Building and Maintaining Air Service Through Incentive Programs (2020)

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1 Background The evolution of the U.S. commercial air passenger industry has included important changes in the service and business strategies used by the airline industry and equally important changes in the ways in which airports and the communities they serve have responded to an evolving air service environment. For airports, and especially for communities, the air service options avail- able to residents and potential visitors are fundamental to their connectedness to the national and global economy. At the same time, airlines must choose between many alternative routes and markets within which their fleets can be deployed. Because of this, airports and the communi- ties they serve have increasingly offered air service incentives to influence these airline decisions and encourage new services by mitigating some of the financial risks that new services can create for airlines. One objective of the ACRP Project 03-44 research was to develop a guidebook to help decision- makers and practitioners from airports and communities make better use of air service incentives to maintain and build their commercial air service. The result is ACRP Research Report 218: Building and Maintaining Air Service Through Incentive Programs (herein after referred to as the Guidebook). Chapter 2 of this Guidebook focuses on the details of air service incentives and their use in the United States. The Guidebook also summarizes material contained in the Contractor’s Final Technical Report and reproduces important sections of the Technical Report in full. The Technical Report can be found on the TRB website (www. trb.org) by searching for “ACRP Research Report 218.” The Guidebook provides the following information: • A summary of key current issues and emerging trends influencing air service in the United States, from evolving airline business models to economic and regulatory factors affecting airline fleets and labor issues • Information and analysis of the recent use of air service incentives by U.S. airports and com- munities, including links to an online database (https://arcg.is/vKmyr) of air service incentive programs recently offered by airports and communities of all sizes • Background on the FAA’s regulatory guidelines and policies that should guide and inform the structure and use of incentive programs, particularly those funded by airports and airport sponsors • Analysis and insights from airline senior managers with their perspectives on selecting and using incentives offered by airports and communities • A summary of modeling results that quantify the links between the use of air service incen- tives and changes in airport activity, and the economic impacts that can be associated with these changes in airport activity • The lessons learned from the research and interviews completed in this project C H A P T E R 1 Introduction

2 Building and Maintaining Air Service Through Incentive Programs The work presented in this Guidebook, together with the accompanying online database, will enable airports and communities to better understand the ways in which incentive programs are being used at other airports that they might regard as competitors or peers. It will also allow airports and communities to better understand the perspectives of other aviation system stake- holders (i.e., the FAA and the airline community) vis-à-vis incentives. Summary of Current and Emerging Trends Influencing Air Service in the United States This section contains a summary of the current and emerging trends influencing air service in the United States. These data and trends are presented in greater detail in the Technical Report. There were significant changes in the U.S. aviation industry, especially in the distribution of commercial passenger activity among airports over the 18 years between 2000 and 2018. These changes—driven by changes in airline economics, in the structure of the airline industry, and the composition and capabilities of airline fleets—led to new challenges for many airports. Widening use of air service incentives by airports and communities has been an important response to these changes. • Total departing seats at U.S. airports in 2018 were only 0.5% lower compared with their number in 2000, but over those 18 years, the distribution of seats among airports changed significantly. – Seat departures from large hubs increased 8% from 2000 to 2018. (Large hub airports, as defined by the FAA, are those airports with more than 1% of total passenger boardings in a given year. In 2017, there were 30 large hub airports. The 31 medium hubs in 2017 were the airports with passenger boardings between 0.25% and 1% of the national total. Small hubs—71 in 2017—are those airports with between 0.05% and 0.25% of total annual passenger boardings. Finally, nonhub airports are the 249 airports in 2017 with between 10,000 passenger boardings and 0.05% of total passenger boardings.) – In contrast, at medium hubs, small, and nonhub airports, seat departures fell 17%, 13%, and 22%, respectively. • Over these years, U.S. airlines came to operate larger aircraft on average. As a result, while departing seats were approximately flat in aggregate, the number of annual commercial passenger flights fell 18%, from 10.9 million in 2000 to 9 million in 2018; however, the magnitude of the reduction varied significantly by airport size. – Flight departures from large hubs fell only 7% from 2000 to 2018. – Between 2000 and 2018, flight departures from medium, small, and nonhubs fell 35%, 32%, and 47%, respectively. • These changes meant there was much less flight activity at smaller airports than there had been at the start of the century. Business and security challenges arising from the 9/11 attacks, fuel price volatility, industry turmoil, and the Great Recession led to equally significant changes in the airline industry. These changes have affected the types of service available to airports serving smaller markets. • Upgauging to larger aircraft sizes within both the regional aircraft fleet and the narrowbody fleet between 2000 and 2018 resulted in increased average aircraft seat size on flights at all air- port sizes, with aircraft at large hubs rising from an average of 117 seats in 2000 to 133 seats per aircraft in 2018. The size of aircraft using medium hubs rose from an average of 100 seats in 2000 to 123 seats in 2018, those serving small hubs rose from an average of 80 seats per aircraft to 98, and aircraft using nonhubs rose from an average of 40 seats per aircraft to 57 by 2018.

Introduction 3 • Changes in the regional jet fleet in this 18-year period were especially noteworthy. In 2007, there were about 1,300 small regional jets (defined as those with 50 or fewer seats) in a total regional jet fleet of around 1,750 aircraft, or nearly three-quarters of the regional jet fleet. By 2018, there were only around 750 small regional jets remaining in a total regional jet fleet of around 1,650 aircraft, or less than half of the regional jet fleet. This drawdown of small regional jets from the regional fleet is projected to continue, with all small regional jets fore- cast to be removed from commercial passenger service by around 2030. Since 2000, there have also been significant changes in the structure and competitive status of the airline industry. The major airlines in the United States have consolidated to the extent that while in 2000 there were 10 major airlines offering about 90% of domestic seat capacity, by 2018 these carriers had consolidated into only four carriers offering 81% of domestic seat capacity. This total includes Southwest Airlines, a major airline that is classified by the U.S. DOT as a low-cost carrier (LCC). The remaining 19% of domestic seat capacity is offered by other LCCs and a growing group of ultra-low-cost carriers (ULCC) that typically offer point- to-point services that may be seasonal or less than daily service. These ULCCs include such carriers as Spirit Airlines, Frontier Airlines, and Allegiant Air. Another aspect of the passenger aviation industry that has affected the dynamics of service to some communities has been the regulatory treatment of pilot training and certification. In 2013, the FAA issued a final rule tightening the requirements that must be met by passenger and cargo airline first officers. This change has affected the availability of qualified pilots for airlines, which in turn affects the ability of airlines to provide service in smaller or less profitable markets. The impact of the changes on the industry as a whole is not yet fully known because the market continues to adjust, but they may create new cost pressures for airlines.