Commercial Aviation: Factors Affecting Efforts to Improve Air	 
Service at Small Community Airports (17-JAN-03, GAO-03-330).	 
                                                                 
The airline industry, facing unprecedented financial losses as a 
result of the economic downturn and the terrorist attacks, has	 
taken steps to minimize losses, including reducing or eliminating
service to some small communities. In March 2002, GAO reported	 
that small communities had almost 20 percent fewer departures in 
October 2001, as compared to October 2000. GAO was asked to	 
follow up on that work by examining the challenges small	 
communities face in attracting and keeping the air service they  
desire and what steps they have taken to overcome these 	 
challenges.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-330 					        
    ACCNO:   A05898						        
  TITLE:     Commercial Aviation: Factors Affecting Efforts to Improve
Air Service at Small Community Airports 			 
     DATE:   01/17/2003 
  SUBJECT:   Air transportation operations			 
	     Airline industry					 
	     Airports						 
	     Regional development programs			 
	     DOT Essential Air Service Subsidy			 
	     Program						 
                                                                 
	     DOT Small Community Air Service			 
	     Development Pilot Program				 
                                                                 

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GAO-03-330

Report to Congressional Requesters

United States General Accounting Office

GAO

January 2003 COMMERCIAL AVIATION

Factors Affecting Efforts to Improve Air Service at Small Community
Airports

GAO- 03- 330

Small communities face a range of fundamental economic challenges in
obtaining and retaining commercial passenger air service. The smallest of
these communities typically lack the population base and level of economic
activity that would generate sufficient passenger demand to make them
profitable to air carriers. While larger communities in this group may
have less difficulty in sustaining a base level of service, they may not
be able to attract additional carriers to provide greater choice and lower
fares. Smaller communities located near larger airports may also face
reduced demand because passengers choose to use the larger airport with
lower fares or more choices for flights. These communities also have
difficulty because the airline industry is in turmoil, making less
profitable operations increasingly vulnerable.

Communities have taken a variety of steps to try to obtain or improve air
service, such as marketing to increase passengers* demand for local
service or offering financial incentives to airlines to attract new or
enhanced service. At communities GAO studied in depth, financial
incentives were most effective in attracting new service. However, the
additional service often ceased when incentives ended. Longer- term
sustainability may rest on a community*s commitment to making air service
a priority.

COMMERCIAL AVIATION

Factors Affecting Efforts to Improve Air Service at Small Community
Airports

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. Highlights of GAO- 03- 330, a report to

Congressional requesters.

January 2003

The airline industry, facing unprecedented financial losses as a result of
the economic downturn and the terrorist attacks, has taken steps to
minimize losses, including reducing or eliminating service to some small
communities. In March 2002, GAO reported that small communities had almost
20 percent fewer departures in October 2001, as compared to October 2000.
GAO was asked to follow up on that work by examining the challenges small
communities face in attracting and keeping the air service they desire and
what steps they have taken to overcome these challenges.

Page i GAO- 03- 330 Small Community Air Service 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 Contents

Page ii 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 LowDemand 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 iii 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 1 GAO- 03- 330 Small Community Air Service

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.

United States General Accounting Office Washington, DC 20548

Page 2 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
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. Results in Brief

Page 3 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 4 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 5 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
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. Background

Page 6 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 perpassenger dollar limit applies). For additional
information on the EAS program, see GAO- 02- 997R.

Page 7 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
air service center on two main issues*( 1) limitations created by having a
small population base from which to draw passengers and (2) an airline
industry that, for the most part, is losing money and seeking ways to
return to profitability. In economic terms, these challenges can be
understood in terms of demand (the number of passengers, the level of
service they desire, and the price they are willing to pay to obtain it)
and supply (the potential providers and their costs in providing the
service). A small population base may not generate sufficient demand to
attract or retain competitive air service because the demand may be too
low to generate a profit for airlines. As a result, the service that small
communities obtain often does little to stimulate demand. Instead, if the
community is located within driving distance of a larger airport,
residents may forgo the local service and drive to a larger airport, where
they have more choices and often pay lower fares. While small communities
have reported that limited service is a long- standing problem, it has
been exacerbated by the second main issue* the current financial condition
of most major U. S. airlines. Hit with declining revenues brought on by
the economic downturn and events of September 11, most carriers have taken
steps to minimize losses and cut costs. The airlines use sophisticated
computer models to help them identify whether certain markets can be
served profitably. These proprietary models take into account such
considerations as the carrier*s operating costs, estimated passenger
traffic, and competition in the market (including the type of aircraft
competitors Small Communities

Face Challenges in Sustaining Desired Levels of Air Service

Page 8 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.

The demand- related challenges that small communities face are linked to
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 lowfare carrier. Challenges Created
by

Limited Demand

Page 9 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 10 GAO- 03- 330 Small Community Air Service

Table 1: Key Year 2000 Data for the 12 Small Communities We Studied City
State County

population Employment

(total full and part time) Per capita

income Manufacturing earnings Number of

carriers Enplanements Awarded

DOT 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 11 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

Against the backdrop of relatively limited demand, small communities face
an additional set of challenges in that the nation*s air carriers* the
suppliers of the service* are facing considerable problems in operating
profitably. Carriers are for- profit entities that need to recoup their
costs and earn a profit. But in 2001 and 2002, the major airlines
generally did not do so. Losses were in excess of $6 billion in 2001, and
Wall Street analysts expected losses to exceed $8 billion in 2002. Just 2
years ago, most major U. S. carriers were earning profits.

