-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-997R		

TITLE:     Options to Enhance the Long-term Viability of the 
Essential Air Service Program

DATE:   08/30/2002 
				                                                                         
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GAO-02-997R

   GAO- 02- 997R Essential Air Service

   August 30, 2002 Congressional Committees Subject: Options to Enhance the
   Long- term Viability of the Essential Air Service Program

   Over two decades ago, the Congress deregulated the airline industry,
   phasing out the federal government*s control over domestic fares and
   routes served and allowing market forces to determine the price, quantity,
   and quality of service. Concerned that air service to some small
   communities would suffer in a deregulated environment, the Congress
   established the Essential Air Service (EAS) program as part of the Airline
   Deregulation Act of 1978. The act guaranteed that communities served by
   air carriers before deregulation would continue to receive a certain level
   of scheduled air service. Special provisions were provided for
   guaranteeing service to Alaskan communities. In general, the act
   guaranteed continued service by authorizing the Civil Aeronautics Board,
   whose duties were later transferred to the Department of Transportation
   (DOT), to require carriers to continue providing service at these
   communities. If an air carrier could not continue that service without
   incurring a loss, DOT could then use EAS funds to award that carrier, or
   another carrier willing to provide service, a subsidy. These subsidies are
   intended to cover the difference between a carrier*s projected revenues
   and expenses and provide a minimum amount of profit.

   The Congress has expressed concern that trends in the aviation industry
   and rising costs may jeopardize the program*s long- term viability. H.
   Rpt. 107- 108 directs GAO to conduct a thorough examination of the
   program. As agreed with staff of the relevant authorizing and
   appropriations committees, we focused on the following research questions:

    What is the status of the program, and how has it changed since 1995? 
   What major factors may affect potential future subsidy requirements? 
   What are some options to revise the program to enhance its long- term
   viability, and what are

   the associated potential effects? During the weeks of August 19 and August
   29, 2002, GAO briefed staff of the House and Senate appropriations and
   authorization committees on the results of its work. References within
   this report relate to figures included in the briefing slides in enclosure
   I.

   United States General Accounting Office Washington, DC 20548

   GAO- 02- 997R Essential Air Service 2

   Results in Brief

   As of July 1, 2002, the EAS program provided subsidies to air carriers to
   serve 114 communities- 79 in the continental United States and another 35
   in Alaska, Hawaii, and Puerto Rico. From 1995 to July 2002, the net number
   of EAS- subsidized communities increased by four in the continental United
   States. That number is expected to increase further, because air carriers
   now providing unsubsidized service to 26 communities have notified DOT
   that they intend to discontinue service there. According to DOT, 12 of
   those 26 communities meet the eligibility criteria for subsidized service.
   DOT is requiring carriers to continue serving those 12 communities, and is
   incurring subsidy liabilities for that service. Federal appropriations to
   the program have more than tripled since 1995, rising from $37 million to
   $113 million in fiscal year 2002 (all dollar figures in this product are
   expressed in constant 2002 dollars). Over the same period, the average
   subsidy per community served in the continental United States rose from
   nearly $424,000 in 1995 to an estimated $828,000 in 2002. For communities
   in Alaska, Hawaii, and Puerto Rico, the average subsidy per community
   served rose from just over $90,000 to an estimated $251,000 in 2002.
   Assuming that it would award subsidies to all eligible communities where
   carriers had filed notice of their intent to discontinue service, DOT
   projects that in fiscal year 2002 it will award $97 million in annual
   subsidies out of the appropriated $113 million. Total passenger traffic at
   EAS- subsidized communities decreased by 20 percent since 1995, and the
   median number of passenger enplanements fell to an estimated 10 per day
   (just over 3 passengers per flight).

   Several factors* including increasing carrier costs, limited passenger
   revenue, and increasing numbers of eligible communities requiring
   subsidized service* are likely to affect potential future subsidy
   requirements of the EAS program. Carriers* operating costs have increased
   over time, in part because of costs associated with meeting federal
   regulatory requirements regarding safety in small aircraft. Carrier costs
   may increase further if trends in the retirement of smaller turboprop
   aircraft continue and carriers begin to use larger aircraft on these
   routes. In contrast, carrier revenues have been limited because many
   individuals traveling to or from EAS- subsidized communities choose not to
   fly from the local airport, but rather to use other, larger nearby
   airports, which generally offer more service at lower airfares. Lastly,
   the number of subsidyeligible communities has increased, and may continue
   to grow in the near term.

   We identified and evaluated major categories of options to enhance the
   long- term viability of the EAS program, each of which has associated
   potential effects. Certainly, the viability of the EAS program can be
   ensured without any changes to the program as long as the Congress
   continues to fully fund it. However, because there are clear indications
   that EAS program costs will increase in the near term, federal fiscal
   discipline may require various changes to the program. In no particular
   order, the options we identified to control costs and improve the
   program*s sustainability include (1) targeting subsidized service to more
   remote communities by changing eligibility criteria, (2) better matching
   capacity with community use by increasing the use of smaller aircraft and
   restricting little- used flight frequencies, (3) consolidating service to
   multiple communities into regional airports, and (4) changing the form of
   the federal assistance from carrier subsidies to local grants. Potential
   positive effects include decreasing federal costs, increasing passenger
   traffic, and creating community choice for transportation options.
   Potential negative effects also exist, such as increased passenger
   inconvenience and the potential negative effect on local economies of lost
   scheduled airline service. We are not making any specific recommendations
   regarding how the Congress might consider changing the program.

   GAO- 02- 997R Essential Air Service 3

   Background

   Air service is positively correlated with various measures of communities*
   economic activity. As we reported earlier this year, communities with
   larger, wealthier and more economically active population bases tend to
   have more air service than smaller communities. 1 Communities that receive
   air service subsidized through the EAS program tend to be much smaller and
   have less economic activity than those small communities that receive air
   service through small or nonhub airports. 2 The figure on slide 6
   describes certain economic characteristics of small communities with and
   without subsidized air service.

   To be eligible for subsidized service, communities must meet three general
   requirements. They must have received scheduled commercial passenger
   service as of October 1978, may be no closer than 70 highway miles to a
   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). 3

   Federal law defines the service that subsidized communities are to receive
   under the EAS program. 4 Carriers providing EAS flights are required to
   use aircraft with at least 15 seats unless the community seeks a waiver.
   The law specifies that communities that require subsidized service are
   entitled to a minimum of 12 round- trip flights per week* 2 daily round-
   trip flights 6 days per week, with not more than one intermediate stop on
   each flight to a hub airport. However, DOT may authorize more service than
   the minimum specified by statute. Flights are to occur at *reasonable
   times* and at prices that are *not excessive.* EAS operations to
   communities in Alaska are subject to different requirements (e. g.,
   carriers may use smaller aircraft).

   Air carriers, not the communities themselves, apply directly to DOT for
   EAS subsidies. Air carriers set the subsidy application process in motion
   when they file a 90- day notice of intent to suspend or terminate service.
   If no air carrier is willing to provide replacement air service without a
   subsidy, DOT solicits proposals from carriers who are willing to provide
   service with a subsidy. Carriers requesting a subsidy must document that
   they cannot profitably serve the

   1 U. S. General Accounting Office, Commercial Aviation: Air Service Trends
   at Small Communities Since October 2000 , GAO- 02- 432 (Washington, D. C.:
   Mar. 29, 2002). As a measure of a community*s level of economic activity,
   we used manufacturing earnings.

