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

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59 C H A P T E R 4 4.1 Introduction To be responsible stewards of an important part of the community’s essential infrastructure and to be responsive to their stakeholders, airports need to understand the forces driving the future of airline services in the United States. In addition, small airports need to understand the actions that they and their communities can take to retain and attract air services. These actions are constrained by FAA policies on the allowable uses of airport revenues for airports that receive federal airport grants. FAA also limits the role that an airport can play (and what it must avoid) in terms of economic assistance that the surrounding community provides to carriers to retain or obtain air service (FAA 2010). Local economic development officials have brought to bear various approaches and tools in trying to attract air carriers to offer service in their communities. One of the most common 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. A study of ASD techniques found that air carriers now view small communities who are seeking service as partners and therefore require them to participate in the financial risk of developing the new service (Martin et al. 2009). As a result, many local and, in some cases, state economic 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 to continue air service or to attract new air service. These programs can help to meet air service needs, but are subject to program restrictions and limited available funding. Some states also have similar programs. However, a major purpose of this project was to focus on additional actions that an airport sponsor or the local community can take regarding air services, rather than the federal programs. 4.2 Airline Decision-Making Process It is important to understand how airlines make air service decisions when designing ASD programs. At the most basic level, the success and potential sustainability of a flight is a prod- uct of the revenue it generates minus the cost to operate that flight. Revenue is determined by the number of passengers and the amount those passengers paid for their tickets and ancillary services. For most legacy carriers and some LCCs, a particular flight is likely to generate greater numbers of passengers if it offers connectivity to the carrier’s route network, rather than serving only passengers traveling between the flight’s O&D locations. The mix of O&D and connecting Air Service Development Programs

60 Effects of Airline Industry Changes on Small- and Non-Hub Airports passengers aboard a flight allows the airline to determine what percentage of a flight’s revenue is attributable to the individual flight (referred to as segment profitability) and the revenue derived from supplying passengers across the airline’s network through connections to other flights (known as beyond profitability). Segment profitability is calculated by determining the revenue in excess of costs generated by the portion of passengers on a flight who are O&D while beyond profitability is the portion of revenue over costs generated by passengers who connect to other flights. When deciding whether to enter a new market, airline route planners have desired financial returns for segment and beyond profitability that they use to determine the overall profitability of a flight and then compare that profitability to other existing or potential flights in their network (Stanley 2012, Oimet 2010). The overall profitability of a flight is also a function of the costs of operating the flight, which include fuel costs, labor costs, and airport fees (e.g., terminal rent, fuel flowage fees, baggage handling fees, and landing fees). Other data considered by air carriers include an analysis of the current actions of competitors, community economic or tourism profiles, and strategic consider- ations and the likely responses of competitors (Mead & Hunt, Inc. 2006). Many airport incentive programs are designed to reduce or eliminate many of the on-airport costs. However, the ability of a flight to generate sustainable revenue is often the primary driver of an airline’s decision to start new service or end existing service. Many community incentive programs that focus on rev- enue guarantees are designed to offset early market entry costs experienced by carriers. Potential flights that are longer distances, less populated, and overfly competing hubs along the way are viewed by many legacy carriers as high-risk and are less likely to be considered. However, many LCCs are looking to fill this gap by offering point-to-point flights that fit within their networks. The challenge is magnified for small airports. A GAO report on efforts to improve service at small community airports (GAO 2011b) examined the challenges that small