One reason for the lack of profitability is a downturn in passenger
revenues. Between June 2001 and June 2002, six major U. S. network
airlines experienced drops in revenue passenger miles of between 8 and 20

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. Small Communities Are

Vulnerable to Carrier CostCutting

Page 12 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 13 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 an
air service improvement program, efforts tended to fall into three main
categories. Over 75 percent of communities undertook some sort of study,
such as examining the potential demand for new or enhanced air service. In
addition, 78 percent conducted some sort of marketing activity to educate
the public about the air service available or to inform carriers about
potential for new or expanded service opportunities. Finally, 45 percent
of the communities offered some sort of financial incentive to encourage
carriers to provide the new or additional service. Small hub airports were
slightly more likely than nonhub airports to implement these three types
of efforts (see table 2). To assist readers* understanding of the economic
effect of various programmatic or policy mechanisms to attract

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. Air Service

Improvement Efforts Fall into Three Main Categories, but Financial
Assistance Has Proven Most Effective

Page 14 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 (81 airports)

Small hub airports (17 airports)

Combined total (98 airports) Type of effort Number Percent of

total Number Percent of total Number Percent of

total

Studies a 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.

Of the 98 airports we contacted, 75 reported conducting a study of their
air service or participating in a multi- airport study. Studies covered
such topics as potential demand for air service, types and levels of
service desired by the community, extent of leakage to other airports, and
barriers the community may need to overcome. These studies emanated from a
variety of sources: Studies Aid in Determining

Communities* Air Service Needs

Page 15 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.

Of the 98 airports we contacted, 76 reported using some form of marketing
to try to increase potential passengers* awareness of the air service or
to try to inform carriers about the airport in an effort to attract new
air service. The amount spent annually on these activities varied from a
few thousand dollars to several hundred thousand dollars at some of the
small hub airports. These efforts took different forms, such as the
following:

 Some communities developed basic advertising campaigns. For example, the
Chamber of Commerce in Paducah, Kentucky, implemented a *Buy

Local, Fly Local* advertising campaign, which included newspaper, radio,
and television ads along with a billboard campaign.

 Chattanooga, Tennessee, implemented a marketing incentive program. It
dedicated funds to marketing a carrier*s new or enhanced service. The
Chattanooga airport provides funds to carriers designated specifically for
marketing. For each new destination, new entrant carriers receive $50,000,
and incumbent carriers receive $30,000.

 Some communities made presentations to airlines to try to obtain new or
additional service. For example, the Olympia (Washington) Regional
Marketing Efforts Help to

Inform the Community of Air Service

Page 16 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 17 GAO- 03- 330 Small Community Air Service

Forty- four of the airports we contacted had created a financial incentive
for a carrier to enter a market or to enhance the level of service already
provided. Financial incentives all share the same basic characteristic*
they mitigate some of the financial risk by providing a carrier with
greater assurance about the financial viability of the service being
provided. In practice, the incentives take a number of different forms
with varying levels of complexity (see table 3). For example, in 2002, the
community of Lancaster, Pennsylvania paid a subsidy of $195,000 to Colgan
Air to offset some of the airline*s costs to begin providing service to
the community. Ski communities in Colorado, Montana, and Wyoming provided
airlines with revenue guarantees* payments to the airlines if revenues
fell short of targets* in exchange for additional flights during the ski
or summer tourist season. Stockton, California set up a travel bank* funds
businesses pledged to use in the future to purchase tickets on the new
service. Participating businesses will have 3 years to use these funds for
travel; and at the end of the period, any unused funds will be given to
the airline. The complexity of these programs varies in part due to the
number of participants. For example, while airport officials can take
action to reduce airport fees, subsidy or revenue guarantee programs may
require government assistance, and travel banks require cooperation from
many community businesses. See appendix III for information on the type of
programs used at the 98 airports we contacted. Financial Incentives

Provide Carriers With Greater Assurance for Making a Profit

Page 18 GAO- 03- 330 Small Community Air Service

Table 3: Major Types of Financial Incentive Programs Prevalence among
nonhub

airports studied (total = 81)

Prevalence among small hub airports studied

(total = 17) Type of financial incentive Description Number Percent of

total Number Percent of total

Reduced airport fees Airport reduces fees charged to carriers*

landing fees, lease rates, or fuel flowage fees in exchange for air
service. (This is often only one element of an air service improvement
program.)

10 12% 7 41% Subsidies Financial assistance to a carrier assists with

start- up, operating or other costs. Carrier may receive a set amount per
period or reimbursement for expenses incurred, sometimes up to a cap.

10 12% 1 6% Revenue guarantees Community and carrier officials set revenue

targets and communities pay carriers only if revenue from operations does
not meet agreed- upon target. Payments are often capped.

