Commercial Aviation
Factors Affecting Efforts to Improve Air Service at Small Community Airports
Gao ID: GAO-03-330 January 17, 2003
The airline industry, facing unprecedented financial losses as a result of the economic downturn and the terrorist attacks, has taken steps to minimize losses, including reducing or eliminating service to some small communities. In March 2002, GAO reported that small communities had almost 20 percent fewer departures in October 2001, as compared to October 2000. GAO was asked to follow up on that work by examining the challenges small communities face in attracting and keeping the air service they desire and what steps they have taken to overcome these challenges.
Small communities face a range of fundamental economic challenges in obtaining and retaining commercial passenger air service. The smallest of these communities typically lack the population base and level of economic activity that would generate sufficient passenger demand to make them profitable to air carriers. While larger communities in this group may have less difficulty in sustaining a base level of service, they may not be able to attract additional carriers to provide greater choice and lower fares. Smaller communities located near larger airports may also face reduced demand because passengers choose to use the larger airport with lower fares or more choices for flights. These communities also have difficulty because the airline industry is in turmoil, making less profitable operations increasingly vulnerable. Communities have taken a variety of steps to try to obtain or improve air service, such as marketing to increase passengers' demand for local service or offering financial incentives to airlines to attract new or enhanced service. At communities GAO studied in depth, financial incentives were most effective in attracting new service. However, the additional service often ceased when incentives ended. Longer-term sustainability may rest on a community's commitment to making air service a priority.
GAO-03-330, Commercial Aviation: Factors Affecting Efforts to Improve Air Service at Small Community Airports
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
January 2003:
Commercial Aviation:
Factors Affecting Efforts to Improve Air Service at Small Community
Airports:
GAO-03-330:
GAO Highlights:
Highlights of GAO-03-330, a report to Congressional requesters.
Why GAO Did This Study:
The airline industry, facing unprecedented financial losses as a
result of the economic downturn and the terrorist attacks, has taken
steps to minimize losses, including reducing or eliminating service
to some small communities. In March 2002, GAO reported that small
communities had almost 20 percent fewer departures in October 2001,
as compared to October 2000. GAO was asked to follow up on that work
by examining the challenges small communities face in attracting and
keeping the air service they desire and what steps they have taken
to overcome these challenges.
What GAO Found:
Small communities face a range of fundamental economic challenges in
obtaining and retaining commercial passenger air service. The
smallest of these communities typically lack the population base and
level of economic activity that would generate sufficient passenger
demand to make them profitable to air carriers. While larger
communities in this group may have less difficulty in sustaining a
base level of service, they may not be able to attract additional
carriers to provide greater choice and lower fares. Smaller
communities located near larger airports may also face reduced demand
because passengers choose to use the larger airport with lower fares
or more choices for flights. These communities also have difficulty
because the airline industry is in turmoil, making less profitable
operations increasingly vulnerable.
Communities have taken a variety of steps to try to obtain or improve
air service, such as marketing to increase passengers‘ demand for
local service or offering financial incentives to airlines to attract
new or enhanced service. At communities GAO studied in depth,
financial incentives were most effective in attracting new service.
However, the additional service often ceased when incentives ended.
Longer-term sustainability may rest on a community‘s commitment to
making air service a priority.
GAO HIghlights Figure:
[See PDF for image]
[End of Figure]
Contents:
Letter:
Results in Brief:
Background:
Small Communities Face Challenges in Sustaining Desired Levels of Air
Service:
Air Service Improvement Efforts Fall into Three Main Categories, but
Financial Assistance Has Proven Most Effective:
Catalyst and Community Commitment Are Important Factors in Developing
Successful Programs:
Implications for Federal Air Service Assistance to Small Communities:
Nonhub Communities May Require Different Assistance Than Small Hubs:
Concluding Observations:
Agency Comments:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Background on Underlying Economic Principles:
Demand for Air Service:
Supply of Air Service:
The Traditional Supply and Demand Model:
Policy Issues and Market Response:
Hypothetical Example of Efforts to Improve Air Service:
Air Service Improvement Initiatives:
Appendix III: Air Service Improvement Efforts at 98 Nonhub
and Small Hub Airports:
Appendix IV: Case Studies Describing Air Service Improvement Programs
in
12 Small Communities:
Mobile, Alabama‘s New Business Model:
Pensacola, Florida‘s Travel Bank Program:
Tallahassee, Florida‘s Revenue Guarantee Program:
Michigan‘s Air Service Program:
Maryland‘s Regional Air Service Development Program:
New Mexico‘s Air Service Assistance Program:
Eugene, Oregon‘s Travel Banks:
Appendix V: Small Community Air Service Development Pilot Program
Grants
and Local Matching Funds
(Fiscal Year 2002):
Appendix VIAir Service Improvement Efforts Planned at
Nonhub and Small Hub Airports Using DOT Grants:
Appendix VIIGAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Related GAO Products:
Tables:
Table 1: Key Year 2000 Data for the 12 Small Communities We Studied:
Table 2: Types of Air Service Development Efforts Undertaken by 98
Communities with Small Hub or Nonhub Airports:
Table 3: Major Types of Financial Incentive Programs:
Table 4: Summary of Features of Eugene, Oregon‘s Travel Banks:
Figures:
Figure 1: Programs Used at the 12 Communities Studied:
Figure 2: Sustainability of Air Service Improvements at 11 Small
Communities After Incentives Ended:
Figure 3: Factors Present in the 12 Communities We Studied:
Figure 4: Cessna Caravan Used by Rio Grande Air:
Figure 5: Six-Seat Cessna 414 Used by Sky Taxi:
Figure 6: Eclipse 500 Jet‘s First Flight on August 26, 2002:
Figure 7: Supply and Demand for Air Service in a High-and Low-Demand
Community:
Figure 8: The Effect of a Government-Provided Subsidy on Community Air
Service:
Figure 9: Twelve Communities We Studied in More Detail:
Figure 10: Communities Studied in Florida and Alabama and Other Nearby
Competing Airports:
Figure 11: Walk-up Fares at Pensacola Regional Airport (August 2002
versus May 2001):
Figure 12: Average Ticket Prices in Tallahassee‘s Top-10 Markets (1st
Quarter 2002 versus 1st Quarter 2001):
Figure 13: Pellston, Michigan and Other Nearby Competing Airports:
Figure 14: Enplanements at Pellston, Michigan (1998-2001):
Figure 15: Cumberland and Hagerstown, Maryland and Other Nearby
Competing Airports:
Figure 16: Boston-Maine Airways Enplanements at Cumberland and
Hagerstown (January through September 2002):
Figure 17: Five Communities Studied in New Mexico and Other Nearby
Competing Airports:
Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso:
Figure 19: Eugene, Oregon and Other Nearby Competing Airports:
Figure 20: Shift in Market Share of Passenger Traffic at Eugene, Oregon
(1998-2001):
Abbreviations:
ACAIS: Air Carrier Activity Information System:
AIR-21: Wendell H. Ford Aviation Investment and Reform Act for
the 21st Century:
ALPA: Air Line Pilots Association:
ATA: Air Transport Association:
BWI: Baltimore/Washington International Airport:
CAB: Civil Aeronautics Board:
DOT: U.S. Department of Transportation:
EAS: Essential Air Service:
FAA: Federal Aviation Administration:
NASAO: National Association of State Aviation Officials:
RAA: Regional Airline Association:
RAP: Regional Aviation Partners:
RFP: Request for proposals:
January 17, 2003:
Congressional Requesters:
The airline industry has undergone profound change since 2000. The
change was set in motion partly by the economic downturn that began
during early 2001, and the terrorist attacks further reduced passenger
levels and sent many airlines‘ revenues into a tailspin from which they
have yet to recover. Many small communities, which already had
relatively few flights to few destinations prior to those changes, lost
additional service as airlines reduced capacity, streamlined fleets,
and restructured networks.
In March 2002, we reported that airlines reduced the total number of
daily departures from small communities by almost 20 percent between
October 2000 and October 2001.[Footnote 1] You asked us to follow up on
that work by examining the problems these communities were facing and
the steps that communities were taking to attract and keep the air
service they desired. We focused our efforts on the following
questions:
* What challenges do small communities face in obtaining or retaining
commercial passenger air service?
* What actions have state or local governmental units or small
communities taken to enhance air service, and how successful have
certain ones been?
* What factors, if any, affect the likelihood of success?
* What implications does this analysis have for federal efforts to
assist small community airports?
To answer these questions, we analyzed Department of Transportation
(DOT) information and contacted numerous state, airport, community,
airline and industry trade group officials. We defined small
communities as those served by small hub or nonhub airports.[Footnote
2] This encompassed a wide variation in communities, from isolated
areas with populations of a few thousand and no scheduled air service
to urban areas with populations of several hundred thousand and service
from multiple airlines. Using federal grant applications and interviews
with officials throughout the aviation community, we identified 292
small communities that had taken some steps (many as part of state-
commissioned air service studies) to try to increase passenger demand
or increase or enhance the supply of air service. To determine what
challenges they faced, what actions they had taken to improve air
service, and how successful some of these communities have been, we
interviewed officials at 98 airports where efforts appeared to be more
extensive. To develop further information on the factors that may
increase the likelihood of success, we studied 12 of these communities
in more detail.[Footnote 3] We selected these communities principally
because they had used a variety of programs to improve their air
service. We also selected them because they varied in population, level
of economic activity and geographic location. We conducted our work
from March 2002 to December 2002 in accordance with generally accepted
government auditing standards. Additional information on our scope and
methodology appears in appendix I.
Results in Brief:
The nation‘s small communities face a range of fundamental economic
challenges in obtaining and retaining the commercial airline service
they desire or making their existing service more attractive to
potential passengers. The smallest of these communities, usually served
by nonhub airports, typically lack the population base and level of
economic activity that would generate sufficient passenger demand to
make them profitable to air carriers. Larger communities in this group,
often served by small hub airports, may have enough people to support
some level of air service, but not enough to attract additional
carriers to compete at that community airport, thereby providing
greater choice and possibly lower fares. Further, if a small community
is located within driving distance of a larger airport, this already-
limited demand is often diluted because passengers may drive to the
larger airport for better service or cheaper fares. These challenges
are exacerbated by an airline industry in economic turmoil. Wall Street
analysts have estimated projected industry losses approaching $8
billion in 2002. Some carriers have taken significant steps to cut
costs and/or minimize losses by reducing service. At some small
communities, this can mean eliminating service altogether.
Information on efforts to develop air service at 98 small communities
showed that actions taken to obtain or enhance air service fall into
three main categories: (1) conducting studies to determine whether
adequate demand for new or enhanced service exists, (2) undertaking
marketing efforts to increase demand for service, and (3) offering
financial incentives for air carriers to introduce or expand service.
Following is a description of each type of action:
* Airport and community officials‘ studies addressed such matters as
the type of service and destinations desired by the community, the
extent to which passengers may use other airports nearby rather than
the local facility, and the parity of local airfares with comparable-
sized communities.
* Officials used a variety of marketing strategies to educate the
community about the importance of using local air service. These ranged
from meeting with local business leaders to advertising through radio,
television, newspaper, or billboards. Some communities provided
marketing funds directly to airlines because airlines often do not
advertise service to smaller communities.
* Financial incentives to air carriers included revenue guarantees
(payments from communities to airlines if actual revenues did not reach
agreed-upon targets), pledges of a certain level of passenger activity
by local businesses, state subsidies, and an arrangement in which an
airport provided the ground crew for a carrier‘s flights.
While studies and marketing can play an important role in air service
improvement efforts, financial incentives may offer the best
opportunity to attract the new or additional air service desired by a
community. Eleven of the 12 communities we studied in depth took such
actions, resulting in new or enhanced air service or lower fares, at
least during the life of the program. However, even financial
incentives may have difficulty bringing about service that can be
sustained after the incentives end. Of the five communities for which
the financial incentive program had ended, only one--at a community
with a small hub airport--retained the enhanced service after the
program finished. The experiences of the four other communities--all
with nonhub airports--illustrate the difficulty of sustaining service
enhancements once the financial incentive or other subsidy ends.
A community‘s population is a key factor in its efforts to attract or
retain air service, yet size is largely beyond a community‘s control.
Our detailed review of 12 projects identified two other factors, more
directly within a community‘s control, which were used to increase the
likelihood of success. The first factor was the presence of a catalyst
or driving force--normally local airport or community officials--who
advocated air service improvements and spearheaded a program for
change. Such a catalyst--important for beginning air service
improvement efforts--was present in each of the 12 communities we
reviewed. For example, state, city, and airline officials worked
together in Taos, New Mexico, to begin new air service through the use
of financial incentives. The second factor was a tangible community
action signaling that obtaining improved air service was a priority.
Three of the 12 communities took this action in various ways, such as
by offering to pledge funds to a carrier providing new or enhanced air
service in return for future travel. For example, Eugene, Oregon,
obtained additional service from two airlines because numerous local
businesses pledged travel funds to demonstrate their support for the
service. These actions helped one community to initially attract air
service and then develop sustainable service. Four other communities
that relied on funds from the state or local government, without taking
this additional action, lost the service when the subsidy ended.
The findings have potential implications for federal efforts to help
small communities improve their air service.[Footnote 4] For example,
our work for this report and recent work on air service to small
communities indicates that there may be significant differences in the
barriers faced by small hub and nonhub communities in developing
sustainable commercial air service, and that effective approaches to
addressing those communities‘ barriers vary accordingly. One small hub
airport was able to use one-time ’seed money“ to attract additional air
service. However, for nonhub airports we visited with smaller
populations and less economic activity, one-time assistance was not
sufficient to sustain the service. Yet ongoing financial assistance is
no guarantee of viable air service. In other studies we conducted on
the Essential Air Service (EAS) program, we found that subsidies paid
directly to air carriers have not produced an effective transportation
solution for passengers at many small communities.[Footnote 5] As
airlines alter their operations in response to financial pressures,
there may be an increasing demand for the federal government to assist
small communities in attracting and maintaining air service. In
selecting communities for assistance, federal efforts will be enhanced
by recognizing variations among those communities, establishing
realistic goals, and identifying some indicators of local commitment.
Background:
In 1978 the Congress deregulated the airline industry, phasing out the
federal government‘s control over domestic fares and routes served and
allowing market forces to determine the price, quantity, and quality of
service. Most major ’network“ carriers, free to determine their own
routes, developed ’hub-and-spoke“ networks.[Footnote 6] These carriers
provide nonstop service to many spoke cities from their hubs. The
airports in the small spoke communities include the smallest 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 community), the network airlines may operate their own
large jets or use regional affiliate carriers to provide service,
usually with regional jet or turboprop aircraft.[Footnote 7] However,
low-fare carriers, such as Southwest Airlines and JetBlue Airways, use
a different model, flying point-to-point generally to and from
secondary airports in or near major metropolitan areas, such as Ontario
International near Los Angeles and Chicago Midway. If passengers at
many small communities wish to use the service of low-fare carriers,
they have to drive to those airports.
The nation‘s commercial airports are categorized into four main groups
based on the annual number of passenger enplanements--large hubs,
medium hubs, small hubs, and nonhubs.[Footnote 8] The 31 large hubs and
35 medium hub airports together enplaned the vast majority--89 percent-
-of the more than 709 million U.S. passengers in 2000. In contrast, the
71 small hubs enplaned about 8 percent, and the 409 nonhub airports
enplaned only 3 percent of U.S. passengers.
While airline deregulation has allowed increased competition and led to
lower fares and better service for most air travelers, some small
communities have suffered from relatively limited service and high
airfares. The Congress, concerned about air service to small
communities, established two programs--the EAS program and the Small
Community Air Service Development Pilot Program--targeted at those
communities‘ air service needs.
* The Congress established the EAS program as part of the Airline
Deregulation Act of 1978. In general, the program guarantees that
communities that received air service prior to deregulation will
continue to receive air service.[Footnote 9] If an air carrier could
not continue service to a community without incurring a loss, DOT (and
before its sunset, the Civil Aeronautics Board) could then use EAS
funds to award a subsidy to that carrier or another carrier willing to
provide service. These subsidies are intended to cover the difference
between a carrier‘s projected revenues and expenses and provide a 5
percent profit margin. As of July 1, 2002, the EAS program provided
subsidies to air carriers to serve 114 communities, 79 of these in the
continental United States. We reported in August 2002 that this number
is expected to increase. Appropriations for the EAS program for fiscal
year 2002 totaled $113 million.
* More recently, the Congress authorized the Small Community Air
Service Development Pilot Program as part of AIR-21 (P.L. 106-181) to
help small communities enhance their air service. Under this program
DOT is authorized to award grants to 40 communities served by small hub
or nonhub airports that have demonstrated air service deficiencies or
higher than average airfares. Priority is given to communities that
provide local matching funds. Congress appropriated $20 million for
fiscal year 2002 for this program. The legislation contained provisions
to allow DOT to work with and coordinate efforts with other federal,
state, and local agencies to increase the viability of service to small
communities.