   2 The nation*s commercial airports are categorized into four main
   groupings based on the number of passengers boarding an aircraft
   (enplaned) for all operations of U. S. carriers in the United States. A
   nonhub has less than 0. 05 percent of the total annual passenger
   enplanements in the United States in any given year. A small hub has at
   least 0. 05 percent, but less than 0. 25 percent, of total U. S.
   enplanements. A medium hub has at least 0. 25 percent and less than 1. 0
   percent of total U. S. enplanements, and a large hub has 1. 0 percent or
   more of total U. S. enplanements. These definitions are contained in
   statute.

   3 The average subsidy per passenger does not equate to a specific portion
   of a passenger's ticket price paid for by EAS funds. Ticket pricing
   involves a complex variety of factors relating to the demand for travel
   between two points, the supply of available seats along that route,
   competition in the market, and how air carriers choose to manage and price
   their available seating capacity.

   4 49 USC 41732.

   GAO- 02- 997R Essential Air Service 4 community without a subsidy. DOT
   requires that air carriers submit historical and projected

   financial data sufficient to support a subsidy calculation. The
   requirements include profit- or- loss statements that project operating
   expenses (e. g., fuel costs) and operating revenues (e. g., passenger
   revenues) that would result from serving the particular community. DOT
   then reviews these data in light of the aviation industry*s pricing
   structure, the size of aircraft required, the amount of service required,
   and the number of projected passengers who would use this service at the
   community. 5 Finally, DOT selects a carrier and sets a subsidy amount to
   cover the difference between the carrier*s projected cost of operation and
   its expected passenger revenues, while providing the carrier with a profit
   element equal to 5 percent of total operating expenses, according to
   statute.

   After DOT selects an air carrier to provide subsidized service to an EAS
   community, that agreement is subject to renewal, generally every 2 years,
   at which time other air carriers are permitted to submit proposals to
   serve that community with or without a subsidy. At any time throughout the
   year, an air carrier providing unsubsidized service to an EAS- eligible
   community can apply for a subsidy if the carrier determines that it can no
   longer provide profitable service. According to DOT, once a subsidy rate
   is agreed to, DOT compensates a carrier for the flights completed, on a
   monthly basis. 6

   Program Costs Have Increased More Than Passenger Use

   As of July 1, 2002, the EAS program provided subsidies to air carriers to
   serve 114 communities- 79 in the continental United States, and another 35
   in Alaska, Hawaii, and Puerto Rico. 7 In 2000, approximately 477,000
   passengers enplaned at airports that received EAS- subsidized service*
   less than 0.1 percent of the more than 700 million passenger enplanements
   in the United States that year. 8 Thirteen regional air carriers served
   the subsidized communities in the continental United States, and 14 served
   those in Alaska, Hawaii and Puerto Rico. The carriers serving the
   communities in the continental United States typically used turboprop
   aircraft seating 19 passengers, whereas in Alaska, Hawaii, and Puerto
   Rico, the most commonly used aircraft seated 4 to 9 passengers. As of mid-
   June 2002, the federal government had obligated $82 million to these air
   carriers. 9

   5 DOT officials stated that they check the reasonableness of the cost and
   revenue information it receives from the air carriers against other data
   reported to DOT and in documents filed with the Securities and Exchange
   Commission.

   6 Total monthly payments to each carrier depend on the extent to which the
   carrier met various performance targets (e. g., percent of scheduled
   departures actually performed). 7 There are 31 subsidized communities in
   Alaska, including 9 Kodiak bush points.

   8 Data for 2001 were not available at the time of our analysis. 9 In
   February 2002, DOT increased the subsidies paid to EAS air carriers by an
   amount equal to 30 percent of the carriers* forecast revenue on an interim
   basis (DOT order 2002- 2- 13). DOT adjusted the subsidies in recognition
   of the EAS carriers* *precipitous rise in costs* accompanied by a
   *substantial drop in revenue* that following the events of September 11,
   2001. The order expressed a concern that, absent some acknowledgment of
   the carriers* financial position, some carriers could be forced to cease
   operations, vitiating the program. The order noted that these losses are
   not directly attributable to losses incurred as a result of federal
   actions taken because of the terrorist attacks* losses for which the
   government provided

   GAO- 02- 997R Essential Air Service 5 As of July 1, 2002, five regional
   carriers served a majority of the EAS markets in the continental

   United States. Those five carriers served 67 EAS subsidized communities in
   the continental United States and received 85.6 percent of subsidies
   awarded for service to communities in those 48 states. Of the five
   carriers, Great Lakes received the largest amount of subsidies ($ 22.4
   million) for serving 29 communities. Big Sky Airlines served 15 subsidized
   communities, received $13.2 million, and had the highest average subsidy
   per passenger. One reason for Big Sky*s higher average subsidy per
   passenger is that the airline served a number of communities that are
   great distances from the hub airport (e. g., Wolf Point, Montana, which is
   212 air miles to Billings) but carried few passengers. 10 Other things
   being equal, carrier costs increase with the distance flown. Colgan Air,
   which provides subsidized service to seven communities, has the highest
   average subsidy per community* about $1.2 million. The figure on slide 12
   summarizes the subsidy and service levels for the top five subsidized
   carriers in the continental United States

   While the net number of subsidized EAS communities increased by four from
   1995 through July 1, 2002, officials at DOT say that number will increase
   further during this fiscal year. 11 At the beginning of calendar year
   2002, DOT subsidized service to 75 communities in the continental United
   States. Since then, carriers notified DOT that they would terminate
   nonsubsidized service at 26 communities in the continental United States
   and Alaska (which would leave those communities without scheduled air
   service), 15 of which are subsidy eligible. DOT has required carriers to
   continue service to those communities. 12 As of July 1, 2002, DOT had
   issued orders establishing subsidy levels to 3 of those 15 communities.
   DOT was in the process of negotiating subsidies for service to the
   remaining 12 communities, and was incurring subsidy liabilities for that
   continued service.

   compensation under the Air Transportation Safety and System Stabilization
   Act, Public Law 107- 42. Through July 2002, the subsidized carriers have
   received nearly $50 million in grants from that act.

   10 In July 2002, DOT transferred the subsidy for serving seven communities
   in Oklahoma, Arkansas, and Texas previously served by Big Sky Airlines to
   Mesa Airlines. Under the new order, the total subsidy awarded for these
   locations is approximately $6. 7 million, or about $1. 1 million less than
   the subsidies earlier given to Big Sky.

   11 We selected 1995 as the base year for comparison because it was the
   most recent year in which the EAS program was unaffected by a major change
   in appropriations and because it preceded a major federal regulatory
   change in U. S. airline safety standards. In 1996, the Federal Aviation
   Administration changed the air safety rules for commuter air carriers to
   match the operational, equipment, and performance safety standards
   required of large air carriers* generally, those that use large jet
   aircraft, having a seating capacity of more than 30 persons. Collectively
   known as the *Commuter Safety Initiative,* these rules imposed many new
   requirements on commuter air carriers that flew aircraft equipped with 10
   seats or more. For example, this initiative required commuter air carriers
   to appoint safety officers, improve ground- deicing programs, and carry
   additional passenger safety equipment (e. g., medical kits). The rule also
   increased training requirements for pilots and further limited the number
   of duty hours crewmembers can fly. See U. S. General Accounting Office,
   Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, and
   Passenger Traffic, GAO/ RCED- 00- 34 (Washington, D. C.: Apr. 14, 2000).

