March 2004

Air Service Incentives:  Giving Away the Store?

In 2002 and 2003, $40 million was funneled into small-town America through the Department of Transportation’s Small Community Air Service Development Pilot Program - most of it going into air service incentive/support programs at non-hub and small hub airports.  Recently I was discussing opportunities in several smaller markets with an analyst at a major airline.  After beating around the passenger and revenue numbers, I asked the big questions.  “So what do you think, how do these cities stack up against the other cities that you are looking at for service?” Without hesitation, he answered, “Well, the numbers look good, but I have 12 service proposals on my desk that include support packages, and five of these include revenue guarantees.  Everything else being close to equal, I am going with the city that offers the best package.” Later, I happened to see a press release about a $1 million, multi-part, two-year community support program that the Greater Peoria Regional Airport and the Peoria Chamber of Commerce assembled for Allegiant Air to land service to Las Vegas.

These examples point to the increasing competition for service in non-hub and small-hub markets.  The competition has gotten more intense in the lat two years thanks to a soft economy and airline fleet reshuffling that has trimmed capacity and replaced many turboprops with regional jets.  One result:  smaller communities competing for fewer aircraft.

Air service’s effect on local commerce hit home for me a few years ago after we helped get a small Western city non-stop flights to a hub.  Eight months later, at a chamber of commerce lunch held to recognize the project, the owner of a truck manufacturing company said:  “Before the new service started, I used to get one potential customer per month from the southwestern United States for my trucks.  Now, I get five a week.  If it wasn’t for the new service I might have gone out of business.”

Any time a community establishes a new air link to another city, reduces the time it takes to get there or cuts travel costs, economic activity increases between the two cities.  So does it make sense for communities to provide air service support packages and incentives?  We are familiar with the tax breaks, training programs, real estate deals and other incentives that communities offer to businesses that locate and bring new jobs in.  Considering this and the broad-based impact air service have on economic activity and job growth, it is not a stretch to conclude that air service warrants the same consideration.

Still, talks about incentive/support programs always include one question:  “What happens if we provide a package for new air service, and next year, the airline pulls service?” My response:  The airline industry has always been a volatile business and will, most likely, continue to be.  But from the time that first flight touches down, the community is benefiting from the new economic activity.  Concerns about the airline leaving can be mitigated by carefully crafting programs to guarantee that the community gets a reasonable return on its investment.

Incentive/support programs are often sensitive topics.  How do you handle the inevitable questions such as, Where does the money come from, should we be spending public funds for private business and is it fair to the incumbent airlines?  First, educate local business leaders about the airline industry realities and the fight that they are in.  In most cases, this group is the most important one in successful air service initiatives.  Next, public officials, especially airport operators, should take a secondary role and recruit local business leaders to champion the initiative.  Why?  If you need the support of the business community, let its leaders lead.  Finally, any air service incentive/support program should be structured to accomplish three primary goals:  1) Influence the airline to make a decision in your favor, 2) minimize the time it takes for the new service to achieve breakeven and 3) promote the long-term success of the new service in the market.

Unfortunately, parties involved in air service negotiations often focus on what it is going to take to do the deal, while little thought is given to the secondary and third goals noted above.  In fairness to airline managers, they are concerned about all three goals.  However, they have been living in a world of red ink that tends to promote a show-me-the-money mindset that favors revenue guarantees and cash incentives.  And why not - should communities enjoy the benefits of air service without some risk?  Revenue guarantees and cash incentives may close the deal.  In the long run, though, it is solid marketing programs, travel banks and other types of support that get people on airplanes - and that’s what it’s all about.

Most importantly, understand that no incentive/support program can make a weak market strong.  A market either exists or it doesn’t.  So before thinking about a program, make sure the homework has been done to quantify and understand the local air service market.  If you have an underserved market, incentives and community support programs can help you secure the service warranted and promote its long-term success.

Reprinted from Airport Magazine, March/April 2004