    Commercial Aviation: Initial Small Community Air Service
    Development Projects Have Achieved Mixed Results (30-NOV-05,
    GAO-06-21).

    Over the last decade significant changes have occurred in the
    airline industry. Many legacy carriers are facing challenging
    financial conditions and low cost carriers are attracting
    passengers away from some small community airports. These
    changes, and others, have challenged small communities to attract
    adequate commercial air service. To help small communities
    improve air service, Congress established the Small Community Air
    Service Development Program in 2000. This study reports on (1)
    how the Department of Transportation (DOT) has implemented the
    program; and (2) what goals and strategies have been used and
    what results have been obtained by the grants provided under the
    program.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-21
        ACCNO:   A42258
      TITLE:     Commercial Aviation: Initial Small Community Air Service
    Development Projects Have Achieved Mixed Results
         DATE:   11/30/2005
      SUBJECT:   Airlines
    	     Airports
    	     Commercial aviation
    	     Evaluation criteria
    	     Grant administration
    	     Grants
    	     Performance measures
    	     Program evaluation
    	     Program management
    	     Strategic planning
    	     Transportation industry
    	     Program implementation
    	     DOT Small Community Air Service
    	     Development Pilot Program

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    GAO-06-21

         * Report to Congressional Addressees
              * November 2005
         * COMMERCIAL AVIATION
              * Initial Small Community Air Service Development Projects Have
                Achieved Mixed Results
         * Contents
              * Results In Brief
              * Background
              * DOT's Implementation of the Small Community Air Service
                Development Program Includes Awarding Grants by Using
                Legislatively Established Priority and Other Factors and
                Providing Grant Oversight
                   * DOT Has Awarded 157 Grants Since 2002, but Grant
                     Applications are Declining
                   * DOT Evaluates Grant Applications According to Legislatively
                     Established Priority Factors and DOT Criteria
                   * DOT Oversees Projects Largely by Reviewing Reimbursement
                     Documents and Reports from Grantees
                   * Grantees Have Been Slow to Implement Some Projects
              * Variety of Goals and Strategies to Improve Air Service are Used,
                but the Results to Date of Completed Projects are Mixed
                   * Most Common Project Goals Were Related to Increasing Service
                     and Enplanements
                   * Grant Projects Use Many Different Strategies to Meet Their
                     Goals
                   * Participating Airlines Generally Favored Revenue Guarantees
                   * Completed Grants Indicated Mixed Results
                   * Most Airport Directors Indicated That Their Grant Projects
                     Were Effective or That It Was Too Soon to Tell
                   * Usefulness of Air Service Development Zone Designation Is
                     Not Clear
              * Conclusions
              * Recommendations for Executive Action
              * Agency Comments and Our Evaluation
         * Objectives, Scope, and Methodology
         * Factors Affecting Air Service to Small Communities
              * Network Carrier Restructuring and Downsizing Negatively Affect
                Service to Small Communities
              * Aircraft Changes at Small Communities Pose Challenges
              * The "Commuter Rule" Has Contributed to Loss of Air Service to
                Some Small Communities
              * Increase in Low Cost Carrier Service May Also Contribute to
                Reduced Service at Small Community Airports
         * DOT Additional Selection Factors
         * Status of Grants Awarded, 2002 through 2005
         * Summary of 10 Completed Small Community Air Service Development
           Program Grants
              * Charleston, West Virginia
                   * Project Funded by Grant
                   * Grant Outcome
              * Daytona Beach, Florida
                   * Project Funded by Grant
                   * Grant Outcome
              * Fort Smith, Arkansas
                   * Project Funded by Grant
                   * Grant Outcome
              * Hailey, Idaho
                   * Project Funded by Grant
                   * Grant Outcome
              * Lynchburg, Virginia
                   * Project Funded by Grant
                   * Grant Outcome
              * Mobile, Alabama
                   * Project Funded by Grant
                   * Grant Outcome
              * Reading, Pennsylvania
                   * Project Funded by Grant
                   * Grant Outcome
              * Scottsbluff, Nebraska
                   * Project Funded by Grant
                   * Grant Outcome
              * Somerset, Kentucky
                   * Project Funded by Grant
                   * Grant Outcome
              * Taos, New Mexico
                   * Project Funded by Grant
                   * Grant Outcome
         * GAO Contact and Staff Acknowledgments

    Report to Congressional Addressees

    November 2005

    COMMERCIAL AVIATION

    Initial Small Community Air Service Development Projects Have Achieved
    Mixed Results

    Contents

    Tables

    Figures

    November 30, 2005Letter

    Congressional addressees

    Over the last decade significant changes have occurred in the airline
    industry that have impacted service to small communities. Today many of
    the legacy carriers are facing challenging financial conditions.1
    Competition from low-cost carriers has contributed to passengers driving
    long distances to obtain low fares rather than use their small community
    airport. Since 2000, there has been a decrease in the use of small
    turboprop aircraft that serve small community airports, with many
    operators opting for larger regional jets holding 50 or more passengers.
    These changes, and others, have challenged small communities to attract
    adequate commercial air service at reasonable prices.

    By establishing the Small Community Air Service Development Pilot Program
    in 2000, Congress created a new source of funds to help small, underserved
    airports improve their air service. The Congress has appropriated $20
    million annually since 2002 for the Department of Transportation (DOT) to
    award up to 40 grants each year to communities that have demonstrated
    insufficient air carrier service or unreasonably high air fares. We
    reviewed (1) DOT's implementation of the Small Community Air Service
    Development Program and (2) the strategies communities receiving grants
    have used and the results obtained by the grants provided under the
    program. In addition, this report provides information on factors
    affecting air service to small communities, which is included in appendix
    II.

    To determine how DOT has implemented the Small Community Air Service
    Development Program, we reviewed legislation authorizing and funding the
    program as well as related orders and guidelines. We interviewed DOT
    officials about their grant selection process and criteria. We reviewed
    grant award information and examined how DOT used its grant criteria to
    select grantees. We also reviewed program controls, receipts, quarterly
    reports, and the final reports that grantees submitted. We obtained and
    reviewed budget and finance data from DOT's Office of the Secretary as
    well as reimbursement data from the Federal Aviation Administration (FAA),
    which reimburses the grantees.  To determine what strategies have been
    used and what results have been obtained, we reviewed the grant
    applications and agreements for all 157 grants awarded through September
    1, 2005. In addition, we reviewed the grants awarded, classified the types
    of strategies carried out within the grants, and summarized the types of
    activities funded. We also visited each of the 10 grantees that had
    completed their grants by December 31, 2004, and interviewed airlines and
    aviation consultants associated with these completed grants. We also
    contacted 13 additional grantees who completed their projects between
    January 1 and September 30, 2005. Further, we conducted two Web-based
    surveys. We used self-administered electronic questionnaires posted to the
    World Wide Web to survey the 146 airport directors involved in the 122
    grants DOT awarded from 2002 through 2004, as well as 116 airport
    directors representing airports that applied for, but did not receive a
    grant during that period. We received response rates of 83 percent and 72
    percent, respectively. To view our surveys and airport directors'
    responses, go to www.gao.gov/cgi-bin/getrpt?GAO-06-101SP. We performed our
    work from September 2004 through October 2005 in accordance with generally
    accepted government auditing standards. Appendix I provides more details
    on our scope and methodology.

    Results In Brief

    DOT considers numerous factors affecting the quality and feasibility of
    proposed projects before making Small Community Air Service Development
    grant awards. The law establishing the Small Community Air Service
    Development Program allows DOT considerable flexibility in implementing
    the program and selecting projects to be funded. We found that DOT
    considered the statutory eligibility criteria and priority factors in
    selecting grant projects. In addition, DOT considers other relevant
    factors in making decisions on projects, and the final selection is at the
    discretion of the Secretary of Transportation. As of September 30, 2005,
    there have been 157 grant awards made in the 4 years of the program. The
    number of applications has declined each year. In 2002, the first year of
    the program, DOT received 179 applications for grants, and by 2005 the
    number of applications had declined to 84. DOT officials said that this
    decline was in part a natural consequence of the large number airports
    implementing projects at the time, and the effect of legislative changes
    made in 2003 that limited a community to one grant award for the same
    project. I In our survey of airport directors, we found that grantee
    airports generally responded positively when asked about DOT's process for
    awarding grants. Two-thirds of grantee airports were satisfied with the
    clarity of selection criteria, while only about one-third of the
    nongrantee airports responding to the survey were satisfied. For program
    oversight, DOT relies on responding to grantee inquiries or requests,
    reviewing documents associated with reimbursable expenses, and reviewing
    quarterly and final reports that the grantees are required to prepare. DOT
    oversight has identified cases where grant funds have not been used and it
    has subsequently reallocated about $4.5 million to other applicants.
    Finally, as of September 30, 2005, 23 grants were completed-20 from 2002,
    2 from 2003, and 1 from 2004.2 DOT officials said that, particularly for
    the first year of the grant program, projects were slow to complete, in
    part, due to the airlines' retrenchment after the September 11 attacks.