   Between 1995 and 1999, the total number of subsidized communities
   decreased by a net 6 from 95 to 89. Eight communities that had not
   received subsidized service in 1995 gained it in 1999, and 14 communities
   lost their eligibility for subsidized service for a variety of reasons.
   Since 1999, the net number of communities in the continental United States
   receiving subsidized EAS operations has increased by 10.

   12 Under 49 USC 41734, carriers must file a notice with DOT of their
   intent to suspend service, and DOT is compelled by statute to require
   those carriers to continue serving those communities for a 90- day period.

   GAO- 02- 997R Essential Air Service 6 Total passenger enplanements at EAS-
   subsidized communities decreased about 20 percent from

   1995 through 2000, falling from approximately 592,000 to about 477,000.
   The median number of passengers carried each day for each subsidized
   community in the continental United States also decreased, dropping from
   11 in 1995 to 10 in 2000 (just over 3 passengers per flight). Furthermore,
   if total EAS- subsidized passenger enplanements in 2002 equal the total
   for 2000, the average subsidy per passenger in the continental United
   States will rise to an estimated $229* a figure that, in the aggregate,
   exceeds the limit for individual communities within 210 miles of a medium-
   or large- hub airport* almost tripling from the $79 average subsidy per
   passenger in 1995. The figure on slide 13 summarizes the service changes
   and projected changes at subsidized communities from 1995 to 2002.

   EAS funding has tripled since 1995. EAS program appropriations increased
   from $37 million in fiscal year 1995 (in constant 2002 dollars) to $113
   million beginning in fiscal year 2002. 13 Consequently, the average
   subsidy per community served in the continental United States rose from
   nearly $424,000 in 1995 to an estimated $828,000 in 2002. For communities
   in Alaska, Hawaii, and Puerto Rico, the average subsidy per community
   served rose from just over $90, 000 to an estimated $251,000 in 2002.
   Assuming that it would award subsidies to all eligible communities where
   carriers have filed notice of their intent to discontinue service, DOT
   projects that total awards for fiscal year 2002 will be $97 million. 14
   The figure on slide 14 summarizes the EAS program budget history from 1995
   to 2002.

   Several Factors Are Likely to Increase Future Subsidy Requirements

   Several factors* including increasing carrier costs, limited passenger
   revenue, and increasing numbers of eligible communities requiring
   subsidized service* are likely to affect future demands on the EAS
   program.

   Carrier costs for operating 19- seat turboprop aircraft-- the size of
   aircraft most commonly used at EAS- subsidized communities-- have
   increased over time. According to data reported to DOT by the air
   carriers, operating costs associated with the Beech 1900 turboprop-- which
   serves the majority of the subsidized communities in the continental
   United States-- have increased by about 18 percent since 1995, from $589
   per block hour in 1995 to $695 in 2000. 15 Costs associated with operating
   other turboprop aircraft have also increased during the period. We
   reported in 1999 that carrier costs of operating turboprop aircraft rose
   beginning in 1996 because of the costs of compliance with new federal
   regulatory requirements relating to safety on commuter air carriers. The
   figure on slide 16 summarizes the changes in operating costs for the Beech
   1900.

   13 Of that total, Congress provided $13 million in the Department of
   Transportation Appropriations Act for fiscal year 2002, in addition to the
   recurring annual appropriation of $50 million derived from overflight user
   fees. Another $50 million was added in a Department of Defense
   supplemental appropriations act, Public Law 107- 117, following the
   September 11, 2001, attacks. All dollar figures are in constant 2002
   dollars. 14 For locations where carriers have filed notices of intent to
   leave, the subsidies would be retroactive to

   the 91 st day after the date contained in the notification, according to
   DOT officials. 15 Direct operating costs include costs associated with
   pilots, fuel, maintenance, and capital expenses (e. g., leasing costs or
   depreciation). These costs are per block hour, which is a common measure
   of aircraft usage. A block hour begins when the aircraft backs away from
   the gate and ends when the aircraft pulls into the gate at the
   destination.

   GAO- 02- 997R Essential Air Service 7 Carrier costs may increase further
   if trends in the retirement of smaller turboprop aircraft

   continue. Carriers have retired large numbers of 19- seat aircraft from
   their fleets over the past few years. According to data from an industry
   trade association, as of January 1, 1999, U. S. regional carriers operated
   368 19- seat aircraft. As of January 1, 2002, that number had dropped to
   154. The average seating capacity of aircraft in regional service
   increased from 24. 6 in 1995 to 33.5 in 2001. Those larger aircraft*
   especially the *regional jet* aircraft that many carriers are
   incorporating into their fleet* are more expensive than 19- seat aircraft
   to operate. For example, according to data for 2000 from DOT, total
   operating costs for the 30- seat Saab 340 were $780 per block hour, and
   total operating costs for the 50- seat Bombardier CRJ- 100 regional jet
   were $1,212 per block hour.

   EAS- subsidized communities tend to generate limited passenger revenue for
   two fundamental reasons. First, these communities (and the surrounding
   geographic areas) have small populations. Second, of the relatively few
   travelers those areas tend to generate annually, many choose either to
   drive to their destination or to fly to and from other, larger airports (a
   phenomenon commonly referred to as *passenger leakage*). EAS community
   airports often serve less than 10 percent of the local passenger traffic.
   For instance, information provided by airport officials at Watertown, New
   York, indicated that only about 3 percent of local passengers use that
   airport. Most travelers choose to drive to and fly from the airport at
   Syracuse, New York, about 65 miles south of Watertown on Interstate 81.
   Over half of subsidized communities in the continental United States are
   within 125 miles, or roughly 2 hours highway driving time, of a larger
   airport. The figures on slides 17 and 20 summarize the proximity of
   subsidized communities to other service options.

   Passengers drive to other airports to get lower airfares and improved
   service options. For example, one- day advance purchase (i. e., business)
   fares between Syracuse and Los Angeles, as of July 22, 2002, were
   approximately $455 (or about 58 percent) less expensive than those between
   Watertown and Los Angeles. As of July 31, 2002, Watertown was served by a
   single carrier with three daily nonstop flights to Pittsburgh, whereas
   Syracuse* a small hub-- was served by seven different carriers operating
   107 daily nonstop flights to 17 different destinations. Similarly,
   business fares between Beckley, West Virginia (an EAS- subsidized
   community), and Denver were $425 (67 percent) more expensive than those
   available at Charleston, West Virginia (a non- hub 69 miles north of
   Beckley on Interstate 77). As of July 31, 2002, Beckley was served by a
   single carrier operating three daily round trips to two different
   destinations, while Charleston was served by five different airlines
   providing 72 daily nonstop flights to 11 different destinations. In other
   markets, carriers had set prices that may influence leisure travelers at
   EAS communities. For example, average 21- day advance purchase fares
   available for travel between Jamestown, North Dakota (an EAS- subsidized
   community), and Denver were $170 (54 percent) more expensive than
   comparable fares available at Fargo, North Dakota, 99 miles east on
   Interstate 94. Similarly, average 21- day advance purchase fares between
   Devil*s Lake, North Dakota (an EAS- subsidized community), and Chicago
   were $129 (43 percent) more expensive than comparable fares available at
   Grand Forks, 146 miles east. 16 The figures on slides 18 and 19 illustrate
   comparisons of airfares at subsidized and larger airports.