communities face in attracting and keeping air service and the steps that they have taken to overcome those challenges. GAO examined 292 small com- munities (defined as small- and non-hub airports in FAA’s hub classification system) that had taken steps to increase air service in 2002. Fundamental economic forces challenge the efforts made by small communities to obtain and retain air service. The smallest communities often do not generate sufficient demand to make them a profitable location for air carriers due to their small populations and economic activity levels. Small communities near larger airports also may lose potential passengers to the larger airports that offer greater ranges of destina- tions and lower fares. 4.3 Airport Incentive Review The FAA’s AIP grant assurances greatly restrict and limit the airport governing board’s ability to provide and participate in local economic development efforts to offer more direct forms of subsidies to air carriers. Typically, airports can offer incentives through marketing and advertis- ing and by reducing rates and charges if airports meet the following criteria (FAA 2010): • Cannot target certain types of carriers (e.g., LCC) or particular air carriers/aircraft types (this is to prevent cross-subsidizing of carriers) • One-year time limit on incentives offered only to new entrants • Two-year time limit on incentives offered to both incumbents and new entrants • Airport revenue may be used to – Promote competition – Increase air service – Raise public and industry awareness of airport facilities and services – Pay for a share of promotional expenses designed to increase travel using the airport

Air Service Development Programs 61 • Airport revenue may not be used for – Destination or tourism marketing – General economic development/marketing not related to the airport – Direct subsidies to air carriers – Guarantees of passenger revenue, ticket sales, or seats filled – Influence of ticket prices A report issued by GAO in 2003 (GAO 2003b) found that the most common ways that small communities have attempted to obtain and retain air service include conducting studies to determine whether adequate demand for new or enhanced service exists, marketing to increase passenger demand, and offering financial incentives to airlines. The financial incentives were the most effective at attracting new service, but the new service often ended when the incentives ended. Exhibit 4-1 summarizes the types of ASD strategies executed by small- and non-hub airports. The two most common types of ASD strategies likely to have a direct effect on airline service decisions are marketing support and financial incentives. The remainder of this section discusses these strategies in depth. 4.3.1 Marketing or Promotional Support A common incentive offered to air carriers is the marketing and advertising of new service. In smaller communities, it is often a challenge for air carriers to market their new service effectively to a new group of travelers who may have loyalties to another carrier or may travel to a nearby airport for their air travel needs. Therefore, local communities often offer to provide market- ing or promotional assistance as part of incentive packages. A 2009 study of small- and non-hub airports found that 80% of airports surveyed offered marketing or financial support as part of their incentive packages (Martin et al. 2009). The SCASD grants distributed by DOT often are used by communities to provide marketing and promotional support to air carriers. Although the FAA’s grant assurances allow airports to directly provide marketing or promo- tional support for new service, airport staffs usually lack the expertise necessary to implement an effective marketing campaign. Therefore, local economic development agencies, chambers of commerce, or other private partners may provide financial assistance in the form of marketing 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% Source: GAO analysis Notes: Columns will not add to total number of airports shown because some airports undertook multiple efforts. The ASD programs were in various stages at the time the researchers spoke with officials. The research team did not include programs in the table above that were in the proposal stage at the time of the discussions. The researchers included communities with ongoing programs and communities that had completed their programs. In a few cases, the research team included communities that had developed financial incentive programs but had to put them on hold or discontinue their efforts due to the events of September 11, air carrier problems, or for other reasons. *Studies included both those conducted at a statewide level and those conducted or commissioned by an individual airport. Exhibit 4-1. Air service development efforts of small- and non-hub airports (GAO 2003b, p. 8).