9 11% 3 18% Travel bank Businesses or individuals pledge future travel

funds to a carrier providing new or expanded air service. Travel funds are
deposited in an account, administered by a business entity (such as the
Chamber of Commerce) and pledging businesses draw against these funds
(often using credit card supplied for this purpose) to purchase tickets.

4 5% 3 18% 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 19 GAO- 03- 330 Small Community Air Service

We studied 12 communities that had taken a variety of actions to improve
air service; all but 1of the 12 communities instituted some form of
financial incentive program for the carrier to attract additional service.
19 All of these communities had undertaken some combination of studies or
marketing in the past. However, the officials at many of these airports
pointed out that while studies provided useful information about
passengers* demand for service and marketing is useful for informing
passengers about the air service, financial incentives were the most
effective tool to attract new air service. According to an official with
the airport in Eugene, Oregon, for example, the airport conducted studies
and marketing, but it did not attract additional air service until the
community eventually implemented a travel bank program. As figure 1 shows,
the four small hub communities implemented varying financial incentives:
travel banks, a revenue guarantee, and a model in which the airport
provided the ground crew for a carrier*s operation.

19 See app. IV for a more detailed description of each community*s
program. Analysis of 12 Projects

Indicates Financial Incentives Are Key to Increasing Service, but No
Guarantee of Success

Page 20 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 21 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 22 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 23 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
statesubsidized 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 24 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
community confronts unique factors that could affect its air service
improvement efforts, success in starting a program and improving its air
service is predicated in part on the community*s size. Simply put, smaller
communities have fewer potential passengers to sustain service. However,
size is largely beyond a community*s control. We identified two other
factors, more directly within a community*s control, that were important
for success. The first, the presence of a catalyst for change, was
particularly important in getting the program started so that the
sustainability of enhanced service could be tested. The catalyst* normally
state, community, or airport officials* provides the critical impetus to
recognize air service deficiencies and begin a program for change.
However, the long- term sustainability of any air service appears related
more to a second factor* a community consensus that air service is a
priority. This second factor involves recognizing that enhanced air
service is likely to come at a price and developing a way in which the
community agrees to participate. We did not find indicators that
communities broadly supported air service development in a number of the
communities we studied (see fig. 3). Catalyst and

Community Commitment Are Important Factors in Developing Successful
Programs

Page 25 GAO- 03- 330 Small Community Air Service

Figure 3: Factors Present in the 12 Communities We Studied

All of the communities we studied had a catalyst or driving force behind
their air service improvement efforts. These individuals recognized the
need for air service improvements and led the program for change. Not all
small communities or airports had such a change agent. Several airport
managers we spoke with during our study said they had not taken any steps
to improve air service. Some said that they had no local funds for air
service development, and some did not know what steps they should take to
help improve demand for or supply of air service.

Some of the catalysts were state aviation or economic development
officials spearheading air service improvement efforts on a broad scale
Most Communities Had a

Catalyst for Change

Page 26 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.

Communities must be committed to supporting any new or enhanced air
service. While this element can be difficult to quantify, indicators do
exist. For example, the ability of a community to pledge funds for future
air travel as a part of a travel bank demonstrates its commitment to air
service. This pledge provides the carrier with guaranteed demand and
revenue for the life of the travel bank and may change passengers* travel
habits by encouraging passengers to try the new service. Eugene airport
and community officials said that broad- based community support for the
air service is more important than the total funds collected for the
travel bank. Eugene*s airport has used travel banks to attract service to
two new

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

the Priority of Service Underscores Commitment

Page 27 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 28 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
detailed review at 12 of those* coupled with our other work on air service
to small communities and the EAS program, have potential implications for
ongoing federal efforts to help small communities improve their air
service. In fiscal year 2002, DOT projects it will provide approximately
$120 million in financial assistance to assist various small communities
with air service* almost $100 million in direct subsidies to air carriers
to serve certain small communities under the EAS program and $20 million
in grants under the Small Community Air Service Development Pilot Program.
Both programs face heavy demand for funds. Our work on this report and
recent work on air service to small communities indicates that there may
be significant differences in the barriers faced by small hub and nonhub
communities in developing sustainable commercial air service and that the
approaches to addressing the communities* barriers vary accordingly. Some
communities with small hub airports were able to marshal local resources
to develop air service improvement efforts. For these communities, a one-
time grant may be sufficient to develop sustainable air service. In
contrast, at four communities we studied with nonhub airports, when the
financial incentives ended, the air service ended. These communities may
not have the resources available locally to develop such a program. If
financial assistance is provided to nonhub communities in hopes of
attracting new or enhanced service, the assistance may need to be longer
term. Yet, ongoing financial assistance is no guarantee of viable air
service. Our previous work on the EAS program indicated that direct
subsidies to air carriers have not been an effective transportation
solution for passengers at small communities.