   16 The fares listed for the North Dakota airports represent the average of
   the lowest- available fares obtained on a weekly basis between December 5,
   2001, and May 30, 2002.

   GAO- 02- 997R Essential Air Service 8 However, it is important to note
   that EAS carriers typically do not set the airfares charged for the

   major markets for EAS travelers. Instead, fares are set by the major
   network airlines, such as US Airways and Northwest Airlines, with which
   EAS carriers usually have contractual agreements. Among other things,
   those agreements may specify the terms under which the EAS carriers and
   their major network airline partners agree to share the revenue generated
   at these communities. Depending upon the exact agreement, the EAS carrier
   usually sets fares for travel only in *local*

   markets (i. e., for origin and destination travel between the EAS
   community and the connecting hub, such as between Beckley and Pittsburgh),
   while the major airline sets the fares for travel between the EAS
   community and the key destinations *beyond* the connecting hub (i. e.,
   fares between Beckley and Los Angeles).

   Finally, EAS program costs are also likely to increase because more
   communities may require subsidized service. As noted earlier, since
   September 2001, carriers filed notices to discontinue unsubsidized service
   at 15 additional communities. According to officials at DOT, additional
   small communities will likely lose unsubsidized service in the future*
   especially those served by a single carrier. As of October 2001, there
   were 98 small communities being served by one carrier. Of the 98, 25 have
   smaller populations and lower levels of employment than the typical EAS-
   subsidized community, 21 have lower levels of income per capita, and 35
   have lower levels of manufacturing earnings. 17

   On the other hand, the increase in program costs may be restrained because
   some communities that now receive subsidized service may lose their
   eligibility. The combination of decreased passenger traffic and increased
   subsidy levels means that some communities may exceed the maximum $200
   subsidy per passenger statutory limit for communities within 210 miles of
   a medium- or large- hub airport. Estimating the number of communities
   whose eligibility may be affected is difficult because of uncertainty
   about passenger traffic levels at individual communities. This may be
   particularly true now, given the broad decline in the national economy
   that began early in 2001 and the events of September 11, 2001. Nationally,
   for the period January through July 2002, domestic passenger enplanements
   decreased by nearly 12 percent compared to the same period in 2001. 18 If
   passenger traffic at subsidy- eligible communities in 2002 equals the same
   levels recorded for 2000, we estimate that 11 communities in the
   continental United States will exceed the per passenger subsidy limit. In
   2002, carriers received $11 million to provide subsidized service to those
   communities.

   While total EAS obligations could be reduced if some of those communities
   were dropped from the program, DOT has not always done so. As we reported
   in 2000, before removing a community*s subsidized service, DOT considers
   extenuating circumstances that could have caused a temporary decline in
   passenger traffic. For various reasons (e. g., service interruptions), DOT
   allowed eight communities located within 210 miles of a medium- or large-
   hub community

   17 In addition, some communities may lose service as various air carriers
   retire their turboprop aircraft. For example, Atlantic Coast Airlines,
   Inc., which operates as a United Express and a Delta Connection carrier,
   is planning to become an *all- jet* carrier by the end of 2003. When it
   retired its 19- seat turboprop aircraft in December 2001, it discontinued
   service to two small communities. Other regional carriers, such as
   American Eagle and Continental Express, have also announced plans to
   become *all- jet* carriers. 18 These data cover operations of large air
   carriers only, as reported by the Air Transport Association.

   GAO- 02- 997R Essential Air Service 9 airport to receive subsidized
   service in 1999, even though the subsidies per passenger exceed the

   $200 limit. 19

   Options to Enhance the Long- term Viability of the EAS Program and Some
   Associated Potential Effects

   While the long- term viability of the EAS program could be ensured without
   any changes to the program as long as the Congress continues to fully fund
   it, there are indications that those costs will increase over time,
   particularly as the number of eligible communities requiring subsidized
   service increases. Federal fiscal discipline may require various changes
   to the program. As requested, we identified and evaluated options to
   control cost increases and improve the program*s sustainability. In no
   particular order, they include (1) targeting subsidized service to more
   remote communities, (2) better matching capacity with community use, (3)
   consolidating service to multiple communities into regional airports, and
   (4) changing the form of the federal assistance from carrier subsidies to
   local grants. Each option presents different positive and negative
   effects. The positive effects include lowered federal costs, increased
   passenger traffic at subsidized communities, and enhanced community choice
   of transportation options. Potential negative effects include increased
   passenger inconvenience and the potential negative effect on local
   economies of lost scheduled airline service.

   Targeting Subsidized Service on More Remote Communities To target
   subsidized service to more remote communities, (1) the highway distance
   criteria between EAS- eligible communities and the nearest qualifying
   airport could be increased and (2) the definition of qualifying nearby
   airports could be expanded to include small hubs and nonhubs with jet
   service from at least two competing carriers. Currently, to be eligible
   for EAS- subsidized service, a community must be more than 70 highway
   miles from the nearest medium- or largehub airport. If the distance
   criterion was increased to 125 highway miles and the qualifying airports
   were expanded as described, 44 current EAS- subsidized communities would
   no longer qualify for subsidies, and travelers at those communities would
   need to drive to the nearby larger airport to access air service. The
   figure on slide 23 summarizes the number of communities and passengers
   potentially affected, as well as the potential savings in federal
   subsidies.

   Potential Positive and Negative Effects Limiting subsidized service to
   more remote communities could potentially save the federal government
   $36.6 million annually (in current dollars). This estimate assumes that
   the total subsidies now in effect at the communities that might lose their
   eligibility would not be obligated to other communities, and that those
   amounts would not change over time. On the other hand, the passengers who
   now use subsidized service at those 44 airports-- approximately 229, 000
   in 2000-- would be inconvenienced because of the increased driving
   required to access air service at the nearest hub airport. In addition,
   implementing this option could potentially negatively impact the economy
   of the affected communities. For instance, officials from some
   communities, such

   19 DOT officials note that, while the governing statutes include a $200
   per passenger subsidy cap, they are silent on how that calculation is to
   be made (e. g., using passenger enplanement data for the most recent
   calendar year or using the average of the last 3 years).

   GAO- 02- 997R Essential Air Service 10 as Brookings, South Dakota, claim
   that they are able to attract and retain local businesses

   because of several factors relating to the quality of life there* with one
   important factor being its scheduled air service. 20

   Better Matching Capacity with Community Use Passenger enplanement data
   indicate that relatively few passengers fly in many EAS markets, and that,
   on average, most EAS flights operate with aircraft that are largely empty.
   To better match capacity with community use, air carriers could reduce
   unused capacity, either by using smaller aircraft or by reducing the
   number of flights. Carriers could use smaller aircraft. For instance, at
   Alamogordo, New Mexico, the community chose to seek a waiver from DOT so
   that it could obtain service from a carrier that operates four daily
   departures using a 9- seat aircraft in place of a carrier operating three
   daily departures with a 19- seat aircraft. The figure on slide 24 compares
   the old and new air service at Alamogordo. Another way to better match
   capacity with use is for carriers to reduce the number of daily departures
   at communities where passenger traffic has not responded to increasing
   flight frequencies. For example, since 1995, total passenger traffic
   dropped at 9 of 24 communities where carriers added flight frequencies.