    Grantees have identified a variety of goals for their projects and
    employed many strategies to improve air service and the results of the
    completed projects to date have been mixed: some have succeeded in meeting
    the program's goal of improving air service, for example, by adding
    carriers or destinations, and some have not. Grantee project goals have
    included adding flights, airlines and destinations, lowering fares,
    upgrading the aircraft serving the community, obtaining better data for
    planning and marketing air service, increasing enplanements, and curbing
    the loss of passengers to other airports. To achieve these goals, grantees
    have used a number of strategies, including subsidies and revenue
    guarantees to the airlines, marketing, hiring personnel and consultants,
    and establishing travel banks in which a community guarantees to buy a
    certain number of tickets. In addition, grantees have subsidized the
    start-up of an airline, taken over ground station operations to reduce
    costs for an airline, and subsidized a bus company to transport passengers
    from their airport to a hub airport. Incorporating marketing as part of
    the project was the most common strategy used by airports. Some airline
    officials also said that marketing efforts were important to the success
    of projects. Airline officials told us that projects that provide direct
    benefits to an airline, such as revenue guarantees and financial
    subsidies, have the greatest chance of success. These officials noted that
    these types of projects allow the airline to test the real market for air
    service in a community without enduring the typical financial losses that
    occur when new air service is introduced. The outcomes of the grants may
    be affected by broader industry factors that are independent of the grant
    itself, such as a decision on the part of an airline to reduce the number
    of flights at a hub. Our review of the 23 projects completed by September
    30, 2005, found that although 19 reported service or fare improvements
    during the life of the grant, only about half reported that the
    improvements were self-sustaining after the grant was complete. A more
    detailed review of the 10 grants completed by January 1, 2005, also showed
    a mixed record of meeting the program's goals, ranging from improved
    service that exceeded projected passenger loads, to a complete loss of air
    service to the airport. However, we were not able to determine the overall
    effectiveness of the program in achieving the act's goal of improving air
    service to small communities because a large majority of funded projects
    are still under way (127 of the 157 projects were ongoing as of September
    30, 2005) and it will take more time to determine if any air service
    improvements achieved with the grants are sustainable after projects are
    complete. Finally, as part of meeting its requirements under the act, DOT
    has designated one airport each year as an Air Service Development Zone.
    Each of the three Air Service Development Zone communities that DOT
    selected through 2004 expressed similar concerns about the usefulness of
    this designation. None cited any effect or change that the designation had
    made and expressed confusion as to what the designation was supposed to
    achieve. All stated that anything that had happened at the airport would
    have happened without the designation.

    We are recommending that in preparation for reauthorization of the program
    in 2008, DOT evaluate completed projects funded by the Small Community Air
    Service Development Program to determine the effectiveness of this program
    in improving air service to small communities. We are also recommending
    that DOT clarify what the support and services it will provide to
    communities that are designated as Air Service Development Zones. In
    commenting on a draft of this report, Department of Transportation
    officials said it generally concurred with the report and agreed to
    consider the recommendations as they go forward with the program.

    Background

    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 legacy carriers, free to determine their own routes,
    developed "hub-and-spoke" networks.3 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
    legacy airlines may operate their own large jets or use regional affiliate
    carriers to provide service, usually with regional jet or turboprop
    aircraft. (See fig. 1 for an example of a turboprop aircraft.) However,
    low-cost carriers, such as Southwest Airlines 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.

    Figure 1: Great Lakes Aviation Twin Engine 19-Seat Turboprop

    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.4 The 30 large hubs and 37 medium hub
    airports together enplaned the vast majority-89 percent-of the almost 703
    million U.S. passengers in 2004, the most recent data available. In
    contrast, the 69 small hubs enplaned about 8 percent, and the 374 nonhub
    airports enplaned only 3 percent of U.S. passengers.

    Air service to nonhub airports has generally declined in recent years, as
    measured by the number of departure flights. As shown in figure 2, nonhubs
    have had an overall decrease in departures since July 2000. While all
    airports showed a decrease in service from July 2001 to July 2003,
    scheduled departures at small, medium, and large hub airports have
    increased since 2003. By July 2005, scheduled departures at small, medium,
    and large hub airports largely rebounded, with departures from large and
    small hubs exceeding the July 2000 number. However, the decline of service
    at nonhub airports continued, with 17 percent fewer departure flights
    serving these airports in July 2005 compared with July 2000. While small
    hubs and nonhubs are eligible to apply for Small Community Air Service
    Development grants, the nonhub airports have been the main beneficiaries
    of the program. As of fiscal year 2005, only 6 percent of the airports
    receiving grants have been small hubs.

    Figure 2: Change in Scheduled Departures at Nonhub, Small Hub, Medium Hub
    and Large Hub Airports since July 2000

    Note: The comparison baseline is the number of scheduled departures for
    July 2000.

    This decline in air service to small communities is particularly prevalent
    at small community airports that are near larger airports. Passengers
    sometimes drive or take other modes of transportation to neighboring
    larger airports to take advantage of more frequent flights and lower
    fares, a phenomenon called leakage. Appendix II provides more information
    on the factors that have influenced the reduction of passenger traffic and
    air service at the nation's small community airports.

    We have previously reported on the decline of air service to small
    communities noting the challenges these communities face in obtaining or

    retaining commercial passenger air service.5 These challenges include the
    lack of demand, inability to operate profitable air service, and
    competition from neighboring larger hub airports. Also, according to an
    aviation consultant, these factors, plus network carrier financial
    difficulties and changes in aircraft usage, have negatively affected
    nonhubs.

    Two programs have been established to help address air service to small
    communities-the Essential Air Service program and the Small Community Air
    Service Development Pilot Program. The Congress established the Essential
    Air Service 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.6 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 Essential Air Service program funds to award a subsidy to that 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 include a 5 percent profit margin. Our prior work on the
    Essential Air Service program found, in part, that financial incentives
    may offer the best opportunity for communities to attract the new or
    additional service but that it may be difficult to bring about service
    that can be sustained after the incentives end.

    More recently, the Congress authorized the Small Community Air Service
    Development Pilot Program as part of the Wendell H. Ford Aviation
    Investment and Reform Act for the 21st Century, P.L. 106-181 (AIR-21), to
    help small communities enhance their air service. AIR-21 authorized the
    program for fiscal years 2002 and 2003. The Vision 100-Century of Aviation
    Reauthorization Act, P.L. 108-176 (Vision 100), reauthorized the program
    for an additional 5 years, through fiscal year 2008, and eliminated the
    "pilot" status of the program. While Vision 100 increased the annual
    authorization amount to $35 million, the Congress has appropriated $20
    million for the program each year from 2002 through 2005, for a total of
    $80 million.7 No funds were appropriated for the first year of the
    program, 2001.

    Under this program, DOT is authorized to award grants to up to 40
    communities served by small hub or nonhub airports (as classified in 1997)
    that have demonstrated air service deficiencies or higher-than-average
    airfares. The Office of Aviation Analysis in DOT's Office of the Secretary
    is responsible for administering the program. The grants may be made to a
    single community or to a consortium of communities, although no more than
    four grants each year may be in the same state. Consortiums are considered
    one applicant for the purpose of this program.8 Some relatively large
    airports qualify for this program. For example, Buffalo Niagara
    International Airport in Buffalo, NY, and Norfolk International Airport in
    Norfolk, VA, are eligible for the program, enplaning over 2.2 million and
    over 1.8 million passengers in 2004, respectively. In contrast, small
    nonhub airports such as the airports in Kake, AK, with about 2,500
    enplanements, or Owensboro, KY, with about 2,800 enplanements, are also
    eligible. The program is available in the 50 states, District of Columbia,
    Puerto Rico, and U.S. territories and possessions.

    The statute also directs DOT to designate one of the grant recipients each
    year as an Air Service Development Zone and work closely with the
    designated community on ways to attract business to the areas surrounding
    the airport and to develop land use options for the area. There are no
    additional funds associated with this designation, and no special benefit
    or preference is to be given to communities seeking this designation in
    receiving a grant under the program. Communities apply for this
    designation through the regular grant application process.

    DOT has not issued separate regulations for the Small Community Air
    Service Development Program. Instead, DOT issues an order every year that
    requests applications and provides guidance for the proper format and
    content of the applications. The authorizing legislation provides that if
    funds are used to subsidize air service, the subsidy cannot last more than
    3 years. However, the time needed to obtain the service is not included in
    the subsidy time limit. While the legislation does not limit the period
    for expenditure of funds on non-subsidy projects, DOT's fiscal year 2005
    order indicates that in general, grant funds should be expended within 3
    years of the award.

    As shown in figure 3, DOT's awards have been geographically spread
    covering all states except Delaware, Hawaii, Maryland, New Jersey, and
    Rhode Island. To date, no communities in Delaware or Rhode Island have
    applied for a grant. Appendix IV contains information on all grants
    awarded as of September 30, 2005.

    DOT's Implementation of the Small Community Air Service Development
    Program Includes Awarding Grants by Using Legislatively Established
    Priority and Other Factors and Providing Grant Oversight

    In the first 4 years of the Small Community Air Service Development
    Program, DOT awarded a total of 157 grants.9 In 2002, the first year the
    program was funded, DOT received 179 grant applications, but this number
    has been declining and was at a low of 84 applications by 2005. DOT
    officials believe this decline is natural as the program matures; many
    airports are currently implementing grants and others now understand DOT's
    expectation of local matching funds. DOT evaluates the applications
    according to legislatively established priority factors and other
    criteria. DOT first considers five priority factors specified in the laws
    and then considers numerous other factors in a second tier review of the
    projects. Certain legislative factors, such as whether a local community
    can demonstrate support by contributing some local matching funds, or DOT
    factors such as whether an airport has received a grant in the past, were
    major considerations in award decisions. In our survey of airport
    directors, we found that airports that received grants generally were
    positive about DOT's process for awarding grants. However, only about
    one-third of the airports we surveyed that applied for but did not receive
    a grant expressed satisfaction over the clarity of selection criteria.
    DOT's oversight of projects relies largely on reviews of reimbursement
    documents and required grantee quarterly reports; it does not perform
    on-site monitoring visits. DOT monitoring has been sufficient to identify
    cases where grant funds have not been utilized and reallocated the funds
    to other applicants. As of September 30, 2005, 23 of the grants awarded
    were completed-20 for 2002, 2 for 2003, and 1 for 2004. About $12.5
    million, or 62 percent of the $20 million total funds for 2002 had been
    expended by grantees as of September 30, 2005. DOT officials said that the
    newness of the program in 2002, and the need to negotiate agreements with
    airlines, help explain why many early grants are still ongoing.

    DOT Has Awarded 157 Grants Since 2002, but Grant Applications are
    Declining

    To be considered for a Small Community Air Service Development Program
    grant, airport communities prepare a grant proposal in response to a
    notice in the Federal Register. The applications should discuss, among
    other things, the need for additional or improved air service, the
    available fares at the airport, and how the grant will help communities
    address these situations. From 2002 through 2005, DOT has awarded 157
    grants. In the first year of the program, demand was the highest, with 179
    applications requesting a total of about $142.5 million in federal
    funding. However, from 2002 through 2005 the program has experienced about
    a 50 percent decline in the number of applications. (See fig. 4 for
    details on the number of applications, awards, and completed and
    terminated grants each year.)