To address air service needs at small communities, Congress has
appropriated increasing sums over recent years. In fiscal year 1997, the
amount appropriated for the EAS program was $26 million; by fiscal year
2002, it was $113 million together with another $20 million for the newly
created Small Community Air Service Development Pilot Program. Indications
are that these sums only partially address the air service development
desires of the nation*s small communities. More specifically: Implications
for

Federal Air Service Assistance to Small Communities: Nonhub Communities
May Require Different Assistance Than Small Hubs

Demand Is Heavy for Two Main Forms of Federal Aid to Small Community
Airports

Page 29 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 30 GAO- 03- 330 Small Community Air Service

Although it is too early to ascertain the pilot program*s success, with
the grants having been effective only since October 2002, our review of
the efforts already attempted by small communities suggests that a *seed

money* approach may have limited effectiveness in creating sustainable
programs. Under current regulations for the pilot program, communities
served by small hub or smaller airports are eligible to apply for a grant.
However, based on our review of the programs launched by the 12
communities we studied in detail, the communities served by nonhub
airports have been less able to successfully develop air service over the
longer term. In such communities, the smaller populations and lower level
of economic activity meant that when the financial incentives provided
through some outside funding source ceased, the additional or enhanced air
service also ceased. For example, additional service to four small
communities in New Mexico ceased when the funds were depleted.

Our findings suggest that the communities that may be best able to use a

*seed money* approach are those with a larger population and economic
activity base* generally communities with small hub airports. For example,
the experience of Eugene, Oregon, with a population of over 200,000 25 and
a financial commitment from the community demonstrated that a limited
financial incentive program can yield sustainable enhanced air service.
For communities with adequate size and resources, such a strategy can
continue to challenge them to use the one- time infusion of money to jump-
start the potential market into a sustainable program. For communities
with smaller, nonhub airports, ongoing financial assistance may be
necessary. We believe that our earlier work on the EAS program provides
insights on strategies that may be more effective for developing air
service to nonhub communities. The EAS program essentially provides one
type of ongoing federal financial assistance to those communities* a
direct grant to air carriers that operate to and from those communities.
However, we found that providing funds to the carrier, rather than the
community, has often not produced the type of air service that meets the
travel desires of the communities* residents. Faced with relatively high
airfares and limited service options, travelers to or from most
EASsubsidized communities *leak* to other airports. As a result,
federallysubsidized 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.

*Seed Money* Approach May Work Only in Limited Circumstances; Nonhubs May
Require Continuing Assistance to Sustain Air Service

Page 31 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.

Some small communities may find it difficult to generate the level of
demand needed to support scheduled, commercial air service even with a
substantial subsidy. For these communities, alternative transportation
programs are developing that could offer an opportunity for connection to
the national air transportation network. These innovative alternatives may
meet some small communities* needs, but they raise significant questions.
Whether passengers will embrace alternatives such as 9- seat aircraft*
particularly in light of the long- recognized aversion of many passengers
to comparatively larger 19- seat turboprop aircraft* remains to be seen.

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.
Alternatives to Scheduled

Commercial Air Service Are Developing, but Passenger Acceptance Is Unknown

Smaller Aircraft

Page 32 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 33 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 34 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.

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 Other
Options

Page 35 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
attracting new air service but also retaining their current service. Many
network air carriers, experiencing unprecedented financial losses, are
taking steps to minimize losses such as cutting unprofitable service. Some
Wall Street analysts have projected that airline losses will continue into
2004. Because service to small communities is often relatively
unprofitable, these communities may be hard hit. This could place further
pressure on the EAS program as additional communities qualify for
federally- subsidized air service. It could also increase the demand for
grants under the Small Community Air Service Development Pilot Program,
which in fiscal year 2002 already had requests far in excess of available
funds.

Our work looking at both small community air service and the EAS program
indicates that there is not a *one size fits all* solution to assist small
communities maintain or improve their access to the national air service
system. Communities that want to increase the demand for or supply of air
service may need to consider some combination of available tools,
including marketing or financial incentives. However, the effectiveness of
the methods chosen, especially financial incentives, will likely depend to
a large extent on the community size. Of those small hub airports we
visited, one was able to use a seed money approach to attract new air
service and sustain it after the grants ended. The evidence suggests,
however, that small communities served by nonhub airports may need
continuing assistance to sustain air service improvements. These
communities generally have limited local resources and greater need for
ongoing assistance to attract, retain, or enhance air service. Further,
some communities that desire scheduled air service but do not have demand
adequate to support it may need to examine other alternate transportation
solutions, such as small aircraft providing on- demand service. Concluding

Observations

Page 36 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
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.
Agency Comments

Page 37 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 38 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

Appendix I: Objectives, Scope, and Methodology

Page 39 GAO- 03- 330 Small Community Air Service

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. Appendix I:
Objectives, Scope, and

Methodology

Appendix I: Objectives, Scope, and Methodology

Page 40 GAO- 03- 330 Small Community Air Service

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

Appendix I: Objectives, Scope, and Methodology

Page 41 GAO- 03- 330 Small Community Air Service

Development Pilot Program. We reviewed relevant legislation, DOT guidance
for the program, program applications, the grant amounts awarded, and
selected grant agreements. We also interviewed DOT officials to discuss
the selection process and status of the program.

