oversight

Commercial Aviation: Factors Affecting Efforts to Improve Air Service at Small Community Airports

Published by the Government Accountability Office on 2003-01-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to Congressional Requesters




January 2003
               COMMERCIAL
               AVIATION

               Factors Affecting
               Efforts to Improve Air
               Service at Small
               Community Airports




GAO-03-330
                                               January 2003


                                               COMMERCIAL AVIATION
                                               Factors Affecting
Highlights of GAO-03-330, a report to
Congressional requesters.
                                               Efforts to Improve Air Service
                                               at Small Community Airports



The airline industry, facing                   Small communities face a range of fundamental economic challenges in
unprecedented financial losses as a            obtaining and retaining commercial passenger air service. The smallest of
result of the economic downturn                these communities typically lack the population base and level of economic
and the terrorist attacks, has taken           activity that would generate sufficient passenger demand to make them
steps to minimize losses, including
                                               profitable to air carriers. While larger communities in this group may have
reducing or eliminating service to
some small communities. In March               less difficulty in sustaining a base level of service, they may not be able to
2002, GAO reported that small                  attract additional carriers to provide greater choice and lower fares. Smaller
communities had almost 20 percent              communities located near larger airports may also face reduced demand
fewer departures in October 2001,              because passengers choose to use the larger airport with lower fares or
as compared to October 2000.                   more choices for flights. These communities also have difficulty because the
GAO was asked to follow up on                  airline industry is in turmoil, making less profitable operations increasingly
that work by examining the                     vulnerable.
challenges small communities face
in attracting and keeping the air              Communities have taken a variety of steps to try to obtain or improve air
service they desire and what steps             service, such as marketing to increase passengers’ demand for local service
they have taken to overcome these
                                               or offering financial incentives to airlines to attract new or enhanced service.
challenges.
                                               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.




www.gao.gov/cgi-bin/getrpt?GAO-03-330.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact JayEtta Z.
Hecker at (202) 512-2834 or
HeckerJ@gao.gov.
Contents


Letter                                                                                    1
               Results in Brief                                                           2
               Background                                                                 5
               Small Communities Face Challenges in Sustaining Desired Levels
                 of Air Service                                                           7
               Air Service Improvement Efforts Fall into Three Main Categories,
                 but Financial Assistance Has Proven Most Effective                     13
               Catalyst and Community Commitment Are Important Factors in
                 Developing Successful Programs                                         24
               Implications for Federal Air Service Assistance to Small
                 Communities: Nonhub Communities May Require Different
                 Assistance Than Small Hubs                                             28
               Concluding Observations                                                  35
               Agency Comments                                                          36

Appendix I     Objectives, Scope, and Methodology                                       39



Appendix II    Background on Underlying Economic Principles                             42
               Demand for Air Service                                                   42
               Supply of Air Service                                                    43
               The Traditional Supply and Demand Model                                  44
               Policy Issues and Market Response                                        46
               Hypothetical Example of Efforts to Improve Air Service                   47
               Air Service Improvement Initiatives                                      49

Appendix III   Air Service Improvement Efforts at 98 Nonhub
               and Small Hub Airports                                                   50



Appendix IV    Case Studies Describing Air Service Improvement
               Programs in 12 Small Communities                                         53
               Mobile, Alabama’s New Business Model                                     53
               Pensacola, Florida’s Travel Bank Program                                 55
               Tallahassee, Florida’s Revenue Guarantee Program                         58
               Michigan’s Air Service Program                                           61
               Maryland’s Regional Air Service Development Program                      65
               New Mexico’s Air Service Assistance Program                              69
               Eugene, Oregon’s Travel Banks                                            74



               Page i                                GAO-03-330 Small Community Air Service
Appendix V             Small Community Air Service Development Pilot
                       Program Grants and Local Matching Funds
                       (Fiscal Year 2002)                                                        78



Appendix VI            Air Service Improvement Efforts Planned at
                       Nonhub and Small Hub Airports Using DOT Grants                            80



Appendix VII           GAO Contacts and Staff Acknowledgments                                    82
                       GAO Contacts                                                              82
                       Acknowledgments                                                           82

Related GAO Products                                                                             83



Tables
                       Table 1: Key Year 2000 Data for the 12 Small Communities We
                                Studied                                                          10
                       Table 2: Types of Air Service Development Efforts Undertaken by
                                98 Communities with Small Hub or Nonhub Airports                 14
                       Table 3: Major Types of Financial Incentive Programs                      18
                       Table 4: Summary of Features of Eugene, Oregon’s Travel Banks             76


Figures
                       Figure 1: Programs Used at the 12 Communities Studied                     20
                       Figure 2: Sustainability of Air Service Improvements at 11 Small
                                Communities After Incentives Ended                               22
                       Figure 3: Factors Present in the 12 Communities We Studied                25
                       Figure 4: Cessna Caravan Used by Rio Grande Air                           32
                       Figure 5: Six-Seat Cessna 414 Used by Sky Taxi                            33
                       Figure 6: Eclipse 500 Jet’s First Flight on August 26, 2002               34
                       Figure 7: Supply and Demand for Air Service in a High- and Low-
                                Demand Community                                                 45
                       Figure 8: The Effect of a Government-Provided Subsidy on
                                Community Air Service                                            47
                       Figure 9: Twelve Communities We Studied in More Detail                    53