    Figure 4: Small Community Air Service Development Program Grant
    Applications, Awards, Completions, and Terminations, 2002 through 2005

    Note: In 2004, DOT awarded six grants with prior year funds that were
    reallocated from four grants that were originally awarded in 2002 and 2003
    but were later terminated.

    According to officials at DOT's Office of Aviation Analysis, the downward
    trend in the number of applications was a natural consequence of the
    implementation of the program. First, many eligible airport communities
    have already received a grant and are still implementing their projects-as
    of September 30, 2005, 127 of the 157 grants were ongoing. Current
    grantees are not likely to reapply soon because many of the projects that
    were funded take time to implement, with some taking over 3 years to
    complete. Second, Office of Aviation Analysis officials told us that the
    airport community has learned that DOT expects that a local cash match
    should be part of the proposal and that communities must honor their
    committed local contribution for the proposed projects. The officials told
    us that some applicants did not fully appreciate this expectation during
    the pilot phase of the program. Finally, according to DOT officials,
    legislative changes in 2003 prohibited communities or consortiums from
    receiving more than one grant for the same project and established the
    timely use of funds as a priority factor for DOT to consider in awarding
    grants.

    Based on our survey, for airports that had applied for but never received
    a grant at the time of the survey, 58 of 81 airport directors, or about 72
    percent, said that they would reapply. The remaining 23 airport directors
    indicated that they would not, or were unsure whether they would apply.
    These airport directors cited two primary reasons for not applying-the
    cost and effort of applying, or a belief that DOT would not fund their
    desired project.

    Finally, some eligible airports have never applied for a grant. To
    understand why, we contacted airport directors from a group of 20 randomly
    selected airports that had never applied under the program but were
    eligible to do so. Although this does not constitute a generalizable
    sample, it provides some useful information on the reasons why some
    communities did not apply. Among the more common reasons cited by the
    directors for not applying were that they did not know about the program,
    or they felt that the cost and effort of applying were too burdensome.
    Among the other reasons given by more than one airport director were the
    airport already had sufficient air service, officials thought the airport
    was not eligible, their grant application would not be competitive, or DOT
    would not fund the kind of project the airport would like to do.

    In our survey of 2002 though 2004 grantees and discussions with officials
    of the 10 completed projects, we found that the grantees were generally
    satisfied with the application process and paperwork requirements. Of the
    121 grantee airport directors responding, 103 were satisfied or very
    satisfied with the application process. In addition, in our discussions
    with the directors of the 10 community airports that had completed grant
    projects, most were satisfied with the application process, although three
    expressed concern about the limited amount of time they had to complete
    their applications after the 2002 announcement. In our survey of grantees,
    this issue did not appear to be significant, especially in years
    subsequent to 2002. DOT has made minor modifications in the application
    process as it has gained experience with the program, such as allowing 90
    days instead of 60 days to complete the application, and has continued to
    allow for flexibility in application format, according to Office of
    Aviation Analysis officials.

    DOT Evaluates Grant Applications According to Legislatively Established
    Priority Factors and DOT Criteria

    The Small Community Air Service Development Program is a discretionary
    program that allows DOT considerable flexibility in selecting projects for
    financial assistance, within the basic eligibility criteria. To be
    eligible, the airport cannot be larger than a small hub airport based on
    1997 FAA boarding data and must have insufficient air service or
    unreasonably high air fares. In addition to the basic eligibility
    criteria, DOT must give priority to projects according to five factors
    established in the law. These factors constitute DOT's Office of Aviation
    Analysis' first tier of project evaluation. DOT must give priority
    consideration to communities that (1) have air fares higher than average
    for all communities, (2) provide a portion of the cost of the project from
    local sources other than airport revenues, (3) have or will establish a
    public-private partnership to facilitate air carrier service to the
    public, (4) will provide material benefits to a broad segment of the
    public that has limited access to the national air transportation system,
    and (5) will use the assistance in a timely manner. Although a local
    community match from nonairport revenues enhances a community's chance of
    receiving a grant, it is not required under the act. However, DOT has
    funded only two projects that did not contain a local cash match.

    In addition to the priority factors, DOT has, as part of a second tier
    evaluation, other "service-related" and "project-related" factors that it
    takes into consideration in evaluating competing proposals. (See app. III
    for a list of the factors used in DOT selections.) DOT uses this second
    tier evaluation to ensure that a project has a strong justification, and
    the factors themselves have changed and evolved over time, according to
    DOT officials. For example, as part of this second tier evaluation, DOT
    looked at 15 air service factors to identify whether a carrier served the
    airport and reviewed the airport's existing service frequencies,
    destinations, aircraft size, and passenger boardings. It also examined air
    service in the broader geographic area, including the applicant
    community's proximity to larger airports and the quality of the roads
    providing access to those airports. DOT also considered 26 project-related
    factors, which include such items as whether the area's demographics will
    support the project or whether the project actually addressed the
    community's air service problem. Some project-related factors can make it
    less likely to be selected, including whether (1) the proposal simply
    shifted costs from the local to the federal level, (2) the air service was
    in proximity to other service that would detract from the proposal, and
    (3) the proposal potentially worked at cross purposes with another grant
    if the airport is located close to a past grant recipient.

    DOT has developed review procedures that detail how it processes the
    applications that it receives and how it applies this two-tier evaluation
    of projects. DOT moved to a more structured process when the Congress, in
    December 2003, changed the status of the program, dropping the pilot
    designation of the program. For 2004, DOT developed more formal
    documentation of its assessment of how well projects met the statutory
    eligibility criteria and priority factors for each grant application.

    The DOT application evaluation reports we reviewed have shown how DOT
    incorporates the priority factors in its 2004 deliberations and how those
    results then translate into the projects it recommends to the Secretary of
    Transportation. Generally, applications that meet fewer of the priority
    considerations are less likely to be selected for grant assistance.
    However, priority factors are not the sole criteria in the final
    selection. As shown in table 1, applications that met four or five of the
    priority factors were not guaranteed selection. Twelve of the 35
    applications that met four out of five of the priority considerations did
    not make the final award list, and one proposal that met all five was not
    selected. In contrast 13 applications that met three priority
    considerations were funded.

    Table 1: Fiscal Year 2004 Grant Applications Meeting Priority Factors and
    Award Results

    Priority factors met       Number of applications meeting Number receiving
                                                         factors           awards
    1 of 5                                                  5                0
    2 of 5                                                 14                0
    3 of 5                                                 37               13
    4 of 5                                                 35               23
    5 of 5                                                  5                4
    Disqualified                                           12                0
    Total                                                 108               40

    Source: GAO analysis of DOT data.

    Note: A fiscal year 2004 application may have been disqualified because it
    was incomplete, the airport community received a grant for the same
    project in prior years, the project concept was no longer feasible, or the
    service was obtained without a grant.

    Projects that meet priority factors may not be funded for a number of
    reasons. According to a DOT official, a project may meet the priority
    factors yet not have any realistic possibility of implementation or
    success. DOT may also choose to award a grant to a community that has
    never received one before awarding a second grant to another community.
    DOT's review of the priority factors involves determining a yes or no
    response for each factor. DOT does not use a weighting or point system or
    other scoring system to numerically rate the projects. However, DOT
    officials told us that they are aware that, although in some cases a
    proposal may technically meet the factor, it may do so very weakly. For
    example, a project satisfies a priority factor if it will use nonairport
    revenues as part of its local contribution, no matter how small that
    nonairport contribution may be. On the other hand, a large non-airport
    contribution can be viewed as a strong indicator of community support. The
    final decisions on which projects are selected are thus a result of the
    consideration of both the priority factors and other factors that affect
    the quality of the proposal and its perceived chances of success.

    Once Office of Aviation Analysis staff have reviewed and analyzed the
    individual projects, the Assistant Secretary for Aviation and
    International Affairs reviews the staff assessments and finalizes a list
    of recommended projects for the Secretary of Transportation. According to
    Office of Aviation Analysis staff, through fiscal year 2004, the Secretary
    had agreed with the recommended list. In fiscal year 2005, subsequent to
    the meeting with the Secretary to review recommended awards, DOT made
    changes in the recommended grants. According to Office of Aviation
    Analysis staff, this was done to achieve a better balance of participating
    communities and a better balance in the distribution of funds.

    Our survey of grantee airports showed that a large majority of the
    directors at these airports were satisfied with DOT's selection criteria
    and process for the program, while fewer nongrantee airport directors
    thought the selection criteria were clear. Eighty of 121 grantees
    responding-or 66 percent-were either satisfied or very satisfied with the
    clarity of the selection criteria, while only 26 of 82 nongrantee airport
    directors-or 32 percent-were either satisfied or very satisfied with the
    clarity of the selection criteria. A possible explanation for this is that
    while DOT has flexibility in making awards and considers many criteria in
    addition to the five priority factors, the ultimate selection decision is
    discretionary. A few of the fiscal year 2002 airport grantees we visited
    observed that although they were pleased they were chosen, they were not
    sure how grantees are selected and what criteria were used.

    DOT Oversees Projects Largely by Reviewing Reimbursement Documents and
    Reports from Grantees

    DOT's Office of Aviation Analysis staff are responsible for oversight of
    the grants and serve as contact points with grantees. For the 2005 program
    cycle, six staff were assigned part-time to the program, an increase from
    four part-time staff during the program's first 3 years. DOT uses a
    document review approach to oversight in which it requires grantees to
    submit quarterly reports that are used to assess a project's progress and
    timeliness. The agency also requires that grantees submit a final report
    on the project, which is used as the basis for its overall evaluation of
    the project and holds back 10 percent of the grant funds until the receipt
    of a final report. DOT operates the program on a reimbursable
    basis-grantees must first expend funds from their own resources for
    project activities and then request reimbursement from DOT for allowable
    expenses. To ensure that government reimbursements are proper and
    allowable, DOT reviews expense receipts, invoices, and other evidence of
    expenditures grantees submit for reimbursement and, if satisfactory, will
    authorize FAA to make payment.10 DOT and FAA maintain and monitor
    reimbursement information on their financial databases. Office of Aviation
    Analysis officials told us that they use this approach because performing
    on-site visits is impractical given the small number of DOT staff who
    administer the over 100 active grantees currently in the program. They
    also noted that there is no provision for administrative expenses in the
    appropriation, thus DOT does not have funds available for site visits.