62 Effects of Airline Industry Changes on Small- and Non-Hub Airports and advertising as part of a community incentive program. Other community partners, particu- larly the media and billboard owners, may provide in-kind assistance through free or reduced advertising rates. In-kind contributions for marketing and advertising support provide sub- stantial value to the local airport, demonstrating local support of the air carrier while showing a high level of community buy-in to the new service. More recently, the use of social media (e.g., Facebook and Twitter) have become ubiquitous and inexpensive tools that airports and local communities can use to market and promote new air service in their communities. Examples of innovative marketing campaigns used by airports to promote new service follow: • State of Wyoming Department of Transportation’s Fly Wyoming Campaign: In 2005, the DOT of the State of Wyoming was awarded a SCASD grant for $800,000 to start a state- wide marketing campaign for its 10 airports. The marketing campaign, titled Fly Wyoming, focused on changing the negative perception of commercial air service in the state that had emerged due to high flight cancellation rates, high fares, and small, unconformable aircraft. The Wyoming DOT marketing campaign targeted all citizens of the state, but focused on busi- ness travelers who lived in Wyoming but traveled great distances to work, energy-related travelers, and Native American travelers. The $800,000 for print, radio, TV, and internet mar- keting was supplemented by more than $100,000 in in-kind contributions from local media outlets. The state DOT’s evaluation of the program in 2008 found that overall awareness of Wyoming airports had risen significantly (Wyoming DOT 2013). • Niagara Falls International Airport (IAG): IAG first established commercial service in 2011 with the arrival of two LCCs. To retain its current service while attracting a legacy network carrier, IAG and its community partners formed the Niagara Falls International Airport Stakeholders Group, Inc., a non-profit entity consisting of 14 area governmental entities and private-sector businesses. The group is charged with conducting marketing and promotional activities funded by contributions from its members, including a $1 million contribution from the Seneca Gaming Corp. The group has focused on producing print, billboard, and radio ads in Toronto that market IAG’s direct flights to Florida (Scheer 2012). ACRP Report 28 (Kramer et al. 2010) is a marketing guidebook specifically geared toward small airports. Such airports are generally run by an airport manager with a small budget and little or no formal training in marketing. However, marketing is essential for small airports (defined as GA and commercial service airports in FAA’s hub classification system) to attract activity and achieve financial self-sufficiency. This ACRP report is an easy-to-use guidebook for airport managers dealing with various marketing issues. The guidebook was developed through interviews with airport managers and other people involved with marketing at small airports to identify best practices. The guidebook summarizes these best practices and explains the basics of what goes into a marketing plan. Specific steps are provided to enable an airport manager to prepare and implement a marketing plan at a small air- port, along with descriptions of tools that an airport can use to ensure successful implementation of the plan. Recognizing that small airports have limited resources available for marketing, one of the main objectives of the guidebook was to present cost-effective marketing tools for airport managers. The guidebook contains case studies that describe how airports developed marketing plans, specific strategies adopted by airports, marketing messages developed by airports, and other marketing-related issues. The case studies were developed through interviews with officials at more than 20 airports conducted as part of the research effort. 4.3.2 Financial Incentives Financial incentives offered to air carriers for new service most commonly involve waivers of airport-levied fees and charges. When an air carrier provides new service at an airport, there

Air Service Development Programs 63 are a host of costs associated with establishing a new ground station at an airport including training of new personnel. Airports also charge for the use of their property including landing fees, terminal rental fees (e.g., baggage claim, ticket counter, and gate and ramp services), and federal inspection charges. Start-up costs for an air carrier can be upward of $200,000 (Martin et al. 2009). The waiving of airport landing fees and rents tends to be one of the most common forms of incentives offered by local communities because they can be administered through the airport governing body and often require little involvement from community partners. Cost waivers by themselves will not differentiate an airport seeking service, because most air carriers regard some level of cost subsidy as a requirement for entering a market. As such, many airports openly advertise their landing fee incentives on their official websites. Given that cost waivers do not typically require substantial community involvement, they are a signal to air carriers of weak community commitment to new service. Many communities offer reductions or waivers of landing fees or terminal rent to air carriers to attract new service. However, notable examples of communities that have provided start-up cost relief or waivers of fees related to doing business at an airport follow: • Mobile Regional Airport (MOB): Following the departure of United Airlines in 2001, airport officials at MOB decided to create a Station Services program, where MOB would provide complete ground-handling services (e.g., ticket counter, baggage claim, and gate and ramp services) for air carriers. MOB would own, operate, and staff the carrier’s entire station opera- tion in exchange for a fee. MOB received a SCASD grant of $450,000 in 2002 to purchase