Small Communities Face Challenges in Sustaining Desired Levels of Air
Service:
The challenges now faced by small communities in obtaining or enhancing
air service center on two main issues--(1) limitations created by
having a small population base from which to draw passengers and (2) an
airline industry that, for the most part, is losing money and seeking
ways to return to profitability. In economic terms, these challenges
can be understood in terms of demand (the number of passengers, the
level of service they desire, and the price they are willing to pay to
obtain it) and supply (the potential providers and their costs in
providing the service). A small population base may not generate
sufficient demand to attract or retain competitive air service because
the demand may be too low to generate a profit for airlines. As a
result, the service that small communities obtain often does little to
stimulate demand. Instead, if the community is located within driving
distance of a larger airport, residents may forgo the local service and
drive to a larger airport, where they have more choices and often pay
lower fares. While small communities have reported that limited service
is a long-standing problem, it has been exacerbated by the second main
issue--the current financial condition of most major U.S. airlines. Hit
with declining revenues brought on by the economic downturn and events
of September 11, most carriers have taken steps to minimize losses and
cut costs. The airlines use sophisticated computer models to help them
identify whether certain markets can be served profitably. These
proprietary models take into account such considerations as the
carrier‘s operating costs, estimated passenger traffic, and competition
in the market (including the type of aircraft competitors used, the
number of daily flights they scheduled, and the fares they charged).
Small markets, which may offer little opportunity for profit, are prime
candidates for cost-cutting considerations.
Challenges Created by Limited Demand:
The demand-related challenges that small communities face are linked to
their limited populations,[Footnote 10] relatively low levels of
economic activity, and (for those communities located relatively close
to larger airports) the tendency of residents to use other airports
with better service and lower fares. Population is a critical factor
because it partly determines the level of demand that carriers can
expect in considering whether to provide service. The smallest of the
communities in our review had such a limited population base as to make
it difficult to attract and retain service from even one carrier. In
those communities that had larger populations--such as those with small
hub airports--passengers may have relatively limited air service; that
is, service from a limited choice of carriers to relatively few nonstop
destinations, often at comparatively high fares.
Relative to larger communities, small communities also tend to have
lower levels of economic activity, as measured by such things as jobs
or per capita income. In general, the level of economic activity
present in small communities is positively correlated with the amount
of air service those small communities received. We reported in March
2002,[Footnote 11] for example, that for every additional 25,000 jobs
in a county, jet departures increased by 4.3 departures per week, and
turboprop departures increased by 4.8 per week. Similarly, for every
additional $5,000 in per capita income, jet departures increased by 3.3
per week and turboprop departures increased by 12.7. In other words, if
two small communities were similar except that community A had $5,000
more in income per capita than community B, community A can be expected
to have 16 more departures per week than community B.[Footnote 12]
Changes in these same factors will also cause changes in demand and
service within a community over time.
Ironwood, Michigan, illustrates the effect of declining population and
lowered economic activity on a community‘s passenger enplanements.
Ironwood is located in the western portion of Michigan‘s Upper
Peninsula. After the community‘s various iron and copper mines closed
in the 1980s and 1990s, its population decreased from about 14,000 in
the 1980s to about 6,800 today. Annual enplanements dropped from about
14,000 annually in the 1980s to 1,800 in 2001. Ironwood now receives
subsidized air service through the EAS program. However, according to
the manager of Ironwood‘s airport, many passengers choose to use an
airport 90 miles away in Rhinelander, Wisconsin, because it offers
better service and lower fares.
The relationship between population and economic activity can also be
seen in the levels of air service at the 12 small communities we
studied in detail. These communities varied substantially in size and
economic activity (see table 1). The larger communities tended to have
higher levels of per capita income, larger manufacturing earnings, and
more air service.
Table 1: Key Year 2000 Data for the 12 Small Communities We Studied:
City: Mobile; : : State: AL; County population: 400,063; Employment
(total full and part time): 220,979; Per capita income: $22,677;
Manufacturing earnings: $923,085; Number of carriers: 6; Enplanements:
389,280; Awarded DOT funds: X.
City: Eugene; : : State: OR; County population: 323,271; Employment
(total full and part time): 188,965; Per capita income: $25,584;
Manufacturing earnings: $1,041,093; Number of carriers: 3;
Enplanements: 374,174; Awarded DOT funds: [Empty].
City: Pensacola; : : State: FL; County population: 294,323; Employment
(total full and part time): 178,360; Per capita income: $22,360;
Manufacturing earnings: $354,989; Number of carriers: 7; Enplanements:
524,811; Awarded DOT funds: [Empty].
City: Tallahassee; : : State: FL; County population: 240,047;
Employment (total full and part time): 175,034; Per capita income:
$26,564; Manufacturing earnings: $113,835; Number of carriers: 8;
Enplanements: 467,914; Awarded DOT funds: [Empty].
City: Nonhubs; : : State: [Empty]; County population: [Empty];
Employment (total full and part time): [Empty]; Per capita income:
[Empty]; Manufacturing earnings: [Empty]; Number of carriers: [Empty];
Enplanements: [Empty]; Awarded DOT funds: [Empty].
City: Hagerstown; : : State: MD; County population: 132,130; Employment
(total full and part time): 76,094; Per capita income: $24,267;
Manufacturing earnings: $430,662; Number of carriers: 1; Enplanements:
25,923; Awarded DOT funds: [Empty].
City: Cumberland; : : State: MD; County population: 74,740; Employment
(total full and part time): 38,472; Per capita income: $21,098;
Manufacturing earnings: $157,379; Number of carriers: 1; Enplanements:
4,815; Awarded DOT funds: [Empty].
City: Roswell; : : State: NM; County population: 61,306; Employment
(total full and part time): 28,138; Per capita income: $19,651;
Manufacturing earnings: $74,980; Number of carriers: 1; Enplanements:
16,706; Awarded DOT funds: [Empty].
City: Hobbs; : : State: NM; County population: 55,206; Employment
(total full and part time): 28,942; Per capita income: $20,229;
Manufacturing earnings: $13,228; Number of carriers: 1; Enplanements:
2,342; Awarded DOT funds: [Empty].
City: Carlsbad; : : State: NM; County population: 51,473; Employment
(total full and part time): 25,776; Per capita income: $21,007;
Manufacturing earnings: $42,009; Number of carriers: 1; Enplanements:
7,355; Awarded DOT funds: [Empty].
City: Pellston; : : State: MI; County population: 31,540; Employment
(total full and part time): 21,902; Per capita income: $27,336;
Manufacturing earnings: $80,400; Number of carriers: 1; Enplanements:
31,571; Awarded DOT funds: X.
City: Taos; : : State: NM; County population: 30,065; Employment (total
full and part time): 16,096; Per capita income: $17,815; Manufacturing
earnings: $7,662; Number of carriers: 1; Enplanements: 1,233; Awarded
DOT funds: X.
City: Ruidoso; : : State: NM; County population: 19,531; Employment
(total full and part time): 10,464; Per capita income: $17,745;
Manufacturing earnings: $4,464; Number of carriers: 0; Enplanements:
13; Awarded DOT funds: X.
Source: GAO analysis of Census Bureau, FAA Air Carrier Activity
Information System (ACAIS), and other data.
Notes: X indicates the community was awarded a Small Community Air
Service Development Pilot Program grant.
Pellston, Michigan and Ruidoso, New Mexico, were initially selected to
receive Small Community Air Service Development Pilot Program funds but
later declined to participate in the program. Pellston withdrew because
Northwest Airlines, which is the one carrier that operates there, was
not interested in participating. Ruidoso withdrew because the community
decided that it wanted flights to El Paso as opposed to Albuquerque,
but the carrier involved in the program was not willing to operate
there at this time. Ruidoso‘s award was a joint award with Taos as part
of the Taos/Ruidoso consortium.
The number of carriers for Mobile, Eugene, Pensacola, and Tallahassee
is for 2001 or before the air service improvement programs began.
The number of carriers for all the nonhub airports is for the 1st
quarter of 2000.
[End of table]
Small communities may also experience passenger ’leakage“--that is,
passengers seeking more choices, better schedules, or lower fares
choose to drive to a larger airport instead. Leakage is a widespread
challenge to air service at small communities. Of the 98 airport
officials we interviewed, 83--including all 12 of the communities we
studied in detail--cited leakage as a problem. Some small communities‘
airports are relatively close to a major airport, making it easy for a
small community‘s passengers to use the larger airport. For example, a
Maryland aviation official reported that many passengers drive 75 miles
to the Baltimore/Washington International Airport. But even airport
officials in Tallahassee, Florida, reported that passengers drove to
such airports as Jacksonville (160 miles) in search of lower fares. In
earlier work on air service to small communities, we also found leakage
to be widely reported as a challenge for small community
airports.[Footnote 13]
To the extent that airline passengers make their decisions on the basis
of price, leakage away from small community airports to larger airports
may increase as low-fare carriers expand their operations. Southwest
Airlines added more than 20 cities to its system between 1990 and
November 2002 for a total of 58 cities served, and JetBlue Airways,
which began service in February 2000, now serves 20 cities. DOT data
indicates that low-fare carriers‘ share of U.S. domestic passengers has
also grown from 5.5 percent in 1990 to 18 percent in 2001. According to
the DOT Inspector General in an October 2002 report, low-fare carriers
have continued to expand between September 2000 and September 2002.
They offered 11 percent more seats, and their share of domestic air
service (as measured in available seats) increased from 16 to 19
percent. Their expansion to additional cities may shift even more
demand away from small community airports as passengers choose to drive
to airports served by low-fare carriers.[Footnote 14]
Small Communities Are Vulnerable to Carrier Cost-Cutting:
Against the backdrop of relatively limited demand, small communities
face an additional set of challenges in that the nation‘s air carriers-
-the suppliers of the service--are facing considerable problems in
operating profitably. Carriers are for-profit entities that need to
recoup their costs and earn a profit. But in 2001 and 2002, the major
airlines generally did not do so. Losses were in excess of $6 billion
in 2001, and Wall Street analysts expected losses to exceed $8 billion
in 2002. Just 2 years ago, most major U.S. carriers were earning
profits.
One reason for the lack of profitability is a downturn in passenger
revenues. Between June 2001 and June 2002, six major U.S. network
airlines experienced drops in revenue passenger miles of between 8 and
20 percent. The drop in passengers included high-yield business
travelers, according to the Air Transport Association (ATA). This group
of flyers has become more price sensitive in the current economic
climate. That is, they began to behave more like leisure travelers, who
forgo the flexibility of refundable, often last-minute tickets, in
exchange for the lower prices of seats booked well in advance. ATA also
reported that average domestic fares in September 2002 were almost 18
percent below September 2000 fares.
A second reason for the lack of profitability is that air service is
expensive to provide, partly because of carriers‘ high operating costs,
which are incurred whether an aircraft is flown empty or full. These
costs include labor, fuel, and maintenance. ATA data show that labor,
fuel, and fleet costs make up almost 60 percent of carriers‘ total
operating expenses and that increases in airline labor costs and
aviation taxes have outpaced inflation. Carriers have taken many
actions to lower their costs and restructure their operations since
September 2001. However, they have not yet returned to profitability.
Another major part of the expense of providing air service is ’station“
costs, according to airline officials. These stations require staff to
handle passengers, bags, and cargo. One airline 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.[Footnote 15]
Small communities may become cost-cutting targets because they are
often a carrier‘s least profitable operation. To a degree, small
communities shared in the overall service reductions that most carriers
made in response to the economic slowdown and the events of September
11. We earlier reported that daily departures from 202 small
communities had decreased by 19 percent between October 2000 and
October 2001, with more of the reductions occurring after September
11.[Footnote 16] The DOT Inspector General reported recently that
nonhub airports experienced a greater loss of direct service to and
from 31 large airports than other airports, losing 17 percent of
scheduled flights between September 2000 and September 2002. By
comparison, small, medium, and large hub airports‘ reductions ranged
from 5 to 10 percent.[Footnote 17]
Even if the reductions in service to small communities were, in the
aggregate, no greater than the reductions in larger communities, the
effect on those small communities can be greater. In small communities,
a service reduction can often mean not fewer flights, but a loss of
service altogether, either from a competing carrier or from the only
carrier providing service. For example, of the 202 communities included
in our March 2002 study, the number of small communities served by only
one airline increased from 83 in October 2000 to 95 in October 2001.
Further, between September 2001 and September 2002, carriers notified
DOT that they planned to eliminate service to 30 communities, 15 of
which had service from only one carrier.[Footnote 18] Also, the
remaining service might be so limited that it creates additional
incentive for potential passengers to drive to larger airports. One
state aviation official termed this cycle of reduced service and
subsequently increased leakage as the ’death spiral.“:
Air Service Improvement Efforts Fall into Three Main Categories, but
Financial Assistance Has Proven Most Effective:
Among the 98 communities we contacted that had taken steps to develop
an air service improvement program, efforts tended to fall into three
main categories. Over 75 percent of communities undertook some sort of
study, such as examining the potential demand for new or enhanced air
service. In addition, 78 percent conducted some sort of marketing
activity to educate the public about the air service available or to
inform carriers about potential for new or expanded service
opportunities. Finally, 45 percent of the communities offered some sort
of financial incentive to encourage carriers to provide the new or
additional service. Small hub airports were slightly more likely than
nonhub airports to implement these three types of efforts (see table
2). To assist readers‘ understanding of the economic effect of various
programmatic or policy mechanisms to attract additional air service,
appendix II discusses in more detail the general economic principles
that underlie the level and type of air service at small communities.
Table 2: Types of Air Service Development Efforts Undertaken by 98
Communities with Small Hub or Nonhub Airports:
Type of effort: Studies[A]; Nonhub airports: (81 airports): Number: 60;
Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports:
(17 airports): Number: 15; Small hub airports: Percent of total: 88%;
[Empty]; Combined total: (98 airports): Number: 75; Combined total:
Percent of total: 77%.
Type of effort: Marketing; Nonhub airports: (81 airports): Number: 60;
Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports:
(17 airports): Number: 16; Small hub airports: Percent of total: 94%;
[Empty]; Combined total: (98 airports): Number: 76; Combined total:
Percent of total: 78%.
Type of effort: Financial incentives; Nonhub airports: (81 airports):
Number: 33; Nonhub airports: Percent of total: 41%; [Empty]; Small hub
airports: (17 airports): Number: 11; Small hub airports: Percent of
total: 65%; [Empty]; Combined total: (98 airports): Number: 44;
Combined total: Percent of total: 45%.
Type of effort: Other; Nonhub airports: (81 airports): Number: 15;
Nonhub airports: Percent of total: 19%; [Empty]; Small hub airports:
(17 airports): Number: 0; Small hub airports: Percent of total: 0%;
[Empty]; Combined total: (98 airports): Number: 15; Combined total:
Percent of total: 15%.
Source: GAO analysis.
Notes: Columns will not add to total number of airports shown because
some airports undertook multiple efforts.
The air service development programs were in various stages at the time
we spoke with officials. We did not include programs in the table above
that were in the proposal stage at the time of our discussions. We
included communities with ongoing programs and communities that had
completed their programs. In a few cases, we 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.
[A] Studies included both those conducted at a statewide level and
those conducted or commissioned by an individual airport.
[End of table]
On the basis of our in-depth review at 12 of these communities, it
appears that some sort of financial incentive is particularly important
in translating a desire for new or enhanced service into an actual
program that puts this service in place. However, even this level of
effort may not be sufficient to sustain the service over the long term.
Four of the five communities that had completed their service
improvement efforts were unable to sustain the enhanced level of
service.
Studies Aid in Determining Communities‘ Air Service Needs:
Of the 98 airports we contacted, 75 reported conducting a study of
their air service or participating in a multi-airport study. Studies
covered such topics as potential demand for air service, types and
levels of service desired by the community, extent of leakage to other
airports, and barriers the community may need to overcome. These
studies emanated from a variety of sources:
* Airports with enough staff and expertise often developed and
conducted studies themselves. For example, staff of the Mobile
(Alabama) Regional Airport developed numerous service and leakage
analyses in-house.
* Some airports worked with aviation consultants to develop studies.
Chico (California) Municipal Airport, for example, worked with a
consulting group to analyze tickets purchased through travel agents,
review air service profiles, and create marketing materials.
* Some studies were done at the state level. Among the states we
contacted, for example, Arizona, North Carolina, Mississippi, and
Pennsylvania had commissioned statewide studies evaluating levels of
air service and fares and developing recommendations for ways to
improve scheduled commercial air service.
By themselves, studies have no direct effect on the demand for, or
supply of, air service. However, while studies do not directly result
in improved air service, they can play a key role in helping
communities determine if there is adequate potential passenger demand
to support new or improved air service. If adequate potential demand
does not exist, then communities can avoid using scarce resources to
pursue scheduled air service that the community cannot adequately
support. If adequate potential demand does exist, studies can provide
more specific information about the size of aircraft and level of
service that could be supported and any marketing or financial
incentives that might be needed.
