Public Funding of Airport Incentives: The Efficacy of Small Community Air Service

Development GrantsMichael D. Wittman

MIT International Center for Air Transportation December 2013

Smaller U.S. Airports Have Seen Significant Reductions In Available Service

• Smaller airports saw a disproportionate share of the cuts in flights and available seats as a result of capacity discipline.

2

Airport Type % change in domestic flights (07- 12)

Large Hub -8.8%

Medium Hub -26.2%

Small Hub -18.2%

Non-Hub -15.4%

EAS -5.0%

All Smaller AirportsAll Airports

-21.3%-14.3%

Source: Wittman, M.D. and W.S. Swelbar. 2013. Trends and Market Forces Shaping Small Community Air Service in the U.S. Report No. ICAT-2013-02

2007 2008 2009 2010 2011 20120

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

Scheduled Domestic Departures at Smaller U.S. Airports

Medium Hub Small Hub Non Hub EAS

Mill

ions

of D

epar

ture

s

Smaller Airports Are Turning to Incentives to Win Service

• With record-high fuel prices, airlines are not providing service to smaller U.S. airports unless there is a significant business case to do so with minimal risk.

• Smaller airports have started a widespread strategy of offering incentives directly to airlines for new service.

• Incentives reduce some of the risk of entering a small airport by guaranteeing revenue or covering airline start-up costs.

• Incentive packages can range into the millions of dollars for a single new destination.– City of Worcester, MA and Massport paid jetBlue $1.2 million in

incentives to start service at ORH in 2013.

3

Types of Airport Incentives

• Revenue Guarantees act as insurance for an airline that a minimum amount of revenue will be achieved on a route.– e.g. if a route with a $500,000 revenue guarantee only realizes $200,000 in revenue,

the airport would pay the airline $300,000.

• Waived or reduced use fee agreements waive some or all airport user charges, such as landing fees, parking, airport rents, etc.

• Advertising and marketing assistance can be provided as free or reduced-price in-airport advertising space or by directly purchasing advertisements.

• Travel banks offer an airline a prepaid commitment that passengers will fly on a newly introduced route.

• Direct subsidies pay an airline directly in exchange for a predefined level of scheduled service.

4

Public Funding of Airport Incentives

• There are two main sources of U.S. government funding of incentives for small airports.

• Essential Air Service (EAS) provides direct subsidies to air carriers in exchange for offering service from geographically-isolated communities to major hubs.– Airports receiving Essential Air Service must be at least 70 miles from

the nearest large or medium-sized airport, and must not currently be receiving unsubsidized air service.

• Small Community Air Service Development Grants (SCASDG) provide ad hoc funding for individual development projects.– Any small-hub or non-hub airport (or a consortium of airports) may

apply for a SCASD grant.

5

Essential Air Service

• Essential Air Service is a federal subsidy program that provides funding to airlines to operate flights to geographically-remote communities.

• Airlines are contractually obligated to provide a minimum level of service to a nearby hub airport.– If an airline wishes to leave an EAS market, they must find a

replacement carrier that is willing to perform the service.

• Note that EAS funding only subsidizes the airline; passengers still must pay regular, unsubsidized airfares.

• EAS provided $214 million in funding to 163 airports in 2013.

6

The Small Community Air Service Development Grant Program

• SCASDG was first introduced in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21) in 2000, and first funded in 2002.

• Provides funding to airports to support incentive packages, marketing programs, air service studies, or other projects intended to gain new service or maintain existing service.

• Grant applications are favorably evaluated for airports with:– Higher-than-average airfares;– Limiting existing service;– Broad community support;– Public-private partnerships; and– Letters of airline support.

7

The Size and Scope of the SCASDG Program Has Varied Widely From 2002-present

82002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

0

5

10

15

20

25

30

35

40

45

Total Funding # of Grants

Tota

l SCA

SDG

Fund

ing

Num

ber o

f Acc

epte

d Gr

ants

Methodology: Evaluating the SCASDG Program

• Complete grant applications for all applicants—regardless if the grant was funded or not—are available on Regulations.gov.

• Grants that are selected for funding are identified in a Grant Selection Order, which also gives the rationale for selection.

• Grant applications were available since the program’s origin in 2002, but this study focuses on the years 2006 to 2011:– Earlier SCASDG grants were already evaluated by the Government

Accountability Office in a 2005 report.– Not enough time has passed to accurately evaluate the success of

2012 and 2013 SCASDG recipients.