    DOT monitoring has been sufficient to identify cases where grant
    recipients have been both successful and unsuccessful in implementing
    their grants. In those cases where sponsors have difficulty implementing
    their projects and are unable to utilize their grant awards, the grants
    are terminated and funds reverted back to DOT for reallocation to other
    applicants. From 2002 through 2004, DOT reallocated about $4.5 million to
    other projects.

    The manner in which DOT administers oversight of grantee reimbursements
    and provides assistance generated a favorable response from grantees. Our
    survey found that grantees had high levels of satisfaction with the way
    DOT monitored the grants and provided assistance to grantees.
    Specifically, 108 of 121, or 89 percent, of grantee airport directors who
    responded to our survey said that they were satisfied or very satisfied
    with DOT's assistance. Likewise, 96 of 121, or 79 percent, of responding
    airport directors were satisfied or very satisfied with DOT's monitoring
    or oversight activities.

    In general, grantees did not see the amount of paperwork required by DOT's
    quarterly reporting mandate as burdensome, with 86 of 121-71 percent-of
    survey respondents being satisfied or very satisfied with this quarterly
    reporting requirement. A lower number, 58 of 119-or about half of airport
    respondents-said they were satisfied or very satisfied with the paperwork
    DOT required for reimbursement and only 5 respondents were dissatisfied or
    very dissatisfied. However, one airport consultant noted that for very
    small airports with very few full-time staff, the reimbursement
    requirements can be more difficult to complete.

    Grantees Have Been Slow to Implement Some Projects

    The Vision 100-Century of Aviation Reauthorization Act added a provision
    that DOT grant assistance will be used in a timely fashion as an
    additional priority consideration for selection to participate in the
    program as of 2004. The only limitation the authorizing legislation places
    on the timely expenditure of funds is that air service subsidies cannot
    last more than 3 years. DOT's 2004 and 2005 grant announcements set an
    expectation that the funds should be used within 3 years. Although this
    criterion was not part of the 2002 grant process, it does provide a
    benchmark for performance, and 2002 grants are at the 3-year point. As of
    September 30, 2005, 16 of 40 fiscal year 2002 grants were still active, 20
    were completed, and 4 had been terminated by DOT. About 62 percent of the
    $20 million total 2002 program grant allocation had been reimbursed to
    2002 grantees. In addition, 58 grants are scheduled to expire in fiscal
    year 2006. Table 2 shows the amounts DOT reimbursed each year through
    September 30, 2005. (See app. IV for more detailed information about the
    status of specific grants.)

    Table 2: Reimbursed to Grantees, as of September 30, 2005

        Dollars in
         millions
          Year of    FY 2002 grants amount       FY 2003       FY 2004      Total
    reimbursement         and (percent) grants amount grants amount reimbursed
                                           and (percent) and (percent)     amount
    2002                       $0 (0.0)                                     $0
    2003                     5.5 (27.3)    $.01 (.05)                      5.5
    2004                     4.9 (24.7)    2.2 (10.9)      $0 (0.0)        7.1
    2005                     2.1 (10.5)    4.1 (20.5)    2.2 (11.1)        8.4
    Total                  $12.5 (62.4)   $6.3 (31.5)   $2.2 (11.1)      $21.0

    Source: GAO analysis of DOT data.

    Notes: (1) The percentages shown were determined by comparing the amount
    of reimbursements made in that year with total awards for that grant year.
    (2) Calendar Year 2005 reimbursement are through September 30, 2005. (3)
    DOT recovered about $2.6 million unused from fiscal year 2002 grants and
    about $1.9 million unused from fiscal year 2003 grants and transferred
    these funds to other grants. It also transferred $5 million in fiscal year
    2005 funds to the Essential Air Service program.

    Office of Aviation Analysis officials told us that the 2002 grants are not
    an indication of what has happened with the grants awarded in following
    years. According to the officials, a number of factors contributed to the
    2002 projects being delayed. First year grants were not awarded until late
    fall of 2002. In addition, the airlines were at that time still recovering
    following September 11, which made it difficult for communities to attract
    new service. Many projects included revenue guarantees, which can take
    some time to finalize. Finally, communities may wait to ask for
    reimbursements after several months of expenditures, which slows the
    payout of federal funds. The reimbursement data indicate that the 2003
    grants also experienced low reimbursements the first year. Only about 11
    percent of the 2003 grant funds were reimbursed by the end of calendar
    2004.

    Finally, it should be noted that when a project includes a revenue
    guarantee, the slow expenditure of funds does not always indicate a
    problem. Revenue guarantees are only paid out if the airline fails to meet
    a revenue target. If it meets the target, no funds are drawn down, which
    may actually be an indication of project success. For example, the
    $500,000 grant award to Rhinelander, WI, included almost $492,000 for a
    revenue guarantee. However, upon project completion, Rhinelander had used
    about $254,000 for the revenue guarantee. According to the airport
    director, the new route initiated under the grant generated more revenue
    for the airline during the grant period than had been expected. Therefore,
    the airport did not have to reimburse the airline as much as it had
    anticipated.

    As part of our survey of grantees, we asked whether their projects were
    proceeding on schedule, and, if not, why they were proceeding more slowly
    than expected. About 40 percent-42 of 106-of the grantee airport directors
    reported that their projects are behind schedule, including 11 of 26
    airport directors surveyed who were involved in implementing grants
    awarded in 2002. (See table 3.) Most of these respondents, 23 of the 42,
    cited difficulties in entering and finalizing agreements with the airlines
    as the main reason for the delay. Grantees we surveyed also cited other
    reasons for delays, including issues with airport personnel and among the
    grant consortium, operational changes at Chicago O'Hare airport, and the
    need to coordinate the grant with the Essential Air Service program.11

    Table 3: Airport Directors Assessments of Grant Progress

    Year grant Ahead of On schedule   Behind    No basis to judge/No     Total
        awarded   schedule             schedule                response responses
    2002              0           9       11                       6        26
    2003              1          13       19                       7        40
    2004              3          22       12                       3        40
    Total             4          44       42                      16       106

    Source: GAO analysis of survey results of airport managers involved in
    grants.

    Note: Because not all airport directors responded to our survey, the
    number of respondents is smaller than the number of grants awarded.

    On a case-by-case basis, DOT has approved a number of grant amendments,
    including extending the grant expiration date, to projects that have been
    slow to be implemented. As of July 26, 2005, DOT had amended a total of 47
    grants, including 27 of the 2002 grants. For example, Binghamton, NY,
    wanted to obtain enhanced service to Washington, D.C., via United Express
    and Detroit, MI, via Northwest Airlink by providing the airlines with
    revenue guarantees. According to officials from the Office of Aviation
    Analysis, there was some delay because of difficulties in negotiating with
    the airlines. DOT agreed to extend the grant expiration date, allowing
    Binghamton extra time to work out agreements with United and Northwest.
    However, during these extended negotiations, the airlines told Binghamton
    that they would agree to provide the enhanced service only if the
    community offered subsidies rather than revenue guarantees. As a result,
    DOT also allowed Binghamton to amend its grant to provide the airlines
    with subsidies rather than revenue guarantees to better accommodate the
    airlines' requirements. Another example is the grant agreement amendment
    DOT provided Lamar, CO. Lamar did not have any commercial service prior to
    its grant award. The purpose of the grant was to obtain service from Rio
    Grande Airlines to access scheduled service to Denver International
    Airport. Lamar was not successful in obtaining service from Rio Grande
    Airlines and instead obtained service to Denver's Front Range Airport from
    Lamar Flying Service, a charter carrier. The Office of Aviation Analysis
    agreed to amend Lamar's grant to allow Lamar Flying Service the time to
    expand its base of operations and establish dependable air transportation.
    Lamar subsequently provided four scheduled trips a week to Denver
    International Airport and has since been able to upgrade its aircraft.

    Variety of Goals and Strategies to Improve Air Service are Used, but the
    Results to Date of Completed Projects are Mixed

    The Small Community Air Service Development Program allows communities to
    set a variety of goals for projects, and individual projects have been
    directed at adding flights, airlines, and destinations; lowering fares;
    changing the aircraft serving the community; completing a study for
    planning and marketing air service; increasing enplanements; and curbing
    the leakage of passengers to other airports. To achieve these goals, grant
    sponsors have used a number of strategies, commonly including subsidies
    and revenue guarantees to the airlines, marketing to the public and to the
    airlines, hiring personnel and consultants, and establishing travel banks
    in which a community guarantees to buy a certain number of tickets. In
    addition, communities have employed a number of other strategies,
    including buying an aircraft, subsidizing the start-up of an airline, and
    taking over ground station operations to reduce the costs for an airline.
    The outcomes of the grants may be affected by broader industry factors
    that are independent of the grant itself, such as larger strategic
    decisions on the part of the airlines. Our evaluation of completed
    projects indicates mixed results, but only 23 of 157 projects were
    completed as of September 30, 2005.12 While officials at 19 of the 23
    airports reported improvements to air service or fares during the life of
    the grant, only about half said that the improvements appeared to be
    self-sustaining. With 127 of the 157 grants still ongoing, it is too soon
    to determine which specific types of strategies work best or assess the
    overall effectiveness of the grant program to improve air service to small
    communities.