                       Page ii                                GAO-03-330 Small Community Air Service
Figure 10: Communities Studied in Florida and Alabama and Other
         Nearby Competing Airports                                       54
Figure 11: Walk-up Fares at Pensacola Regional Airport (August
         2002 versus May 2001)                                           58
Figure 12: Average Ticket Prices in Tallahassee’s Top-10 Markets
         (1st Quarter 2002 versus 1st Quarter 2001)                      60
Figure 13: Pellston, Michigan and Other Nearby Competing
         Airports                                                        62
Figure 14: Enplanements at Pellston, Michigan (1998-2001)                64
Figure 15: Cumberland and Hagerstown, Maryland and Other
         Nearby Competing Airports                                       66
Figure 16: Boston-Maine Airways Enplanements at Cumberland
         and Hagerstown (January through September 2002)                 68
Figure 17: Five Communities Studied in New Mexico and Other
         Nearby Competing Airports                                       70
Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso               73
Figure 19: Eugene, Oregon and Other Nearby Competing Airports            75
Figure 20: Shift in Market Share of Passenger Traffic at Eugene,
         Oregon (1998-2001)                                              77




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



Page iii                              GAO-03-330 Small Community Air Service
United States General Accounting Office
Washington, DC 20548




                                    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 2001.1 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




                                    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.



                                    Page 1                                       GAO-03-330 Small Community Air Service
                   those served by small hub or nonhub airports.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.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.


                   The nation’s small communities face a range of fundamental economic
Results in Brief   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


                   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.




                   Page 2                                         GAO-03-330 Small Community Air Service
    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


    Page 3                                  GAO-03-330 Small Community Air Service
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.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


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.




Page 4                                         GAO-03-330 Small Community Air Service
             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.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.



             In 1978 the Congress deregulated the airline industry, phasing out the
Background   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.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.7 However, low-fare carriers, such as Southwest Airlines



             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.




             Page 5                                            GAO-03-330 Small Community Air Service
    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.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.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


    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.




    Page 6                                           GAO-03-330 Small Community Air Service
                            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.


                            The challenges now faced by small communities in obtaining or enhancing
Small Communities           air service center on two main issues—(1) limitations created by having a
Face Challenges in          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
Sustaining Desired          return to profitability. In economic terms, these challenges can be
Levels of Air Service       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


                            Page 7                                  GAO-03-330 Small Community Air Service
                        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   The demand-related challenges that small communities face are linked to
Limited Demand          their limited populations,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 2002,11 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.12 Changes in these same factors will also cause changes in
                        demand and service within a community over time.




                        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.




                        Page 8                                         GAO-03-330 Small Community Air Service
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.




Page 9                                  GAO-03-330 Small Community Air Service
Table 1: Key Year 2000 Data for the 12 Small Communities We Studied

                                       Employment                                                                                 Awarded
                            County    (total full and     Per capita     Manufacturing Number of                                     DOT
City            State    population       part time)        income           earnings    carriers              Enplanements         funds
Small hubs
Mobile          AL          400,063          220,979         $22,677           $923,085                   6             389,280           X
Eugene          OR          323,271          188,965         $25,584          $1,041,093                  3             374,174
Pensacola       FL          294,323          178,360         $22,360           $354,989                   7             524,811
Tallahassee     FL          240,047          175,034         $26,564           $113,835                   8             467,914
Nonhubs
Hagerstown      MD          132,130           76,094         $24,267            $430,662                  1              25,923
Cumberland      MD           74,740           38,472         $21,098            $157,379                  1               4,815
Roswell         NM           61,306           28,138         $19,651             $74,980                  1              16,706
Hobbs           NM           55,206           28,942         $20,229             $13,228                  1               2,342
Carlsbad        NM           51,473           25,776         $21,007             $42,009                  1               7,355
Pellston        MI           31,540           21,902         $27,336             $80,400                  1              31,571           X
Taos            NM           30,065           16,096         $17,815              $7,662                  1               1,233           X
Ruidoso         NM           19,531           10,464         $17,745              $4,464                  0                  13           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.


                                        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



                                        Page 10                                                 GAO-03-330 Small Community Air Service
                              service to small communities, we also found leakage to be widely reported
                              as a challenge for small community airports.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.14


Small Communities Are         Against the backdrop of relatively limited demand, small communities face
Vulnerable to Carrier Cost-   an additional set of challenges in that the nation’s air carriers—the
Cutting                       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



                              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.




                              Page 11                                          GAO-03-330 Small Community Air Service
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 $550,000.15

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 11.16 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.




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.




Page 12                                         GAO-03-330 Small Community Air Service
                       By comparison, small, medium, and large hub airports’ reductions ranged
                       from 5 to 10 percent.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.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.”