9

The Majority of SCASDG Applications Target New Service

10

2006 2007 2008 2009 2010 20110

5

10

15

20

25

New Service Rev. Guarantees Marketing Study Other

Num

ber o

f SCA

SD G

rant

s

* Note: Revenue guarantee category is not mutually exclusive

Defining a Metric for SCASDG Success

• We wish to examine whether each community was successful in meeting the goals defined in their application.

• Need to pick a time period for analysis that is long enough to allow the grant to take effect, but not long enough to introduce other confounding factors.

• Since grant selection generally happens in August or September each year, decided to use a time period of 28 months for grant evaluation.– i.e., if a grant is funded in August 2008, did the grantee meet their

goals by December 2010?

11

Definition: SCASD Grant Success

• A SCASD grant intended to provide new service is successful if the airport achieves the new scheduled service targeted in its proposal within 28 months of grant acceptance, and maintains that service throughout the remainder of the 28 month period.

• A SCASD grant intended to market existing service is successful if the airport maintains or improves its level of service (number of flights, +/- 10%) present at grant acceptance for at least 28 months afterwards.

• A SCASD grant that does not meet these characteristics is deemed to have failed to meet its objectives.

12

Evaluation of Grant Success

• Using the metric on the previous slide, evaluated the success or failure of 115 SCASD grantees from 2006-2011.– 18 applications to fund air service viability studies, infrastructure, and

applications from consortia of airlines were not evaluated.

• Data: Innovata Schedule Reference Service (SRS)– Accessed via Diio Mi Market Intelligence portal.– Contains flight frequency, operating carrier, aircraft, number of seats,

and ASM data for scheduled flights worldwide.– For this analysis, used yearly aggregate data from scheduled domestic

flights from 2007-2013.

13

The SCASDG Success Rate Was Under 50% in All Years• The average program success rate from 2006-2011 was 36.5%.

142006 2007 2008 2009 2010 20110

2

4

6

8

10

12

14

16

18

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Successes Failures Success Rate

Num

ber o

f Gra

ntee

s

Succ

ess R

ate

What Can Influence the Success or Failure of a SCASD Grant?

• There are a number of reasons why SCASD grantees might fail to meet their objectives:– Many SCASDG applications are highly speculative with no airline support;– Economic slowdown or fuel price spike could torpedo air service

development efforts;– Exogenous airline-specific factors (mergers, bankruptcies, etc.); and/or– Pushback from unsubsidized airlines currently operating at the airport.

• Let’s examine three case studies to identify common characteristics of successful SCASD grantees:– Manhattan Regional Airport (MHK), Manhattan, KS, 2010– Outagamie County Regional Airport (ATW), Appleton, WI, 2009– Bozeman Gallatin Field Airport (BZN), Bozeman, MT, 2011

15

Manhattan Regional Airport (MHK)

• MHK was subsidized by EAS from 2003-2009 until they attracted DFW service in 2009 with a revenue guarantee.

• Applied for $300,000 in SCASDG funding for a comprehensive marketing effort intended to maintain the new unsubsidized service, particularly after the revenue guarantee expired.

• MHK maintained their level of DFW service even after the revenue guarantee expired, and added an additional daily frequency to ORD.

16

Outagamie County Regional Airport (ATW)

• ATW asked for $150,000 in SCASDG money in 2009 for marketing to prevent passenger leakage to nearby MKE and GRB.

• ATW’s application included letters of support from four different airlines.

• ATW maintained its level of service from these carriers through 2011.

• Allegiant Air awarded ATW a “Best Marketing Award” in 2011 and 2012.

17

Bozeman Gallatin Field Airport (BZN)

• BZN serves as a gateway to Yellowstone National Park, and is heavily reliant on leisure traffic.

• Proposed for a $1,000,000 SCASD grant to induce new seasonal air service to the NYC area through a revenue guarantee.

• Public-private partnership of state tourism councils and local resorts pledged $725,000 (42.0% of the full $1.725 million incentive package) to support the revenue guarantee.

• Attracted United Airlines to provide new nonstop service from BZN to EWR in 2012. – After a successful trial period, the seasonal service was expanded in

2013 from 13 to 20 flights per season.

18

How Might the SCASDG Program Be Reformed?

• Several possible reforms of the SCASDG program could improve its success rate:– Requiring airline commitment through a letter of support before funding

is issued.– Introducing a “community-match” requirement to ensure community

support of proposed new service.– Specifically encouraging small-hub airports, who have historically been

more successful in realizing their SCASDG goals, to apply for funding.

• Challenge will be reforming SCASDG in a way that still encourages innovative projects and supports air service at the very smallest U.S. airports.

• The elephant in the room: With 500 primary commercial service airports in the U.S., which ones “deserve” scheduled air service?

19