We conducted our work from March 2002 to December 2002 in accordance with
generally accepted government auditing standards.

Appendix II: Background on Underlying Economic Principles

Page 42 GAO- 03- 330 Small Community Air Service

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
individual consumers. As a result, the economic factors that influence
consumers* choices and decisions are critical to understanding demand for
air service. The influence of prices* fares, in this case* on a potential
passenger*s decision- making process is no different for air service than
with other products or services. All else being equal, consumers are
willing to purchase more tickets for air travel the lower the airfare.

Variation in demand for air service between different communities results
in large part from differences in community size and economic factors that
influence consumers* choices. The population of the community and region
surrounding an airport, residents* level of income, economic activity, the
quality and type of air service available at the local airport, the
distance to the nearest competing airport, and the quality and type of
service offered at that competing airport are a few factors that create
differences in passenger demand between communities. All else being equal,
demand for air service is generally greater in communities with more
population and employment, higher per capita income, and greater economic
activity. Similarly, all else being equal, communities that are more
geographically isolated* further from the nearest competing airport* will
generally have greater demand for air service because the

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. Appendix II:
Background on Underlying

Economic Principles Demand for Air Service

Appendix II: Background on Underlying Economic Principles

Page 43 GAO- 03- 330 Small Community Air Service

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
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. Supply of Air Service

Appendix II: Background on Underlying Economic Principles

Page 44 GAO- 03- 330 Small Community Air Service

The traditional supply- and- demand model provides a simple conceptual
framework to broadly discuss (1) air service in small communities and (2)
the economic factors that create and explain differences in service
between communities and variations in service within communities over
time. The size of a community and the corresponding demand for air travel
is arguably the most important element in determining whether a community
receives commercial air service. For each community, unless a certain
minimum level of demand for air travel exists, carriers are unable to
provide sustainable service at fares that cover costs.

Figure 7 illustrates the demand (D) for air service in two hypothetical
communities* H a high- demand community and L a low- demand community* and
the potential supply (S) representing carriers* willingness to provide
service to the communities at different fare levels. 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 D H ) is shown
to be greater than the demand from community L (as illustrated by the line
labeled D L ). 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, Q H , exceeds that of the low- demand
community, Q L . Another way to consider this is that to purchase the same
number of seats, Q H , consumers are willing to pay more per seat in the
high- demand community, F, than consumers in the lowdemand community, F L
.

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. The Traditional

Supply and Demand Model

Appendix II: Background on Underlying Economic Principles

Page 45 GAO- 03- 330 Small Community Air Service

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 (F H *) at which
carriers* quantity supplied is equal to passengers* quantity demanded.
Another way to consider this is that passengers* willingness to pay (F H
*, as shown on the demand curve, D H ) for a level of service (Q H *) is
the same as what carriers are willing to accept for providing the service
(F H *, 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).

Appendix II: Background on Underlying Economic Principles

Page 46 GAO- 03- 330 Small Community Air Service

The challenge for policymakers in attracting, maintaining, or improving
market- provided, commercial air service in the long run to small
communities is to identify the most effective short- term policies that
attempt to grow (or maintain) the market to sustainable levels. Granted,
policymakers only have the tools to influence a few of the economic
factors that affect the supply of and demand for air service in a
community. A community*s population and its geographic location (in
relation to other communities with airports) are fixed in the short run.
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 Q SUB . The effect of
the subsidy is illustrated graphically by shifting the supply curve
outward from S to S SUB . For the same amount of service (Q SUB ), the
average fare passengers face with the subsidized service, F SUB , is less
than the minimum that the carrier would have been willing to accept in a
situation with no subsidy, F NS . 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. Policy Issues and

Market Response

Appendix II: Background on Underlying Economic Principles

Page 47 GAO- 03- 330 Small Community Air Service

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
providing or enhancing a community*s air service. However, to be
successful at sustaining air service in a community in the long run
without prolonged government intervention, a program will need to target
factors that ultimately influence consumers* decisions and increase
passenger demand in the market. The following hypothetical scenario
provides a general example of how a policy can potentially increase the
level of air service in a community. Hypothetical Example

of Efforts to Improve Air Service

Appendix II: Background on Underlying Economic Principles

Page 48 GAO- 03- 330 Small Community Air Service

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

Appendix II: Background on Underlying Economic Principles

Page 49 GAO- 03- 330 Small Community Air Service

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 examples
of policies with a supply- side orientation* the direct impact of an
initiative is aimed at the supplier of the service, the carriers. Other
programs that attempt to grow a market may be demand oriented, where the
focus of the initiative is on potential passengers. For instance, a
marketing proposal aimed at educating potential travelers in a region
about air service from a local airport is a demand- oriented program.
Regardless of orientation, the goal of policymakers developing short- term
initiatives such as travel banks, revenue guarantees, cost- sharing
agreements, direct subsidization, and consumer education (marketing) is to
attract, maintain, or improve air service in their community. Ultimately,
a sustainable level of service will result from the effectiveness of
various policies to change travelers* decisions and increase demand within
a community. In the long run, some communities simply do not have the size
and level of economic activity necessary to maintain commercial service
without a government subsidy. Others may simply be unable to curb
passenger leakage because they cannot compete with larger airports within
relatively close driving distance that offer better service from more
carriers, especially low- fare carriers. Air Service