equipment, hire and train staff, and set up a management system for the program. Because MOB charges for the service, it can offer a waiver or reduction in the cost to carriers for their ground-handling services as part of an incentive package (Kentucky Legislative Research Commission 2011). • Springfield/Branson Airport (SGF): Following the bankruptcy of Trans World Airlines (TWA) in 2001, SGF lost over 70% of its commercial air service. To attract a new carrier, the airport decided to invest over $500,000 in tugs and baggage equipment to provide airport- operated baggage services. Delta Air Lines subsidiaries Comair and Sky West decided to offer service to Cincinnati and Salt Lake City as a result of the incentive. Airline officials estimated that SGF’s baggage service saved them $300,000 in start-up costs. In 2005, the airport esti- mated that the baggage service had covered the initial capital costs and was providing an annual profit of over $130,000 (Aviation Today 2005). 4.4 Community Incentive Review Community incentives for air service differ from airport incentives in that they are not bound by FAA grant assurances, so the program administrator can design the program in any manner. Airport sponsors must not be involved with the program and airport revenue cannot be used. Community incentives are less common than airport incentives and are often used to attract or retain specific service, such as service to a particular destination. 4.4.1 Minimum Revenue Guarantees Revenue guarantees are agreements, between air carriers and communities, that establish a target amount of revenue the air carrier will receive for operating service on a route over a specified period of time. Communities commit to a certain revenue level agreed upon with the carrier and if the carrier does not achieve the desired revenue level, community funds are used to bridge the gap. If the new service achieves the desired level of revenue, it is an indication of

64 Effects of Airline Industry Changes on Small- and Non-Hub Airports the success of the route and indicates to the carrier that the new service may be self-sustaining without future subsidy. Many communities place performance requirements on the carrier as conditions for the payout of the revenue guarantees. Such requirements can include on-time performance benchmarks or limits on the number of cancelled flights. A 2009 study of air carrier incentive programs found that although many airports offered revenue guarantees as part of their incentive packages, very few offered only revenue guarantees to attract air carriers (Martin et al. 2009). Many communities also offered revenue guarantees through funds received through SCASD grants from the U.S. DOT, which shifted the risk of the service failing to the federal government. Of the 33 SCASD grants awarded in 2012, 20 contained provisions to provide federal funds to air carriers in the form of revenue guarantees. As more communities try to attract fewer available air carrier flights to their airports, the amount of revenue guarantees communities are offering to air carriers continues to rise. For example, in its successful 2012 SCASD grant, Bentonville, Arkansas, proposed a $1,000,000 revenue guarantee to attract an air carrier to their community (Northwest Arkansas Regional Airport Authority 2012). While revenue guarantees are an effective incentive, they also have some challenges. Many carri- ers may be hesitant to take a revenue guarantee if they know the route will be unprofitable because of the negative brand image it may leave in the community. Also many airports noted in a 2009 study of incentive packages that raising money from the community for revenue guarantees was difficult (Martin et al. 2009). Hundreds of communities have tried to attract air service with revenue guarantees; notable programs that used revenue guarantees to attract service follow: • Greenbrier Valley Airport (LWB): In 2010, the Greenbrier Resort, a golf, casino, and confer- ence facility in White Sulfur Springs, WV, entered into an agreement with Delta to provide service from LWB to ATL and LGA. The Greenbrier sought the service due to being selected to host an annual PGA Tour golf tournament along with the opening of a new casino facil- ity. As part of the incentive package provided to Delta, the resort agreed to provide revenue guarantees if the service was not cost effective for Delta. At the end of the first year of service, the two routes were a combined $4 million below the guaranteed revenue amount. Facing other financial hardships, the Greenbrier Resort decided not to remit the difference to Delta Airlines. In January 2012, Delta Airlines sued the Greenbrier Resort for the $4 million owed in revenue guarantees. The case is still pending in the U.S. Court of Appeals (Raby 2012). • Fort Wayne International Airport (FWA): In 2013, FWA applied for and received a $600,000 SCASD grant to provide a minimum revenue guarantee to US Airways for non-stop daily service to its hub in Philadelphia. The $600,000 in funds from the DOT was matched by $1,400,000 in funding from the City of Fort Wayne and the Greater Fort Wayne Chamber of Commerce for a revenue guarantee and $60,000 in marketing support. In addition, to the $2,000,000 in minimum revenue guarantees, the Fort Wayne-Allen County Airport Authority waived over $500,000 in airport fees. In May 2014, US Airways announced two daily flights to Philadelphia International Airport and one daily flight to Charlotte Douglas International Airport on 50 seat CRJ regional jets. 4.4.2 Guaranteed Ticket Purchases (Ticket Banks) Guaranteed ticket purchases, or travel banks, ensure that the air carrier being targeted will have a certain level of passenger traffic worth a certain volume of revenue. Local businesses or individuals deposit funds in a back account that can be used only for purchasing tickets on the specified air carrier during a given period of time. Typically, local or state governments will match funds provided by businesses in the form of additional revenue guarantees.