Marketing Efforts Help to Inform the Community of Air Service:
Of the 98 airports we contacted, 76 reported using some form of
marketing to try to increase potential passengers‘ awareness of the air
service or to try to inform carriers about the airport in an effort to
attract new air service. The amount spent annually on these activities
varied from a few thousand dollars to several hundred thousand dollars
at some of the small hub airports. These efforts took different forms,
such as the following:
* Some communities developed basic advertising campaigns. For example,
the Chamber of Commerce in Paducah, Kentucky, implemented a ’Buy Local,
Fly Local“ advertising campaign, which included newspaper, radio, and
television ads along with a billboard campaign.
* Chattanooga, Tennessee, implemented a marketing incentive program. It
dedicated funds to marketing a carrier‘s new or enhanced service. The
Chattanooga airport provides funds to carriers designated specifically
for marketing. For each new destination, new entrant carriers receive
$50,000, and incumbent carriers receive $30,000.
* Some communities made presentations to airlines to try to obtain new
or additional service. For example, the Olympia (Washington) Regional
Airport hired a consultant to prepare a presentation to attract service
from Big Sky Airlines. The package included a proposed schedule, travel
agent survey, estimated traffic, and a pro forma model of service. Big
Sky initiated service between Olympia and Spokane on November 13, 2002.
This was Olympia‘s first scheduled service since 1995.
Unlike studies, marketing efforts can have a direct effect on
increasing demand for air service, if these efforts succeed in
increasing the passenger base or reducing the amount of leakage to
other airports. Marketing directed at airlines can have a direct effect
on the supply of air service if the marketing efforts succeed in
attracting new carriers or more service from existing carriers. The
effect of marketing efforts is more difficult to ascertain, but many
airport managers said educating passengers about available air service
was an important step to increasing demand for air service. For
example, an official from Shenandoah Valley (Virginia) Regional Airport
said he believed marketing was a useful tool for airports to increase
demand. He pointed to the fact that the airport‘s annual enplanements
more than doubled--from 8,000 to 20,000--since the airport began its
marketing and public relations campaign in 1996.
The Michigan Air Service Program is another example of how marketing
efforts can help to enhance air service to small communities. Michigan
provides airports with under 150,000 annual enplanements with grants
that can be used for marketing, air carrier recruitment, or capital
improvements. Pellston Regional Airport, one of the 12 airports we
studied in detail, has received such funding and used it for marketing.
Pellston has received over $100,000 since fiscal year 1998, which the
community has used for promotional materials; newspaper, radio, and
televisions ads; and a newsletter. The airport has used the ’Fly From
Nearby“ theme to communicate to the community the importance of using
their local airport. While Pellston‘s enplanements declined from 1998
to 2001, they appear to have stabilized and as of August 2002,
officials reported enplanements were up 11 percent from 2001. In
addition, Pinnacle Airlines (operating as Northwest Airlink) provided
regional jet service between Pellston and Detroit from June to
September 2002. Though airport officials could not directly link the
marketing program to the increasing enplanements, they said it had
helped maintain passenger demand for air service at Pellston.
Financial Incentives Provide Carriers With Greater Assurance for Making
a Profit:
Forty-four of the airports we contacted had created a financial
incentive for a carrier to enter a market or to enhance the level of
service already provided. Financial incentives all share the same basic
characteristic--they mitigate some of the financial risk by providing a
carrier with greater assurance about the financial viability of the
service being provided. In practice, the incentives take a number of
different forms with varying levels of complexity (see table 3). For
example, in 2002, the community of Lancaster, Pennsylvania paid a
subsidy of $195,000 to Colgan Air to offset some of the airline‘s costs
to begin providing service to the community. Ski communities in
Colorado, Montana, and Wyoming provided airlines with revenue
guarantees--payments to the airlines if revenues fell short of targets-
-in exchange for additional flights during the ski or summer tourist
season. Stockton, California set up a travel bank--funds businesses
pledged to use in the future to purchase tickets on the new service.
Participating businesses will have 3 years to use these funds for
travel; and at the end of the period, any unused funds will be given to
the airline. The complexity of these programs varies in part due to the
number of participants. For example, while airport officials can take
action to reduce airport fees, subsidy or revenue guarantee programs
may require government assistance, and travel banks require cooperation
from many community businesses. See appendix III for information on the
type of programs used at the 98 airports we contacted.
Table 3: Major Types of Financial Incentive Programs:
Type of financial incentive: Reduced airport fees; Description: Airport
reduces fees charged to carriers--landing fees, lease rates, or fuel
flowage fees in exchange for air service. (This is often only one
element of an air service improvement program.); Prevalence among
nonhub airports studied: (total = 81): Number: 10; Prevalence among
nonhub airports studied: Percent of total: 12%; [Empty]; Prevalence
among small hub airports studied: (total = 17): Number: 7; Prevalence
among small hub airports studied: Percent of total: 41%.
Type of financial incentive: Subsidies; Description: Financial
assistance to a carrier assists with start-up, operating or other
costs. Carrier may receive a set amount per period or reimbursement for
expenses incurred, sometimes up to a cap.; Prevalence among nonhub
airports studied: (total = 81): Number: 10; Prevalence among nonhub
airports studied: Percent of total: 12%; [Empty]; Prevalence among
small hub airports studied: (total = 17): Number: 1; Prevalence among
small hub airports studied: Percent of total: 6%.
Type of financial incentive: Revenue guarantees; Description: Community
and carrier officials set revenue targets and communities pay carriers
only if revenue from operations does not meet agreed-upon target.
Payments are often capped.; Prevalence among nonhub airports studied:
(total = 81): Number: 9; Prevalence among nonhub airports studied:
Percent of total: 11%; [Empty]; Prevalence among small hub airports
studied: (total = 17): Number: 3; Prevalence among small hub airports
studied: Percent of total: 18%.
Type of financial incentive: Travel bank; Description: Businesses or
individuals pledge future travel funds to a carrier providing new or
expanded air service. Travel funds are deposited in an account,
administered by a business entity (such as the Chamber of Commerce) and
pledging businesses draw against these funds (often using credit card
supplied for this purpose) to purchase tickets.; Prevalence among
nonhub airports studied: (total = 81): Number: 4; Prevalence among
nonhub airports studied: Percent of total: 5%; [Empty]; Prevalence
among small hub airports studied: (total = 17): Number: 3; Prevalence
among small hub airports studied: Percent of total: 18%.
Type of financial incentive: Other; Description: [Empty]; Prevalence
among nonhub airports studied: (total = 81): Number: 6; Prevalence
among nonhub airports studied: Percent of total: 7%; [Empty];
Prevalence among small hub airports studied: (total = 17): Number: 3;
Prevalence among small hub airports studied: Percent of total: 18%.
Source: GAO analysis.
Note: The air service development programs were in various stages at
the time we spoke with officials. We did not include programs in the
table above that were in the proposal stage at the time of our
discussions. We included communities with ongoing programs and
communities that had completed their programs. In a few cases, we
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.
[End of table]
Analysis of 12 Projects Indicates Financial Incentives
Are Key to Increasing Service, but No Guarantee of Success:
We studied 12 communities that had taken a variety of actions to
improve air service; all but 1of the 12 communities instituted some
form of financial incentive program for the carrier to attract
additional service.[Footnote 19] All of these communities had
undertaken some combination of studies or marketing in the past.
However, the officials at many of these airports pointed out that while
studies provided useful information about passengers‘ demand for
service and marketing is useful for informing passengers about the air
service, financial incentives were the most effective tool to attract
new air service. According to an official with the airport in Eugene,
Oregon, for example, the airport conducted studies and marketing, but
it did not attract additional air service until the community
eventually implemented a travel bank program. As figure 1 shows, the
four small hub communities implemented varying financial incentives:
travel banks, a revenue guarantee, and a model in which the airport
provided the ground crew for a carrier‘s operation.
Figure 1: Programs Used at the 12 Communities Studied:
[See PDF for image]
[End of figure]
Officials in Mobile also used studies and marketing but developed a new
staffing model after two airlines announced that they planned to cease
service there. United Express indicated that it dropped service as a
result of the effects of September 11. US Airways subsequently
announced that it would be forced to discontinue service because United
Express supplied their ground staff (i.e., ticket agents and baggage
handlers). Officials decided that they needed to develop a new strategy
to attract and retain carriers. Airport officials adopted a model under
which the airport supplies the ground crew and equipment and charges
participating carriers a fee for the service. With this new business
model in place, US Airways decided to continue serving Mobile.
Officials said they believe that this new way of conducting business
may help encourage other carriers to serve Mobile because there will be
fewer barriers for airlines wishing to begin new service since the
airport will supply staff and equipment.
Of the seven nonhub communities that implemented some form of financial
incentives, each used subsidies to air carriers. Some of these
subsidies were provided by the state, while cities, counties, or some
combination of these sources funded the others. Our conversations with
community and carrier officials indicated that these financial
incentives were key to attracting carriers and actually putting the
service in place.
The experience to date in these communities shows that the long-term
sustainability of the service after incentives end is
uncertain.[Footnote 20] Financial incentives helped attract new or
better service, leading officials in all 11 communities to rate their
programs as successful in the short term. At 6 of the 11 communities,
the programs were ongoing as of November 1, 2002. The remaining five
communities had completed their programs--that is, they had moved
beyond the initial period in which they were able to offer some form of
financial incentive. Of these five communities, only one--Eugene, a
small hub airport--retained the additional air service after the
incentives had ended. The four others--all nonhub airports with low
demand for air service--lost the additional service when the incentives
ended. Figure 2 shows the status of each program.
Figure 2: Sustainability of Air Service Improvements at 11 Small
Communities After Incentives Ended:
[See PDF for image]
[End of figure]
While each community confronts unique challenges and has adopted
various programs to try to address these challenges, we believe that
the performance to date of the six ongoing programs provides some
indication of the likelihood of sustainability of the air service after
the incentives end. Following are descriptions of the six ongoing
programs:
* Mobile. The Mobile program--where the airport authority, rather than
the airline, provides ground crew and equipment and charges
participating airlines a fee for this service--differs from many of the
other financial incentive programs because there is not a specific time
period or set amount of funding for the program. Rather, airport
officials said they will consider their staffing initiative successful
in the short-term if US Airways continues to provide air service to
Mobile. Longer-term success will be measured by whether additional
airlines choose to participate. To date, no airline other than US
Airways, the initial participant, has done so.
* Pensacola and Tallahassee. Pensacola appears to be on track to reach
sustainable service in 2003, and Tallahassee is renewing its revenue
guarantee in order to retain the current levels of air service. While
both airports used financial incentives to obtain AirTran service,
Pensacola used a travel bank (businesses pledged future travel funds)
and Tallahassee used a revenue guarantee program (the city guaranteed
to pay AirTran if their revenues from the new service did not meet
agreed-upon targets). An AirTran official said that they chose to serve
both cities because they believed that these cities were capable of
supporting service. In the short term, both programs have been
successful because passengers have received lower average airfares.
However, both agreements were reached before September 11, after which
overall passenger loads throughout the country dropped dramatically.
Further, airport and air carrier officials said that Delta, a major
carrier serving these cities, has adopted a pricing strategy of
matching AirTran‘s low fares as well as adding flights and capacity to
counterbalance AirTran‘s entry into the Tallahassee market. Tallahassee
airport officials said depressed demand and low airfares have resulted
in lower-than-anticipated revenue and slower progress toward
profitability. The Pensacola airport manager said that his airport‘s
load factors (percent of occupied seats on flights) are now approaching
the goal of 70 percent, and he believes that when the travel bank ends
in September 2003, the service will be self-sustaining. Tallahassee
officials said that profitability for AirTran‘s operation, initially
projected for the end of the revenue guarantee (September 30, 2002),
will probably not materialize until the third quarter of 2003. As of
November 2002, officials stated that AirTran had requested an extension
of the program and an additional $1.5 million revenue guarantee in
order to continue service. Tallahassee agreed to renew the $1.5 million
revenue guarantee for another year beginning in November 2002.
* Cumberland and Hagerstown. Neither of these airports with state-
subsidized air service appears likely to sustain service when
incentives end, based on the low level of passenger demand. While a
Maryland official said they set a load factor target of 60 percent for
the service, actual load factors in September 2002 (after 9 months of
operation) were 12 percent.
* Taos. Taos, which has received state and local subsidies since 2000,
also continues to struggle to generate enough passenger demand. Though
the state renewed the original 1-year state grant twice for a total of
$570,000 (in addition to local matching funds), monthly enplanements
have not exceeded 295 (March 2000). According to an airline official,
the service is still not profitable.
Available studies presaged some communities‘ inability to develop
sustainable service. A consulting study of potential service for Hobbs
and Ruidoso concluded that these communities would be unable to support
additional service without some form of subsidy. As predicted, when the
state-supplied subsidy ended, the communities were unable to sustain
the service, and the carrier quickly discontinued service. Similarly, a
consultant studying Cumberland and Hagerstown suggested that these
markets would only support service with a small aircraft, such as one
with eight seats. Further, the consultant concluded that Hagerstown
showed the least promise because of existing service to the hub in
Pittsburgh. Nonetheless, officials decided to go ahead with service to
both communities using 19-seat aircraft because they thought passengers
would be more inclined to fly in larger planes.
Catalyst and Community Commitment Are Important Factors in Developing
Successful Programs:
Our review of programs at 12 communities indicates that while each
community confronts unique factors that could affect its air service
improvement efforts, success in starting a program and improving its
air service is predicated in part on the community‘s size. Simply put,
smaller communities have fewer potential passengers to sustain service.
However, size is largely beyond a community‘s control. We identified
two other factors, more directly within a community‘s control, that
were important for success. The first, the presence of a catalyst for
change, was particularly important in getting the program started so
that the sustainability of enhanced service could be tested. The
catalyst--normally state, community, or airport officials--provides
the critical impetus to recognize air service deficiencies and begin a
program for change. However, the long-term sustainability of any air
service appears related more to a second factor--a community consensus
that air service is a priority. This second factor involves recognizing
that enhanced air service is likely to come at a price and developing a
way in which the community agrees to participate. We did not find
indicators that communities broadly supported air service development
in a number of the communities we studied (see fig. 3).
Figure 3: Factors Present in the 12 Communities We Studied:
[See PDF for image]
[End of figure]
Most Communities Had a Catalyst for Change:
All of the communities we studied had a catalyst or driving force
behind their air service improvement efforts. These individuals
recognized the need for air service improvements and led the program
for change. Not all small communities or airports had such a change
agent. Several airport managers we spoke with during our study said
they had not taken any steps to improve air service. Some said that
they had no local funds for air service development, and some did not
know what steps they should take to help improve demand for or supply
of air service.
Some of the catalysts were state aviation or economic development
officials spearheading air service improvement efforts on a broad scale
through statewide studies, grant programs to fund airports‘ air service
improvement efforts, or statewide meetings or other methods to
disseminate information on successful practices. This was the case for
the program we reviewed in Michigan. Since 1998, Michigan‘s Aviation
Services Division has spent $1.5 million to improve air service by
performing studies assessing local air service and providing grants to
16 small community airports to aid them in attracting carriers and
educating the public about the importance of air service.[Footnote 21]
Officials at several small community airports in Michigan said that the
state program is helpful because they lack local resources for these
efforts.
At individual airports, the catalyst was generally some combination of
airport officials and local government or community leaders. At Taos,
New Mexico, the mayor led efforts to work with airline officials to
attract new air service to the area, and in Eugene, Oregon, and
Pensacola, Florida, airport officials worked with the local Chambers of
Commerce and business leaders to develop travel banks. Having community
leaders involved can provide important perspective for airport and
airline officials on the type of air service the community desires and
is useful for enlisting community support to increase local demand. For
example, the Pensacola Airport manager said that involving key
community leaders in air service development efforts helped convince
other business leaders to lend their support to the program. Sometimes
the impetus came largely from one source. In Mobile, Alabama, for
example, airport officials came up with a new business model designed
to attract or retain carriers by eliminating the need for the airline
to find and retain local staff.
Community Consensus on the Priority of Service Underscores Commitment:
Communities must be committed to supporting any new or enhanced air
service. While this element can be difficult to quantify, indicators do
exist. For example, the ability of a community to pledge funds for
future air travel as a part of a travel bank demonstrates its
commitment to air service. This pledge provides the carrier with
guaranteed demand and revenue for the life of the travel bank and may
change passengers‘ travel habits by encouraging passengers to try the
new service. Eugene airport and community officials said that broad-
based community support for the air service is more important than the
total funds collected for the travel bank. Eugene‘s airport has used
travel banks to attract service to two new destinations and in both
cases, kept the additional service after the travel banks were
completed. In each instance, more than 50 businesses contributed to
each travel bank, indicating widespread support for the additional
service although total funds pledged to each travel bank were less than
$500,000. In Pensacola over 300 businesses and individuals pledged $2.1
million to its airport travel bank.[Footnote 22]
Conversely, the inability or unwillingness of a community to contribute
funds for new air service may indicate that the community did not view
air service as a priority. For example, the service from Cumberland and
Hagerstown to Baltimore/Washington International Airport was begun with
$4.25 million in state funds. Local communities did not contribute any
matching funds, and a state aviation official said that neither
community was interested in developing a travel bank. Since the
subsidized air service started in December 2001, actual demand is
significantly below set targets.
Officials we spoke with said that it is critical that stakeholders also
agree on clear goals for air service and have specific agreements with
airlines on departure times, funding, and time frames for the program.