Improvement Initiatives

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

Page 50 GAO- 03- 330 Small Community Air Service

Financial incentives State City

2000 Enplanements Category Study a Marketing

Travel bank

Revenue guarantee

Reduced airport

fees Subsidy Other

financial Other

Huntsville 529,052 small hub X X Alabama Mobile 389,280 small hub X X X X
Show Low 4,059 nonhub X X Arizona Yuma 63,987 nonhub X X Bakersfield
148,200 nonhub X X South Lake Tahoe 2,289 nonhub X X California

Stockton 238 nonhub X XX X X 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
Colorado

Telluride 17,107 nonhub X X X Connecticut New Haven 38,159 nonhub X X X

Gainesville 144,078 nonhub X X Naples 54,791 nonhub X X Pensacola 524,811
small hub X XX X Sarasota/ Bradenton 743,603 small hub X X X Florida

Tallahassee 467,914 small hub X X XX X Augusta 208,444 nonhub X X X
Brunswick 20,980 nonhub X X Columbus 87,450 nonhub X X Georgia

Savannah 879,821 small hub X X Dubuque 58,531 nonhub X Iowa Sioux City
85,684 nonhub X X Idaho Hailey 73,072 nonhub X

Quincy 10,173 nonhub X X Illinois Springfield 71,065 nonhub X XXX Gary
24,588 nonhub X X X Lafayette 20,128 nonhub X X Indiana

Terre Haute 523 nonhub X X Kansas Wichita 584,160 small hub X XXX Kentucky
Lexington 507,334 small hub X X

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

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

Page 51 GAO- 03- 330 Small Community Air Service

Financial incentives State City

2000 Enplanements Category Study a Marketing

Travel bank

Revenue guarantee

Reduced airport

fees Subsidy Other

financial Other

Baton Rouge 417,716 small hub X X Lake Charles 66,165 nonhub X Louisiana

Shreveport 361,436 small hub X X Cumberland 4,815 nonhub X X X Maryland
Hagerstown 25,923 nonhub X X X Bangor 272,833 nonhub X X Portland 668,098
small hub X X Maine

Presque Isle 25,174 nonhub X X 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
Michigan

Pellston 31,571 nonhub X X Minnesota Bemidji 28,537 nonhub X

Cape Girardeau 7,349 nonhub X X Kaiser Lake Ozark 11 nonhub X X Missouri

Springfield 352,008 nonhub X X X Bozeman 240,583 nonhub X Helena 76,675
nonhub X X Montana

Missoula 230,065 nonhub X XX X Asheville 277,189 nonhub X X X X
Fayetteville 149,244 nonhub X X Hickory 16,010 nonhub X XX Kinston 2, 702
nonhub X X X X North

Carolina Pinehurst/ Southern Pines 17,751 nonhub X X Fargo 237,234 nonhub
X North Dakota 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 XX

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 XX New Mexico

Taos 1,233 nonhub X XX

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

Page 52 GAO- 03- 330 Small Community Air Service

Financial incentives State City

2000 Enplanements Category Study a Marketing

Travel bank

Revenue guarantee

Reduced airport

fees Subsidy Other

financial Other

Ohio Youngstown/ Warren 31,475 nonhub X Oregon Eugene 374,174 small hub X
X X

Allentown 494,815 small hub X X X Du Bois 15,439 nonhub X X Johnstown
20,820 nonhub X X Pennsylvania

Lancaster 13,977 nonhub X X X South Carolina

Hilton Head 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

Newport News 227,635 nonhub X X X X Virginia

Staunton/ Waynesboro Harrisonburg 21,113 nonhub X X X Burlington 446,363
small hub X X X Vermont Rutland 4,010 nonhub X Moses Lake 10,634 nonhub X
Olympia 65 nonhub X Pasco 210,681 nonhub X Pullman/ Moscow (ID) 33,221
nonhub X Washington

Yakima 86,451 nonhub X Appleton 260,474 nonhub X X Wisconsin Rhinelander
37,937 nonhub X X X Charleston 276,095 nonhub X X X West Virginia
Lewisburg 12,717 nonhub X X X Casper 66,918 nonhub X X Cheyenne 21,720
nonhub X Gillette 16,419 nonhub X X Wyoming

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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 53 GAO- 03- 330 Small Community Air Service

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
growing economic base. In 2001, six carriers provided nonstop service from
Mobile to 10 destinations. In October 2001, United Express, which Appendix
IV: Case Studies Describing Air

Service Improvement Programs in 12 Small Communities

Mobile, Alabama*s New Business Model

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 54 GAO- 03- 330 Small Community Air Service

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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12 Small Communities

Page 55 GAO- 03- 330 Small Community Air Service

 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 carriers, they have had to contend with high airfares and leakage
to neighboring airports. Pensacola, located in the panhandle of Florida,
is about 1 hour*s drive from small hubs located at Fort Walton Beach,
Florida and Mobile, Alabama. Pensacola Regional Airport officials have
undertaken a variety of strategies to address these problems. In 1998,
Pensacola airport officials approached incumbent carrier Delta Air Lines
requesting that they lower fares to match those available at Fort Walton
Beach. The meetings with Delta were unsuccessful. Pensacola officials had
also been in ongoing discussions with Southwest Airlines and recognized
that any service possibilities from Southwest were not likely in the
immediate future.