                       Among the 98 communities we contacted that had taken steps to develop
Air Service            an air service improvement program, efforts tended to fall into three main
Improvement Efforts    categories. Over 75 percent of communities undertook some sort of study,
                       such as examining the potential demand for new or enhanced air service.
Fall into Three Main   In addition, 78 percent conducted some sort of marketing activity to
Categories, but        educate the public about the air service available or to inform carriers
Financial Assistance   about potential for new or expanded service opportunities. Finally, 45
                       percent of the communities offered some sort of financial incentive to
Has Proven Most        encourage carriers to provide the new or additional service. Small hub
Effective              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


                       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.




                       Page 13                                          GAO-03-330 Small Community Air Service
                             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

                                             Nonhub airports              Small hub airports              Combined total
                                               (81 airports)                 (17 airports)                 (98 airports)
                             Type of                  Percent of                    Percent of                    Percent of
                             effort         Number          total         Number           total        Number           total
                                     a
                             Studies             60          74%               15          88%               75          77%
                             Marketing           60          74%               16          94%               76          78%
                             Financial
                             incentives           33            41%              11           65%              44            45%
                             Other                15            19%               0            0%              15            15%
                             Source: GAO analysis.
                             Notes: Columns will not add to total number of airports shown because some airports undertook
                             multiple efforts.
                             The 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.


                             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   Of the 98 airports we contacted, 75 reported conducting a study of their air
Communities’ Air Service     service or participating in a multi-airport study. Studies covered such
Needs                        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:




                             Page 14                                              GAO-03-330 Small Community Air Service
                            •   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       Of the 98 airports we contacted, 76 reported using some form of marketing
Inform the Community of         to try to increase potential passengers’ awareness of the air service or to
Air Service                     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


                                Page 15                                GAO-03-330 Small Community Air Service
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.




Page 16                                 GAO-03-330 Small Community Air Service
Financial Incentives    Forty-four of the airports we contacted had created a financial incentive
Provide Carriers With   for a carrier to enter a market or to enhance the level of service already
Greater Assurance for   provided. Financial incentives all share the same basic characteristic—
                        they mitigate some of the financial risk by providing a carrier with greater
Making a Profit         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.




                        Page 17                                 GAO-03-330 Small Community Air Service
Table 3: Major Types of Financial Incentive Programs

                                                                      Prevalence among nonhub                 Prevalence among small hub
                                                                           airports studied                         airports studied
                                                                              (total = 81)                             (total = 17)
Type of
financial                                                                                   Percent of                                Percent of
incentive       Description                                                 Number               total                Number               total
Reduced         Airport reduces fees charged to carriers—                       10               12%                       7               41%
airport fees    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.)
Subsidies       Financial assistance to a carrier assists with                     10               12%                       1                6%
                start-up, operating or other costs. Carrier may
                receive a set amount per period or
                reimbursement for expenses incurred,
                sometimes up to a cap.
Revenue         Community and carrier officials set revenue                          9              11%                       3               18%
guarantees      targets and communities pay carriers only if
                revenue from operations does not meet
                agreed-upon target. Payments are often
                capped.
Travel bank     Businesses or individuals pledge future travel                       4               5%                       3               18%
                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.
Other                                                                                6               7%                       3               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.




                                            Page 18                                                GAO-03-330 Small Community Air Service
Analysis of 12 Projects     We studied 12 communities that had taken a variety of actions to improve
Indicates Financial         air service; all but 1of the 12 communities instituted some form of
Incentives                  financial incentive program for the carrier to attract additional service.19
                            All of these communities had undertaken some combination of studies or
Are Key to Increasing       marketing in the past. However, the officials at many of these airports
Service, but No Guarantee   pointed out that while studies provided useful information about
of Success                  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.




                            19
                                 See app. IV for a more detailed description of each community’s program.




                            Page 19                                           GAO-03-330 Small Community Air Service
Figure 1: Programs Used at the 12 Communities Studied




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



Page 20                                  GAO-03-330 Small Community Air Service
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.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.




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.




Page 21                                         GAO-03-330 Small Community Air Service
    Figure 2: Sustainability of Air Service Improvements at 11 Small Communities After
    Incentives Ended




    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



    Page 22                                    GAO-03-330 Small Community Air Service
    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


    Page 23                                   GAO-03-330 Small Community Air Service
                       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.


                       Our review of programs at 12 communities indicates that while each
Catalyst and           community confronts unique factors that could affect its air service
Community              improvement efforts, success in starting a program and improving its air
                       service is predicated in part on the community’s size. Simply put, smaller
Commitment Are         communities have fewer potential passengers to sustain service. However,
Important Factors in   size is largely beyond a community’s control. We identified two other
                       factors, more directly within a community’s control, that were important
Developing             for success. The first, the presence of a catalyst for change, was
Successful Programs    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).




                       Page 24                                 GAO-03-330 Small Community Air Service
                         Figure 3: Factors Present in the 12 Communities We Studied




Most Communities Had a   All of the communities we studied had a catalyst or driving force behind
Catalyst for Change      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


                         Page 25                                   GAO-03-330 Small Community Air Service
                          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.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    Communities must be committed to supporting any new or enhanced air
the Priority of Service   service. While this element can be difficult to quantify, indicators do exist.
Underscores Commitment    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



                          21
                           The Michigan Air Service Program also provides funds to airports for capital
                          improvements. Our study did not evaluate that portion of the program.