Officials from the New Mexico communities said they did not begin the
program with full agreement on the air service goals (such as
destinations to be served) and program structure (such as specific
contract provisions for reimbursement). A Roswell official said that
she eventually agreed to the proposed destinations and structure so the
program would not be delayed. Further, while the communities had an
agreement with the airline on the frequency of service to be provided,
the carrier determined the flight times, which were not always
convenient for travelers, according to consortium officials. The
agreement also placed few limits on reimbursement of funds to the
airline--that is, the equipment, staff, and training costs that would
be reimbursed. The funds were depleted less than 4 months after the
service began, and the service was discontinued shortly thereafter.
Officials said that in the future, they would be more specific in their
air service agreements.
Implications for Federal Air Service Assistance to Small Communities:
Nonhub Communities May Require Different Assistance Than Small Hubs:
Findings from our review of 98 small community airports--including our
detailed review at 12 of those--coupled with our other work on air
service to small communities and the EAS program, have potential
implications for ongoing federal efforts to help small communities
improve their air service. In fiscal year 2002, DOT projects it will
provide approximately $120 million in financial assistance to assist
various small communities with air service--almost $100 million in
direct subsidies to air carriers to serve certain small communities
under the EAS program and $20 million in grants under the Small
Community Air Service Development Pilot Program. Both programs face
heavy demand for funds. Our work on this report and recent work on air
service to small communities indicates that there may be significant
differences in the barriers faced by small hub and nonhub communities
in developing sustainable commercial air service and that the
approaches to addressing the communities‘ barriers vary accordingly.
Some communities with small hub airports were able to marshal local
resources to develop air service improvement efforts. For these
communities, a one-time grant may be sufficient to develop sustainable
air service. In contrast, at four communities we studied with nonhub
airports, when the financial incentives ended, the air service ended.
These communities may not have the resources available locally to
develop such a program. If financial assistance is provided to nonhub
communities in hopes of attracting new or enhanced service, the
assistance may need to be longer term. Yet, ongoing financial
assistance is no guarantee of viable air service. Our previous work on
the EAS program indicated that direct subsidies to air carriers have
not been an effective transportation solution for passengers at small
communities.
Demand Is Heavy for Two Main Forms of Federal Aid to Small Community
Airports:
To address air service needs at small communities, Congress has
appropriated increasing sums over recent years. In fiscal year 1997,
the amount appropriated for the EAS program was $26 million; by fiscal
year 2002, it was $113 million together with another $20 million for
the newly created Small Community Air Service Development Pilot
Program. Indications are that these sums only partially address the air
service development desires of the nation‘s small communities. More
specifically:
* As we reported earlier this year, the amount of money needed to fully
fund the EAS program as currently authorized is likely to increase
further in the near future.[Footnote 23] As of July 2002, DOT
subsidized service to 114 communities, 79 of them in the continental
United States. Between September 2001 and September 2002, carriers had
notified DOT of their intent to discontinue service to 15 subsidy-
eligible communities. With the continuing financial deterioration of
the industry, that number may increase yet further.
* While DOT had $20 million available for grants to 40 small
communities under its Pilot Program, demand for the funds far exceeded
this amount. In all, DOT received 180 applications from communities in
47 states, and the applications totaled over $142.5 million, or more
than seven times the amount available. By December 2002, DOT had
awarded grants totaling about $20 million to 40 communities (or
consortia of communities).[Footnote 24] The grants, which ranged in
size from $44,000 to $1,557,500, were applied to such purposes as
studies, marketing programs, financial incentives, and other
transportation options. The expectation in awarding such grants is that
the communities that receive them will be able to parlay the grant into
an ongoing program that can be self-sustaining. For example, in a
community that is trying to enhance its existing service, the grant
might help provide a revenue guarantee to the airline for the first
months of the expanded operation, with the expectation that the
expanded service will stimulate the market, creating a sustainable base
of passengers. The grants are not designed to be renewable. The
authorizing legislation contains provisions to allow DOT to coordinate
efforts with other federal, state, and local agencies to increase the
viability of service to small communities, which could include
disseminating information on ’best practices“ identified by the
program.
’Seed Money“ Approach May Work Only in Limited Circumstances; Nonhubs
May Require Continuing Assistance to Sustain Air Service:
Although it is too early to ascertain the pilot program‘s success, with
the grants having been effective only since October 2002, our review of
the efforts already attempted by small communities suggests that a
’seed money“ approach may have limited effectiveness in creating
sustainable programs. Under current regulations for the pilot program,
communities served by small hub or smaller airports are eligible to
apply for a grant. However, based on our review of the programs
launched by the 12 communities we studied in detail, the communities
served by nonhub airports have been less able to successfully develop
air service over the longer term. In such communities, the smaller
populations and lower level of economic activity meant that when the
financial incentives provided through some outside funding source
ceased, the additional or enhanced air service also ceased. For
example, additional service to four small communities in New Mexico
ceased when the funds were depleted.
Our findings suggest that the communities that may be best able to use
a ’seed money“ approach are those with a larger population and economic
activity base--generally communities with small hub airports. For
example, the experience of Eugene, Oregon, with a population of over
200,000[Footnote 25] and a financial commitment from the community
demonstrated that a limited financial incentive program can yield
sustainable enhanced air service. For communities with adequate size
and resources, such a strategy can continue to challenge them to use
the one-time infusion of money to jump-start the potential market into
a sustainable program. For communities with smaller, nonhub airports,
ongoing financial assistance may be necessary. We believe that our
earlier work on the EAS program provides insights on strategies that
may be more effective for developing air service to nonhub communities.
The EAS program essentially provides one type of ongoing federal
financial assistance to those communities--a direct grant to air
carriers that operate to and from those communities. However, we found
that providing funds to the carrier, rather than the community, has
often not produced the type of air service that meets the travel
desires of the communities‘ residents. Faced with relatively high
airfares and limited service options, travelers to or from most EAS-
subsidized communities ’leak“ to other airports. As a result,
federally-subsidized air service tends to serve only a small portion of
the potential passenger traffic at these communities. On average, each
flight to or from an EAS-subsidized community carries only three
passengers. In our earlier report, we suggested a number of options
that could be examined to enhance the long-term viability of the EAS
program. These options include eliminating subsidized service to
certain communities that were relatively nearby other larger airports
(where most local travelers had demonstrated a clear preference for
using the competing large airport), providing eligible communities with
direct grants to allow them to tailor air service to unique local
needs, and allowing communities to use air carriers that operated
aircraft smaller than those currently permitted.
Alternatives to Scheduled Commercial Air Service Are Developing, but
Passenger Acceptance Is Unknown:
Some small communities may find it difficult to generate the level of
demand needed to support scheduled, commercial air service even with a
substantial subsidy. For these communities, alternative transportation
programs are developing that could offer an opportunity for connection
to the national air transportation network. These innovative
alternatives may meet some small communities‘ needs, but they raise
significant questions. Whether passengers will embrace alternatives
such as 9-seat aircraft--particularly in light of the long-recognized
aversion of many passengers to comparatively larger 19-seat turboprop
aircraft--remains to be seen.
Smaller Aircraft:
Some communities that do not have the population or demand to support
service from 19-seat turboprop aircraft have received service from
smaller aircraft. In New Mexico, Rio Grande Airlines is flying 9-seat
Cessna aircraft between Albuquerque and some of the state‘s smaller
communities, including Taos. (See fig. 4.) Such an alternative may be
appropriate since a community like Taos, with a population of
6,200,[Footnote 26] generated only a limited level of demand. Taos
received service to Albuquerque from a carrier flying 19-seat turboprop
aircraft in the past. According to a state aviation official, the
carrier ceased service because it was not profitable; the aircraft were
too large and costly. Rio Grande‘s smaller, less costly aircraft better
match seating capacity to Taos‘ demand. Whether that service can become
self-sustaining depends on many factors, including the carrier‘s
ability to offer more economical airfares or its ability to connect to
the larger network through codesharing.[Footnote 27] Rio Grande has
established marketing and codeshare arrangements with Great Plains
Airlines to connect passengers beyond Albuquerque.[Footnote 28]
However, some state officials and airport managers have noted that many
passengers do not like to fly on these smaller aircraft, and this may
depress demand for the service.
Figure 4: Cessna Caravan Used by Rio Grande Air:
[See PDF for image]
[End of figure]
Another potential approach combines the idea of smaller aircraft with a
more flexible ’taxi“ approach to scheduling flights. In Oregon,
communities lacking air service are testing a new air taxi business.
SkyTaxi, which had its inaugural flight in April 2002, is a blend of an
airline and a charter company that primarily serves communities in
Oregon, Washington, and Northern California. According to company
officials, SkyTaxi franchises use 6-seat (4-passenger) Cessna 414
aircraft (see fig. 5) and have a comparable seat price to regional
carriers that serve spoke airports, but also provide the on-demand
service of a charter. Individuals, private entities, or local
governments can invest in a SkyTaxi franchise that includes a franchise
license fee, purchase of aircraft, and other ongoing fees such as
operations and marketing. Using a dispatch system similar to a ground
taxicab service, passengers call for an aircraft to pick them up at a
given location and fly them to another community. This business model
is still relatively new. It may be necessary to educate the traveling
public about this new option for air travel.
Figure 5: Six-Seat Cessna 414 Used by Sky Taxi:
[See PDF for image]
[End of figure]
Finally, other efforts are also under way to develop new jet aircraft
that are small (six seats or less) and less costly than other types of
jet aircraft now available for commercial applications. Two aircraft
companies, Eclipse and Safire, are in the developmental and testing
phases of their aircraft programs. Eclipse has determined that the
original engines selected for its jet did not provide adequate thrust.
As of January 2003, Eclipse had not yet selected a replacement engine
provider. (See fig. 6.):
Figure 6: Eclipse 500 Jet‘s First Flight on August 26, 2002:
[See PDF for image]
[End of figure]
In the future, these aircraft may be options for small communities that
cannot support scheduled, commercial air service with bigger aircraft.
These smaller aircraft may be targeted toward personal or corporate use
and not scheduled, commercial air service. However, nonscheduled
airlines may use the aircraft to serve smaller communities in a charter
capacity.
Other Options:
Combining several small underutilized airports or investing in other
forms of transportation to connect small communities to the national
air transportation network may serve as solutions for very small
communities that, by themselves, cannot support any form of air
service. Regionalization--combining two or more airports and their
resources into one regional airport so that services and passengers can
be consolidated--is a way for communities to possibly streamline costs
and create greater demand at an airport. Intermodalism--the concept of
using alternatives such as buses, shuttle vans, or trains to connect to
air service at larger airports--is another alternative for small
communities. However, we found that many communities are not interested
in either of these concepts. Communities have a strong sense that air
service is important not only for transportation needs but also for
economic development. For example, Salem, Oregon officials believe that
despite its proximity to Portland, Salem can attract and support new
air service from their community. Though Salem appears to have an
adequate population base to support air service (139,320 in 2001), the
airport is located just 47 miles from the Portland International
Airport, a medium hub. Salem no longer receives scheduled air service.
A shuttle bus service supplements travelers‘ own vehicles to transport
passengers between Salem and the Portland airport.
Concluding Observations:
Small communities are facing increasingly difficult challenges in not
only attracting new air service but also retaining their current
service. Many network air carriers, experiencing unprecedented
financial losses, are taking steps to minimize losses such as cutting
unprofitable service. Some Wall Street analysts have projected that
airline losses will continue into 2004. Because service to small
communities is often relatively unprofitable, these communities may be
hard hit. This could place further pressure on the EAS program as
additional communities qualify for federally-subsidized air service. It
could also increase the demand for grants under the Small Community Air
Service Development Pilot Program, which in fiscal year 2002 already
had requests far in excess of available funds.
Our work looking at both small community air service and the EAS
program indicates that there is not a ’one size fits all“ solution to
assist small communities maintain or improve their access to the
national air service system. Communities that want to increase the
demand for or supply of air service may need to consider some
combination of available tools, including marketing or financial
incentives. However, the effectiveness of the methods chosen,
especially financial incentives, will likely depend to a large extent
on the community size. Of those small hub airports we visited, one was
able to use a seed money approach to attract new air service and
sustain it after the grants ended. The evidence suggests, however, that
small communities served by nonhub airports may need continuing
assistance to sustain air service improvements. These communities
generally have limited local resources and greater need for ongoing
assistance to attract, retain, or enhance air service. Further, some
communities that desire scheduled air service but do not have demand
adequate to support it may need to examine other alternate
transportation solutions, such as small aircraft providing on-demand
service.
Underlying any successful air service improvement efforts is a
community‘s commitment to the air service. We found that the likelihood
of successful initiatives to obtain additional air service increases
when the small community demonstrates that enhanced air service is a
priority--for example, by financially participating in air service
improvement programs and, more importantly, by providing sufficient
passenger demand at the local airport. Without adequate demand for air
service, long-term financially viable service is unlikely. Our EAS work
demonstrated, for example, that small communities with an average of
only three passengers per flight required substantial EAS subsidies to
maintain their service. Furthermore, low-fare carriers are expanding
the number of destinations they serve, and many travelers are choosing
to bypass flights from local airports and use other larger nearby
airports to obtain lower fares or more air service. Such actions create
new options for local travelers but further diminish already-limited
demand for air service from small communities. As passenger demand
diminishes, small communities become even less attractive targets for
airlines to serve.
Agency Comments:
We provided a copy of the draft report to DOT for review and formal
comment. We also provided sections of our draft report for technical
comment to state or airport officials for the 12 communities we studied
in detail. DOT, state, and airport officials offered technical
comments, which we incorporated into this report as appropriate.
We are sending copies of this report to the Secretary of
Transportation, the Regional Airline Association, and other interested
parties. We will also send copies to others upon request. In addition,
this report also will be available at no charge on our Web site at
http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me, HeckerJ@gao.gov, or Steve Martin at (202) 512-2834,
MartinS@gao.gov. Other key contributors to this report are listed in
appendix VIII.
Signed by JayEtta Z. Hecker:
JayEtta Z. Hecker
Director, Physical Infrastructure Issues:
List of Congressional Requesters:
The Honorable Don Young
Chairman
The Honorable James Oberstar
Ranking Minority Member
Committee on Transportation and Infrastructure
House of Representatives:
The Honorable John Rockefeller, IV
The Honorable Olympia Snowe
The Honorable Ron Wyden
United States Senate:
The Honorable William Lipinski
The Honorable John Mica
The Honorable John Peterson
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of this project were to identify (1) challenges that
small communities face in obtaining or retaining commercial passenger
air service; (2) what actions state and local governmental units or
small communities have taken to enhance air service and how successful
they have been; (3) what factors, if any, affect the likelihood of
success; and (4) what implications this analysis has for federal
efforts to assist small community airports.
For this study, we included all nonhub and small hub airports, which
various statutes define as small communities.[Footnote 29] For
enplanement data, we used the carrier-submitted data for nonhub and
small hub airports that comprises the Federal Aviation Administration
(FAA) Air Carrier Activity Information System (ACAIS). The ACAIS
database categorizes airports by the number of annual enplanements.
To identify (1) challenges faced by small communities in obtaining or
retaining desirable and economical air service and (2) steps
governmental units or communities had taken to try to improve air
service or lower fares, we reviewed all 180 applications submitted to
the Department of Transportation (DOT) for grants under the Small
Community Air Service Development Pilot Program. These applications
provided information on a range of issues relating to air service at
these communities, including the type and amount of air service at the
community, level of airfares, challenges faced, and information about
previous air service improvements undertaken. We also interviewed state
aviation officials from all 50 states to gather information about the
state‘s role in air service improvement efforts and suggestions for
specific airports to contact that had undertaken air service
improvement programs. We interviewed officials at several airlines
(AirTran Airways, American Airlines, Northwest Airlines, US Airways,
Big Sky Airlines, Boston-Maine Airways, Colgan Air, Rio Grande Air, and
Mesa Air Group) to discuss air service issues and identify air service
improvement efforts. We also interviewed officials from the National
Association of State Aviation Officials (NASAO), Regional Airline
Association (RAA), Regional Aviation Partners (RAP), and Air Line
Pilots Association (ALPA).
After identifying 292 airports as having taken some steps (often
studies and marketing) to improve air service, we then contacted
airport or community officials at 98 communities where available
information suggested that more extensive improvement efforts had been
undertaken. We discussed with officials the air service challenges
faced by the community and gathered more specific information about the
types of air service improvement programs implemented or ongoing
between 1997 and 2002. We asked for information about the specific type
of steps undertaken, costs (if known), time frames, goals, status, and
the officials‘ self-defined perspective of project success. We allowed
officials associated with the project to define its success because
each community faced unique challenges and had defined their own air
service needs. Officials could determine whether their community‘s
needs had been met by the program.