In August 2001, AirTran Airways approached Pensacola and requested a pro
forma study of operational costs to determine the costs to operate from
the Pensacola Regional Airport. The airline was requesting information
because they were engaged in negotiations with airport Pensacola,
Florida*s

Travel Bank Program

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12 Small Communities

Page 56 GAO- 03- 330 Small Community Air Service

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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12 Small Communities

Page 57 GAO- 03- 330 Small Community Air Service

 Reduced Airport Fees: Pensacola agreed to cover the difference in
operational costs between Fort Walton Beach and Pensacola, which amounts
to approximately $375,000 per year. A consortium of local government and
business entities 33 agreed to cover this additional cost* for the first 2
years of AirTran*s operations.

 Moving Costs: The airport agreed to pay the $39,000 cost of moving
AirTran operations from Fort Walton Beach to Pensacola.

 Marketing: Pensacola*s airport includes a staff that conducts marketing
and works closely with AirTran to promote Pensacola*s air service. The
airport budgets $50,000 per year for AirTran (for the duration of the
travel bank* 2 years).

Pensacola*s financial incentive program has been a success in the
shortterm. 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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12 Small Communities

Page 58 GAO- 03- 330 Small Community Air Service

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
destinations from 8 carriers (as of August 2001), but has been faced with
relatively high airfares. As a result, large numbers of its potential
passengers chose to fly out of other area airports, including those as far
away as Orlando, Jacksonville, Tampa, and Atlanta. According to airport
officials, high fares were a major barrier to Tallahassee*s economic
development because they discouraged businesses from locating there.

To attract and keep businesses, airport officials began an effort to
improve existing air service and attract new service. Officials said they
were not successful in either persuading Delta or US Airways to lower
fares or in attracting Southwest Airlines. The state issued a request for
bids to carriers who could provide guaranteed airfares to employees of the
state government* the primary employer for Tallahassee. AirTran, a low-
fare carrier was the only respondent to the request for proposals (RFP).
The city had a history of working with the state to secure a low- fare
carrier. The state indicated that it would only award the contract to
AirTran if it would provide service to Tallahassee. AirTran agreed to
provide service if some kind of assistance was provided in turn. Working
with officials from Tallahassee, Florida*s

Revenue Guarantee Program

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Page 59 GAO- 03- 330 Small Community Air Service

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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12 Small Communities

Page 60 GAO- 03- 330 Small Community Air Service

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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Page 61 GAO- 03- 330 Small Community Air Service

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 B717 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
ranked third most important in terms of cultivating business, the
thengovernor 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. Michigan*s
Air Service

Program

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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 Airlines 39 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 50seat 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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 65 GAO- 03- 330 Small Community Air Service

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 and
the Baltimore/ Washington International Airport (BWI). The cessation of
this service left Hagerstown (a community of 37,000, located approximately
75 miles northwest of Baltimore on I- 70) with scheduled service to
Pittsburgh, Pennsylvania. 44 As of September 2001, Cumberland (a community
of 22,000, 65 miles further west of Hagerstown on I- 68) lost all
scheduled service with the cessation of service to Pittsburgh.

44 Ronald Reagan Washington National Airport and Washington Dulles
International Airport are also nearby. Maryland*s Regional

Air Service Development Program

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12 Small Communities

Page 66 GAO- 03- 330 Small Community Air Service

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
statesubsidized 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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 67 GAO- 03- 330 Small Community Air Service

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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 68 GAO- 03- 330 Small Community Air Service

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

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 69 GAO- 03- 330 Small Community Air Service

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 service
and relatively high fares. State officials said that residents of the
small communities that have commercial airports generally do not fly from
their local facilities. Rather, they tend to fly either from the state*s
largest airport, Albuquerque (which in November 2002 offered nonstop
service to 36 different destinations from 12 carriers, including 2 low-
fare carriers), or from airports in Texas, such as Midland (which offered
nonstop service to 8 different destinations from 4 carriers). State
aviation and local airport officials said that while air service is
important to New Mexico*s small communities because of their remoteness
and lack of other transportation options, residents have become used to
driving long distances. Combined with the presence of low- fare carriers
within 250 miles of most residents, it is difficult for small airports to
attract adequate demand for air service. New Mexico*s Air

Service Assistance Program

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 70 GAO- 03- 330 Small Community Air Service

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

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 71 GAO- 03- 330 Small Community Air Service

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.