   Potential Positive and Negative Effects Better matching capacity with
   community use could save federal subsidies. For instance, limiting the
   number of daily subsidized departures to three could save federal
   subsidies by reducing carrier costs in some locations. Federal subsidies
   could also be lowered at communities where carriers used smaller* and
   hence less costly-- aircraft. As suggested at Alamogordo, those subsidies
   may be reduced even if the number of daily flight frequencies rises. On
   the other hand, there are a number of potential disadvantages. For
   example, passenger acceptance is uncertain. Representatives from some
   communities, like Beckley and Bluefield, West Virginia, said that
   passengers who are already somewhat reluctant to fly on 19- seat
   turboprops would be even less willing to fly on smaller aircraft. Such
   negative passenger reaction may cause more people to drive to larger
   airports or simply drive to their destinations. Additionally, the loss of
   some daily departures at certain communities would likely inconvenience a
   relatively small number of passengers. Lastly, reduced capacity may have a
   negative impact on the economy of the affected community.

   20 Although scheduled commercial air service is positively correlated with
   local economic activity, we were unable to locate reliable studies that
   describe the extent to which scheduled commercial air service is directly
   responsible for economic development in small communities in the United
   States (i. e., whether air service precedes, follows, or develops
   simultaneously with local economic activity). Various calculations have
   been made estimating the direct and indirect financial contributions that
   air service makes to local communities. But questions arise about the
   relative contributions that scheduled commercial air service makes as an
   effective economic asset to a community. For example, the value of
   scheduled air service to a community may be related to use of that local
   air service compared with the use, availability, and quality of
   alternatives.

   GAO- 02- 997R Essential Air Service 11 Consolidating Subsidized Service
   Now Provided to Multiple Communities into Service at

   Regional Airports As of July 1, 2002, 21 EAS subsidized communities were
   located within 70 highway miles of at least one other subsidized
   community. If subsidized service to each of these communities were
   regionalized, 10 regional airports could serve those 21 communities. The
   figure on slide 25 illustrates the locations of the communities that are
   within 70 highway miles of each other.

   Potential Positive and Negative Effects Regionalizing service to some
   communities could generate federal savings. However, those savings may be
   marginal, because the total costs to serve a single regional airport may
   be only slightly less than the cost to serve two or three neighboring
   airports. For example, DOT provides $1.9 million in annual subsidies to
   Air Midwest, Inc., to serve Watertown, New York, with stops at two other
   EAS- subsidized communities-- Ogdensburg and Massena, New York* before
   arriving at its final destination, Pittsburgh, Pennsylvania. According to
   an official with Air Midwest, the marginal cost of operating the flight
   segments to Massena and Ogdensburg are small in relation to the cost of
   operating the flight from Pittsburgh to Watertown. Another potential
   positive effect is that passenger levels at the proposed regional airports
   could grow because the airline( s) would be drawing from a larger
   geographic area, which could prompt the airline( s) to provide better
   service (i. e., larger aircraft or more frequent departures). There are
   also a number of disadvantages to implementing this option. First, local
   passengers would be inconvenienced since they would likely have to drive
   longer distances to obtain local air service. Moreover, the passenger
   response to regionalizing local air service is unknown. For example, city
   officials at Watertown reported that they believed no one would drive 60
   miles north to Ogdensburg to fly with an EAS carrier because Syracuse is
   roughly the same distance to the south and offers better fares and
   service. Additionally, as with other options, the potential impact on the
   economy of the affected communities is unknown. Regionalizing air service
   has sometimes proven controversial at the local level, in part because
   regionalizing air service would require some communities to give up their
   own local service for the hypothetical benefits of a less convenient
   regional facility. Even in situations where one airport is larger and
   better equipped than others (e. g., where one airport has longer runways,
   a superior terminal facility, and better safety equipment on site), it is
   likely to be difficult for the other communities to recognize and accept
   the benefits of surrendering their local control and benefits.

   Changing Carrier Subsidies into Local Grants Local grants could enable
   communities to match their transportation needs with individually tailored
   transportation options to connect them to the national air service system.
   DOT has been pilot testing local transportation grants to communities. 21
   Through this program, in July 2002, DOT awarded $20 million in grants to
   40 small communities, including 5 EAS- subsidized communities, in part to
   test whether increased flight frequencies, capacity, and/ or marketing at
   those communities could improve service and passenger ridership. For
   instance, DOT awarded $500,000 to Cape Girardeau, Missouri, to support the
   community*s efforts to test the benefits of increased flight frequencies
   at the community airport. According to DOT, nearly all of the 40

   21 The Wendell H. Ford Aviation Investment and Reform Act for the 21 st
   Century (AIR- 21), Public Law 106- 181, established a pilot program
   designed to help smaller communities enhance their air service.

   GAO- 02- 997R Essential Air Service 12 grants awarded involved additional
   financial contributions from the communities themselves,

   and a majority either has or will establish public/ private partnerships
   to increase community participation in the proposed projects. Slide 26
   lists a range of DOT AIR- 21 pilot grants.

   Potential Positive and Negative Effects Local grants would enable
   communities to choose how to meet their transportation needs. Some of
   these choices may be less costly than the current federal subsidies paid
   to air carriers. In addition, depending on the option, passenger traffic
   could grow because, in theory, the community could choose the most
   appropriate way for people in that community to access the national air
   service system. There are also a number of disadvantages to implementing
   this option. First, to administer the local grants, an administrative
   mechanism would need to be created and funded. Second, the passenger
   response to any change in access to air service is unknown. In addition,
   depending on the option implemented, local passengers could be
   inconvenienced. The unknown passenger response, coupled with the
   possibility of additional passenger inconvenience, could potentially
   result in a greater passenger leakage. Additionally, the resulting impact
   on the economy of the affected communities is unknown.

   Concluding Observations

   The EAS program appears to be meeting its statutory objective* to ensure
   continued air service to small communities. However, information we
   developed indicates that relatively few people who travel to or from some
   of these communities use the federally- subsidized air service. Many
   travelers at some of these communities have alternatives to their local
   airports. Their decisions to use those alternatives* whether another,
   larger airport or simply the highway system-- are economically and
   financially rational. Changing those individuals* behavior would likely
   require significant changes in the fares and service provided at small
   community airports. Increasing EAS- subsidized communities* stakes in
   their local service would seem to be beneficial. Yet decisions regarding
   fares and service are shaped by market forces and often made by
   corporations that are not party to EAS contractual agreements with DOT--
   major U. S. network airlines. As a result, we believe that the program*s
   costs will rise in the short run (particularly as air carriers file
   notices to discontinue service at various communities), and that the
   number of passengers who use subsidized service will continue to be
   relatively small. To the extent that the program must operate within
   certain fiscal constraints, we identified some directions that the
   Congress may wish to consider to redefine the circumstances under which
   communities can receive subsidized air service, as it has done in the
   past, or to fundamentally change the form of the federal assistance
   provided to these communities for air service. Any changes to the
   program*s structure or objective will affect each EAS- subsidized
   community differently, depending on such characteristics as its distance
   to alternate, larger airports. The Congress will need to weigh the effects
   of each option against the program*s overall goal.