To identify the factors that contribute to the effectiveness of air
service development initiatives, we developed case studies of
individual community efforts. We adopted a case study methodology
because, while the results cannot be projected to the universe of small
communities, case studies are useful in illustrating the range and
complexity of programs communities implemented, specific problems
encountered and the outcome of the program. We selected 12 communities
in 6 states for a more in-depth review. We chose these sites
principally because they had used a variety of programs to try to
improve their air service. We also selected them because they varied in
population, level of economic activity, and geographic location. The
communities were served by a mix of small hub and nonhub airports. We
visited the states and met with airport and community officials to
discuss air service challenges, the type of programs implemented,
project costs, the success of the program, and any lessons learned that
might help other communities contemplating a similar program. We also
gathered information about the type and amount of air service before
and after the improvement effort as well as the level of enplanements
(i.e., passenger boardings) and airfares.
To identify implications for other federal programs relating to air
service at small communities, we reviewed recently completed relevant
studies, along with information on the DOT Small Community Air Service
Development Pilot Program. We reviewed relevant legislation, DOT
guidance for the program, program applications, the grant amounts
awarded, and selected grant agreements. We also interviewed DOT
officials to discuss the selection process and status of the program.
We conducted our work from March 2002 to December 2002 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Background on Underlying Economic Principles:
Economic principles provide the foundation to explain the level and
type of air service any community receives.[Footnote 30] The
independent and interdependent forces of supply and demand are critical
to understand how a community‘s air service changes over time as the
national, regional, and local marketplaces evolve. In the short run,
for small community airport managers and local policymakers‘ purposes,
the knowledge of what factors influence the travel decisions of
potential passengers and airlines‘ service decisions are essential to
identify policies that may affect the level of service a community
receives. In the long run, a small community‘s ability to maintain
commercial air service--without public financial assistance--depends
on the effectiveness of various policies to fundamentally alter
travelers‘ choices to increase demand for local air service.
Demand for Air Service:
Demand for air service in a region stems from the collective demand of
individual consumers. As a result, the economic factors that influence
consumers‘ choices and decisions are critical to understanding demand
for air service. The influence of prices--fares, in this case--on a
potential passenger‘s decision-making process is no different for air
service than with other products or services. All else being equal,
consumers are willing to purchase more tickets for air travel the lower
the airfare.
Variation in demand for air service between different communities
results in large part from differences in community size and economic
factors that influence consumers‘ choices. The population of the
community and region surrounding an airport, residents‘ level of
income, economic activity, the quality and type of air service
available at the local airport, the distance to the nearest competing
airport, and the quality and type of service offered at that competing
airport are a few factors that create differences in passenger demand
between communities. All else being equal, demand for air service is
generally greater in communities with more population and employment,
higher per capita income, and greater economic activity. Similarly, all
else being equal, communities that are more geographically isolated--
further from the nearest competing airport--will generally have greater
demand for air service because the cost of accessing alternative forms
of air travel is higher, and thus there is less ’passenger leakage“
from the community.
’Passenger leakage“ refers to individuals either driving away from
their local community airport to an alternative airport for service, or
simply driving to their final destination. Potential passenger leakage
is a critical factor in determining a community‘s demand for air
service. Passenger leakage occurs for a number of reasons, however, the
two primary reasons are the difference in airfares and the quality of
service between a local and competing airport. All else being equal,
communities generally experience greater levels of passenger leakage if
a competing airport, within reasonable driving distance, is able to
attract travelers by offering better service--more destinations,
greater flight frequency, larger planes--or lower fares.
Supply of Air Service:
Just as market demand for air service is derived from individual
consumer‘s demand for service, the potential air service supplied in a
region is determined by the economic factors that influence individual
carrier‘s decisions and corporate goals. Broadly speaking, a producer
or supplier of a good or service must receive some minimum price as
compensation in order to remain in business. This concept holds true
for air carriers when determining whether to serve certain markets, and
if so, with what type of aircraft and with what daily frequency. Unless
a carrier is able to charge a fare that covers the operational costs of
a flight at a minimum, it will not provide service to a market. All
else being equal, carriers are willing to provide additional service as
airfares rise.
The economic factors that affect the supply of air service to a market,
as well as changes to supply over time, are the number of carriers
serving the community, labor, fuel, and capital costs, government
policies and regulations, fleet distribution (i.e., size and type of
aircraft available in the carrier‘s fleet), airport expenses (such as
landing fees, ground and terminal crew costs, and gate charges), and
relative market and route profitability. Changes to airlines‘ cost
structures can directly affect the supply of air service. Fuel price
spikes, renegotiated labor contracts that increase wages, new
government safety or security regulations, and increased airport
landing fees are all examples of factors that affect structural costs
and cause airlines to reconsider markets served and route structure.
The Traditional Supply and Demand Model:
The traditional supply-and-demand model provides a simple conceptual
framework to broadly discuss (1) air service in small communities and
(2) the economic factors that create and explain differences in service
between communities and variations in service within communities over
time. The size of a community and the corresponding demand for air
travel is arguably the most important element in determining whether a
community receives commercial air service. For each community, unless a
certain minimum level of demand for air travel exists, carriers are
unable to provide sustainable service at fares that cover costs.
Figure 7 illustrates the demand (D) for air service in two hypothetical
communities--H a high-demand community and L a low-demand community--
and the potential supply (S) representing carriers‘ willingness to
provide service to the communities at different fare levels.[Footnote
31] As discussed previously, all else being equal, an inverse
relationship exists between airfares and the number of seats demanded
by consumers; whereas, carriers are willing to supply additional seats
as fares rise. Demand for air service in community H (as illustrated by
the line labeled DH) is shown to be greater than the demand from
community L (as illustrated by the line labeled DL). At an average
airfare of F (shown on the vertical axis), the quantity of seats
demanded in one month (shown on the horizontal axis) in the high-demand
community, QH, exceeds that of the low-demand community, QL. Another
way to consider this is that to purchase the same number of seats, QH,
consumers are willing to pay more per seat in the high-demand
community, F, than consumers in the low-demand community, FL.
Figure 7: Supply and Demand for Air Service in a High-and Low-Demand
Community:
[See PDF for image]
[End of figure]
Incorporating supply to the model, community H is shown to receive
scheduled commercial air service because a price exists (FH*) at which
carriers‘ quantity supplied is equal to passengers‘ quantity demanded.
Another way to consider this is that passengers‘ willingness to pay
(FH*, as shown on the demand curve, DH) for a level of service (QH*) is
the same as what carriers are willing to accept for providing the
service (FH*, as shown on the supply curve, S). The level and type of
service being provided may not be adequate in the minds of community
members; nevertheless, the community receives service. Conversely,
community L receives no air service due to the lack of demand.
Potential passengers in the community are not willing to pay ticket
prices for any level of service that carriers would be willing to
accept as compensation for the provision of service (a price does not
exist where quantity supplied and quantity demanded are equal).
Policy Issues and Market Response:
The challenge for policymakers in attracting, maintaining, or improving
market-provided, commercial air service in the long run to small
communities is to identify the most effective short-term policies that
attempt to grow (or maintain) the market to sustainable levels.
Granted, policymakers only have the tools to influence a few of the
economic factors that affect the supply of and demand for air service
in a community. A community‘s population and its geographic location
(in relation to other communities with airports) are fixed in the short
run.[Footnote 32] However, local planners can undertake programs that
attempt to alter potential passengers‘ travel choices and decisions,
with the objective of capturing a community‘s potential passenger base
by reducing leakage. In addition, airport managers may introduce
programs that attempt to reduce the cost burden carriers face when
serving or beginning service in a community. Ultimately, however, some
communities may not have the sheer size or level of economic activity
or be able to compete with the lower fares and/or better service of a
nearby airport, to maintain the necessary demand for air service. Thus,
for certain smaller communities, sustainable service, without some form
of government intervention, may be unachievable in the long term.
Government intervention in the form of a subsidy to carriers (for
example, a cost-sharing agreement) may enable a small community to
receive air service that commercial carriers would otherwise not serve.
The example discussed above of the low-demand community that does not
receive market-provided air service, is revisited in figure 8. The
government subsidy effectively lowers the carrier‘s costs, creating an
environment in which it can afford to provide service to the community.
The amount of air service provided to the community is illustrated by
QSUB. The effect of the subsidy is illustrated graphically by shifting
the supply curve outward from S to SSUB. For the same amount of service
(QSUB), the average fare passengers face with the subsidized service,
FSUB, is less than the minimum that the carrier would have been willing
to accept in a situation with no subsidy, FNS. The end result of the
program is government-subsidized air service in a community that
otherwise would not receive commercial air service. Without the
subsidy, the carrier would not provide service because passengers would
not be willing to pay any price that carriers would be willing to
accept for providing service (the supply and demand curves do not
intersect).
Figure 8: The Effect of a Government-Provided Subsidy on Community Air
Service:
[See PDF for image]
[End of figure]
The DOT Essential Air Service (EAS) program provides an example of how
government intervention can enable a small community to receive air
service that commercial carriers would otherwise not serve. In general,
the EAS program provides a subsidy to carriers that serve certain
communities. The subsidy is calculated to cover the difference between
a carrier‘s projected revenues and expenses and provide a minimum
amount of profit.
Hypothetical Example of Efforts to Improve Air Service:
In the short term, a number of different programs may be successful at
providing or enhancing a community‘s air service. However, to be
successful at sustaining air service in a community in the long run
without prolonged government intervention, a program will need to
target factors that ultimately influence consumers‘ decisions and
increase passenger demand in the market. The following hypothetical
scenario provides a general example of how a policy can potentially
increase the level of air service in a community.
The local small community market: Consider a community that receives
air service but at levels that the community deems inadequate (i.e., a
single carrier, with poor on-time performance, that operates only a few
daily flights to one destination on small aircraft at relatively
expensive airfares). Because of the relatively poor service at the
local airport and increased availability of service elsewhere, many or
most potential local passengers drive to other nearby airports for
better service and lower fares. As a result of the high level of
passenger leakage, demand in the local community has been declining,
and the carrier is considering dropping the market.
The policy and objectives: The local airport and community-planning
bodies initiate a program that provides (for a fee) the ground and
terminal labor and capital necessary for airport operations (i.e.,
similar to the Mobile, Alabama business model). The short-term
objective of the initiative is to encourage the carrier to remain in
the community and improve service (i.e., frequency of flights, number
of destinations, on-time performance) by lowering its local operational
costs. The long-term goal of policymakers is also to improve service,
but by increasing demand through reduced passenger leakage.
The potential market response following program implementation:
Following the program‘s introduction, the reduced costs create an
incentive for the carrier to improve service by offering a greater
frequency of daily flights, adding an additional destination, and
enhancing on-time performance. The improved service at the local
airport may alter the choices and travel decisions of potential
passengers in the community. As a result, more passengers may choose to
use this service rather than driving elsewhere, so demand increases due
to a reduction in passenger leakage. The increase in demand increases
load factors, thus potentially improving the market‘s profitability,
which in turn may attract new carriers into the community offering
additional flight destinations and frequencies. The introduction of a
competitor at the airport further increases supply and creates
competition between the carriers for passenger traffic. At the then-
current level of demand, average airfares drop and the total amount of
seats demanded at that new lower fare level increases. The addition of
other carriers also may increase flight frequency and destinations and
thus may increase demand as passengers reconsider their mode and trip
choices. The cycle continues to evolve over time as changes in the
local, regional, and national marketplace occur.
The above example may paint too rosy a picture for what policymakers in
smaller communities could expect from initiatives aiming to attract or
improve service. This may be especially true at this time, because the
current climate in the aviation marketplace consists of the exact
opposite story: the downward spiral of declining demand and increasing
costs, resulting in service being reduced or eliminated in certain
markets.
Air Service Improvement Initiatives:
The EAS program and the hypothetical scenario presented above are
examples of policies with a supply-side orientation--the direct impact
of an initiative is aimed at the supplier of the service, the carriers.
Other programs that attempt to grow a market may be demand oriented,
where the focus of the initiative is on potential passengers. For
instance, a marketing proposal aimed at educating potential travelers
in a region about air service from a local airport is a demand-oriented
program. Regardless of orientation, the goal of policymakers developing
short-term initiatives such as travel banks, revenue guarantees, cost-
sharing agreements, direct subsidization, and consumer education
(marketing) is to attract, maintain, or improve air service in their
community. Ultimately, a sustainable level of service will result from
the effectiveness of various policies to change travelers‘ decisions
and increase demand within a community. In the long run, some
communities simply do not have the size and level of economic activity
necessary to maintain commercial service without a government subsidy.
Others may simply be unable to curb passenger leakage because they
cannot compete with larger airports within relatively close driving
distance that offer better service from more carriers, especially low-
fare carriers.
[End of section]
Appendix III: Air Service Improvement Efforts at 98 Nonhub and Small
Hub
Airports:
[See PDF for image]
[End of figure]
Source: GAO.
Notes: The air service development programs were in various stages at
the time we spoke with officials. We did not include programs in the
table above that were in the proposal stage at the time of our
discussions. We included communities with ongoing programs and
communities that had completed their programs. In a few cases, we
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.
[A] Studies included both those conducted at a statewide level and
those conducted or commissioned by an individual airport.
[End of table]
[End of section]
Appendix IV: Case Studies Describing Air Service Improvement Programs
in
12 Small Communities:
We visited 6 states for a more in-depth review of 12 communities‘ air
service improvement programs. As shown in figure 9, the states visited
were spread across the United States. We reviewed several communities
in New Mexico because they were working together on state-funded air
service improvement efforts. Other communities, such as Mobile, were
operating a program independently.
Figure 9: Twelve Communities We Studied in More Detail:
[See PDF for image]
[End of figure]
Mobile, Alabama‘s New Business Model:
Mobile, Alabama has faced challenges in retaining service, despite its
growing economic base. In 2001, six carriers provided nonstop service
from Mobile to 10 destinations. In October 2001, United Express, which
was sharing ground staffing (e.g., ticketing and baggage operations)
and equipment with US Airways Express, discontinued service to Mobile.
When it did so, US Airways Express had no personnel or equipment to
assist with ground service.
Figure 10: Communities Studied in Florida and Alabama and Other Nearby
Competing Airports:
[See PDF for image]
[End of figure]
Officials with the Mobile Airport Authority suggested that it could
manage US Airways‘ ground services, streamlining those operations and
saving the carrier some money. Airport officials said they recognized
that doing so could be a solution to a problem inherent to small
community airports--relatively high market entry costs associated with
establishing a ground station and operations at an airport with limited
passenger demand.
According to Mobile Airport Authority officials, this ’new business
model“ costs about $26,000 per month. The model, which began after
September 11, 2001, has three components that are aimed at reducing an
airline‘s start-up costs:
* The airport provides staff for all airline ground operations. Those
staff are fully trained in airlines‘ systems and operations, including
checking in passengers and baggage, selling and issuing tickets, and
marshalling aircraft into and out of the assigned parking positions. As
of November 2002, the airport had nine staff allocated to the program.
* The airport provides all ground handling equipment (e.g., baggage
carts and tugs) for aircraft. The airport is currently using ground
equipment on loan from a previous tenant and planning to purchase
equipment at a cost of nearly $145,000.
* The airport charges a fee of $315 (as of October 2001) for services
provided for each scheduled turn (i.e., arrival and departure).
Mobile was able to retain service from US Airways Express. To date, US
Airways is the only airline involved in the model; no other incumbent
airlines have expressed interest in participating. Mobile officials
believe this is because airlines would need to lay off their own ground
staff in order for the program to be feasible. According to airport
officials, the model will be most attractive to new carriers who do not
currently have ground personnel on staff or to carriers thinking of
leaving Mobile due to staff costs. Recently, DOT awarded Mobile
$456,137 from the Small Community Air Service Development Pilot Program
to fund the purchase of ground equipment and pay for program operation
expenses for 1 year. Officials are hopeful their staffing program will
help attract other carriers to Mobile.
Pensacola, Florida‘s Travel Bank Program:
While travelers at Pensacola, Florida have enjoyed air service from
several carriers, they have had to contend with high airfares and
leakage to neighboring airports. Pensacola, located in the panhandle of
Florida, is about 1 hour‘s drive from small hubs located at Fort Walton
Beach, Florida and Mobile, Alabama. Pensacola Regional Airport
officials have undertaken a variety of strategies to address these
problems. In 1998, Pensacola airport officials approached incumbent
carrier Delta Air Lines requesting that they lower fares to match those
available at Fort Walton Beach. The meetings with Delta were
unsuccessful. Pensacola officials had also been in ongoing discussions
with Southwest Airlines and recognized that any service possibilities
from Southwest were not likely in the immediate future.
In August 2001, AirTran Airways approached Pensacola and requested a
pro forma study of operational costs to determine the costs to operate
from the Pensacola Regional Airport. The airline was requesting
information because they were engaged in negotiations with airport
officials related to the planned terminal expansion at Fort Walton
Beach. According to an AirTran official, they decided to move because
of problems concerning the planned terminal expansion at Fort Walton
Beach, including the timing of construction, location of AirTran
operations during construction, amount of construction that AirTran was
expected to pay for, and overall increased costs to AirTran. The
airport manager in Pensacola said he had heard about other airports
using travel banks and acted quickly to develop a travel bank. AirTran
began service in Pensacola in November 2001 with three daily nonstop
flights to Atlanta.