    Most Common Project Goals Were Related to Increasing Service and
    Enplanements

    According to our survey of 146 airport directors that received funds from
    the 122 grants DOT awarded from 2002 through 2004, the most common goals
    associated with Small Community Air Service Development Program grants
    were generally related to increasing service and enplanements (see fig.
    5). Recapturing passenger traffic-that is, stopping leakage to other
    airports-was also a frequent objective that increased in importance each
    year of the program. In contrast, conducting a study of the local market
    or changing the type of aircraft serving the community were relatively
    infrequent goals. By 2004, relatively few airports cited these goals for
    their grants. Finally, although addressing high fares is an explicit goal
    of the program, lowering fares was cited as an objective by 62 airport
    directors of the 146 airport directors over the 3-year span.

    Figure 5: Project Goals as Identified by Airport Directors for Grants
    Awarded 2002 through 2004

    Note: Some airport directors identified more than one goal. In addition,
    because some grants cover multiple airports through a consortium, the
    number of airport directors responding may be greater than the number of
    grants DOT awarded in that year.

    Grant Projects Use Many Different Strategies to Meet Their Goals

    Grantees engaged in a number of strategies to meet their goals, including
    various financial incentives, marketing, studies, and other approaches.
    For example, a number of different financial incentives have been funded
    under the program, including:

    o Start-up subsidies-these provide assistance for an airline to begin
    operations or pay for an aircraft.

    o Revenue guarantees-the community and air carrier agree on a revenue
    target and the community pays the carrier only if revenues from the
    service do not meet the target.

    o Travel banks-businesses or individuals deposit or promise future travel
    funds to a carrier providing new or expanded service. A business entity
    may handle an account containing the travel funds, and contributing
    entities then draw down on this account.

    o Airport station operations-the airport may assume the ground station
    operations for one or a number of carriers serving the airport. Ground
    personnel such as baggage handlers and ticket agents become airport
    employees and may be shared among the airlines. Airlines pay for these
    services, but their cost can be lower than if provided by the airline
    itself.

    Marketing support generally took a variety of forms, including mass media
    such as television, radio, magazine and newspaper advertising, outdoor
    advertising such as billboards and banners, direct mail, internet
    advertising including using the airport web site, airport special events
    such as open houses, frequent flyer promotions, travel agent incentives,
    and other approaches. Figure 6 shows an example of the use of outdoor
    advertising in one of the marketing projects funded by the grants.

    Figure 6: Example of a Billboard Advertisement Resulting from a Grant
    Project

    The Small Community Air Service Development Program also has funded
    studies and various other approaches. For example, in 2002, DOT awarded
    the Aleutians East Borough in Alaska a $240,000 grant to study the air
    service market for some rural airports in the lower Alaskan peninsula and
    the eastern Aleutian Islands. DOT also subsequently awarded the Aleutians
    East Borough $70,000 in 2003 to expand the study. Finally, other
    approaches have included developing alternative ground services such as
    bus service to nearby hubs and funding personnel such as airport economic
    development staff positions or consultants.

    We reviewed the grant applications and agreements for all 157 grants
    awarded from 2002 through 2005. Projects commonly include more than one
    strategy, such as combining a revenue guarantee with marketing for the air
    service provided under the grant. Over time, a few trends can be seen in
    the strategies used by communities. First, while marketing activities have
    always been heavily used as a strategy, by 2004 marketing had virtually
    become a universal strategy. All 46 grants-the initial 40 DOT awarded plus
    the 6 additional grants awarded with reallocated prior year grant
    funds-included marketing as a component. Second, the number of projects
    using direct subsidies and travel banks declined by 2004 and remained low
    in 2005, while the number of projects using revenue guarantees increased
    after 2002. Revenue guarantees have been the most common form of financial
    assistance each year of the program. Figure 7 provides a summary of the
    types of strategies communities have used under the program.

    Figure 7: Strategies Included in Grant Projects

    Note: DOT awarded 40 grants in 2002, 36 grants in 2003, 46 grants in 2004
    (including 6 grants awarded using funds reallocated from prior declined,
    terminated, or completed projects) and 35 grants in 2005.

    Because marketing was such a heavily used strategy, we contacted all 23
    airports that had completed their grants by September 30, 2005, to
    determine what types of marketing they actually did. We found that 22 of
    the 23 completed grants had included some kind of marketing component to
    encourage greater use of the airport or the airlines that fly there; the
    lone exception was a grant which funded a study only. All 22 grantees used
    newspaper advertising, 21 used radio advertising, and 21 used the
    Internet-for example, the airport Web site. Television and outdoor
    advertising were also common strategies, 17 grantees used television and
    18 used outdoor advertising.13 After these strategies, the most common
    forms of marketing were airport special events (14 projects), magazine ads
    (12 projects), and direct mail (11 projects). Other types of marketing,
    such as frequent flyer promotions, travel agent incentives, or trade show
    booths, were also used in a few cases.

    Participating Airlines Generally Favored Revenue Guarantees

    Officials from airlines participating in the Small Community Air Service
    Development Program said revenue guarantees or other forms of financial
    subsidies were generally their preferred type of strategy, but they also
    considered other types of strategies proposed by communities under the
    program. We contacted each of the airlines associated with the 10 projects
    completed by January 1, 2005, including Continental Airlines, Delta Air
    Lines, Horizon Airlines, Rio Grande Air, TransStates Airlines, US Airways,
    and Westward Airways. Although their comments do not constitute a
    comprehensive analysis of industry views of the grant program, they
    provide a useful perspective on how participating airlines view the
    program. Several airline officials noted that reducing financial risk has
    become a key factor for airline and airport officials and consultants we
    interviewed also made this observation. Finally, airline officials said
    they perform their own due diligence doing market analyses of the
    airports, the competitive situation, and route finances regardless of what
    a local study says.

    Airlines face challenges when initiating air service to a community.
    Start-up costs can be significant and include repositioning equipment,
    renting space, and hiring and training personnel. Also, even if a viable
    air travel market exists in a community, entering a new market involves
    changing passengers' existing travel patterns and loyalties, which may
    take time. Airline officials noted that given the current financial
    condition of the industry, airlines cannot afford to take a year of losses
    to build a customer base in a market, as they had in the past. For this
    reason, airline officials stated that they often could not enter smaller
    markets without some kind of revenue guarantee, such as that provided by a
    Small Community Air Service Development Program grant, or other financial
    support from the community.

    Airline officials emphasized that for a project to be of interest to them,
    the market must be potentially self-sustaining without subsidy or revenue
    guarantee in the longer term. The grant will eventually end and airlines
    do not wish to start over in another market, with the accompanying costs
    and risks. Airline officials also emphasized the importance of local
    funding to provide marketing for the new service; for some airlines, this
    was a crucial factor in selecting the community. A related observation by
    airline officials was that the level of local support and commitment to
    air service was a key factor in their decision to work with a local
    community. The Small Community Air Service Development Program has this
    component of local commitment, which some airline officials saw as
    important. In addition, some airline officials said that the overall
    project (grant and local match) must be sufficiently large to gain their
    interest. Finally, most airline officials were unfavorably disposed toward
    travel banks citing the difficulty in administering them and their poor
    track record of success. However, one airline official said they had been
    involved with successful travel banks and was open to the prospect of
    trying that strategy again.

    All airline officials we talked to had positive views of the Small
    Community Air Service Development Program. Several officials stated that
    the program was superior to the Essential Air Service program because it
    addressed markets that were potentially self-sustaining but were
    underserved. However, in one case, airline officials said they were
    concerned about communities using the program to attract low-cost carriers
    to compete with existing service they were already providing to the
    community. Office of Aviation Analysis officials noted that higher than
    average fares is a statutory criterion for priority consideration in the
    selection of grantees, so introducing a low-cost carrier into a community
    is an acceptable strategy for a community under the program.

    Completed Grants Indicated Mixed Results

    We contacted officials of the 23 Small Community Air Service Development
    Program grant projects that were complete by September 30, 2005, and
    compared them against the program's goals of improved air service and
    found that there were mixed results. In general, we found that the airport
    officials reported almost all the completed projects had some positive
    effect on air service during the life of the grant, but in some cases the
    improvements did not remain after the initial grant period, or that the
    improvements were not self-sustaining. For most completed grants, 19 of
    the 23, airport officials reported some kind of improvement in service,
    either in terms of an added carrier, destination, flights, or change in
    the type of aircraft. Of the 23, 8 reported adding a new carrier, 13 a new
    destination, and 13 an increase in the number of flights. In addition, 13
    reported that some fares had lowered at the airport during the grant.
    These service and fare improvements may explain the positive effect on
    enplanements the airport officials reported-19 grantees reported
    enplanements rose during the course of the grant. However, the
    improvements seen during the grant did not always continue afterwards.
    Fourteen of the 23 grantees reported that the improvements were still in
    place as of October 1, 2005. Further, there is the question of whether the
    service or fare improvement is self-sustaining and will continue without
    additional funding. About half the grantees with completed grants-11 of
    the 23 grantees-reported that the improvements they experienced as a
    result of the program were self-sustaining thus far. It should be noted
    that these outcomes are preliminary. Thirteen of these grants were
    completed in 2005, and determining whether a particular project is
    successful may depend on the timeframe used. For example, Westward Airways
    was able to initially provide service to Scottsbluff, NE, under the grant,
    but later went out of business.