                          Page 26                                        GAO-03-330 Small Community Air Service
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.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




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.




Page 27                                          GAO-03-330 Small Community Air Service
                            shortly thereafter. Officials said that in the future, they would be more
                            specific in their air service agreements.


                            Findings from our review of 98 small community airports—including our
Implications for            detailed review at 12 of those—coupled with our other work on air service
Federal Air Service         to small communities and the EAS program, have potential implications
                            for ongoing federal efforts to help small communities improve their air
Assistance to Small         service. In fiscal year 2002, DOT projects it will provide approximately
Communities:                $120 million in financial assistance to assist various small communities
Nonhub 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
May Require Different       grants under the Small Community Air Service Development Pilot
Assistance Than             Program. Both programs face heavy demand for funds. Our work on this
                            report and recent work on air service to small communities indicates that
Small Hubs                  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     To address air service needs at small communities, Congress has
Main Forms of Federal Aid   appropriated increasing sums over recent years. In fiscal year 1997, the
to Small Community          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
Airports                    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:




                            Page 28                                  GAO-03-330 Small Community Air Service
•   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.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).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.




    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).




    Page 29                                          GAO-03-330 Small Community Air Service
“Seed Money” Approach       Although it is too early to ascertain the pilot program’s success, with the
May Work Only in Limited    grants having been effective only since October 2002, our review of the
Circumstances; Nonhubs      efforts already attempted by small communities suggests that a “seed
                            money” approach may have limited effectiveness in creating sustainable
May Require Continuing      programs. Under current regulations for the pilot program, communities
Assistance to Sustain Air   served by small hub or smaller airports are eligible to apply for a grant.
Service                     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
                            200,00025 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


                            25
                                 The population is for the Eugene-Springfield metropolitan area.




                            Page 30                                            GAO-03-330 Small Community Air Service
                            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   Some small communities may find it difficult to generate the level of
Commercial Air Service      demand needed to support scheduled, commercial air service even with a
Are Developing, but         substantial subsidy. For these communities, alternative transportation
                            programs are developing that could offer an opportunity for connection to
Passenger Acceptance Is     the national air transportation network. These innovative alternatives may
Unknown                     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 6,200,26
                            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.27 Rio Grande
                            has established marketing and codeshare arrangements with Great Plains




                            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.




                            Page 31                                           GAO-03-330 Small Community Air Service
Airlines to connect passengers beyond Albuquerque.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




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


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.




Page 32                                        GAO-03-330 Small Community Air Service
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




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.)




Page 33                                   GAO-03-330 Small Community Air Service
                Figure 6: Eclipse 500 Jet’s First Flight on August 26, 2002




                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



                Page 34                                      GAO-03-330 Small Community Air Service
               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.


               Small communities are facing increasingly difficult challenges in not only
Concluding     attracting new air service but also retaining their current service. Many
Observations   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.




               Page 35                                 GAO-03-330 Small Community Air 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.


                  We provided a copy of the draft report to DOT for review and formal
Agency Comments   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.




                  Page 36                                 GAO-03-330 Small Community Air Service
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.




JayEtta Z. Hecker
Director, Physical Infrastructure Issues




Page 37                                    GAO-03-330 Small Community Air Service
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




Page 38                              GAO-03-330 Small Community Air Service
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



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.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,


              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.




              Page 39                                         GAO-03-330 Small Community Air Service
Appendix I: Objectives, Scope, and
Methodology




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


Page 40                                 GAO-03-330 Small Community Air Service
Appendix I: Objectives, Scope, and
Methodology




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.




Page 41                                 GAO-03-330 Small Community Air Service
                 Appendix II: Background on Underlying
Appendix II: Background on Underlying
                 Economic Principles



Economic Principles

                 Economic principles provide the foundation to explain the level and type
                 of air service any community receives.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 in a region stems from the collective demand of
Demand for Air   individual consumers. As a result, the economic factors that influence
Service          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



                 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.




                 Page 42                                         GAO-03-330 Small Community Air Service
                        Appendix II: Background on Underlying
                        Economic Principles




                        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.


                        Just as market demand for air service is derived from individual
Supply of Air Service   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.




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                    Appendix II: Background on Underlying
                    Economic Principles




                    The traditional supply-and-demand model provides a simple conceptual
The Traditional     framework to broadly discuss (1) air service in small communities and (2)
Supply and Demand   the economic factors that create and explain differences in service
                    between communities and variations in service within communities over
Model               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.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.




                    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.




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Appendix II: Background on Underlying
Economic Principles




Figure 7: Supply and Demand for Air Service in a High- and Low-Demand
Community




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).




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                    Appendix II: Background on Underlying
                    Economic Principles




                    The challenge for policymakers in attracting, maintaining, or improving
Policy Issues and   market-provided, commercial air service in the long run to small
Market Response     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.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).