Air Service Development Programs 65 Travel banks, unlike revenue guarantees from local governments, indicate to the airline the community’s commitment to use the proposed service. Travel banks also indicate the interest of the business community, which often provides the greatest source of funds to the travel bank and which is typically the type of client the air carrier is most interested in securing for new service (typically high-yield customers). Ticket banks also signal the level of commitment to existing carriers at an airport. A lack of support for a travel bank to attract a new carrier may signal to the air carrier that there is already a great deal of customer loyalty to an existing carrier at the airport or at a nearby airport. Although travel banks offer benefits, implementing travel banks as part of an incentive pro- gram can present challenges. First, travel banks require a great deal of local initiative to organize and implement. Travel banks often are most successful when implemented through a grassroots organization led by a significant community champion. Second, airline acceptance of travel banks is not uniform. A 2005 GAO report found that most airline officials viewed travel banks unfavorably due to the difficulty and unreliability of their implementation (GAO 2005). Finally, funds from SCASD grants cannot be used to support travel banks, which limits the ability of local communities to supplement local contributions with federal funds. Examples of communi- ties that have implemented travel banks follow: • Roberts Field-Redmond Municipal Airport (RDM): In 2003, Economic Development for Central Oregon (EDCO) sought to attract an air carrier to offer eastbound service from RDM to complement the major population, employment, and business growth of the region. EDCO led a team effort along with RDM, the Central Oregon Visitors Association (COVA), the Redmond Chamber of Commerce, and the Central Oregon Air Service Taskforce (COAST) to establish a $500,000 travel bank as part of an incentive package. EDCO also applied for and won a SCASD grant for $500,000 in revenue guarantees as part of the incentive package. Delta committed to offer service to Salt Lake City, with a start date of March 2005. EDCO secured $640,000 from 120 local companies for the travel bank, which were converted into prepaid travel. Load factors for the service were high and ranged from 73%–80% in the first 3 months of service. As a result of the commitment secured by the travel bank and the public- ity of the effort, the Delta flight was so successful in the first year that EDCO needed to use only minimal revenue guarantee funds (EDCO 2013). • St. George Airport (SGU): The St. George Airport in St. George, UT, opened in 2011 as a replacement airport. The airport had existing service from Delta Airlines to Salt Lake City (SLC) and United Express to LAX, however, airport officials wanted a direct flight to Denver to provide eastbound service. SGU applied for and won a $500,000 SCASD grant to provide revenue guarantees to a carrier for Denver service (St. George Airport 2012). The St. George Chamber of Commerce also developed a travel bank for $100,000 in advance purchase tickets. United Express began SGU to Denver in June of 2013. • Youngstown-Warren Regional Airport (YNG): In 2012, YNG applied for and received a $780,000 SCASD grant to support a $1.2 million revenue guarantee to attract a legacy network carrier to the airport. YNG is served by Allegiant Air and the Total Rewards casino air carrier, but has not had legacy network carrier service since 2000. To show community support for the service, a non-profit organization composed of local economic development officials and community leaders called YNG Air Partners, along with several chambers of commerce from both eastern Ohio and western Pennsylvania created the Youngstown-Warren Air Service Initiative. The Initiative is a non-binding collection of pledges from local businesses and orga- nizations to quantify local demand for regularly scheduled air service. The Initiative eclipsed its initial goal of $5 million in pledges and reached a total of $6.3 million in ticket purchase pledges in early 2013 (YNG 2013). Despite this support for the service, YNG remains without service from a legacy network carrier.