    We also visited 10 airports that had completed grants by January 1, 2005,
    in order to gain a more detailed understanding of the outcomes of their
    projects (app. V contains discussion of each of these). Of these, five
    projects-Charleston, WV; Daytona Beach, FL; Hailey, ID; Lynchburg, VA; and
    Mobile, AL, were generally successful in achieving their goals and had
    made self-sustaining improvements to air service at the time of our
    review.

    o Charleston was able to add a new air carrier (Continental) and
    destination (Houston). However, Continental subsequently reduced the
    number of daily flights from two to one. Charleston officials said this
    was a result of a larger strategic allocation of equipment by Continental,
    and the airline later restored this second flight to Charleston.

    o Daytona Beach's objective was to add service to Newark, NJ, which has
    remained in place after the grant was completed. After the grant was
    completed, Continental extended its agreement with the airport. DOT
    officials said that Continental has also expanded its service at the
    community to additional destinations.

    o Hailey successfully added air service to Los Angeles via Horizon
    Airlines (see fig. 8). Although the service continues, it does not operate
    all year long due to the seasonal nature of demand to this resort
    community. After the grant expired, a local resort funded the revenue
    guarantee to Horizon, indicating that the service was initially not
    self-sustaining. However, Horizon now offers the service without a grant
    guarantee. In addition, the grant helped convince Horizon to add another
    flight to a new destination, Oakland, CA.

    o Lynchburg, VA, was able to upgrade service to Atlanta from 30-seat
    turboprops to 50-seat regional jets through a revenue guarantee. The new
    jet service resulted in higher load factors on the larger regional jets
    than on the smaller turboprops due to increased demand. This service also
    has continued after the completion of the grant. DOT officials said that
    the community has also succeeded in negotiating, with its carrier,
    relative fare parity with the carrier's operations with a nearby airport.

    o Mobile, AL, established an innovative program to assume the ground
    operations, including baggage handling and staffing ticket counters for US
    Airways, which was about to abandon service to the airport, according to
    an airline official. US Airways has maintained its operations in Mobile,
    and the airport has expanded this program, with American Airlines joining
    the ground operations service.

    Figure 8: Horizon Airlines Turboprop Serving Hailey, ID

    The four projects that did not result in self-sustaining improvements in
    air service were Fort Smith, AR; Reading, PA; Scottsbluff, NE; and Taos,
    NM.

    o Ft. Smith provides an example of how larger events in the aviation
    industry can affect the outcome of the grant. Ft. Smith obtained the air
    service it sought under the grant, however, American Airlines' strategic
    decision to reduce the number of flights at its St. Louis hub resulted in
    Ft. Smith losing the service.

    o In the case of Reading, PA, the grant may have had a negative effect on
    air service. The grant established a bus service from Reading Airport to
    the Philadelphia airport, with the goal of demonstrating that air travel
    demand existed in Reading and service could be added to the airport.
    However, the bus service provided competition to the existing air carrier
    at Reading, which subsequently withdrew its service. The bus service
    ultimately failed (although a private operator has re-established bus
    service without subsidy), and Reading was left for a time without any
    scheduled air service.

    o Scottsbluff, NE, was initially successful in resuming an intrastate air
    service between Scottsbluff, North Platte, Lincoln, and Omaha via start-up
    air carrier Westward Airways. This service did not reach the expected
    level of enplanements and Westward Airways, which was able to begin
    operations with the help of the grant, ceased operations in July 2005.

    o Taos, NM, was not able to achieve sufficient enplanements to make its
    air service self-sufficient, and Rio Grande Air, the small carrier that
    provided the service to Taos, went bankrupt.14

    Finally, it is too early to determine whether the $95,000 grant to
    Somerset, KY, may be considered a success. The purpose of the grant was to
    conduct a study, which has been successfully completed. However, the
    ultimate goal of the program and the grant is to improve or attract air
    service. Because the community received a second grant in 2005, it will be
    possible in the future to determine the ultimate outcome of the initial
    and subsequent grants. Until the results of Somerset's efforts to attract
    service are known, it is too soon to evaluate this grant.

    Some of the 10 grantees we visited identified additional positive and
    negative indirect effects not anticipated at the time of the grant. For
    example, one airport cited increased community involvement as a positive
    outgrowth of the grant-it helped forge ties between the airport and
    business community that were not there before. In addition, the study
    performed with grant funding fostered better community understanding of
    the local airline market. In a few instances, services begun under the
    grant stimulated other air service not part of the grant such as
    attracting other new service or improved service by a competing carrier.
    Conversely, some airport officials were concerned that grants to nearby
    competing airports could dilute effects of the grant at their airports. An
    airport official and an industry consultant also expressed concern that
    the program was no longer producing innovative ideas. Instead, some
    airports were copying approaches that had been funded in the past as a way
    to improve their chances of receiving a grant.

    Because a large majority of Small Community Air Service Development
    Project grants are not complete (127 of the 157 grants were ongoing as of
    September 30, 2005), it is too soon to determine which strategies have
    performed the best or assess the overall effectiveness of this program to
    improve air service to small communities. However, in addition to the
    preliminary results from the projects we studied, comments from DOT
    officials, airport directors, and airline officials provide some
    indications of what strategies that had positive results. Airline
    officials saw projects that provide direct financial benefits to the
    airline, such as revenue guarantees, as having the greatest chance of
    success. These officials noted that these types of projects allow the
    airline to test the real market for air service in a community without
    enduring the typical financial losses that occur when new air service is
    introduced. Airline officials also said that marketing efforts were
    important for success. DOT and some airline officials doubted the
    effectiveness of travel banks, in part because of the difficulty with
    administering the program. Finally, one strategy that airport and airline
    officials found innovative was for airports to take over the airlines'
    ground station operations, such as ticketing and baggage handling. Only
    two airports have used this strategy under the program, so it is too early
    to tell if this model will be more widely adopted.

    Most Airport Directors Indicated That Their Grant Projects Were Effective
    or That It Was Too Soon to Tell

    Most grantee airport directors we surveyed indicated that their projects
    were at least partially successful or that it is too early to make an
    assessment. As shown in table 4, 60 of 120 airport directors that
    responded said that their grant was effective or very effective in
    increasing passenger traffic. About 46 percent (54 of 118) of airport
    directors said that their grant was effective or very effective in
    improving service quality. However, in both instances, almost as many
    airport directors said that they had no basis to judge effectiveness or
    that the question was not applicable. In addition, 38 of 118 airport
    directors answered that their grant had been effective or very effective
    in reducing high fares. A majority, 63 airport directors, said that this
    issue was not applicable or they had no basis to judge.

    Table 4: Airport Directors' Views on Success of Grant Projects

                                 Very As effective Very effective NA or     Total
                         effective or           as or ineffective    No
                            effective  ineffective                basis responses
                                                                     to
                                                                  judge
    Increasing                  60            7              1    52       120
    passenger traffic
    Improving air               54           11              2    51       118
    service quality
    Resolving fare              38            9              8    63       118
    issues

    Source: GAO survey of grantee airport directors.

    Some of the airport directors responding to our survey also said that they
    thought the funds used for marketing had been effective. For example, one
    airport director said that the small airport he directs does not have a
    marketing budget and that the grant funds provided for marketing were more
    than the airport's total annual operating budget. The marketing funds
    therefore, brought public awareness the airport would not otherwise have
    been able to obtain. Another airport director said that he believed the
    marketing program conducted as part of the airport's grant resulted in an
    11 percent annual increase in enplanements.

    Usefulness of Air Service Development Zone Designation Is Not Clear

    AIR-21 requires that each year DOT designate an Air Service Development
    Zone as part of the Small Community Air Service Development Program. The
    act specifies that DOT shall work with the community or consortium on
    means to attract business to the area surrounding the airport, to develop
    land use options for the area, and provide data working with the
    Department of Commerce and other agencies. DOT sees this designation as
    providing an opportunity for the selected community to work with its grant
    award to stimulate economic development, increase use of the airport's
    facilities, and create a productive relationship between the community and
    the federal government to achieve these goals. DOT has designated one
    airport each year of the program as an Air Service Development
    Zone-Augusta, GA (2002); Dothan, AL (2003); Waterloo, IA (2004); and
    Hibbing, MN (2005). Airports may apply for the designation by indicating
    their interest and providing supporting information on their grant
    applications. Airport officials said there are no special reporting
    requirements nor any additional funding for airports designated Air
    Service Development Zones.

    Airport and local officials at the three locations designated in 2002
    through 2004 said they did not know the criteria for being selected as an
    Air Service Development Zone or they were unclear on why their airports
    were selected. Upon selection, all three airports met with DOT staff to
    further clarify what the program entails. Officials from one airport said
    that DOT suggested the airport come up with ideas for how to use the
    designation, which could serve as a model for other communities. Another
    airport official told us that DOT offered to introduce the airport to
    other federal agencies as part of the designation. However another
    official said that other federal agencies, including FAA, do not
    "recognize" the designation as providing any special status for the
    airport. DOT officials said all of the requirements of other agencies,
    including DOT agencies, still apply to the airport and community.
    According to one local official, this makes the designation ineffective in
    fostering economic development.

    All three communities told us that the Air Service Development Zone
    designation has neither positive nor negative effects on the airport,
    because it has done nothing to either help or hurt them. The officials
    from all three airports noted that receiving the designation initially
    provided some positive local publicity for the airport, but that was the
    only effect they could name. Community and airport officials told us that
    any actual economic development that has been created at or near the
    airport would have occurred without the Air Service Development Zone
    designation.

    Conclusions

    Our review of completed Small Community Air Service Development Program
    grants to date found that they had a mixed record of meeting program
    goals. The projects we reviewed included both instances where grantees
    were able to develop self-sustained air service and cases where this was
    not achieved. However, given that relatively few Small Community Air
    Service Development Program projects have been completed thus far (23
    completed grants of the 157 awarded grants, or about 15 percent, as of
    September 30, 2005), it was too early for us to assess the overall
    effectiveness of the grants in improving air service to small communities.
    Examining the effectiveness of this program when more projects are
    complete would allow the evaluation of whether additional or improved air
    service was not only obtained but whether it continues after the grant
    support has expired. This may be particularly important since our work on
    the limited number of completed projects found that only about half of the
    grantees reported that the improvements were self-sustaining after the
    grant was complete. In addition, our prior work on the Essential Air
    Service program found that once incentives are removed, additional air
    service may be difficult to maintain. Over the next year, an additional 58
    projects are scheduled to expire and examining the results from completed
    grants at that time may provide a clearer picture of the value of this
    program. Any improved service achieved from this program could then be
    weighed against the cost to achieve those gains. This information will be
    important as the Congress considers the reauthorization of this program in
    2008.