                    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.




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                        Appendix II: Background on Underlying
                        Economic Principles




                        Figure 8: The Effect of a Government-Provided Subsidy on Community Air Service




                        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.


                        In the short term, a number of different programs may be successful at
Hypothetical Example    providing or enhancing a community’s air service. However, to be
of Efforts to Improve   successful at sustaining air service in a community in the long run without
                        prolonged government intervention, a program will need to target factors
Air Service             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.



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Appendix II: Background on Underlying
Economic Principles




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


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              Appendix II: Background on Underlying
              Economic Principles




              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.


              The EAS program and the hypothetical scenario presented above are
Air Service   examples of policies with a supply-side orientation—the direct impact of
Improvement   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
Initiatives   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.




              Page 49                                 GAO-03-330 Small Community Air Service
                                          Appendix III: Air Service Improvement
Appendix III: Air Service Improvement     Efforts at 98 Nonhub and Small Hub Airports



Efforts at 98 Nonhub and Small Hub Airports


                                                                                              Financial incentives
                                                                                                Reduced
                                     2000                                  Travel    Revenue      airport            Other
State         City          Enplanements Category     Studya   Marketing    bank    guarantee        fees Subsidy financial   Other
Alabama       Huntsville          529,052 small hub       X           X
              Mobile              389,280 small hub       X           X                               X                  X
Arizona       Show Low              4,059 nonhub          X                                                                      X
              Yuma                 63,987 nonhub          X                                                                      X
California    Bakersfield         148,200 nonhub                      X                                                          X
              South Lake
              Tahoe                 2,289 nonhub                      X                               X
              Stockton                238 nonhub          X           X        X                      X                          X
Colorado      Alamosa               4,888 nonhub          X
              Colorado
              Springs           1,205,552 small hub                   X
              Durango              91,276 nonhub                      X                    X
              Gunnison             55,131 nonhub                                           X
              Lamar                  322 nonhub           X           X
              Montrose             67,242 nonhub          X           X                    X
              Pueblo                5,213 nonhub                      X
              Telluride            17,107 nonhub          X           X                    X
Connecticut   New Haven            38,159 nonhub          X           X                    X
Florida       Gainesville         144,078 nonhub          X           X
              Naples               54,791 nonhub          X                                           X
              Pensacola           524,811 small hub       X           X        X                                         X
              Sarasota/
              Bradenton           743,603 small hub       X           X                               X
              Tallahassee         467,914 small hub       X           X                    X          X                  X
Georgia       Augusta             208,444 nonhub                      X        X                      X
              Brunswick            20,980 nonhub          X           X
              Columbus             87,450 nonhub          X           X
              Savannah            879,821 small hub                   X                               X
Iowa          Dubuque              58,531 nonhub                      X
              Sioux City           85,684 nonhub          X           X
Idaho         Hailey               73,072 nonhub          X
Illinois      Quincy               10,173 nonhub                      X                                                  X
              Springfield          71,065 nonhub                      X                               X                  X       X
Indiana       Gary                 24,588 nonhub          X           X                               X
              Lafayette            20,128 nonhub                      X                                                          X
              Terre Haute            523 nonhub           X                                                              X
Kansas        Wichita             584,160 small hub       X           X        X           X
Kentucky      Lexington           507,334 small hub       X           X




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                                             Efforts at 98 Nonhub and Small Hub Airports




                                                                                                 Financial incentives
                                                                                                    Reduced
                                        2000                                  Travel    Revenue       airport            Other
State          City            Enplanements Category     Studya   Marketing    bank    guarantee         fees Subsidy financial   Other
Louisiana      Baton Rouge           417,716 small hub       X           X
               Lake
               Charles               66,165 nonhub                       X
               Shreveport           361,436 small hub        X           X
Maryland       Cumberland             4,815 nonhub           X           X                                         X
               Hagerstown            25,923 nonhub           X           X                                         X
Maine          Bangor               272,833 nonhub           X           X
               Portland             668,098 small hub        X           X
               Presque Isle          25,174 nonhub           X           X
Michigan       Alpena                12,609 nonhub           X           X
               Benton
               Harbor                 2,823 nonhub           X           X                                                           X
               Hancock               31,263 nonhub           X           X
               Ironwood               1,999 nonhub           X           X
               Pellston              31,571 nonhub           X           X
Minnesota      Bemidji               28,537 nonhub                       X
Missouri       Cape
               Girardeau              7,349 nonhub           X           X
               Kaiser Lake
               Ozark                     11 nonhub           X           X
               Springfield          352,008 nonhub           X           X                                                           X
Montana        Bozeman              240,583 nonhub                                             X
               Helena                76,675 nonhub                       X                               X
               Missoula             230,065 nonhub           X           X        X                                                  X
North          Asheville            277,189 nonhub           X           X                               X                   X
Carolina       Fayetteville         149,244 nonhub           X           X
               Hickory               16,010 nonhub           X           X        X
               Kinston                 2,702 nonhub          X           X                               X                   X
               Pinehurst/
               Southern
               Pines                 17,751 nonhub           X           X
North Dakota   Fargo                237,234 nonhub                       X
               Grand Forks           90,465 nonhub           X           X
New
Hampshire      Lebanon               15,156 nonhub           X           X
New Jersey     Atlantic City        429,788 small hub        X           X                     X         X
New Mexico     Angel Fire                13 nonhub                                                                 X                 X
               Carlsbad               7,355 nonhub           X                                                     X
               Hobbs                  2,342 nonhub           X                                                     X
               Roswell               16,706 nonhub           X                                                     X
               Ruidoso                   13 nonhub           X                                                     X                 X
               Taos                   1,233 nonhub                       X                                         X                 X