The following are elements of Pensacola‘s program:
* Travel Bank: Pensacola‘s travel bank was the product of a large
community effort involving support from numerous community
stakeholders. The Chamber of Commerce, Pensacola city officials, and
airport officials conducted outreach for the travel bank over a 3-week
period, and persuaded 327 businesses and individuals to contribute a
total of $2.1 million for a 2-year period. The businesses contractually
agreed to dedicate a portion of their travel budget to fly on AirTran.
The local bank involved issued each participating business a credit
card account, which is used to draw funds toward the purchase of
AirTran airline tickets. Using their credit card accounts, businesses
can purchase tickets from travel agents, the Internet, and other
distribution channels. If the businesses do not spend the funds they
have allocated to the account within the 2-year period, the remaining
funds are transferred to AirTran Airways, and they receive vouchers
with AirTran, which they have 1 year to redeem. While Pensacola
passengers can fly to any of AirTran‘s destinations (via Atlanta),
AirTran determines the flight schedule. If AirTran reduces their
flights from three per day, files for bankruptcy, or sells more than 50
percent of their stock, then businesses participating in the travel
bank can be released from the agreement.
* Reduced Airport Fees: Pensacola agreed to cover the difference in
operational costs between Fort Walton Beach and Pensacola, which
amounts to approximately $375,000 per year. A consortium of local
government and business entities[Footnote 33] agreed to cover this
additional cost--for the first 2 years of AirTran‘s operations.
* Moving Costs: The airport agreed to pay the $39,000 cost of moving
AirTran operations from Fort Walton Beach to Pensacola.
* Marketing: Pensacola‘s airport includes a staff that conducts
marketing and works closely with AirTran to promote Pensacola‘s air
service. The airport budgets $50,000 per year for AirTran (for the
duration of the travel bank--2 years).
Pensacola‘s financial incentive program has been a success in the
short-term. Pensacola has seen a dramatic drop in airfares since
AirTran began air service in August 2001. (See fig. 11.) According to
Pensacola Airport officials, as of August 2002, the walk-up fares for
Pensacola to Atlanta were $300, about 70 percent lower than in 2001.
Furthermore, two regional airlines (affiliated with Delta) began
serving more destinations since AirTran began service. According to
Pensacola‘s airport manager, this is likely due to AirTran‘s presence.
AirTran‘s load factors in July 2002 were at 67 percent, approaching the
program goal of 70 percent. As of November 2002, Pensacola had four
AirTran flights daily using a mix of regional and mainline jets. The
airport manager said that the service is attractive to travelers, and
he believes that given the increasing passenger demand at the airport,
service will become self-sustaining by the end of the program.
Figure 11: Walk-up Fares at Pensacola Regional Airport (August 2002
versus May 2001):
[See PDF for image]
[End of figure]
Tallahassee, Florida‘s Revenue Guarantee Program:
Tallahassee, the state capital of Florida, had nonstop service to 11
destinations from 8 carriers (as of August 2001), but has been faced
with relatively high airfares. As a result, large numbers of its
potential passengers chose to fly out of other area airports, including
those as far away as Orlando, Jacksonville, Tampa, and Atlanta.
According to airport officials, high fares were a major barrier to
Tallahassee‘s economic development because they discouraged businesses
from locating there.
To attract and keep businesses, airport officials began an effort to
improve existing air service and attract new service. Officials said
they were not successful in either persuading Delta or US Airways to
lower fares or in attracting Southwest Airlines. The state issued a
request for bids to carriers who could provide guaranteed airfares to
employees of the state government--the primary employer for
Tallahassee. AirTran, a low-fare carrier was the only respondent to the
request for proposals (RFP). The city had a history of working with the
state to secure a low-fare carrier. The state indicated that it would
only award the contract to AirTran if it would provide service to
Tallahassee. AirTran agreed to provide service if some kind of
assistance was provided in turn. Working with officials from the city
and the governor‘s office, Tallahassee reached an agreement with
AirTran to begin service to Atlanta, Tampa, and Miami as of November
15, 2002. The city agreed to provide a revenue guarantee of $1.5
million (raised through the sale of city-owned real estate) to help
AirTran mitigate start-up risks. Under this program, the city
guaranteed for a 1-year period that AirTran would earn gross passenger
revenues of $4,154 per block hour.[Footnote 34] If the revenue fell
short of this goal, the city would make up the difference, up to a
total of $1.5 million.[Footnote 35] In addition, the city agreed to pay
AirTran up to $250,000 for marketing and $350,000 of operational
incentives creating a package totaling $2.1 million. To ensure
ridership of the new service, employees of the state and the city of
Tallahassee were required to use AirTran when possible.
Tallahassee‘s airfares have declined since November 2001. Fares in 8 of
Tallahassee‘s top 10 markets decreased by 36 percent or more. For
example, fares from Tallahassee to Atlanta declined by 60 percent. (See
fig. 12.) Passenger traffic has also increased since AirTran began
service. On a year-over-year basis, passenger volumes have improved by
27 percent for the year through November 2002.
Figure 12: Average Ticket Prices in Tallahassee‘s Top-10 Markets (1st
Quarter 2002 versus 1st Quarter 2001):
[See PDF for image]
[End of figure]
AirTran‘s service from Tallahassee has not yet been profitable. In an
effort to reclaim passengers after September 11, AirTran and its
competitors lowered fares dramatically. Even with increasing load
factors, the airline was unable to generate enough revenue to meet the
preset revenue goal. Consequently, AirTran exhausted the $1.5 million
revenue guarantee within the program‘s first 3 months. According to
airport representatives, AirTran service was predicted to be self-
sufficient by the third quarter of 2002, but the events of September 11
and the resulting decline in passenger traffic has pushed the target
for self-sufficiency to the third quarter of 2003. As of September
2002, Tallahassee learned that AirTran might suspend service in
November 2002 unless it had received a renewal of the full $1.5 million
revenue guarantee. The renewed agreement would include a monthly cap of
$125,000.
According to a Tallahassee airport official, Air Tran and the
Tallahassee city commissioner were able to come to an agreement to
renew the $1.5 million revenue guarantee. Funding for the revenue
guarantee is coming from the proceeds of additional land sold by the
city of Tallahassee. The revenue guarantee was renewed for a 1-year
period beginning November 15, 2002. The new contract with AirTran
provides that regional jets may be used in place of the larger B-717
jets, which would allow AirTran to better match frequency and capacity.
While the block hour guarantee for the B-717 jets will remain the same
($4,154), the regional jet block hour guarantee will be two-thirds of
the amount. AirTran officials are hopeful this new agreement with
Tallahassee will allow the Tallahassee market to become self-sufficient
and profitable.
Michigan‘s Air Service Program:
After a 1986 state survey of businesses indicated that air service was
ranked third most important in terms of cultivating business, the then-
governor of Michigan established a state program to assist the state‘s
smaller airports.[Footnote 36] Since 1988, the Michigan Air Service
Program has provided grants to the state‘s airports (generally those
with annual enplanements under 150,000) to aid in three distinct
categories--marketing local airport service, air carrier recruitment
and retention, and capital improvements and equipment.[Footnote 37]
These grants are funded by the state‘s aviation fuel tax, and airports
are required to provide a local match to the state funding. Between
fiscal years 1998 and 2002, Michigan awarded over $1.3 million to small
airports for marketing and carrier recruitment projects and spent
another $265,000 for projects that benefit airports statewide.[Footnote
38] In the last 5 fiscal years, the airports at Alpena, Houghton
County, Marquette, Pellston, and Sault Ste. Marie were among the 16
airports that have received state grant funds. We reviewed the efforts
of Pellston, Michigan in more detail.
Figure 13: Pellston, Michigan and Other Nearby Competing Airports:
[See PDF for image]
[End of figure]
The Pellston Regional Airport of Emmet County is located near a major
resort and tourist area in part because of its proximity to Mackinac
Island. Northwest Airlines[Footnote 39] offers the only air service
from Pellston--three flights daily to Detroit using 34-seat
turboprops.[Footnote 40] A roundtrip business fare between Pellston and
Detroit exceeded $400.[Footnote 41] However, Pellston is only 85 miles
north of Traverse City, which has over three times as many daily
departures provided by three carriers, including service to Chicago and
Detroit.[Footnote 42] As a result, about 50 percent of Pellston‘s
passengers leak, primarily to Traverse City.
Pellston has received over $100,000 in state grant funds since fiscal
year 1998 and has used the vast majority of the funds to market the
airport. A lesser amount has been used to recruit and retain air
carriers. According to a state aviation official, the community of
Pellston has contributed over $12,000 to these projects; the Petoskey
Regional Chamber of Commerce‘s Air Service Task Force has been
instrumental in raising the local share of the airport‘s marketing
funds. Pellston has used its state marketing grants to develop
promotional materials such as newspaper, radio, and TV ads highlighting
the state‘s ’Fly From Nearby“ theme and a newsletter that updates the
community on airport projects. The airport has used carrier recruitment
and retention grants to examine possible one-stop service to
Chicago.[Footnote 43] The Pellston airport manager believes that these
marketing efforts are benefiting their enplanement levels.
Pellston‘s enplanements declined 16 percent between 1998 and 2001. For
the first 8 months of 2002, passenger traffic had increased, compared
with the same period in 2001, an indication that the airport was
successfully handling the fallout from the industry‘s financial woes
and the September 11 attacks. Figure 14 illustrates the changes in
Pellston‘s enplanements between 1998 and 2001.
Figure 14: Enplanements at Pellston, Michigan (1998-2001):
[See PDF for image]
[End of figure]
Michigan had an experience in which its efforts to obtain and maintain
commercial passenger service were not successful--at Benton Harbor.
Michigan officials reported two significant lessons learned in their
efforts at Benton Harbor to develop sustainable air service: (1) the
community needs to provide long-term support for air service and (2)
factors contributed by other modes of transportation should be
considered when undertaking service initiatives. Officials recognized
these lessons after the state agreed to a risk-sharing arrangement with
Northwest to provide service to Benton Harbor. The airline initiated
service to Benton Harbor in June 1995. However, a major highway to
South Bend, Indiana was completed about the time the service was
initiated, easing southwest Michigan residents‘ access to the multiple-
carrier service at the South Bend Airport. According to the state
officials, this factor, together with the initial reliability problems
with Northwest service; Benton Harbor‘s proximity to three other
airports with lower service or better fares; and other issues resulted
in the eventual termination of the service in 2000. However, this was 2
years beyond the agreed-upon service period. Enplanements at Benton
Harbor peaked in 1996, the first full year of service, at 7,501 and
declined each year thereafter, to 5,586 in 1999. In 2000, only 2,821
passengers had enplaned when the service was suspended in August.
Benton Harbor is still without commercial air service, and the airport
manager there believes it is probably more feasible to develop into a
general aviation airport serving private jets and other aircraft.
Michigan and local airport officials we contacted expressed overall
satisfaction with the state‘s program. State officials indicated that
they elicit feedback in annual meetings with airport officials,
maintain regular telephone and in-person contact with airport
officials, and survey airport customers every 2 years. In our
discussions with managers of airports that had received state grants
since 1998, they expressed support of and satisfaction with the
assistance the state has provided over the years.
Maryland‘s Regional Air Service Development Program:
In 1998, US Airways discontinued service between Hagerstown, Maryland
and the Baltimore/Washington International Airport (BWI). The cessation
of this service left Hagerstown (a community of 37,000, located
approximately 75 miles northwest of Baltimore on I-70) with scheduled
service to Pittsburgh, Pennsylvania.[Footnote 44] As of September 2001,
Cumberland (a community of 22,000, 65 miles further west of Hagerstown
on I-68) lost all scheduled service with the cessation of service to
Pittsburgh.
Figure 15: Cumberland and Hagerstown, Maryland and Other Nearby
Competing Airports:
[See PDF for image]
[End of figure]
Maryland state economic and transportation officials evaluated several
possible ways to increase air service to small communities, including a
state-owned and -operated airline, but decided on a program of state-
subsidized air service. In July 2000, the state appropriated $4.25
million for the Maryland Aviation Administration to finance ’scheduled
air service that effectively links to the national and international
air transportation system underserved regions of the State that are
capable of supporting scheduled air service“ for the 2-year subsidy
program.[Footnote 45]
Several communities initially expressed interest in participating in
the program. The state contracted with a consultant to study the
potential of each of those communities. Ultimately, the other
communities chose not to participate, and the state selected Hagerstown
and Cumberland. The consultant‘s report recommended that the program
use an eight-seat aircraft because of the relatively ’thin“ Cumberland
and Hagerstown markets (i.e., relatively few people would likely fly in
those markets). The communities involved chose to use a carrier with
19-seat aircraft because they believed that service on a larger
aircraft was more acceptable to the traveling public. One of the issues
state officials discussed with the airport and community leaders was
possible local efforts to generate additional revenue to help with the
costs of starting new service, such as a travel bank. The legislation
did not require communities to contribute local matching funds, and a
state official said the communities declined to participate in a travel
bank.
Boston-Maine Airways, doing business as Pan Am Clipper Connection,
began operations in Maryland with a 19-seat J-31 Jetstream turboprop
aircraft in December 2001. Flights originated in Cumberland and stopped
in Hagerstown on their way to BWI. The carrier agreed to provide three
flights daily on weekdays and two daily flights on weekends in return
for biweekly payments of $170,268. The state‘s agreement with Boston-
Maine included some provisions for reductions in payments commensurate
with reductions in service (e.g., cancelled flights).
Passenger enplanements peaked in March 2002 with a total of 398 (an
average of about 13 passengers per day, or 5 per flight) flying from
Cumberland and Hagerstown. Since that time, they have declined each
month and in September 2002 totaled 192, or less than 7 passengers per
day (an average of just over 2 passengers per flight) departing from
Cumberland and Hagerstown. Figure 16 shows the change in enplanements
during the first 9 months of service.
Figure 16: Boston-Maine Airways Enplanements at Cumberland and
Hagerstown (January through September 2002):
[See PDF for image]
[End of figure]
It appears unlikely that this air service will become self-sustaining
if current trends continue. The consultant estimated that this service
would require an annual subsidy of $2 million, even with a 70-percent
load factor--or 13 passengers per flight--and a $90 one-way fare.
However, in September 2002, enplanements averaged about 2 passengers
per flight, and November 2002 fares were $70 one way (Cumberland to
BWI). Based on enplanements to date and their declining trend, it
appears unlikely that this service will become self-sufficient unless
enplanements and fares increase significantly. A state official agreed
with this assessment.
A number of factors appeared to have played a role in the low
enplanements. First, while Maryland generally had state and local
stakeholders committed to the goal of improving air service, there were
no indications that either community regarded air service to BWI as a
priority. For example, the communities did not pledge to use the
service or contribute any funding for the service. Also, the sites
selected did not appear capable of supporting air service with a 19-
seat aircraft. The consultant report projected that Hagerstown would
generate only about seven passengers per day. Finally, the Cumberland
Airport manager stated that weather conditions coupled with equipment
problems at the Cumberland Airport resulted in many flights being
cancelled or delayed. He said that it did not take many delays or
cancellations before passengers chose not to fly to BWI, but to instead
drive or use the existing shuttle van service. He also indicated that
he preferred to drive to BWI.
New Mexico‘s Air Service Assistance Program:
New Mexico‘s small communities experienced limited scheduled air
service and relatively high fares. State officials said that residents
of the small communities that have commercial airports generally do not
fly from their local facilities. Rather, they tend to fly either from
the state‘s largest airport, Albuquerque (which in November 2002
offered nonstop service to 36 different destinations from 12 carriers,
including 2 low-fare carriers), or from airports in Texas, such as
Midland (which offered nonstop service to 8 different destinations from
4 carriers). State aviation and local airport officials said that while
air service is important to New Mexico‘s small communities because of
their remoteness and lack of other transportation options, residents
have become used to driving long distances. Combined with the presence
of low-fare carriers within 250 miles of most residents, it is
difficult for small airports to attract adequate demand for air
service.
Figure 17: Five Communities Studied in New Mexico and Other Nearby
Competing Airports:
[See PDF for image]
[End of figure]
In 1998, the New Mexico Municipal League and the New Mexico Airport
Managers Association spearheaded an effort to develop a state air
service assistance program to provide funding for new air service to
small communities. State officials said that the program was intended
to provide ’seed money“ for new service. The legislature authorized the
New Mexico Air Service Assistance Program and appropriated a total of
$900,000 for fiscal years 1999 through 2002. Under the program, an
eligible recipient (a consortium of municipalities or other public
entities) that provides airline service from one or more nonhub
airports to a small hub or larger airport can receive a grant of up to
$200,000 per year. A 50-percent local match is required.[Footnote 46]
Subsequent legislation reauthorized the program through 2007 and
modified the funding to provide the program with a percentage of state
gross receipts. State officials estimated that this will provide
approximately $600,000 for fiscal year 2003, but amounts may vary. To
date, state grants have been used to subsidize new service to several
communities.