    We also found that the Air Service Development Zone concept has had no
    identifiable effect at any of the three locations designated from 2002
    through 2004. The officials at the 3 designated airports remained unclear
    about what they were supposed to do once designated a development zone.
    DOT sees this designation as providing an opportunity for the selected
    community to work with its grant award to stimulate economic development,
    increase use of the airport's facilities, and create a productive
    relationship between the community and the federal government to achieve
    these goals. DOT officials said they are available to help the designees,
    if they are asked. However, DOT has not developed guidance or a conceptual
    model for what an Air Service Development Zone should be or what it should
    accomplish. Without this guidance, DOT advice or direction is limited and
    the designees may or may not pursue any air service development zone
    activities.

    Recommendations for Executive Action

    To ensure the effectiveness of the Small Community Air Service Development
    Program, we are making the following two recommendations to the Secretary
    of Transportation:

    o The Secretary should conduct an evaluation of the Small Community Air
    Service Development Program in advance of the program's reauthorization in
    2008. Such an evaluation should occur after additional grant projects are
    complete and include a determination of the extent to which the program is
    meeting its intended purpose of improving air service to small
    communities.

    o The Secretary should clarify what support and services it will provide
    to communities that are designated as Air Service Development Zones.

    Agency Comments and Our Evaluation

    We provided copies of a draft of this report to the Department of
    Transportation for its review and comment. We received oral comments from
    DOT officials including the Associate Director, Office of Aviation
    Analysis. The officials told us that, in general, they concurred with the
    report's findings and agreed to consider the recommendations as they go
    forward with the program. DOT also provided clarifying and technical
    comments, which we incorporated into this report as appropriate.

    We are sending copies of this report to appropriate congressional
    committees and the Secretary of Transportation. We will make copies
    available to others on request. In addition, the report will be available
    at no charge on the GAO Web site at h  ttp://www.gao.gov.

    If you or your staff have any questions regarding the contents of this
    report, please contact me at (202) 512-2834 or d  illinghamg@gao.gov.
    Contact points for our Offices of Congressional Relations and Public
    Affairs may be found on the last page of this report. Individuals who made
    major contributions to this report are listed in appendix VI.

    Gerald L. Dillingham Director, Physical Infrastructure Issues

    List of Congressional Addressees

    The Honorable Thad Cochran Chairman The Honorable Robert C. Byrd Ranking
    Minority Member Committee on Appropriations United States Senate

    The Honorable Jerry Lewis Chairman The Honorable David Obey Ranking
    Minority Member Committee on Appropriations House of Representatives

    The Honorable Peter A. DeFazio House of Representatives

    Objectives, Scope, and MethodologyAppendix I

    To determine how the Department of Transportation (DOT) has implemented
    the Small Community Air Service Development Grant Program, we obtained and
    reviewed legislation authorizing and funding the program as well as
    related orders and guidelines. We interviewed DOT officials regarding
    their grant review and selection process as well as the procedures they
    use to oversee and monitor grant implementation. We reviewed grant
    proposals and award information and information about how DOT used grant
    criteria to review grant applications and award grants. We reviewed
    program controls to understand DOT's program oversight and monitoring. We
    also reviewed quarterly reports and final reports grantees submitted. We
    obtained and reviewed DOT financial data from the Office of the Secretary
    and from the Federal Aviation Administration. Based on our understanding
    of the data through discussions with knowledgeable agency officials, as
    well as checks for obvious errors in accuracy and completeness, we
    determined that the data were sufficiently reliable for our purposes.

    To determine what strategies have been used and what results have been
    obtained, we reviewed the grant applications and agreements for all 157
    grants awarded from 2002 through 2005. We classified the types of
    strategies carried out within the program and summarized the types of
    activities funded.

    In addition, we conducted site visits at each of the 10 grantees that had
    completed their projects as of December 31, 2004. This included
    Charleston, WV; Daytona Beach, FL; Fort Smith, AR; Hailey, ID; Lynchburg,
    VA; Mobile, AL; Reading, PA; Scottsbluff, NE; Somerset, KY; and Taos, NM.
    We interviewed airlines associated with these completed grants to obtain
    information on air service trends at small community airports and the
    Small Community Air Service Development Program. Airlines interviewed
    include American Eagle Airlines, Continental Airlines, Delta Air Lines,
    TransStates Airlines, US Airways, Horizon Airlines, Rio Grande Air, and
    Westward Airways. We contacted 13 additional airports that completed their
    grants by September 30, 2005, to obtain basic information on the outcome
    of their grant. We also interviewed selected aviation consultants that had
    prepared grant applications to obtain information on air service trends at
    small community airports and the Small Community Air Service Development
    Program. Aviation consultants interviewed include Wilbur Smith Associates,
    Vesta Rae and Associates, and Intervistas.

    In addition, we conducted two Web-based surveys. We sent surveys to the
    146 airport directors involved in the 122 grants awarded by DOT from 2002
    through 2004. We sent a different survey to the 116 airport directors who
    applied for but did not receive a grant. For both surveys, we sent the
    survey to the airport directors or managers who were knowledgeable about
    the grant that was received or, in the case of the nongrantees, were
    knowledgeable about the grant proposal. To determine the airports that
    were included in the grant award, we reviewed the grant applications,
    information on the grants from DOT, and information from the grantees. To
    determine the airport directors who applied for but did not receive a
    grant, we reviewed the grant proposal documents from the DOT docket and
    information on the applications from DOT. We did not include airports
    smaller than a nonhub airport (as defined in 1997) in the nongrantee
    survey because they did not have scheduled commercial service.

    Each survey asked a combination of questions that allowed for open-ended
    and closed-ended responses. The survey to airports that received the grant
    included questions about (1) the intended goals of the project, (2)
    project elements, (3) assessments of DOT's implementation of the grant
    program, (4) results obtained under the project, and (5) recent trends
    that have affected air service at the airport. The survey to airports that
    did not receive the grant included questions about (1) the intended goals
    of the project, (2) project elements, (3) assessments of DOT's
    implementation of the grant program, and (4) recent trends that have
    affected air service at the airport.

    For both surveys, a GAO survey specialist designed the questionnaires in
    conjunction with other GAO staff knowledgeable about the grant program. In
    addition, we pretested the grantee questionnaire with three communities
    that had received fiscal year 2002 grants. We also had two aviation
    experts review the grantee questionnaire and provide comments. We
    pretested the nongrantee questionnaire with three other communities that
    had applied for, but did not receive, grants for each of the fiscal year
    2002 through 2004 periods. During the pretests for each questionnaire, we
    asked whether the questions were understandable and if the information was
    feasible to collect. We refined each of the questionnaires as appropriate.

    Both surveys were conducted using self-administered electronic
    questionnaires posted to the World Wide Web. For the grantee survey, we
    sent email notifications to 146 airport managers and directors beginning
    on March 2, 2005. We then sent each potential respondent a unique password
    and username on March 8, 2005, by email to ensure that only members of the
    target population could participate in the survey. To encourage
    respondents to complete the questionnaire, we sent an email message to
    prompt each nonrespondent each week after the initial email message for
    approximately 3 weeks. We closed the survey on April 18, 2005. Because of
    the location and nature of the two grants awarded to the Aleutians East
    Borough islands in Alaska, we did not send surveys to each airport
    included in the grants. Instead, we asked that the legal sponsor of the
    grants complete a single survey for each of the two grants awarded. For
    those questions in the survey that specifically pertain to the airports
    involved in the grants, we asked that the sponsor respond for any of the
    airports in that grant for that specific grant year. We received 121
    completed surveys, a response rate of 83 percent. To view our survey and
    airport directors' responses, go to
    www.gao.gov/cgi-bin/getrpt?GAO-06-101SP.

    The nongrantee surveys were also conducted using self-administered
    electronic questionnaires posted to the World Wide Web. For this survey,
    we sent email notifications to 116  airport managers and directors
    beginning on April 12, 2005. We then sent each potential respondent a
    unique password and username on April 14, 2005, by email to ensure that
    only members of the target population could participate in the survey. To
    encourage respondents to complete the questionnaire, we sent an email
    message to prompt each nonrespondent each week after the initial email
    message for approximately 3 weeks. We closed the survey on May 18, 2005.
    There was an application from two airports in Hawaii. Because both
    airports had the same airport director, we sent him only one survey. We
    received 83 completed surveys, a response rate of 72 percent. We removed
    two airport directors from the respondent list because their airports were
    included in a proposal submitted by a representative of the state DOT
    without the airports' knowledge. Therefore, the airport directors did not
    have sufficient information to complete the survey. To view our survey and
    airport directors' responses, go to
    www.gao.gov/cgi-bin/getrpt?GAO-06-101SP.

    Because these were not sample surveys, there are no sampling errors.
    However, the practical difficulties of conducting any survey may introduce
    errors, commonly referred to as nonsampling errors. For example,
    difficulties in how a particular question is interpreted, in the sources
    of information that are available to respondents, or in how the data are
    entered into a database or were analyzed, can introduce unwanted
    variability into the survey results. We took steps in the development of
    the questionnaires, data collection, and the data analysis to minimize
    these nonsampling errors. For example, social science survey specialists
    designed the questionnaires in collaboration with GAO staff with subject
    matter expertise. Then, as mentioned earlier, the draft questionnaire was
    pretested with appropriate officials to ensure that the questions were
    relevant, clearly stated, and easy to comprehend. When the data were
    analyzed, a second, independent analyst checked all computer programs.
    Since these were Web-based surveys, respondents entered their answers
    directly into the electronic questionnaires. This eliminated the need to
    have the data keyed into a database thus removing an additional source of
    error.

    We also called a random sample of 20 small hub and nonhub airport
    directors or managers as categorized in 1997. We selected our sample from
    a total of 206 small and nonhub airports we determined had never applied
    for a grant. We called the 20 airport directors to ask them why they had
    not applied. The sample was stratified by FAA region and airport size.
    While we did not attempt to project these results to all airports that did
    not apply for grants, the sample provided some useful observations on the
    types of reasons airports had for not applying.