                                             Page 51                                         GAO-03-330 Small Community Air Service
                                            Appendix III: Air Service Improvement
                                            Efforts at 98 Nonhub and Small Hub Airports




                                                                                                     Financial incentives
                                                                                                       Reduced
                                       2000                                      Travel     Revenue      airport            Other
State           City           Enplanements Category      Studya    Marketing     bank     guarantee        fees Subsidy financial            Other
Ohio            Youngstown/
                Warren               31,475 nonhub             X
Oregon          Eugene              374,174 small hub          X             X         X
Pennsylvania    Allentown           494,815 small hub          X             X                                    X
                Du Bois              15,439 nonhub             X                                                                                   X
                Johnstown            20,820 nonhub             X             X
                Lancaster            13,977 nonhub             X             X                                                X
South           Hilton Head
Carolina        Island               92,465 nonhub             X             X
South Dakota    Huron                 2,941 nonhub                                                                                        X
Tennessee       Chattanooga         300,746 nonhub                           X
Texas           Amarillo            445,161 small hub          X                                                              X
Utah            Logan                   16 nonhub              X             X
Virginia        Newport
                News                227,635 nonhub             X             X                       X                        X
                Staunton/
                Waynesboro
                Harrisonburg         21,113 nonhub             X             X                                                                     X
Vermont         Burlington          446,363 small hub          X             X                                    X
                Rutland               4,010 nonhub             X
Washington      Moses Lake           10,634 nonhub             X
                Olympia                 65 nonhub              X
                Pasco               210,681 nonhub             X
                Pullman/
                Moscow (ID)          33,221 nonhub             X
                Yakima               86,451 nonhub             X
Wisconsin       Appleton            260,474 nonhub             X             X
                Rhinelander          37,937 nonhub             X             X                                    X
West Virginia   Charleston          276,095 nonhub             X             X                                                                     X
                Lewisburg            12,717 nonhub             X             X                       X
Wyoming         Casper               66,918 nonhub             X             X
                Cheyenne             21,720 nonhub                           X
                Gillette             16,419 nonhub             X             X
                Jackson             173,692 nonhub                           X                       X
                                            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.




                                            Page 52                                                GAO-03-330 Small Community Air Service
                                       Appendix IV: Case Studies Describing Air
Appendix IV: Case Studies Describing Air
                                       Service Improvement Programs in 12 Small
                                       Communities


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




                                       Mobile, Alabama has faced challenges in retaining service, despite its
Mobile, Alabama’s                      growing economic base. In 2001, six carriers provided nonstop service
New Business Model                     from Mobile to 10 destinations. In October 2001, United Express, which



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Communities




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




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:



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                           Service Improvement Programs in 12 Small
                           Communities




                       •   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.


                           While travelers at Pensacola, Florida have enjoyed air service from several
Pensacola, Florida’s       carriers, they have had to contend with high airfares and leakage to
Travel Bank Program        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


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    Service Improvement Programs in 12 Small
    Communities




    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.




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    Service Improvement Programs in 12 Small
    Communities




•   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 entities33 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.




    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.




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                                        Service Improvement Programs in 12 Small
                                        Communities




Figure 11: Walk-up Fares at Pensacola Regional Airport (August 2002 versus May 2001)




                                        Tallahassee, the state capital of Florida, had nonstop service to 11
Tallahassee, Florida’s                  destinations from 8 carriers (as of August 2001), but has been faced with
Revenue Guarantee                       relatively high airfares. As a result, large numbers of its potential
                                        passengers chose to fly out of other area airports, including those as far
Program                                 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



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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.34 If the revenue fell short of this goal, the city would make up the
difference, up to a total of $1.5 million.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.




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.




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Figure 12: Average Ticket Prices in Tallahassee’s Top-10 Markets (1st Quarter 2002 versus 1st Quarter 2001)




                                         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


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                         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.


                         After a 1986 state survey of businesses indicated that air service was
Michigan’s Air Service   ranked third most important in terms of cultivating business, the then-
Program                  governor of Michigan established a state program to assist the state’s
                         smaller airports.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.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.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.




                         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.




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Figure 13: Pellston, Michigan and Other Nearby Competing Airports




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 Airlines39 offers the only air service from Pellston—three flights
daily to Detroit using 34-seat turboprops.40 A roundtrip business fare
between Pellston and Detroit exceeded $400.41 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.42 As a result, about 50 percent of Pellston’s passengers leak,
primarily to Traverse City.



