Building and Maintaining Air Service Through Incentive Programs (2020)

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38 In the course of the research conducted for this project, the project team interviewed a comprehensive range of stakeholders and participants from the evolving world of air service incentives in the United States. These included the airports and communities who offer, fund, and manage air service incentives; airlines that make use of incentives to develop their air transportation networks; and the regulators who ensure that airport-sponsored incentive pro- grams represent appropriate and fair uses of airport generated funds. Consequently, several lessons about the current use of air service incentives were synthesized and are presented in this chapter. 1. In concert with the evolution and changes in the airline industry in recent years, the use of air service incentives by airports and communities has become much more commonplace, and incentives are now in much wider use by U.S. airports and their communities. While the importance of the sustainability of a new service remains fundamental for airlines evaluating new markets and opportunities, the use of some type of incentive for financial risk sharing and as a “deal sweetener” is increasingly becoming an airline expectation, especially for LCCs and ULCCs. a. Because of the constraints placed on airport-funded and airport-directed incentives, they may be less complex and will sometimes be of shorter duration than incentives developed and funded by communities. Because of this, community-directed incentives may be the more likely source of innovation in U.S. air service incentive programs and offerings. b. Most large and medium hub airports have incentives of some type in place, and those that do not offer them are likely to be slot constrained airports of national prominence that serve markets that are in high demand. They may not need to offer incentives. This is consistent with what was heard in the airline interviews—airlines do not look for incen- tives from LaGuardia Airport (LGA) or John F. Kennedy International Airport (JFK), for example. c. The importance and amount of air service incentives depend on a variety of factors, including the stage length of a potential route, the aircraft being used, the market’s history with similar service, the business model of the air carrier, and the likelihood of a competi- tive response from another carrier. d. Increasingly, large and medium hub airports are focusing their incentive programs on attracting international air service and service to point-to-point markets with busi- ness demand, while small hubs and nonhubs have focused their efforts on increased connectivity through routes to domestic hubs. e. This evolution or spread of the use of incentives by airports and communities, and their increased frequency, which reduces the variability in the datasets especially for large and medium hub airports, makes the mixed regression results (which show only modest C H A P T E R 3 Lessons Learned

Lessons Learned 39 differences in the performance of airports with and without incentive programs) in effect unsurprising. Increasingly, the use of incentives sponsored by airport stakeholders, includ- ing the airports themselves, to support new markets is becoming the norm. 2. There is increasing importance for community-funded and managed incentives. This grow- ing prominence may lead to new kinds of problems or challenges for both communities and their airports. a. Community organizations interested in providing incentives may be less well informed about commercial aviation, airline economics, and the requirements from the FAA that may constrain the freedom with which airport managers can be involved with community incentive efforts. b. Community organizations could benefit from a better understanding of airline economics and the opportunity costs for an airline when it assigns aircraft to service in specific loca- tions and knowing more about what drives airline choices and their willingness to enter markets (or decide to leave them). i. Encouraging this better understanding of airlines may be increasingly important because community-funded and community-managed incentives are the likely source of innovation in U.S. air service incentives, including the adoption of the kinds of incentive approaches seen at non-U.S. airports. c. Sponsors of community incentives also need to understand the limitations on the extent to which airport directors, managers, and staff can be involved in the offering and implemen- tation of community-directed incentives—this may be especially challenging for small hub and nonhub airports that are operated as departments of municipal governments, with airport directors reporting to city managers and councils. d. The diversity of public and private entities providing air service incentives has increased in recent years. For example, 19 states either have established air service incentive programs or have participated in community air service incentive programs. 3. What should airports and communities know about the incentives they might introduce? a. Is the proposed program comparable to offerings by nearby or by similar airports and communities? How can incentive programs be put side by side and compared? b. What markets can airport-directed incentives plausibly encourage service to? How would service in those markets interact with the markets currently served by the airport, or by nearby competitor airports? How will these factors and interactions influence airline thinking about potential routes? c. What kinds of returns do the airport and the community think about as contributing to the return on investment (ROI) for an incentive offering? For airports, does ROI refer strictly to financial returns, or operational changes and developments? Do the commu- nity organizations and state and local governments that are sponsoring more and more air service incentive programs have the same understanding of the regional benefits of improved air service as airports do? d. What should airports and airport managers do to stay compliant with the FAA require- ments regarding incentive programs and their provisions and structure? i. FAA has stated that it does not approve incentive programs, and audits of incen- tive programs typically come about as part of overall audits of airport finances and programs. ii. FAA interest or concern regarding incentive programs and incentive provisions may sometimes be initiated by airline complaints that an incentive program is structured to fit or benefit a particular type of carrier. iii. FAA oversight and guidance of U.S. airport-directed incentive programs may be of particular interest for state, local, and community policymakers interested in the

40 Building and Maintaining Air Service Through Incentive Programs differences between U.S. restrictions on airport-funded air service incentives and those that can be offered by non-U.S. airports. 1. To what extent can this innovation gap be made up by the greater flexibility avail- able to community-directed programs? 4. Airports can be very different from one another with respect to these factors and lessons iden- tified in this report, and understanding an airport’s features and the ways in which the airport may differ from other airports is very important for creating effective air service incentives by both airports and communities.