use in retaining or attracting air service. To provide a custom set of strategies for small- and non-hub airports facing diverse challenges, a self-assessment tool has been designed that asks airport managers and com- munity leaders to answer a series of brief questions in five categories: • Local Economic Performance • Existing Air Service Profile • Recent Change in Air Service Performance • Airline and Community Incentive Programs • Level of Community Engagement These categories were selected because of the importance placed on them by airport and community leaders who have led successful air service development efforts. The self- assessment tool, reprinted from Chapter 9, is provided as Exhibit S-2. Using the recommended scoring approach shown above, an airport’s performance can be classified as strong or weak in each of the five categories, and a set of specific recommen- dations tailored to the classification in each category is provided in Section 9.4. For many airport managers, the assessment tool and recommended strategies will allow them to iden- tify and assess ways to help retain and develop scheduled commercial air service given their airport’s particular strengths and weaknesses. Recommendations are summarized below. Strong Local Economic Performance • Ensure that Major Businesses that Depend on Air Service are Active Members of Airline Attraction Committees Many communities that have been successful in attracting and retaining air service and have experienced strong economic performance have effectively involved representatives from major businesses or industries that rely heavily on air travel. Local business participation on airline attraction committees establishes a sense of buy-in and loyalty from major employers to choose to fly from smaller airports and to contribute financially to ASD efforts. • Plan to Meet Routinely to Quantify Both Realized and Unrealized Demand for Air Service Generated by Changes in Economic Indicators and Demographic Factors By routinely meeting to discuss potential business attraction efforts or seasonal tourism projections, airport managers and community leaders can provide unique information to airline route planners about demand for new service in their communities. Information such as seasonality of demand, corporate travel group trends, links with nearby communities, and new or emerging businesses or attractions that drive demand are critical to presenting a com- munity’s demand for new air service effectively.

4 Effects of airline Industry Changes on Small- and Non-Hub airports Exhibit S-2. Self-assessment tool for small- and non-hub airports. Local Economic Performance Response Score Does your region have a major industry or business that depends on airline service? Yes= 1 No=0 Is the count of annual enplaned passengers greater than your current population total? Yes= 1 No=0 Over the past 5 years, has your region experienced employment growth greater than or equal to the national average? Yes= 1 No=0 Over the past 5 years, has your region experienced per capita income growth greater than or equal to the national average? Yes= 1 No=0 Total Score Total Score 3 or more = Strong Economic Performance Total Score 2 or less = Weak Economic Performance Existing Air Service Profile Response Score Does your airport currently have service to a legacy-carrier network hub? Yes=1 No=0 Does your airport currently have service to more than one legacy-carrier network hub? Yes= 1 No=0 Does your airport currently have low-cost carrier service? Yes=1 No=0 Is your airport within a 2-hour drive of an airport with competing air service? Yes=0 No=1 Does your airport face competition from alternative modes of transportation such as rail or bus service in any key markets? Yes=0 No=1 Total Score Total Score 3 or more = Strong Air Service Profile Total Score 2 or less = Weak Air Service Profile Recent Change in Air Service Performance Response Score Has your airport seen a significant increase in the number of available airline seats over the past 5 years? Yes, More than 20%=2 Yes, Between 5% and 20%=1 No=0 Has your airport seen a significant increase in the number of daily flights over the past 5 years? Yes, More than 20%= 2 Yes, Between 5% and 20%=1 No=0 Has your airport seen an increase in overall connectivity (measured by Quality of Service Index (QSI) score) over the past 5 years? Yes, More than 20%= 2 Yes, Between 5% and 20%=1 No=0 Has your airport successfully attracted new legacy-carrier service to a network hub over the past 5 years? Yes=1 No=0 Has your airport successfully attracted new low-cost carrier service to an origin-destination market over the past 5 years? Yes=1 No=0 Total Score Total Score 4 or more = Strong Change in Air Service Performance Total Score 3 or less = Weak Change in Air Service Performance