66 Effects of Airline Industry Changes on Small- and Non-Hub Airports 4.5 FAA and DOT Programs for Small Community Air Service Although federal programs designed to promote air service at small communities are not the main focus of this ACRP project, a short review of the programs is necessary because the pro- grams are closely linked with airport and community ASD efforts. In some cases, the marketing incentives offered by airports make use of grant funds from the SCASD program. Many of the community incentive programs are also part of a SCASD grant. 4.5.1 SCASD Grant The DOT’s SCASD program offers grant funding for communities that wish to offer subsidies to air carriers to obtain air service. The program has offered between $6 million and $20 million for up to 46 grants each year. Created in 2002 as part of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21), the program offers funds to attract air service in communities with small- or non-hub airports where air fares are higher than the national average, a portion of the cost of the activity contemplated is supplemented by local non-airport revenue sources, a public-private partnership has been or will be established to facilitate air carrier service to the public, where improved service will bring material benefits of scheduled air transportation to a broad section of the traveling public, and where multiple communities cooperate to submit a regional or multistate application to consolidate air service into one regional airport (49 U.S. Code § 41743 (c)(5)). Exhibit 4-2 summarizes total SCASD appropriations, awards, grants awarded, and average grant amount for each year of the program from FY2002 to FY2013. The number of grants awarded per year has ranged from 15 to 46 and the average grant award amount has ranged from $200,000 to $600,000. Two major studies evaluating SCASD outcomes have been completed to date. The first study was performed by GAO in 2005 and evaluated SCASD grants awarded from 2002 to 2005. The most common goals of grants awarded during this period were generally related to increasing service and enplanements. The strategies employed to meet these goals included start-up sub- sidies, revenue guarantees, travel banks, airline station operations provided by an airport, and marketing support. Fiscal Year Funding Total SCASD Appropriations (in millions) Total Annual Grant Awards (in millions) Number of Grants Average Grant Award Amount (in millions) 2002 $20.0 $20.0 40 $0.5 2003 $20.0 $19.9 36 $0.6 2004 $20.0 $21.8 46 $0.4 2005 $20.0 $19.0 35 $0.6 2006 $10.0 $9.7 25 $0.4 2007 $10.0 $9.0 26 $0.4 2008 $8.0 $6.5 15 $0.5 2009 $8.0 $6.9 20 $0.3 2010 $6.0 $7.0 19 $0.4 2011 $6.0 $15.0 29 $0.2 2012 $6.0 $13.9 33 $0.2 2013 $6.0 $11.4 25 $0.2 Source: DOT Note: For fiscal year 2010, Congress appropriated $6 million for SCASDP, but DOT added additional funds that could be reallocated from prior year recoveries to make funding available for additional grant awards, which continued into fiscal year 2013. Exhibit 4-2. SCASD summary, FY 2002–2013 (GAO 2014b).

Air Service Development Programs 67 Of the 23 projects completed as of September 30, 2005, 22 contained a marketing component. Most airports (19 of 23) reported improvements to air service or fares during the life of the grant. About one-half of the airports reported air service improvements that were self-sustaining after the grant was over. The GAO identified possible explanations for the low success rate, including airline decisions to reduce flights at a hub airport, and some smaller airlines that went bankrupt during or after the grant period. Exhibit 4-3 summarizes airport directors’ view on the success of grant projects. Michael Wittman (2014) evaluated the outcomes of 115 SCASD grants awarded from 2006 to 2011. Most of these grants were intended to attract new air service that had not previously existed. Almost all of the grants offered a revenue guarantee to the targeted airline. The criteria for evaluation of the grants depended on whether the grant was to provide new ser- vice or to market existing service. Grants to provide new service were deemed successful if the air- port achieved the new scheduled service identified in the SCASD application within 28 months of grant acceptance and maintained that service throughout the remainder of the 28-month period. Grants to market existing service were deemed successful if the airport maintained or improved its level of service (±10%) present at grant acceptance for at least 28 months afterwards. Of the 115 grants evaluated, 36.5% were found to be successful as shown in Exhibit 4-4. Possible explanations for the relatively low success rate included unrealistic expectations of grantees regarding how much traffic would be stimulated or diverted from nearby airports, the macroeconomic slowdown, and the spike in jet fuel prices during the period. In addition, air- lines already operating unsubsidized service at the airport prior to the SCASD grant objected to the incentives being provided to the new entrant and exited the market in some cases. 