Taos and Ruidoso:
In Taos, a town of 6,200 approximately 130 miles drive northeast from
Albuquerque, local community and Rio Grande Air officials, with the
assistance of state aviation officials, acted as catalysts to improve
air service. The mayor said that air service is necessary for economic
development. Rio Grande Air, a small carrier using nine-seat Cessna
single engine aircraft,[Footnote 47] began operations between Taos, Los
Alamos, and Albuquerque in August 1999--the first scheduled air service
to Taos in 13 years, according to state officials. The previous carrier
had abandoned service after not having attracted sufficient passenger
demand to offset the costs of operating its 19-seat aircraft. State and
Rio Grande Air officials said that they hoped that by using smaller
aircraft, costs would be lower, fares would be lower, and the air
service would eventually be economically viable.
In January 2000, the state awarded a $100,000 grant, which was matched
by the Town of Taos, the Village of Taos Ski Valley, and the County of
Los Alamos. A second state grant, for $79,000, was awarded in May 2000.
Service to Durango, Colorado was added. However, Rio Grande Air
officials decided to discontinue service to Los Alamos, effective
February 2001 because the service had little ridership.
Rio Grande Air began providing service between Ruidoso and Albuquerque
in July 2001. Ruidoso--a city of roughly 7,700 located approximately
185 miles southeast of Albuquerque--had no scheduled air service at the
time. In October 2001, the state awarded a grant of $190,000 to help
fund service between Taos, Ruidoso, and Albuquerque. Taos provided
$25,000 in matching funds; the Village of Taos Ski Valley $25,000; and
Ruidoso $150,000.
In February 2002, Taos and Ruidoso jointly applied for a grant from the
DOT Small Community Air Service Development Pilot Program. The
principal objective of the grant was to help fund Rio Grande‘s service
from both communities to Albuquerque. The communities also envisioned
an extensive marketing campaign to boost enplanements. The application
sought $500,000 from DOT, which would be matched with $200,000 from the
state and $200,000 from the participating communities. However, the
airport manager at Ruidoso said that city officials later decided that
service to El Paso, Texas, would better meet the community‘s needs.
When a Rio Grande Air official said that the funds were inadequate to
provide service to El Paso, Ruidoso elected to withdraw from the
consortium. Rio Grande discontinued service to Ruidoso in May 2002. In
September 2002, DOT finalized a grant of $500,000 to Taos. Taos
replaced Ruidoso‘s portion of the matching funds with funding supplied
by another nearby community, according to a DOT official.
Despite considerable financial assistance since 2000 and the promise of
future assistance, officials with the state of New Mexico and Rio
Grande Air said that the long-term outlook for sustainable air service
is uncertain. Carrier officials said that they had to overcome some
initial difficulties. One major problem was that Rio Grande Air service
did not have visibility in the reservation system used by many
individuals and travel agents. A traveler needed to be aware of the
service and contact Rio Grande directly in order to make reservations.
In addition, the carrier confronted other marketing barriers for Taos
passengers traveling to or from a location ’beyond“ Albuquerque (i.e.,
a city for which a Taos passenger would need to connect at
Albuquerque). The carrier lacked a codeshare arrangement with any other
airline to allow for ’seamless“ travel between a passenger‘s origin and
destination. For example, travelers flying from Taos to Chicago would
have to pick up their bags in Albuquerque and recheck them with the
airline with which they were flying to Chicago. An airline official
said that Rio Grande Air has since secured a codesharing agreement with
Great Plains Airlines (which has in interline agreement with American
Airlines). This also provides Rio Grande with visibility in the
reservation system. Even with these improvements, enplanements have not
been increasing overall, as shown in figure 18.[Footnote 48]
Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso:
[See PDF for image]
[End of figure]
Carlsbad, Hobbs, and Roswell:
The second consortium consisted of Carlsbad, Hobbs (Lea County), and
Roswell, all located in the southeastern part of the state. In 2000,
Mesa Air provided all three communities with service to Albuquerque
using 19-seat turboprop aircraft. In addition, Mesa provided Roswell
with service to Dallas. Community officials said that they desired
service to one or more additional hub airports within a 500-mile radius
of the communities, such as Phoenix or Dallas. The three formed a
consortium to work with New Mexico state aviation officials to obtain a
state grant to fund additional service to their communities. Consortium
officials said they sent an RFP to 11 airlines but only 1--Big Sky
Airlines--responded.
Big Sky began service from the three communities to Denver and Dallas
with 19-seat Metro turboprop aircraft beginning in October 2000, using
$200,000 of state funds and $300,000 in local matching funds. By
January 2001, the carrier had exhausted all $500,000 in state and local
funds. Roswell and Carlsbad officials said that when the carrier
requested additional funding, they declined to provide any. Local
officials said the service had been unreliable with up to one-third of
the flights cancelled due to weather or mechanical problems. Big Sky
discontinued service to these communities in March 2001. Hobbs (Lea
County) agreed to provide $35,000 per month in additional funding to
the carrier, according to the airport supervisor. However, in January
2002, the carrier discontinued service to Hobbs when Lea County
officials also declined to provide any further financial assistance.
The airport official said that the carrier had difficulty establishing
sufficient passenger demand, in large part because weather and
mechanical problems forced the cancellation of many flights.
While the state program had both state and local stakeholders committed
to the goal of improving air service, there were key steps and
underlying elements missing from the program, which ultimately resulted
in the relative lack of success. For example, there were few steps
taken to educate potential passengers about the new service. Officials
said that they believed marketing would have helped develop demand for
the service. Also, key local stakeholders in the consortium did not all
agree on their goal for air service (e.g., destinations to be served).
However, the most important element was the relatively small size of
the communities and their lack of potential demand for air service. For
example, an August 2000 consultant study found that of these three
communities, only Roswell had adequate potential demand to support
unsubsidized air service. Carlsbad and Hobbs would require some form of
subsidies or financial incentives.
A state aviation official said that there are very few carriers willing
to supply air service to the small communities in New Mexico. He cited
the fact that only one carrier responded to the Roswell consortium and
said that they have continued to renew the grants to Rio Grande Air
because no other carriers have come forward to serve those communities.
Eugene, Oregon‘s Travel Banks:
Eugene Airport/Mahlon Sweet Field is a small hub airport located 120
miles south of Portland in Eugene, Oregon. The airport has an estimated
catchment area population of over 700,000. Before implementation of the
travel banks, Eugene had service from three airlines (United, United
Express, and Horizon) to four destinations (Portland, Seattle, Denver,
and San Francisco). Community and airport officials believed that
additional carriers and destinations would increase competition for the
dominant carrier (United), lower fares, and help stem passenger leakage
to Portland International Airport.
Figure 19: Eugene, Oregon and Other Nearby Competing Airports:
[See PDF for image]
[End of figure]
The airport manager and president of the local Chamber of Commerce
developed the idea of obtaining financial pledges from local businesses
to set up a ’travel bank“ to secure service to Phoenix from America
West Airlines. The Chamber of Commerce and airline negotiated the
amount of funds needed in the travel bank as well as the exact service
to be provided (e.g., number of daily flights and the type of
aircraft). Interested businesses in the community were then asked to
commit future travel dollars to the carrier and sign an
agreement[Footnote 49] that guaranteed business flyers would use the
new service. The agreement also included various protections for
participants‘ investments. The funds were held by the airline, which
issued corporate accounts to participating businesses. The
participating companies had 24 months to use the funds, after which any
remaining funds reverted to the airline and were available as ticket
vouchers for another 12 months. After that point, any funds remaining
in the bank would go to the airline. Eugene‘s airport also committed
$300,000 over 2 years for marketing to promote the new service.
With the success of the first travel bank, Eugene officials looked into
the possibility of a second travel bank for Los Angeles service. After
negotiating an agreement with Horizon Air, the Chamber of Commerce
again successfully sought pledges from area businesses. This bank
became operational 1 year after the first travel bank, and
participating businesses had used 81 percent of the funds within the
first 18 months. Table 4 provides more detail about the America West
and Horizon Air travel banks.
Table 4: Summary of Features of Eugene, Oregon‘s Travel Banks:
Airline: America West; Implementation dates: September 1999 - September
2001; Service provided as of 10/18/02: 3 flights daily to Phoenix using
CRJ200 (50-seat jets); Travel bank pledges: 65 businesses contributed
$461,000; Marketing commitment: Airport pledged $300,000 in marketing
funds over 2 years.
Airline: Horizon Air; Implementation dates: September 2000 - September
2002; Service provided as of 10/18/02: 2 flights daily to Los Angeles
using CRJ700 (70-seat jets); Travel bank pledges: 57 businesses
contributed $452,000; Marketing commitment: Airport pledged $300,000 in
marketing funds over 2 years.
Source: GAO analysis of data from Eugene airport officials.
[End of table]
One Eugene Airport official said that travel banks offer a number of
advantages over other types of financial incentives. The travel banks‘
advantages include:
* providing airlines a guarantee of sustained support over the initial
periods, when risks are typically higher and:
* helping the new carrier overcome frequent flyer programs of incumbent
airlines, existing travel habits, incentives provided to travel agents
who book on the incumbent carriers, and corporate purchase agreements.
As of October 2002, the two travel banks had added five flights and 290
seats daily to the Eugene market. They also brought more jet service to
Eugene. The airport manager believes the travel banks were successful
in adding competition to the market, alleviating high fares, and
stemming some of the passenger leakage to Portland.
Our analysis of Eugene enplanement data shows that the travel banks
played a role in the shift in market share between the dominant
carrier--United--and the other carriers at Eugene from 1998 to 2001.
Over that period, United‘s market share decreased from 71 percent of
the market to 58 percent. (See fig. 20.) Additionally, since both
America West and Horizon have maintained their Phoenix and Los Angeles
service after the end of each travel bank, we concluded that the travel
banks have generated long-term success in Eugene. The Eugene airport
manager said the community is exploring the possibility of additional
travel banks with other carriers.
Figure 20: Shift in Market Share of Passenger Traffic at Eugene, Oregon
(1998-2001):
[See PDF for image]
[End of figure]
Note: For 1998, n = 366,006 enplanements, and for 2001, n = 325,998
enplanements.
[End of section]
Appendix V: Small Community Air Service Development Pilot Program
Grants
and Local Matching Funds (Fiscal Year 2002):
City: King Cove, Sand Point, Akutan, Cold Bay, False Pass, Nelson
Lagoon; State: AK; Total federal funds requested: $240,000; Total
federal funds granted: $240,000; Total matching funds: $25,000.
City: Mobile; State: AL; Total federal funds requested: 456,137; Total
federal funds granted: 456,137; Total matching funds: 20,000.
City: Fort Smith; State: AR; Total federal funds requested: 108,520;
Total federal funds granted: 108,520; Total matching funds: 20,000.
City: Lake Havasu City; State: AZ; Total federal funds requested:
403,478; Total federal funds granted: 403,478; Total matching funds:
275,000.
City: Chico; State: CA; Total federal funds requested: 44,000; Total
federal funds granted: 44,000; Total matching funds: 30,000.
City: Santa Maria; State: CA; Total federal funds requested: 217,530;
Total federal funds granted: 217,530; Total matching funds: 24,170.
City: Lamar; State: CO; Total federal funds requested: 250,000; Total
federal funds granted: 250,000; Total matching funds: 55,000.
City: Telluride; State: CO; Total federal funds requested: 300,000;
Total federal funds granted: 300,000; Total matching funds: 210,000.
City: Daytona Beach; State: FL; Total federal funds requested: 743,333;
Total federal funds granted: 743,333; Total matching funds: 165,000.
City: Augusta/Aiken; State: GA/SC; Total federal funds requested:
759,004; Total federal funds granted: 759,004; Total matching funds:
1,421,266.
City: Mason City; State: IA; Total federal funds requested: 600,000;
Total federal funds granted: 600,000; Total matching funds: 405,000.
City: Hailey; State: ID; Total federal funds requested: 600,000; Total
federal funds granted: 600,000; Total matching funds: 344,243.
City: Marion; State: IL; Total federal funds requested: 212,694; Total
federal funds granted: 212,694; Total matching funds: 5,000.
City: Fort Wayne; State: IN; Total federal funds requested: 1,178,000;
Total federal funds granted: 398,000; Total matching funds: 112,000.
City: Manhattan; State: KS; Total federal funds requested: 500,000;
Total federal funds granted: 388,350; Total matching funds: 43,150.
City: Somerset; State: KY; Total federal funds requested: 95,000; Total
federal funds granted: 95,000; Total matching funds: 18,000.
City: Paducah; State: KY; Total federal funds requested: Up to 754,000;
Total federal funds granted: 304,000; Total matching funds: 107,000.
City: Lake Charles; State: LA; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 300,000.
City: Presque Isle; State: ME; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 100,000.
City: Brainerd, St. Cloud; State: MN; Total federal funds requested:
1,000,000; Total federal funds granted: 1,000,000; Total matching
funds: 3,460,000.
City: Cape Girardeau; State: MO; Total federal funds requested:
500,000; Total federal funds granted: 500,000; Total matching funds:
125,000.
City: Meridian; State: MS; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 140,000.
City: Asheville; State: NC; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 578,000.
City: Bismarck; State: ND; Total federal funds requested: 1,557,500;
Total federal funds granted: 1,557,500; Total matching funds: 512,500.
City: Scottsbluff; State: NE; Total federal funds requested: 950,000;
Total federal funds granted: 950,000; Total matching funds: 750,000.
City: Taos; State: NM; Total federal funds requested: 500,000; Total
federal funds granted: 500,000; Total matching funds: 400,000.
City: Binghamton; State: NY; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 100,000.
City: Akron/Canton; State: OH; Total federal funds requested: 950,000;
Total federal funds granted: 950,000; Total matching funds: 800,000.
City: Baker City; State: OR; Total federal funds requested: 300,000;
Total federal funds granted: 300,000; Total matching funds: 661,000.
City: Reading; State: PA; Total federal funds requested: 470,000; Total
federal funds granted: 470,000; Total matching funds: 30,000.
City: Rapid City; State: SD; Total federal funds requested: 1,500,000;
Total federal funds granted: 1,400,000; Total matching funds:
1,400,000.
City: Johnson/Kingsport/Bristol; State: TN/VA; Total federal funds
requested: 615,000; Total federal funds granted: 615,000; Total
matching funds: 230,000.
City: Abilene; State: TX; Total federal funds requested: 85,010; Total
federal funds granted: 85,010; Total matching funds: 126,250.
City: Beaumont/Port Arthur; State: TX; Total federal funds requested:
510,000; Total federal funds granted: 500,000; Total matching funds:
1,062,000.
City: Moab; State: UT; Total federal funds requested: 280,000; Total
federal funds granted: 250,000; Total matching funds: 0.
City: Lynchburg; State: VA; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 100,000.
City: Bellingham; State: WA; Total federal funds requested: 301,500;
Total federal funds granted: 301,500; Total matching funds: 33,500.
City: Rhinelander; State: WI; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 100,000.
City: Charleston; State: WV; Total federal funds requested: 500,000;
Total federal funds granted: 500,000; Total matching funds: 100,000.
City: Casper; State: WY; Total federal funds requested: 500,000; Total
federal funds granted: 500,000; Total matching funds: 700,000.
City: Total; State: [Empty]; Total federal funds requested:
$21,480,706; Total federal funds granted: $19,999,056; Total matching
funds: $15,088,079.
Source: DOT.
Note: Total matching funds may not include the value of in-kind
services, improvements, and equipment:
[End of table]
[End of section]
Appendix VI: Air Service Improvement Efforts Planned at Nonhub and
Small
Hub Airports Using DOT Grants:
State: Alaska; City: King Cove, Sand Point, Cold Bay, Nelson Lagoon,
False Pass, Akutan; Studies: X; Marketing: [Empty]; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Alabama; City: Mobile; Studies: [Empty]; Marketing: [Empty];
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
State: Arkansas; City: Fort Smith; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Arizona; City: Lake Havasu City; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: X; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: California; City: Chico; Studies: X; Marketing: [Empty];
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
City: Santa Maria; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: X; Financial Incentives: Revenue guarantee:
[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial
Incentives: Subsidy: [Empty]; Financial Incentives: Financial other:
[Empty]; Financial Incentives: Other: [Empty].
State: Colorado; City: Lamar; Studies: X; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: X.
City: Telluride; Studies: [Empty]; Marketing: X; Financial Incentives:
Travel banks: [Empty]; Financial Incentives: Revenue guarantee:
[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial
Incentives: Subsidy: [Empty]; Financial Incentives: Financial other:
[Empty]; Financial Incentives: Other: X.
State: Florida; City: Daytona Beach; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: X; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Georgia; City: Augusta; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees: X;
Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
State: Iowa; City: Mason City; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: X; Financial Incentives: Reduced airport fees: [Empty];
Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Idaho; City: Hailey; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: X.
State: Illinois; City: Marion; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Indiana; City: Fort Wayne; Studies: X; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: X; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Kansas; City: Manhattan; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: X; Financial Incentives: Reduced airport fees: [Empty];
Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Kentucky; City: Paducah; Studies: X; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
City: Somerset; Studies: X; Marketing: [Empty]; Financial Incentives:
Travel banks: [Empty]; Financial Incentives: Revenue guarantee:
[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial
Incentives: Subsidy: [Empty]; Financial Incentives: Financial other:
[Empty]; Financial Incentives: Other: [Empty].