Summary 5 • Use Indicators of Strong Economic Performance to Expand Existing Service In communities that have had strong economic performance over the past several years, an effective ASD strategy may be to use information on increased demand or ticket yield (air fare per mile) to expand existing service. Weak Local Economic Performance • Be Actively Involved in Local Economic Development Efforts to Attract New Businesses or Industries to a Region In communities with weak regional economic performance, a critical first step to building the foundation for future air service development success is for airport managers to foster a close working relationship with local economic development and tourism officials. An effec- tive method to ensure a close working relationship between airport and economic develop- ment officials is to “cross-pollinate” board members in existing organizations including the Airline and Community Incentive Programs Response Score Does your airport currently offer fee waivers or reduced terminal rent for new air carriers or new service by existing air carriers? Yes=1 No=0 Does your airport currently offer marketing support for new air service? Yes= 1 No=0 Has your airport applied for a U.S. DOT Small Community Air Service Development (SCASD) grant over the past 5 years? Yes=1 No=0 Over the past 5 years, has your community offered a minimum revenue guarantee (MRG) or guaranteed ticket purchases (travel bank) to an air carrier for new service? Yes=1 No=0 Has your current airline incentive program been in effect for more than 2 years? Yes=1 No=0 Total Score Total Score 3 or more = Strong Airline and Community Incentive Programs Total Score 2 or less = Weak Airline and Community Incentive Programs Level of Community Engagement Response Score Does your airport management conduct regularly scheduled presentations to community organizations (Rotary, Chamber of Commerce, etc.)? Yes=1 No=0 Are members of the airport board also members of the local Chamber of Commerce or Economic Development Corporation? Yes= 1 No=0 Do you have community event days sponsored by and conducted at the airport? Yes=1 No=0 Does the airport manager have routine communication with the Chamber of Commerce, the Economic Development Corporation, or the Convention and Visitors Bureau? Yes=1 No=0 Does your airport provide tours upon request? Yes=1 No=0 Total Score Total Score 3 or more = Strong Level of Community Engagement Total Score 2 or less = Weak Level of Community Engagement Exhibit S-2. (Continued).

6 Effects of airline Industry Changes on Small- and Non-Hub airports airport, the economic development office, the chamber of commerce, and the convention and visitors bureau (CVB). • Consider Airport Experience Branding or Tourism Investment Opportunities as Potential Strategies to Overcome Limited Economic Growth and Generate Demand for New Service Communities that have experienced weak economic performance can generate demand for air service by working with community leaders to invest in tourism promotion or with airport officials to promote the flying experience from the airport compared to a larger hub airport. Strong Existing Air Service Profile • Focus on Optimizing Existing Carrier Service Rather than Pursuing Possible Competing Routes Small- and non-hub airports that have achieved a diverse air service profile including multiple legacy-carrier routes to network hubs and low-cost carrier (LCC) service to ori- gin and destination (O&D) markets should develop plans that focus on retaining exist- ing service while looking to expand the number of flights or increase aircraft size with existing carriers. If the demand in a market increases due to seasonality or a new employer moving into a region, airport and community leaders often can use their relationships with incumbent carriers to quickly add new flights or move to larger aircraft to accommodate the increase in demand rather than trying to attract a new carrier to the airport. • Target New Service that Complements Existing Service and Offers Maximum Connectivity for Travelers Airport managers at small- and non-hub airports with strong air service profiles may still want to pursue new service to meet untapped demand that cannot be met by exist- ing carriers. In these cases, airport and community leaders would be wise to consider not only the destination with the most demand, but the ability to reach other destinations via connecting service that a new route would provide to travelers. Metrics such as the Qual- ity of Service Index (QSI) estimates (discussed in Chapter 8) may allow airport managers to identify destinations that have the greatest connectivity to domestic and international markets. Weak Existing Air Service Profile • Target Carriers Whose Business Model Fits with the Community’s Needs Managers at small- and non-hub airports that have a weak existing air service profile often face significant internal financial pressure as well as external pressure from local elected offi- cials and citizens to pursue new flights, regardless of the new carrier’s connectivity to other destinations. A key lesson from the most successful small- and non-hub airports over the past 10 years was that managers and community leaders should analyze potential carriers to find those carriers with business models and destination profiles that match the demand of the local community. • Educate the Public on the Macro- and Micro-level Causes of the Community’s Weak Air Service Profile While Working to Gain Support for Future ASD Efforts Many airport officials at airports with weak air service profiles must try to garner support from businesses that may have employees drive to other airports for travel needs and then criticize the local airport for a lack of flight options. In these cases, airport officials must work