4.5.2 Essential Air Service The Essential Air Service program was established as part of the Airline Deregulation Act in 1978 to ensure that small communities would continue to be served by airlines after deregulation. The DOT administers the program and ensures air service to small communities by subsidizing Very Effective or Effective As Effective as Ineffective Not Very Effective or Ineffective NA or No Basis to Judge Total Responses Increasing passenger traffic 60 7 1 52 120 Improving air service quality 54 11 2 51 118 Resolving fare issues 38 9 8 63 118 Source: GAO survey of grantee airport directors. Exhibit 4-3. Airport directors’ views on success of SCASD grants awarded from 2002 to 2005 (GAO 2005). Year Total Grants Grants Evaluated Successes Failures Success Rate Not Evaluated 2006 25 24 9 15 37.50% 1 2007 26 21 8 13 38.10% 5 2008 15 13 4 10 30.80% 2 2009 19 17 6 11 35.30% 2 2010 19 14 6 8 42.90% 5 2011 29 26 9 17 34.60% 3 Total 133 115 42 74 36.50% 18 Exhibit 4-4. Results of SCASD grants, 2006–2011 (Wittman 2014).

68 Effects of Airline Industry Changes on Small- and Non-Hub Airports two to four round trips a day with small aircraft between small communities and major hub airports. Exhibit 4-5 provides an overview of the EAS program from FY2002 to FY2013. A 2014 GAO report found that airports that received EAS-subsidized service were the only group of airports to experience increased flights since 2007. However, EAS may not always be the most cost-effective way of connecting communities to the national transportation network. Total and per-community EAS subsidies have grown since 2008. In 2013, load factors for EAS service were approximately 49%, compared with an industry average of approximately 83%. The popula- tion of some EAS communities is too small to support higher passenger loads (GAO 2014b, p. 11). Recent legislation has been enacted to control EAS costs by making eligibility requirements more stringent. The legislative changes will likely lead to fewer communities receiving EAS subsidies in the future. The effectiveness and overall value of the EAS programs has been debated in both the popular press and the scholarly literature. Several organizations, including the Cato Institute, the Heritage Foundation, and the Reason Foundation have criticized the EAS program as an example of waste- ful government spending due to the mostly empty aircraft operating under a government subsidy and as a program that exists because of politics (Reidl 2003). Matisziw, Lee, and Grubesic (2012) found that the overall level of connectivity provided by the EAS program has declined since 2001 as many former large and medium hubs have lost connecting service. Özcan (2014) found that EAS service raised per capita income in communities that led to the sustainability of service after a community’s eligibility for subsidies expired. 4.6 Small- and Non-Hub Airport Air Service Incentive Program Survey SPA conducted an air service incentive survey of small- and non-hub airports in November and December 2013. The survey was received by 150 airports and more than one-half (78 airports) of the survey recipients responded. The survey respondents were equally divided between small- and non-hub airports. Fiscal Year Total EAS Appropriations (in millions) Includes only non-Alaska Total Annual Subsidies (in millions) Number of Communities Served Average Subsidy Amount per Community (in millions) 2002 $113.0 $89.6 94 $1.0 2003 $101.8 $93.1 103 $0.9 2004 $101.7 $89.1 108 $0.8 2005 $101.6 $93.3 115 $0.8 2006 $109.4 $99.1 116 $0.9 2007 $109.4 $98.1 109 $0.9 2008 $109.4 $97.7 103 $0.9 2009 $138.4 $151.8 107 $1.4 2010 $200.0 $163.0 109 $1.5 2011 $199.7 $176.0 109 $1.6 2012 $215.5 $225.0 120 $1.9 2013 $232.2 $219.9 117 $1.9 Source: DOT Note: The appropriations dataare for the entire EAS program, including Alaska, Hawaii, and Puerto Rico. However, DOT’s data, for information about the communities and airlines receiving EAS subsidies and their amounts, exclude EAS operations to communities in Alaska. These data do not represent a continuous picture of service provided under the EAS program within each fiscal year. The appropriations include the annually appropriated $50 million from overflight fees. Exhibit 4-5. Essential air service summary, FY2002–2013 (GAO 2014b, p. 10).