   Scope and Methodology

   To describe the current state of the EAS program and how it has changed
   since 1995, we analyzed information from DOT on air service levels (e. g.,
   the number of communities served, passengers enplaned, and available
   seating capacity in each market), subsidy rates, and the EAS program*s
   budget. To identify and describe major factors that may affect potential
   future subsidy requirements, we used quantitative and testimonial
   information from DOT, air carriers, and commercial aviation databases with
   which GAO has annual contracts (e. g., BACK Aviation Solutions). We
   conducted case studies at five EAS- subsidized communities in the
   continental

   GAO- 02- 997R Essential Air Service 13 United States to illustrate these
   factors. Those communities were Beckley and Bluefield, West

   Virginia; Watertown, New York; Brookings, South Dakota; and Wolf Point,
   Montana. We selected those communities because they varied in passenger
   traffic, carrier subsidies, geographic locations, and other factors. To
   identify and evaluate options that might enhance the long- term viability
   of the EAS program and their potential related effects, we interviewed DOT
   officials and representatives from various industry groups, EAS
   communities, and major and regional air carriers, and analyzed information
   from those and other data sources. Because of time constraints, we did not
   analyze the reliability of DOT*s passenger enplanement data or carriers*
   financial information.

   - - - - As arranged with your offices, we will provide copies to the
   Honorable Norman Mineta, Secretary of Transportation; air carriers that
   provide subsidized EAS operations; and other interested parties. We are
   sending copies of this report to interested congressional committees. We
   will also send copies to others upon request. In addition, the report will
   be available at no cost on the GAO Web site at http:// www. gao. gov.

   We provided a draft of this report to DOT for its review. DOT officials
   provided technical and clarifying comments, which we incorporated as
   appropriate. We conducted our review between March and August 2002 in
   accordance with generally accepted government auditing standards.

   If you have any questions about this report, please contact me or Steve
   Martin at 202- 512- 2834. Key contributors to this assignment are listed
   in enclosure II.

   JayEtta Z. Hecker Director, Physical Infrastructure Issues

   GAO- 02- 997R Essential Air Service 14 List of Congressional Committees

   The Honorable Patty Murray Chairman The Honorable Richard Shelby Ranking
   Minority Member Subcommittee on Transportation Committee on Appropriations
   United States Senate

   The Honorable Ernest F. Hollings Chairman The Honorable John McCain
   Ranking Minority Member Committee on Commerce, Science, and Transportation
   United States Senate

   The Honorable John D. Rockefeller, IV Chairman The Honorable Kay Bailey
   Hutchinson Ranking Minority Member Subcommittee on Aviation Committee on
   Commerce, Science, and Transportation United States Senate

   The Honorable Harold Rogers Chairman The Honorable Martin Olav Sabo
   Ranking Minority Member Subcommittee on Transportation Committee on
   Appropriations House of Representatives

   The Honorable Don Young Chairman The Honorable James Oberstar Ranking
   Minority Member Committee on Transportation and Infrastructure House of
   Representatives

   GAO- 02- 997R Essential Air Service 15 The Honorable John L. Mica

   Chairman The Honorable William O. Lipinski Ranking Democratic Member
   Subcommittee on Aviation Committee on Transportation and Infrastructure
   House of Representatives

   Enclosure I

   GAO- 02- 997R Essential Air Service 16

   1 Commercial Aviation

   Options to Enhance the Long- term Viability of the Essential Air Service
   (EAS) Program

   Briefings to Congressional Committees, August 22- 29, 2002

   Enclosure I

   GAO- 02- 997R Essential Air Service 17

   2 Overview

   * Objectives  Results in brief  Background  Review results  Summary 
   Scope and methodology

   Enclosure I

   GAO- 02- 997R Essential Air Service 18

   3 Objectives

    What is the status of the EAS program, and how has it changed since
   1995?

    What major factors may affect potential future subsidy requirements?

    What are some options that might enhance the long- term viability of the
   EAS program and their potential effects?

   Enclosure I

   GAO- 02- 997R Essential Air Service 19

   4 Results in Brief

    As of July 1, 2002, the EAS program subsidized air service to 79
   communities in the continental U. S. and 35 in Alaska, Hawaii, and Puerto
   Rico* a net increase of 4 since 1995 for the continental U. S. DOT was
   incurring subsidy liabilities to carriers serving another twelve
   communities. Total FY 2002 awards may approach $97 million.*

    Several factors* including increasing carrier costs, limited passenger
   revenue, and increasing numbers of eligible communities requiring
   subsidized service* are likely to affect future subsidy requirements.

    We identified four options to enhance the long- term viability of the
   EAS program. Potential effects of these options include decreasing federal
   costs, increasing passenger traffic, and creating community choice on
   transportation options. Potential negative effects also exist, such as
   increased passenger inconvenience.

   *All dollar figures are expressed in constant 2002 dollars.

   Enclosure I

   GAO- 02- 997R Essential Air Service 20

   5 Background: EAS Program

   Goals

    When Congress deregulated the airline industry in 1978, it was concerned
   that small communities might lose access to the national air service
   system. Therefore, it provided for a continuation of air transportation to
   all cities with air service provided by a certificated carrier as of
   October 24, 1978.

    Congress established the EAS program to carry out this mandate by
   providing direct subsidies to air carriers to serve eligible small
   communities they would not serve without being subsidized. The Department
   of Transportation (DOT) administers the EAS program.

   Enclosure I

   GAO- 02- 997R Essential Air Service 21

   6 Background: Small Communities* Air

   Service and Economic Activity

   Community type

   Number of communities Population Employment

   Income per capita

   Manufacturing earnings

   Carriers serving community

   Daily departures Typical number of Average county

   EAS- subsidized communities (continental U. S.)

   Nonsubsidized small communities* (continental U. S.)

   79 202

   52, 352 126,813

   29, 638 77, 558

   $21,997 $25,147 $344,579

   $127, 943 2 1

   6 3

   *Nonsubsidized small communities are those served by airports that are
   defined as *nonhubs* by statute (49 USC 41731). (See GAO- 02- 432 for more
   Information on air service to small communities.) Source: GAO analysis of
   1999 economic data from the Bureau of Economic Analysis and airline
   schedule data from the Kiehl Hendrickson Group, as of October 2001. Number
   of EAS communities is as of July 1, 2002.

   Enclosure I

   GAO- 02- 997R Essential Air Service 22

   7 Background: EAS Program Service

   and Eligibility Criteria

    Received service in October 1978

    Are located more than 70 highway miles from the nearest medium or large
   hub

    Require a subsidy of less than $200 per passenger (except for
   communities more than 210 miles away from a medium or large hub)
   Communities would be eligible for subsidized air service under three

   general conditions:

   Enclosure I

   GAO- 02- 997R Essential Air Service 23

   8 Background: EAS Program Service

   and Eligibility Criteria (Cont*d)

    Service to a medium or large hub airport with not more than one
   intermediate stop*

    Service with aircraft having at least 15 passenger seats (e. g., Beech
   1900, Embraer 110, Jetstream 31)

    Two daily round trips

    Service with pressurized aircraft for flights over 8000 feet

    Flights at *reasonable* times at prices that are *not excessive*
   compared to generally prevailing prices

    Service to Alaskan communities subject to different requirements Current
   law requires that essential air service generally include:

   *A large hub enplanes at least 1 percent of all U. S. passengers, a medium
   hub 0.25 to 0.99 percent.