Summary 7 to educate the community on the importance of business and community support for new service in today’s competitive ASD environment, the benefits of flying locally, and larger air- line industry trends that can affect the community’s ability to attract service. Airport officials should consider investing in studies and economic analyses that show the value of flying from the local airport versus driving to a nearby airport. Strong Recent Changes in Air Service Performance • Work Diligently to Market and Support New Flights to Ensure Their Sustainability A key mistake made by many communities and airport officials is that they often expend so much time and effort persuading a carrier to announce new service that they have few resources to spend on developing an effective marketing or public relations plan to generate community awareness and support for the new service. Successful marketing campaigns for new air service can include traditional advertising (e.g., television, radio, and newspaper), social media advertising, and events that draw members of the community to the airport. • Plan to Meet Periodically With Airline Route Planners to Outline a Multi-Year Strategic Plan for the Community and How Service Will Be Sustained Airports and communities that have had recent successes must continue to communi- cate and build relationships with airline route planners and executives once these indi- viduals have agreed to start new service. A key piece of this communication is a multi-year strategic plan that describes the community’s plans for (1) economic development and business attraction, tourism development, and marketing and promoting the new service, and (2) how airport leaders will stay engaged with the community. Such plans indicate the sustainability of newly initiated service to airline route planners. Weak Recent Changes in Air Service Performance • Work With Local Businesses and Community Leaders to Generate Support for Existing Air Service, However Limited It May Be Many small- and non-hub airports with limited existing air service must generate business and community support for flights that are often at inconvenient hours, on small regional aircraft, are unreliable, and often the first flights cancelled by air carriers during periods of irregular operations. Showing that the community can support the limited service it has is critical to pursuing additional air service. • Pursue Alternative Modes of Transportation, Including Passenger Bus or Rail Service, to Supplement Existing Air Service Airports with limited existing flight options should pursue alternative modes of transpor- tation including airport bus service and train service to supplement their existing service. Many small- and non-hub airports are within a 2- to 3-hour drive of a major network hub. Private bus service between the small- or non-hub and the larger hub can provide passengers an important back-up option during times of irregular operations. Strong Airline and Community Incentive Programs • Develop Flexible Incentive Programs and Remain in Frequent Contact with Air Carriers to Determine if the Program is Meeting the Needs of the Carriers Airports and communities with incentive programs being used to subsidize new service should continue to meet frequently with airline route planners to monitor the profitability

8 Effects of airline Industry Changes on Small- and Non-Hub airports and performance of new routes and work to adjust incentive structures if the new flight is not meeting performance metrics or if the carrier shifts its business model. Weak Airline and Community Incentive Programs • Conduct a Realistic Assessment of Whether an Investment of Public and Private Money in an Incentive Program is Feasible, Given Existing Financial Constraints and the Likelihood of Sustaining New Service A critical component of developing and implementing an airline incentive program is to assess the likelihood that the investment of public and private money to attract or retain air service will be successful, given macro-level factors in the airline industry, existing financial constraints in the local community, and the level of community support and demand for new air service. Such an assessment allows airport and community leaders to identify key businesses and elected officials who may act as champions for ASD efforts. • Match the Incentive Program Being Developed to the Business Model of the Air Carrier Being Targeted Most airline route planners say that general incentive programs do not have a significant effect on their decision to start new air service in a community. However, they also note that incentive programs that consider the business model of the air carrier are much more likely to influence the decision-making process. To understand the underlying business model of the targeted air carrier, airport and community leaders should meet frequently and routinely with airline route planners. • Focus on Reducing Short-Term Risk and Costs to the Air Carrier While Protecting the Interests of the Community When a carrier begins new service in a community, there are several risks to the carrier including a lack of enplanements due to a lack of marketing, the costs of opening a new sta- tion at the airport, and the cost of moving or hiring new employees for baggage, ticketing, and ramp operations. Incentives such as ticket banks or minimum revenue guarantees are designed to offset these costs and risks over a short period. However, these incentives can present significant financial risk to local businesses and governments. Airport and com- munity leaders must work with air carriers to design incentive programs that protect the interests of the air carrier and the local community. Strong Level of Community Engagement • Continue to Educate and Reach Out to Local Businesses and Civic Groups about the Performance of the Airport and Airline Industry Continual and frequent education and outreach to the community is essential to suc- cessful ASD efforts. For communities with new service, outreach allows airport and eco- nomic development officials to communicate industrywide or local trends that may affect the success of their service while allowing for the establishment of new ASD efforts due to local changes (e.g., a new business opening). In communities still working for new air service, outreach and education forums allow for coordinating efforts and resources to bolster development efforts or suggest new approaches. • Formalize Governance Arrangements to Allow for Nimble Responses to Future ASD Opportunities In many communities with strong community engagement programs, much of the work between airport managers and local economic development leaders occurs on an ad hoc

Summary 9 basis and may often overlap or compete with other efforts in the community. Developing a formalized governance structure (e.g., an official airline attraction committee) allows for shared responsibility across several organizations. Formalizing previously ad hoc processes also allows for quicker response to new ASD opportunities that may arise. Weak Level of Community Engagement • Establish Education and Outreach Programs that Communicate the Value of the Airport to the Community Airport managers in communities with weak engagement must remind the community that their airport has value to the region, even though many citizens may have never used or been to the airport. A way to overcome the lack of awareness of the airport more generally is to hold frequent and regular education and outreach meetings with key civic groups. By educating the community on macro-level industry trends and local factors that influence air service, airport managers can begin to foster an understanding of the underlying market demand that is necessary to expand flights and how members of the community can help establish the conditions necessary to expand service. • Develop Close Working Relationships with Key Community and Economic Leaders Local officials must remain engaged in attraction and retention efforts. By partnering with key community groups, airports can overcome traditional limitations on air service develop- ment by developing a flexible airline attraction program that provides incentives to carriers. More important, by being in constant communication with these organizations, the airport will be better equipped to access real-time information on the needs of the business commu- nity and to address any concerns through an organization’s regular meetings.