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. Taos and Ruidoso

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 72 GAO- 03- 330 Small Community Air Service

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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 73 GAO- 03- 330 Small Community Air Service

Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso

The second consortium consisted of Carlsbad, Hobbs (Lea County), and
Roswell, all located in the southeastern part of the state. In 2000, Mesa
Air provided all three communities with service to Albuquerque using 19-
seat turboprop aircraft. In addition, Mesa provided Roswell with service
to Dallas. Community officials said that they desired service to one or
more additional hub airports within a 500- mile radius of the communities,
such as Phoenix or Dallas. The three formed a consortium to work with New
Mexico state aviation officials to obtain a state grant to fund additional
service to their communities. Consortium officials said they sent an RFP
to 11 airlines but only 1* Big Sky Airlines* responded.

Big Sky began service from the three communities to Denver and Dallas with
19- seat Metro turboprop aircraft beginning in October 2000, using
$200,000 of state funds and $300, 000 in local matching funds. By January
2001, the carrier had exhausted all $500,000 in state and local funds.
Roswell and Carlsbad officials said that when the carrier requested
additional funding, they declined to provide any. Local officials said the
Carlsbad, Hobbs, and

Roswell

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 74 GAO- 03- 330 Small Community Air Service

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
miles south of Portland in Eugene, Oregon. The airport has an estimated
catchment area population of over 700,000. Before implementation of the
travel banks, Eugene had service from three airlines (United, United
Express, and Horizon) to four destinations (Portland, Seattle, Denver, and
San Francisco). Community and airport officials believed that additional
carriers and destinations would increase competition for the dominant
carrier (United), lower fares, and help stem passenger leakage to Portland
International Airport. Eugene, Oregon*s

Travel Banks

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 75 GAO- 03- 330 Small Community Air Service

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 agreement 49 that guaranteed
business flyers would use the new service. The agreement also included
various protections for participants* investments. The funds were held by
the airline, which issued corporate accounts to participating businesses.
The participating companies had 24 months to use the funds, after which
any remaining funds reverted to the airline and were available as ticket
vouchers for another 12 months. After that point, any funds remaining in
the bank would go to the airline. Eugene*s airport also committed $300,000
over 2 years for marketing to promote the new service.

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.

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 76 GAO- 03- 330 Small Community Air Service

With the success of the first travel bank, Eugene officials looked into
the possibility of a second travel bank for Los Angeles service. After
negotiating an agreement with Horizon Air, the Chamber of Commerce again
successfully sought pledges from area businesses. This bank became
operational 1 year after the first travel bank, and participating
businesses had used 81 percent of the funds within the first 18 months.
Table 4 provides more detail about the America West and Horizon Air travel
banks.

Table 4: Summary of Features of Eugene, Oregon*s Travel Banks Airline
Implementation dates Service provided as of

10/ 18/ 02 Travel bank pledges Marketing commitment

America West September 1999 *

September 2001 3 flights daily to Phoenix using CRJ200 (50- seat jets)

65 businesses contributed $461,000 Airport pledged $300,000

in marketing funds over 2 years Horizon Air September 2000 *

September 2002 2 flights daily to Los Angeles using CRJ700 (70- seat jets)

57 businesses contributed $452,000 Airport pledged $300,000

in marketing funds over 2 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

Appendix IV: Case Studies Describing Air Service Improvement Programs in
12 Small Communities

Page 77 GAO- 03- 330 Small Community Air Service

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.

Appendix V: Small Community Air Service Development Pilot Program Grants
and Local Matching Funds (Fiscal Year 2002)

Page 78 GAO- 03- 330 Small Community Air Service

City State Total federal funds requested Total federal funds

granted Total matching funds

King Cove, Sand Point, Akutan, Cold Bay, False Pass, Nelson Lagoon AK
$240,000 $240,000 $25,000 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

Appendix V: Small Community Air Service Development Pilot Program Grants
and Local Matching Funds (Fiscal Year 2002)

Appendix V: Small Community Air Service Development Pilot Program Grants
and Local Matching Funds (Fiscal Year 2002)

Page 79 GAO- 03- 330 Small Community Air Service

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

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

Page 80 GAO- 03- 330 Small Community Air Service

Financial Incentives State City Studies Marketing Travel

banks Revenue guarantee

Reduced airport

fees Subsidy Financial other Other

Alaska King Cove, Sand Point, Cold Bay, Nelson Lagoon, False Pass, Akutan

X Alabama Mobile X Arkansas Fort Smith X Arizona Lake Havasu City X X

Chico X California Santa Maria X X Lamar X X X X Colorado 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

Paducah X X X Kentucky 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/

Kingsport X XX X Abilene X Texas Beaumont/ Port Arthur X X X Utah Moab X X
Virginia Lynchburg X X Washington Bellingham X X

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

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

Page 81 GAO- 03- 330 Small Community Air Service

Financial Incentives State City Studies Marketing Travel

banks Revenue guarantee

Reduced airport

fees Subsidy Financial 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.

Appendix VII: GAO Contacts and Staff Acknowledgments

Page 82 GAO- 03- 330 Small Community Air Service

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

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

Acknowledgments GAO Contacts Acknowledgments

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

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-
01402T. 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.
Related GAO Products

Related GAO Products Page 84 GAO- 03- 330 Small Community Air Service

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

(544033)

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