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.



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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.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.




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.




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Figure 14: Enplanements at Pellston, Michigan (1998-2001)




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.


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                      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.


                      In 1998, US Airways discontinued service between Hagerstown, Maryland
Maryland’s Regional   and the Baltimore/Washington International Airport (BWI). The cessation
Air Service           of this service left Hagerstown (a community of 37,000, located
                      approximately 75 miles northwest of Baltimore on I-70) with scheduled
Development           service to Pittsburgh, Pennsylvania.44 As of September 2001, Cumberland
Program               (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.




                      44
                       Ronald Reagan Washington National Airport and Washington Dulles International Airport
                      are also nearby.




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Figure 15: Cumberland and Hagerstown, Maryland and Other Nearby Competing
Airports




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.45

Several communities initially expressed interest in participating in the
program. The state contracted with a consultant to study the potential of



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.




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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.




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Figure 16: Boston-Maine Airways Enplanements at Cumberland and Hagerstown
(January through September 2002)




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



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                     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 small communities experienced limited scheduled air
New Mexico’s Air     service and relatively high fares. State officials said that residents of the
Service Assistance   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
Program              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.




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Figure 17: Five Communities Studied in New Mexico and Other Nearby Competing
Airports




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




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                   required.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,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.


                   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.




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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 18.48




48
 Taos’ enplanements peaked in the first quarter of each year, which corresponds with the
ski season.




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Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso




Carlsbad, Hobbs, and                   The second consortium consisted of Carlsbad, Hobbs (Lea County), and
Roswell                                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



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                   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 Airport/Mahlon Sweet Field is a small hub airport located 120
Eugene, Oregon’s   miles south of Portland in Eugene, Oregon. The airport has an estimated
Travel Banks       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.




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Figure 19: Eugene, Oregon and Other Nearby Competing Airports




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 agreement49 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.



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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                                       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

                                            Service provided as of
Airline        Implementation dates         10/18/02                         Travel bank pledges          Marketing commitment
America West   September 1999 –             3 flights daily to Phoenix       65 businesses contributed    Airport pledged $300,000
               September 2001               using CRJ200 (50-seat            $461,000                     in marketing funds over 2
                                            jets)                                                         years
Horizon Air    September 2000 –             2 flights daily to Los           57 businesses contributed    Airport pledged $300,000
               September 2002               Angeles using CRJ700             $452,000                     in marketing funds over 2
                                            (70-seat jets)                                                years
                                       Source: GAO analysis of data from Eugene airport officials.


                                       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


                                       Page 76                                              GAO-03-330 Small Community Air Service
Appendix IV: Case Studies Describing Air
Service Improvement Programs in 12 Small
Communities




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)




Note: For 1998, n = 366,006 enplanements, and for 2001, n = 325,998 enplanements.




Page 77                                           GAO-03-330 Small Community Air Service
                                           Appendix V: Small Community Air Service
Appendix V: Small Community Air Service    Development Pilot Program Grants and Local
                                           Matching Funds (Fiscal Year 2002)


Development Pilot Program Grants and Local
Matching Funds (Fiscal Year 2002)

                                                            Total federal funds         Total federal funds     Total matching
City                                       State                     requested                     granted               funds
King Cove, Sand Point, Akutan, Cold Bay,   AK                         $240,000                    $240,000             $25,000
False Pass, Nelson Lagoon
Mobile                                     AL                           456,137                    456,137              20,000
Fort Smith                                 AR                           108,520                    108,520              20,000
Lake Havasu City                           AZ                           403,478                    403,478             275,000
Chico                                      CA                            44,000                     44,000              30,000
Santa Maria                                CA                           217,530                    217,530              24,170
Lamar                                      CO                           250,000                    250,000              55,000
Telluride                                  CO                           300,000                    300,000             210,000
Daytona Beach                              FL                           743,333                    743,333             165,000
Augusta/Aiken                              GA/SC                        759,004                    759,004           1,421,266
Mason City                                 IA                           600,000                    600,000             405,000
Hailey                                     ID                           600,000                    600,000             344,243
Marion                                     IL                           212,694                    212,694               5,000
Fort Wayne                                 IN                         1,178,000                    398,000             112,000
Manhattan                                  KS                           500,000                    388,350              43,150
Somerset                                   KY                            95,000                     95,000              18,000
Paducah                                    KY                     Up to 754,000                    304,000             107,000
Lake Charles                               LA                           500,000                    500,000             300,000
Presque Isle                               ME                           500,000                    500,000             100,000
Brainerd, St. Cloud                        MN                         1,000,000                  1,000,000           3,460,000
Cape Girardeau                             MO                           500,000                    500,000             125,000
Meridian                                   MS                           500,000                    500,000             140,000
Asheville                                  NC                           500,000                    500,000             578,000
Bismarck                                   ND                         1,557,500                  1,557,500             512,500
Scottsbluff                                NE                           950,000                    950,000             750,000
Taos                                       NM                           500,000                    500,000             400,000
Binghamton                                 NY                           500,000                    500,000             100,000
Akron/Canton                               OH                           950,000                    950,000             800,000
Baker City                                 OR                           300,000                    300,000             661,000
Reading                                    PA                           470,000                    470,000              30,000
Rapid City                                 SD                         1,500,000                  1,400,000           1,400,000
Johnson/Kingsport/Bristol                  TN/VA                        615,000                    615,000             230,000
Abilene                                    TX                            85,010                     85,010             126,250
Beaumont/Port Arthur                       TX                           510,000                    500,000           1,062,000
Moab                                       UT                           280,000                    250,000                   0
Lynchburg                                  VA                           500,000                    500,000             100,000
Bellingham                                 WA                           301,500                    301,500              33,500
Rhinelander                                WI                           500,000                    500,000             100,000
Charleston                                 WV                           500,000                    500,000             100,000
Casper                                     WY                           500,000                    500,000             700,000
Total                                                              $21,480,706                 $19,999,056         $15,088,079