   Enclosure I

   GAO- 02- 997R Essential Air Service 24

   9 Background: Subsidy Calculation

   (Direct and indirect expenses: e. g., fuel and oil, maintenance,
   insurance, salaries, leasing)

   (e. g., passenger revenue, freight revenue)

   Projected operating expenses

   Projected operating revenues

   Profit element

   (5% of operating expenses)

   Carrier subsidy

   Note: Air carriers provide the data for the subsidy calculations. DOT
   officials state that they confirm reasonableness of information submitted.

   Enclosure I

   GAO- 02- 997R Essential Air Service 25

   10 What Is the Status of the EAS Program and How Has

   It Changed Since 1995?

    As of July 1, 2002, the EAS program subsidized air service to 79
   communities in the continental U. S. and 35 in Alaska, Hawaii, and Puerto
   Rico* a net increase of 4 since 1995 for the continental U. S. DOT was
   incurring subsidy liabilities for carriers serving another 12 communities.

    Five regional carriers serve the majority of the EAS markets in the
   continental U. S.

    Since 1995, the budget authority for the EAS program has increased from
   $37 million to $113 million. Since 1995, the average subsidy per
   continental U. S. community has increased from $424, 000 to $828, 000.
   Total FY 2002 awards may approach $97 million.

   Enclosure I

   GAO- 02- 997R Essential Air Service 26

   11 EAS Program Status

   (as of July 1, 2002)

    114 subsidized communities (Tentative additional communities*: 12)

    Total annual subsidies awarded: $74.2 million** (Tentative additional
   subsidies: $11.6 million)

    Estimated average annual subsidy per community: $828, 000 (continental
   U. S.), $251, 000 (AK, HI, PR)

    EAS carriers: 13 (continental U. S.), 14 (AK, HI, PR)

    Most common aircraft type: 19- seat Beech 1900 (continental U. S.) and
   4- 9 seat Cessna (AK, HI, PR)

   *New communities defined as subsidy eligible by statute where carriers
   have filed notice to discontinue unsubsidized service. ** Fourteen of the
   114 subsidized communities are under rate negotiation with DOT. The
   estimated additional annual subsidies to be awarded to carriers serving
   the 14 communities is $5. 1 million. DOT expects to award an additional
   $6. 5 million in retroactive subsidies under DOT Order 2002- 2- 13.

   Enclosure I

   GAO- 02- 997R Essential Air Service 27

   12 Top Five EAS Carriers

   (as of July 1, 2002)

   Carrier 2001- 2002

   subsidies (millions)

   Percentage of EAS subsidy awards in the continental U. S.

   Number of EAS communities

   served Average

   subsidy per community

   2002 passengers

   Percentage of EAS passengers in the

   continental U. S. Average subsidy per

   passenger Great Lakes

   Big Sky Projected

   Colgan Mesa Corporate Subtotal

   Source: GAO analysis of data from DOT. $22.4

   $13.2 $8. 4 $6. 2 $5. 5 $55.7

   34. 2% 20. 5% 12. 8%

   9.6% 8.5% 85. 6%

   29 15

   7 9 7 67

   $770, 904 $880, 883 $1, 195, 946

   $693, 737 $785, 855

   258,000 79, 000 98, 000 65, 000 79, 000 579,000

   35% 11% 13%

   9% 11% 79%

   $87 $167

   $85 $95 $70

   Enclosure I

   GAO- 02- 997R Essential Air Service 28

   13 EAS Service Changes

   (as of July 1, 2002)

   1995 1999 2002 (estimated) Percentage total change

   Number of subsidized communities Median daily passengers enplaned per
   community

   Average subsidy per community Average subsidy per passenger

   Number of subsidized communities Median daily passengers enplaned per
   community

   Average subsidy per community Average subsidy per passenger

   Service elements - Alaska, Hawaii, Puerto Rico

   75 11 $423, 803

   $79

   Service elements - continental U. S.

   31 2 $90,403

   $13 68

   8 $668, 448

   $133 28

   2 $97,966

   $42 79

   10* $828, 474

   $229* 35

   1* $251, 219

   $99* 5.3%

   -9. 1% 95. 5% 189.9%

   12. 9% -50.0% 177.9% 661.5%

   *Passenger estimates for 2002 are based on passenger enplanements for
   2000. Source: GAO analysis of data from DOT and FAA.

   Enclosure I

   GAO- 02- 997R Essential Air Service 29

   14 EAS Budget Since 1995

   0 20

   40 60

   80 100

   120 1995 1996 1997 1998 1999 2000 2001 2002

   *Outlays and obligations are projected. Source: GAO analysis of data from
   DOT.

   Millions (2002 constant dollars) Budget authority Outlays Obligations

   Projections

   Enclosure I

   GAO- 02- 997R Essential Air Service 30

   15 What Major Factors May Affect Potential

   Future Subsidy Requirements?

    Increased aircraft operating costs

    Limited revenue caused by EAS carriers* limited ability to capture local
   passenger traffic:

    Passengers may choose to travel from larger airports.

    Passengers may choose other transportation modes.

    Additional eligible communities may require subsidized service.

   Enclosure I

   GAO- 02- 997R Essential Air Service 31

   16 Increased Carrier Costs

   0 100

   200 300

   400 500

   600 700

   800 1995 1996 1997 1998 1999 2000 Beech 1900 operating costs per block
   hour* (2002 constant dollars)

   *Block hours are a common measure of aircraft usage. A block hour begins
   when the aircraft backs away from the gate and ends when the aircraft
   pulls into the gate at the destination.

   Source: GAO analysis of selected air carrier data from DOT.

   Enclosure I

   GAO- 02- 997R Essential Air Service 32

   17 Limited Revenue: Passengers

   May Choose Larger Airports Source: GAO analysis.

   Many EAS subsidized airports are relatively near larger airports. Larger
   airports may have more carriers and therefore more competition, which can
   result in lower fares.

   EAS and Air Alternatives

   Within 125 driving miles of all hubs or nonhub Within 125 driving miles of
   low- fare service and all hubs or nonhub Further than 125 driving miles
   from low- fare service and all hubs or nonhub

   Enclosure I

   GAO- 02- 997R Essential Air Service 33

   18 Limited Revenue: Passengers May

   Choose Larger Airports

   0 200

   400 600

   800 1000

   1200 1400

   Orlando Las Vegas Los Angeles Denver New Orleans Actual fare ($)

   Watertown, NY (EAS) Syracuse, NY Destination

   Business fares may be lower at larger airports.

   Note: Business fares based on 1- day advance fare purchase. Source: GAO
   analysis of fare data from www. orbitz. com (7/ 22/ 02).

   Enclosure I

   GAO- 02- 997R Essential Air Service 34

   19 Limited Revenue: Passengers May

   Choose Larger Airports (Cont*d)

   0 100

   200 300

   400 500

   600 700

   800 Phoenix Las Vegas Denver Minneapolis Chicago Average fare ($)*

   North Dakota EAS community North Dakota Non- EAS community Destination

   *Average leisure fares from two North Dakota EAS airports compared to
   fares available at Bismarck or Grand Forks, ND. Source: GAO analysis of
   data from the North Dakota Aeronautics Commission as of June 11, 2002.