State: Louisiana; City: Lake Charles; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: X; Financial Incentives: Reduced airport fees: [Empty];
Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Maine; City: Presque Isle; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: X; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Minnesota; City: Brainerd/St. Cloud; Studies: [Empty];
Marketing: X; Financial Incentives: Travel banks: X; Financial
Incentives: Revenue guarantee: [Empty]; Financial Incentives: Reduced
airport fees: [Empty]; Financial Incentives: Subsidy: [Empty];
Financial Incentives: Financial other: X; Financial Incentives: Other:
[Empty].
State: Missouri; City: Cape Girardeau; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: X; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Mississippi; City: Meridian; Studies: X; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: X; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: North Carolina; City: Asheville; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
X; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
State: North Dakota; City: Bismarck; Studies: X; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
State: Nebraska; City: Scottsbluff; Studies: X; Marketing: [Empty];
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: New Mexico; City: Taos; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: X; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: New York; City: Binghamton; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: X; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Ohio; City: Akron; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: X; Financial Incentives: Reduced airport fees: [Empty];
Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Oregon; City: Baker City; Studies: [Empty]; Marketing: [Empty];
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: Pennsylvania; City: Reading; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: South Dakota; City: Rapid City; Studies: X; Marketing: X;
Financial Incentives: Travel banks: X; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Tennessee; City: Bristol/Johnson/; Kingsport; Studies: [Empty];
Marketing: X; Financial Incentives: Travel banks: [Empty]; Financial
Incentives: Revenue guarantee: X; Financial Incentives: Reduced airport
fees: X; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: Texas; City: Abilene; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
City: Beaumont/Port Arthur; Studies: X; Marketing: X; Financial
Incentives: Travel banks: X; Financial Incentives: Revenue guarantee:
[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial
Incentives: Subsidy: [Empty]; Financial Incentives: Financial other:
[Empty]; Financial Incentives: Other: [Empty].
State: Utah; City: Moab; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: [Empty]; Financial Incentives: Revenue
guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: X.
State: Virginia; City: Lynchburg; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: X; Financial Incentives: Other: [Empty].
State: Washington; City: Bellingham; Studies: X; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Wisconsin; City: Rhinelander; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: X; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: West Virginia; City: Charleston; Studies: [Empty]; Marketing: X;
Financial Incentives: Travel banks: [Empty]; Financial Incentives:
Revenue guarantee: X; Financial Incentives: Reduced airport fees:
[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives:
Financial other: [Empty]; Financial Incentives: Other: [Empty].
State: Wyoming; City: Casper; Studies: [Empty]; Marketing: X; Financial
Incentives: Travel banks: X; Financial Incentives: Revenue guarantee:
[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial
Incentives: Subsidy: [Empty]; Financial Incentives: Financial other:
[Empty]; Financial Incentives: Other: X.
Source: GAO analysis of DOT Small Community Air Service Development
Pilot Program applications.
[End of table]
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
JayEtta Z. Hecker (202) 512-2834
Steven C. Martin (202) 512-2834:
Acknowledgments:
In addition to those named above, Janet Frisch, David Hooper, Joseph
Kile, Sara Ann Moessbauer, Ryan Petitte, Sharon Silas, Stan Stenersen,
and Pamela Vines made key contributions to this report.
[End of section]
Related GAO Products:
Commercial Aviation: Financial Condition and Industry Responses Affect
Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.
Options to Enhance the Long-term Viability of the Essential Air Service
Program. GAO-02-997R. Washington, D.C.: August 30, 2002.
Commercial Aviation: Air Service Trends at Small Communities Since
October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.
Proposed Alliance Between American Airlines and British Airways Raises
Competition Concerns and Public Interest Issues. GAO-02-293R.
Washington, D.C.: December 21, 2001.
’State of the U.S. Commercial Airlines Industry and Possible Issues for
Congressional Consideration“, Speech by Comptroller General of the
United States David Walker. The International Aviation Club of
Washington: November 28, 2001.
Financial Management: Assessment of the Airline Industry‘s Estimated
Losses Arising From the Events of September 11. GAO-02-133R.
Washington, D.C.: October 5, 2001.
Commercial Aviation: A Framework for Considering Federal Financial
Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.
Aviation Competition: Restricting Airline Ticketing Rules Unlikely to
Help Consumers. GAO-01-832. Washington, D.C.: July 31, 2001.
Aviation Competition: Challenges in Enhancing Competition in Dominated
Markets. GAO-01-518T. Washington, D.C.: March 13, 2001.
Aviation Competition: Regional Jet Service Yet to Reach Many Small
Communities. GAO-01-344. Washington, D.C.: February 14, 2001.
Airline Competition: Issues Raised by Consolidation Proposals. GAO-01-
402T. Washington, D.C.: February 7, 2001.
Aviation Competition: Issues Related to the Proposed United Airlines-US
Airways Merger. GAO-01-212. Washington, D.C.: December 15, 2000.
Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs,
and Passenger Traffic. RCED-00-34. Washington, D.C.: April 14, 2000.
Aviation Competition: Effects on Consumers From Domestic Airline
Alliances Vary. RCED-99-37. Washington, D.C.: January 15, 1999.
FOOTNOTES
[1] U.S. General Accounting Office, Commercial Aviation: Air Service
Trends at Small Communities Since October 2000, GAO-02-432 (Washington,
D.C.: March 29, 2002). See list of related products.
[2] This definition is consistent with the definition of small
community--small hubs or smaller--used for the Small Community Air
Service Development Pilot Program authorized by the Wendell H. Ford
Aviation Investment and Reform Act for the 21st Century (AIR-21), P.L.
106-181, Section 203. A ’small“ hub airport boards from 0.05 to 0.249
percent of all passengers. In 2000, 790,324 passengers boarded
commercial aircraft at the average small hub airport. A ’nonhub“
airport boards less than 0.05 percent of all passengers for all
operations of U.S. carriers in the United States. In 2000, 58,322
passengers boarded commercial aircraft at the average nonhub airport.
Small hubs and nonhubs are defined in 49 U.S.C. 41731.
[3] The 12 communities we studied in more detail were: Mobile, Alabama;
Pensacola and Tallahassee, Florida; Cumberland and Hagerstown,
Maryland; Pellston, Michigan; Carlsbad, Hobbs, Roswell, Ruidoso, and
Taos, New Mexico; and Eugene, Oregon.
[4] In fiscal year 2002, DOT provided approximately $100 million in
direct subsidies to air carriers to serve certain small communities
under the Essential Air Service (EAS) program. DOT also awarded $20
million in grants to 40 small communities to implement air service
improvement programs under the Small Community Air Service Development
Pilot Program, authorized by the Wendell H. Ford Aviation Investment
and Reform Act for the 21st Century (AIR-21), P.L. 106-181, Section
203.
[5] See U.S. General Accounting Office, Options to Enhance the Long-
term Viability of the Essential Air Service Program, GAO-02-997R
(Washington, D.C.: August 30, 2002).
[6] Network carriers are defined as carriers using a ’hub-and-spoke“
system. Under this system, airlines bring passengers from a large
number of ’spoke“ cities to one central location (the hub) and
redistribute them to connecting flights for their final destinations.
The major network carriers are America West Airlines, American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines,
United Airlines, and U.S. Airways.
[7] Major network carriers contract with or separately operate regional
affiliates to provide service to smaller communities. For example,
United Airlines contracts with Atlantic Coast Airlines to fly
passengers to and from its hub at Washington Dulles International
Airport. However, Delta Air Lines purchased two of its regional
affiliates, Comair and Atlantic Southeast Airlines, in 1999 to feed its
hubs.
[8] The categories are based on the number of passengers boarding an
aircraft (enplaning) for all operations of U.S. carriers in the United
States. A large hub enplanes at least 1 percent of all passengers, a
medium hub 0.25 to 0.99 percent, a small hub 0.05 to 0.249 percent, and
a nonhub less than 0.05 percent. Nonhubs and small hubs are defined in
49 U.S.C. 41731; medium hubs are defined in 49 U.S.C. 41714; and large
hubs are defined in 49 U.S.C. 47134. A passenger flying from Baltimore
to San Francisco who connects to a different flight in Cincinnati
counts as two passenger enplanements--one at Baltimore and one at
Cincinnati.
[9] To be eligible for subsidized service, communities must meet three
general requirements. They must have been listed on a carrier‘s Civil
Aeronautics Board (CAB) issued service certificate and received
scheduled commercial passenger service as of October 1978, may be no
closer than 70 highway miles to the nearest medium or large hub
airport, and must require a subsidy of less than $200 per person
(unless the community is more than 210 highway miles from the nearest
medium or large hub airport, in which case no average per-passenger
dollar limit applies). For additional information on the EAS program,
see GAO-02-997R.
[10] See table 1 for information on the county population for the 12
communities included in our review.
[11] See GAO-02-432.
[12] The regression model holds other factors constant between the
hypothetical communities A and B: population, manufacturing earnings,
and distance from an airport served by a low-fare carrier.
[13] Over half of the airport managers responding to a survey said that
local residents drove to another airport for airline service to a great
or very great extent. Eighty-one percent of them attributed the leakage
to the availability of lower fares from a major airline at the
alternative airport. See GAO-02-432.
[14] In our previous work, we found that 47 percent of the 202 small
communities were within 100 miles of an airport served by a low-fare
airline or that served as a hub for a major carrier. We adopted DOT‘s
definition of a low-fare airline and included AirTran, American Trans
Air, Frontier, JetBlue, Southwest, Spirit, and Vanguard (no longer
operating). See GAO-02-432.
[15] Costs depend on a number of variables, including the type of
aircraft being operated. The estimates given were for 37-seat and 70-
seat aircraft.
[16] See GAO-02-432.
[17] U.S. Department of Transportation, Office of the Inspector
General, Airline Industry Metrics: Trends on Demand and Capacity,
Aviation System Performance, Airline Finances, and Service to Small
Airports, Number CC-2003-001, (Washington, D.C.: October 7, 2002).
[18] Carriers are required to file a 90-day notice of intent to suspend
or terminate service at EAS communities. DOT established an additional
reporting requirement for air carriers in response to the emergency
created by the events of September 11. From September 28, 2001, until
March 31, 2002, DOT (under the Air Transportation Safety and System
Stabilization Act, P.L. 107-42, Section 105) required air carriers to
report any significant service reductions--i.e., terminations of all
scheduled service or termination of the last nonstop service.
[19] See app. IV for a more detailed description of each community‘s
program.
[20] As shown in figure 1, Pellston used studies and marketing. It was
the only one of the 12 communities that did not implement a financial
incentive program.
[21] The Michigan Air Service Program also provides funds to airports
for capital improvements. Our study did not evaluate that portion of
the program.
[22] An AirTran official cited another example (Wichita, Kansas), which
was not one of the 12 communities we studied but demonstrates the
importance of community consensus that air service is a priority.
Wichita was a marginally potential community for AirTran to serve, the
official said, (because the population is smaller than the communities
normally selected for service under the airline‘s low-cost business
model), but the community support shown for the air service convinced
AirTran to launch service there. Wichita airport officials said almost
400 organizations pledged a total of $7.2 million in travel funds for
AirTran. In addition, the program included a revenue guarantee and
marketing component. Officials reported that since AirTran began
service, fares have dropped significantly and passenger enplanements
increased from 112,000 in 2001 to 130,000 in 2002.
[23] GAO-02-997R.
[24] DOT announced the applicants selected for grants on June 26, 2002.
Four communities involved in three grant awards withdrew from the
program. Ruidoso, New Mexico withdrew from the Taos/Ruidoso consortium,
but was replaced by Angel Fire and Red River, New Mexico with no change
to the original grant award. Pasco, Washington and Houghton/Pellston,
Michigan (consortium) declined DOT‘s grant offers, collectively
totaling $320,000. Additionally, $14,944 remained available from the
original allocation and, based on an arithmetic error, the award to
Beaumont/Port Arthur, Texas was reduced from $510,000 to $500,000,
making a total of $344,944 available for reallocation. On December 20,
2002, DOT reallocated the available funds to Telluride, Colorado,
($300,000) and Chico, California ($44,000).
[25] The population is for the Eugene-Springfield metropolitan area.
[26] This was Taos‘ population in 1995.
[27] Codesharing allows an airline to sell seats on its partner‘s plane
as if they were its own, enabling the airline to expand its route
network without adding any planes.
[28] Great Plains has an interlining agreement with American Airlines
that allows passengers to travel from a community served by Rio Grande
Air to a community served by American Airlines on one ticket and
without having to recheck bags when changing airlines.
[29] For example, the Wendell H. Ford Aviation Investment and Reform
Act for the 21st Century (AIR-21), P.L. 106-181, defines small
communities as including both nonhub and small hub community airports.
The categories of airports--large hub, medium hub, small hub, and
nonhub--are defined by statute. Nonhubs and small hubs are defined in
49 U.S.C. 41731; medium hubs are defined in 49 U.S.C. 41714; and large
hubs are defined in 49 U.S.C. 47134. The categories are based on the
number of passengers boarding an aircraft (enplaned) for all operations
of U.S. carriers in the United States. A large hub enplanes at least 1
percent of all passengers, a medium hub 0.25 to 0.99 percent, a small
hub 0.05 to 0.249 percent, and a nonhub less than 0.05 percent. In
2000, there were a total of 546 commercial passenger airports: 31 large
hubs, 37 medium hubs, 74 small hubs, and 404 nonhubs. The Federal
Aviation Administration (FAA) sometimes defines hubs as geographic
areas rather than as airports. In this report, however, when we discuss
hubs, we are referring to airports.
[30] The ensuing discussion is intended only as a general overview. For
a more detailed description of the economics of air service, interested
readers should consult Handbook of Airline Economics, Darryl Jenkins,
Executive Editor, New York, The McGraw-Hill Companies, 1995.
[31] For simplicity, the supply curve representing the relationship
between average fares and seats available per month is illustrated as a
straight line. However, because a carrier would not add an additional
seat as fares increase but rather an entire flight (or larger aircraft)
consisting of many seats, the supply curve is more accurately captured
as a line increasing in a stepped fashion.
[32] Of course, as illustrated by low-fare carriers‘ expansion into new
cities (e.g., Southwest launching service in Manchester, New
Hampshire), service at those cities can change.
[33] Foundations for the Future (Pensacola Area Chamber of Commerce),
the city of Pensacola, Escambia County, Santa Rosa County, the city of
Milton, and the city of Gulf Breeze.
[34] A block hour is a common measure of aircraft usage. Block hours
are measured from the time the aircraft backs away from the gate until
the aircraft pulls into the gate at the destination.
[35] The anticipated scheduled block time covered by the agreement was
65 minutes per flight segment or 19.5 block hours per day for all
flights.
[36] Michigan airports include the large hub at Detroit, a small hub at
Grand Rapids, and several nonhub airports. There are no airports
classified as medium hubs in Michigan. Three Michigan communities--Iron
Mountain, Ironwood, and Manistee--are served by EAS-subsidized carriers
that offer flights to Chicago or Milwaukee.
[37] We did not analyze awards made in the capital improvements and
equipment category.
[38] As an example of a statewide project, in fiscal year 1998 the
state hired a consultant to assist community leaders and local
travelers in understanding the dynamics of the industry.
[39] Northwest Airlink partner Mesaba Airlines operates these flights.
[40] Northwest Airlink partner Pinnacle Airlines also operated two
daily departures with 50-seat regional jets out of Pellston from June
to September 2002 and, according to a Michigan Aeronautics official,
plans future regional jet operations on a seasonal basis.
[41] The business fare indicated is based on a 1-day advance purchase
fare from the Orbitz Web site, www.orbitz.com as of November 7, 2002.
[42] Traverse City is served by American Eagle, Northwest Airlink
(Mesaba and Pinnacle), and United Express (Air Wisconsin) as of
December 2002.
[43] The state allocated additional recruitment and retention funds of
$16,000 in fiscal year 2002 for Pellston‘s application to the U.S. DOT
for a Small Community Air Service Development Pilot Program grant of
$60,000. Pellston was awarded a grant and planned to use the funds to
facilitate the introduction of seasonal regional jet service. However,
according to DOT and Michigan aviation officials, Pellston declined the
grant after Northwest Airlines reconsidered its willingness to
participate in the initiative.
[44] Ronald Reagan Washington National Airport and Washington Dulles
International Airport are also nearby.
[45] The law authorized $5 million for a 3-year program but subsequent
legislation reduced the amount to $4.25 million. Due to difficulty
getting the carrier certificated as a Part 121 carrier, the service
start date was delayed from June 2001 to December 2001. The subsidy
program ends June 30, 2003.
[46] The regulations state that a 50-percent local match is required,
but a state official explained that they require a 100-percent local
match. In other words, the state pays 50 percent, and the local
matching funds make up the other 50 percent.
[47] See figure 4.
[48] Taos‘ enplanements peaked in the first quarter of each year, which
corresponds with the ski season.
[49] These agreements were business-to-business contracts with the
Chamber of Commerce as the focal point for agreements with the airline,
a consulting firm, participating businesses, and later on, the bank
that issued the credit card.
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