                                           Page 78                                       GAO-03-330 Small Community Air Service
Appendix V: Small Community Air Service
Development Pilot Program Grants and Local
Matching Funds (Fiscal Year 2002)




Source: DOT.
Note: Total matching funds may not include the value of in-kind services, improvements, and
equipment




Page 79                                             GAO-03-330 Small Community Air Service
                                       Appendix VI: Air Service Improvement Efforts
Appendix VI: Air Service Improvement   Planned at Nonhub and Small Hub Airports
                                       Using DOT Grants


Efforts Planned at Nonhub and Small Hub
Airports Using DOT Grants

                                                                                Financial Incentives
                                                                                   Reduced
                                                             Travel     Revenue      airport         Financial
State          City                   Studies    Marketing   banks     guarantee        fees Subsidy     other        Other
Alaska         King Cove, Sand              X
               Point, Cold Bay,
               Nelson Lagoon, False
               Pass, Akutan
Alabama        Mobile                                                                                             X
Arkansas       Fort Smith                               X
Arizona        Lake Havasu City                         X                                              X
California     Chico                       X
               Santa Maria                              X         X
Colorado       Lamar                       X            X                                                         X       X
               Telluride                                X                                                                 X
Florida        Daytona Beach                            X                        X
Georgia        Augusta                                  X         X                          X                    X
Iowa           Mason City                               X         X              X
Idaho          Hailey                                   X                                                         X       X
Illinois       Marion                                   X
Indiana        Fort Wayne                  X            X                                              X
Kansas         Manhattan                                X         X              X
Kentucky       Paducah                     X            X                                                         X
               Somerset                    X
Louisiana      Lake Charles                             X         X              X
Maine          Presque Isle                             X                                              X
Minnesota      Brainerd/St. Cloud                       X         X                                               X
Missouri       Cape Girardeau                           X         X                                    X
Mississippi    Meridian                    X            X                                              X
North Carolina Asheville                                X                                    X                    X
North Dakota Bismarck                      X            X         X                                               X
Nebraska       Scottsbluff                 X                                                                              X
New Mexico     Taos                                     X                        X                                        X
New York       Binghamton                               X                        X
Ohio           Akron                                    X                        X
Oregon         Baker City                                                                                                 X
Pennsylvania Reading                                    X                                                                 X
South Dakota Rapid City                    X            X         X
Tennessee      Bristol/Johnson/
                                                        X                        X           X                            X
               Kingsport
Texas          Abilene                                  X
               Beaumont/Port Arthur        X            X         X
Utah           Moab                                     X                                                                 X
Virginia       Lynchburg                                X                                                         X
Washington     Bellingham                  X            X




                                       Page 80                                        GAO-03-330 Small Community Air Service
                               Appendix VI: Air Service Improvement Efforts
                               Planned at Nonhub and Small Hub Airports
                               Using DOT Grants




                                                                           Financial Incentives
                                                                              Reduced
                                                       Travel      Revenue      airport         Financial
State           City          Studies    Marketing     banks      guarantee        fees Subsidy     other             Other
Wisconsin       Rhinelander                      X                        X
West Virginia   Charleston                       X                        X
Wyoming         Casper                           X          X                                                              X
                               Source: GAO analysis of DOT Small Community Air Service Development Pilot Program applications.




                               Page 81                                           GAO-03-330 Small Community Air Service
                  Appendix VII: GAO Contacts and Staff
Appendix VII: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  JayEtta Z. Hecker (202) 512-2834
GAO Contacts      Steven C. Martin (202) 512-2834


                  In addition to those named above, Janet Frisch, David Hooper, Joseph
Acknowledgments   Kile, Sara Ann Moessbauer, Ryan Petitte, Sharon Silas, Stan Stenersen, and
                  Pamela Vines made key contributions to this report.




                  Page 82                                GAO-03-330 Small Community Air Service
             Related GAO Products
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.



             Page 83                                GAO-03-330 Small Community Air Service
           Related GAO Products




           Aviation Competition: Effects on Consumers From Domestic Airline
           Alliances Vary. RCED-99-37. Washington, D.C.: January 15, 1999.




(544033)
           Page 84                            GAO-03-330 Small Community Air Service
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