   Leisure fares may be lower at larger airports.

   Enclosure I

   GAO- 02- 997R Essential Air Service 35

   20 Limited Revenue: Passengers May

   Choose Other Transportation Modes Source: GAO analysis.

   People may choose to drive or take rail service to their final
   destination. 42 EAS subsidized communities have immediate access to
   Amtrak, interstate highways, or both.

   EAS and Ground Alternatives

   Within 20 driving miles of Amtrak Within 20 driving miles of interstate
   Within 20 driving miles of both Further than 20 driving miles from both

   Enclosure I

   GAO- 02- 997R Essential Air Service 36

   21 Additional Eligible Communities

   May Require Subsidized Service

    Since September 11, 2001, carriers at 15 additional eligible communities
   filed notice to discontinue unsubsidized service. Projected subsidies
   required: $14.5 million.*

    Additional eligible communities may require subsidies in the future. Of
   the 98 small communities with air service from only one carrier:**

    25 have smaller populations and lower levels of employment than the
   average EAS- subsidized community.

    21 have lower levels of income per capita than the average EASsubsidized
   community.

    35 have lower levels of manufacturing earnings than the average EAS-
   subsidized community.

   *Projected subsidies are the average subsidy per community (based on most
   current orders) multiplied by the number of additional subsidy- eligible
   communities post- September 2001 or DOT estimates. ** Data is as of
   October 2001. See GAO- 02- 432. Source: GAO analysis of data from the
   Geospatial and Statistical Data Center.

   Enclosure I

   GAO- 02- 997R Essential Air Service 37

   22 What Are Some Options That Might Enhance the

   Long- term Viability of the EAS Program and Their Potential Related
   Effects?

    Target subsidized service to more remote communities

    Better match capacity with community use

    Consolidate service to multiple communities into regional airports

    Change carrier subsidies into local grants

    Summary: each option potentially would have different effects.

   Enclosure I

   GAO- 02- 997R Essential Air Service 38

   23 Option: Target Subsidized Service

   to Remote Communities

   Mileage EAS communities

   no longer meeting eligibility criteria (continental U. S.)

   Passengers (estimated

   CY 2000) Current annual

   EAS subsidy

   <70 driving miles** <100 driving miles <125 driving miles <150 driving
   miles

   Cumulative outcomes

   13 25 44 55

   67, 669 125,967 229,277 280,539

   $11, 815,476 $22, 685,589 $36, 596,430 $45, 795,085

   Note: A small hub enplanes 0. 05 to 0. 249 percent of all U. S.
   passengers, and a nonhub less than 0.05 percent. *Service data for nonhubs
   is from Kiehl- Hendrickson schedule data (October 2001). ** Only small and
   nonhubs with jet service from two or more carriers are included in
   analysis. Source: GAO analysis of data from DOT.

   Increase the highway distance criteria for eligibility to focus on the
   most remote communities and expand the qualifying nearby airports to
   include small hubs and non- hubs with jet service from two or more
   competing carriers.*

   Enclosure I

   GAO- 02- 997R Essential Air Service 39

   24 Option: Better Match Capacity

   with Community Use

    Encourage communities to seek a waiver from the Secretary of
   Transportation of the requirement that service must be provided with
   aircraft carrying at least 15 seats. Alamogordo, NM, example:

    Reduce unused capacity at communities where carriers have added daily
   flight frequencies. Since 1995, carriers added flight frequencies at 24
   communities in the continental U. S., and passenger traffic dropped at 9.

   Carrier Mesa

   (2000- 2002 data) Rio Grande

   (projected data) Percentage change

   Aircraft type Daily flights Subsidy

   Beech 1900 3 $923, 789

   Cessna Caravan 4 $849, 235

   -36. 8% 33. 3%

   -8. 1%

   (available seats) (19 seats) (9 seats) *Change in the total seats per day.
   Source: GAO analysis of data from DOT.

   *

   Enclosure I

   GAO- 02- 997R Essential Air Service 40

   25 Option: Consolidate Service to Multiple

   Communities into Regional Airports Source: GAO analysis.

   21 EAS- subsidized communities are located within 70 highway miles of at
   least one other EASsubsidized community. If these 21 communities were
   consolidated, the result would be10 regional EASsubsidized airports. All
   others

   EAS airports within 70 driving miles

   Enclosure I

   GAO- 02- 997R Essential Air Service 41

   26 Option: Change Carrier

   Subsidies into Local Grants

    Moab, UT, community- based marketing ($ 250,000)

    Cape Girardeau, MO, increased frequencies ($ 500, 000)

    Mason City, IA, revenue guarantee ($ 600, 000)

    Casper/ Gillette, WY, aircraft purchase ($ 500, 000)

    Baker City, OR, Sky Taxi charter service ($ 300,000)

    Scottsbluff, NE, start- up commuter carrier ($ 950,000)

    Binghamton, NY, equipment upgrade to regional jet ($ 500,000)

    Meridian, MS, increased flight frequency and hub access ($ 500,000)

    Hailey, ID, air carrier revenue guarantees ($ 600,000)

    Reading, PA, airport shuttle service ($ 470, 000) Local grants could
   allow small communities to choose a variety of ways to

   meet local transportation needs.

   Selected DOT AIR- 21 pilot grants:

   Enclosure I

   GAO- 02- 997R Essential Air Service 42

   27 Summary: Potential Effects

   Less cost Community

   choice Increased

   passenger traffic

   Increased passenger

   leakage Unknown

   economic impact on community

   Unknown passenger acceptance

   Increased passenger inconvenience

   Target remote communities

   Better match capacity with use

   Consolidate to regional airports

   Local grants

   Admin. Structure

   needed

   Note: The above table does not include all potential effects for each
   option listed. In addition, the net effect of each option above is
   indeterminable. Source: GAO analysis

   Enclosure I

   GAO- 02- 997R Essential Air Service 43

   28 Scope and Methodology

    To describe the current status of the EAS program budget and service,
   and how it has changed over time, GAO used quantitative and testimonial
   information from DOT, air carriers, and commercial aviation databases with
   which GAO has annual contracts.

    To identify and describe the factors that may affect future subsidy
   requirements, GAO used quantitative and testimonial information from DOT,
   air carriers, and commercial aviation databases with which GAO has annual
   contracts. To illustrate the factors, we conducted case studies at five
   EASsubsidized communities in the continental U. S., chosen by variation in
   passenger traffic, subsidy amounts, and geographic location.

   We conducted our work between March and August 2002 in accordance with
   generally accepted government auditing standards.

   Enclosure I

   GAO- 02- 997R Essential Air Service 44

   29 Scope and Methodology

   (Cont*d)

    To identify and evaluate options to enhance the long- term viability of
   the EAS program, including ways to decrease carrier costs and increase
   passenger demand, and their potential effects, we analyzed cost and
   revenue data from DOT and air carriers, and interviewed DOT officials and
   representatives from various industry groups, EAS communities, and major
   and regional air carriers.

   Enclosure II

   GAO- 02- 997R Essential Air Service 45

   GAO Contacts and Staff Acknowledgments GAO Contacts

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

   Acknowledgments

   In addition to those named above, Triana Bash, David Hooper, Patty Hsieh,
   John Mingus, Ryan Petitte, and Alwynne Wilbur made key contributions to
   this report.

   (544035)
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