Air Service Development Programs 69 4.6.1 Structure of Airport Incentive Programs More than 81% of the airports have an existing air service incentive program, while 19% do not. (The values sum to more than 100% because airports can offer multiple incentives.) Cost waivers, advertising, and media support are the top incentives offered by airports for new or enhanced service. Exhibit 4-6 shows the share of airports offering various types of incentives. The top goals for airports with incentive programs are attracting new entrant carriers and attracting new non-stop service. Exhibit 4-7 provides an overview of goals cited by respondents with an airport incentive program. (The values sum to more than 100% because airports were allowed to select more than one goal.) Most airports (61%) provide 1-year incentives, while the remainder (39%) offers incentives for 2 years, which is the maximum time permitted by FAA policy. 4.6.2 Results of Airport Incentive Programs Airports with incentive programs have generally been successful at attracting and retaining new service. Among airports with incentive programs, 76% secured an increase in service. About Exhibit 4-6. Incentive types offered by small- and non-hub airports. Exhibit 4-7. Small- and non-hub airport incentive program goals.

70 Effects of Airline Industry Changes on Small- and Non-Hub Airports 11% of airports need more time to evaluate the results of the incentive program. Exhibit 4-8 shows the responses to the question of whether an airport’s incentive program has resulted in new service or enhanced existing service. Of those airports that secured an increase in service, 76% experienced sustained service. Exhibit 4-9 shows the responses to the question of whether an airport’s new service has proven to be sustainable. Given that a carrier may have been planning on initiating or expanding service at an airport, regardless of the existence of an airport incentive program, that a carrier initiates or expands service is not enough to determine that it was a result of the airport incentive program. Airports were asked whether their incentive programs have made a difference. About two-thirds of airports with incen- tive programs believe that the incentive program has made a difference, as shown in Exhibit 4-10. Those airports reporting that their incentive program has not made a difference were asked to explain the reasons for the lack of success. The reasons included • Insufficient funds for marketing • Airport marketing does not reduce total airline costs enough to influence air service decisions • Program is not flexible enough Exhibit 4-8. Has an airport incentive program resulted in new service or enhanced existing service? Exhibit 4-9. Has new service proven to be sustainable?

Air Service Development Programs 71 Exhibit 4-10. Has your incentive program made a difference? More than two-thirds of airports with incentive programs believe that the incentive program has helped improve service. Exhibit 4-11 shows airport responses to the question of whether an incentive program has made a difference in service levels. Respondents were asked to explain how an air service incentive program has helped. Some of the responses included • Makes us competitive with other communities across the nation, taking away one reason for an airline to say no • Mitigates the risk for airlines to give time to try unproven markets • Helps mitigate airline start-up costs • Assists the carrier to become established • Have gained, retained, and kept doors of communication open on many levels with various individuals within the airport and airline to keep track of successes and so forth One sign of airports’ belief in the benefits of incentive programs is the fact that 75% of airports offering incentives have had the program in effect for 5 years or more. Exhibit 4-12 shows the number of years that survey respondents have had an incentive program in place. More than one-half of airports without an incentive program (60%) are not sure whether incentives will make a difference, while the remaining 40% believe that an incentive program Exhibit 4-11. Has an incentive program made a difference in service levels?

72 Effects of Airline Industry Changes on Small- and Non-Hub Airports may make a difference. About one-third of airports without an existing incentive program plan to implement a program within the next 1 to 3 years. The airports that plan to implement a program cite attracting new non-stop service and new entrant carriers and improving existing service as the top goals. Each of the airports develop- ing programs plan to offer incentives for 1 year. The airports that do not plan to develop an air service incentive program cite several reasons, including • Lack of funding/resources • Philosophically believe that incentives should not be offered—that the market demand is there or it is not and incentives will not change the outcome • Skeptical that airlines will operate beyond the incentive timeframe Exhibit 4-12. Length of time that small- and non-hub airport incentive programs have been in effect.