    To determine how passenger traffic and air service have changed at the
    nation's small community airports, we conducted a literature review of
    aviation trends, focusing on studies that describe overall trends at small
    community airports (small hubs and nonhubs) in terms of the number of
    scheduled flights and destinations, available seats on scheduled flights,
    and scheduled flights by aircraft type. We narrowed our criteria to
    analyses contained in published studies and reports in the past 5 years.
    We reviewed each of the studies meeting our criteria and determined that
    the studies were methodologically sound.

    As an additional assessment of the reliability of the studies' findings,
    we considered the reliability of the underlying data that were used in the
    studies and reports. Where noted in the study, we considered the steps
    that the study authors took to determine if the data used in their
    analyses were sufficiently reliable for their purposes. For example, much
    of the published data are from DOT's Office of the Inspector General who
    periodically reports to the Congress on small community air service. The
    Inspector General's reports on aviation trends relied on data from various
    sources. The data that we cited primarily came from the Federal Aviation
    Administration's Flight Schedule Data System, which derives from the
    Official Airline Guide Schedules Database. While the Inspector General did
    not systematically audit or validate the databases they used in their
    report, they conducted trend analyses and sporadic checks of the data to
    assess reasonableness and comprehensiveness. When their judgmental
    sampling identified anomalies or apparent limitations in the data, they
    discussed these irregularities with managers responsible for maintaining
    the data.

    Additionally, we made use of BACK Aviation Solutions, a private contractor
    that uses the Official Airline Guide Schedules Database and the Federal
    Aviation Administration Aerospace Forecasts, which is based on the
    Department of Transportation's Bureau of Transportation Statistics data on
    passenger traffic and fleet type. We recently issued a report and assessed
    the reliability of BACK's and DOT's data.1 Based on (1) reviews of
    documentation from BACK Aviation Solutions and DOT about their data and
    the systems that produced them and (2) interviews with knowledgeable
    agency and company officials, we found the information to be sufficiently
    reliable for these types of analyses. On the basis of our review of the
    methodologies cited in the studies, together with the authors' statements
    concerning steps they took to assess the reliability of the underlying
    data along with our previous data reliability assessments of BACK Aviation
    Solutions and DOT databases, we concluded that the studies' analyses were
    sufficiently reliable for our purposes.

    We performed our work from September 2004 through October 2005 in
    accordance with generally accepted government auditing standards.

    Factors Affecting Air Service to Small CommunitiesAppendix II

    Air service to nonhub airports has generally declined in recent years, as
    measured by the number of departure flights. Nonhubs have had an overall
    decrease in departures since July 2000. While all airports showed a
    decrease in service from July 2001 to July 2003 scheduled departures at
    small, medium, and large hub airports have increased since 2003. By July
    2005, scheduled departures at small, medium, and large hub airports
    largely rebounded, with departures from large and small hubs exceeding the
    July 2000 number. However, the decline of service at nonhub airports
    continued, with 17 percent fewer departure flights serving these airports
    in July 2005 compared with July 2000.

    Many factors may help explain why some small communities face relatively
    limited air service.1 First, many network carriers have cut service to
    small communities while carriers face financial difficulties and
    restructure their operations. Regional carriers now operate at small
    communities where network carriers have withdrawn. Second, regional
    carriers are phasing out turboprops in favor of regional jets, which has
    had a negative effect on small communities that have not generated the
    passenger levels needed to support regional jet service. Third, the
    "Commuter Rule" that FAA enacted in 1997 might have also had an effect.
    This rule was intended to bring small commuter aircraft operated under the
    same safety standards as larger aircraft.2 This change created challenges
    for small communities because it is more difficult to economically operate
    smaller aircraft such as 19-seat turboprops under the new safety
    requirements. In addition, the Aviation and Transportation Security Act
    instituted the same security requirements for the screening of passengers
    for smaller airports as it did for larger airports, creating a "hassle
    factor" for passengers.3 Fourth, low cost carriers have emerged in the
    deregulated environment, but these airlines have generally avoided small
    communities, leading to the phenomenon of "leakage"-that is, passengers
    choosing to drive to a larger airport instead of the small community
    airport. According to industry consultants, low cost carriers are now
    looking at medium-sized markets to expand, which could result in further
    reduction of air service at small community airports.

    Network Carrier Restructuring and Downsizing Negatively Affect Service to
    Small Communities

    The financial condition of network carriers has negatively affected
    service to small communities, especially those served by nonhubs.4 We have
    reported that in response to the economic downturn begun in early 2001 and
    the events of September 11, 2001, many network carriers have been
    undertaking major restructuring and downsizing of their operations.5 A
    regional airline association official noted that as part of restructuring,
    network carriers have transferred routes to regional carriers or reduced
    air service to certain communities.6 According to an industry association,
    network carriers have also discontinued some service at major hubs, which
    can, in turn, reduce service to small communities. Flights to small
    communities have been cut because they are often considered to be less
    profitable than other routes.

    Aircraft Changes at Small Communities Pose Challenges

    According to aviation consultants, turboprops have been  the primary
    source of airline service to small communities, and in particular nonhubs,
    because turboprops have been the most economically viable for small
    communities. However, turboprop use is declining. According to one
    aviation consultancy, from 1995 to 2005, the number of nonstop routes
    served by turboprops declined 54 percent. According to the FAA Aerospace
    Forecast Fiscal Years 2005-2016, the trend is for further decline.7 By
    2016, FAA expects that 10-40 seat turboprop aircraft will represent 13.3
    percent of the fleet, down from 22.8 percent in 2004.

    According to FAA, the primary reason for the decline in turboprops has
    been the rise of the use of regional jets at small community airports.
    According to the DOT Office of the Inspector General, the number of

    regional jet flights at nonhubs has increased 199 percent from July 2000
    to July 2005.8 In comparison, flights by other types of aircraft have
    declined-by 29 percent for large jets, 39 percent for turboprops, and 17
    percent for piston aircraft. The increased use of regional jets at small
    communities is in line with national trends at larger airports. The FAA
    Aerospace Forecast Fiscal Years 2005-2016 states that jet departures by
    regional air carriers accounted for 65.8 percent of industry departures in
    2004 compared with just 0.2 percent in 1991.

    According to an aviation consultant, increased use of regional jets, which
    tend to have 50 seats or more, makes it more difficult for small
    communities to fill the aircraft. Thus, according to an aviation
    consultant, regional jets have not been a direct substitution for
    turboprops on routes; rather, regional jets may fly to denser passenger
    markets where they can profitably operate. Another trend that might
    negatively affect service to small communities is that some airlines have
    been procuring more 70 and 90 seat aircraft. According to the FAA
    Aerospace Forecast Fiscal Years 2005-2016, because the larger aircraft
    allow for longer flight lengths, new markets may be tapped for
    point-to-point service that will by-pass congested hub airports. We have
    reported in the past that small communities may have particular difficulty
    attracting regional jet service because their passenger demand could not
    support it.9

    In addition, an aviation consultant and industry airline association
    official both stated that scope clauses in labor agreements between
    regional and network carriers can constrain regional airlines in the
    aircraft size, routes, and airports served.10 For example, the aviation
    consultant said clause requirements that jets be used on certain routes
    have led to the retirement of turboprops even where turboprop service had
    been profitable.

    The "Commuter Rule" Has Contributed to Loss of Air Service to Some Small
    Communities

    In 1997, the FAA enacted the "Commuter Rule" that called for "one level of
    safety" among all commercial aircraft and placed stringent safety
    standards on regional carriers. The intent was to bring aircraft that have
    10 to 30 seats and operate scheduled service under the same safety
    standards as network carriers that operate with larger aircraft. The
    additional costs required to meet the increased safety standards made some
    smaller aircraft uneconomical to operate. According to industry
    association officials and an aviation consultant, the safety upgrades have
    contributed to eliminating the 19-seat plane because of the increased
    operating costs. According to the  FAA Aerospace Forecast Fiscal Years
    2005-2016, in 1998, 1 year after the implementation of the Commuter Rule,
    the number of city pairs serviced by the regional or commuter carriers
    fell to its lowest level of the decade. Although the trend reversed in
    1999 as more regional jets entered the fleet, the number of short-haul
    markets under 200 miles continued to decline. Furthermore, between 2001
    and 2004, 456 city pairs in the 0-199 mile range and 248 in the 200-499
    mile range lost nonstop regional or commuter service. Taking into account
    city pairs that gained service, the overall result was a net loss of 184
    city pairs in the 0-199 mile range and 90 in the 200-499 mile range. FAA
    told us that part of this decline may be due to the Commuter Rule.11

    Small community airports are required to meet the same security standards
    as larger airports, which can be costly for small community airports and
    create a "hassle factor" for passengers. According to an aviation
    consultant, with the rise in increased security measures at airports, many
    in the traveling public have opted to drive or take trains or buses to
    travel in the post 9/11 era. Consumers believe that with the increased
    time it takes to pass through security, they would be better off using
    another method of transportation to go to their final destination.

    Increase in Low Cost Carrier Service May Also Contribute to Reduced
    Service at Small Community Airports

    Low-cost carriers such as Southwest and JetBlue, provide point-to-point
    service in dense population markets with limited access to low fares, and
    in recent years this model has been relatively successful. According to
    the FAA Aerospace Forecast Fiscal Years 2005-2016, since 2000, network
    carriers have reduced their domestic capacity by 14.3 percent, while low
    cost carriers have increased capacity by 40.5 percent.

    Low-cost carriers generally avoid nonhub airports where demand for their
    point-to-point service is insufficient to make it economically feasible to
    serve with their fleets of larger aircraft. According to the Department of
    Transportation Office of the Inspector General, low-cost carriers
    scheduled service to only 5 of the more than 500 nonhub airports in July
    2005, representing approximately 2 percent of the total available
    passenger seats at these airports. An aviation consultant stated that only
    the six large network carriers pay attention to small community air
    service.

    Low-cost carriers provide a challenge to small communities. Neighboring
    larger airports that have low cost carrier service are attracting
    passengers from smaller airports, a phenomenon called leakage. We have
    reported this as a critical factor determining a community's demand for
    air service.12 During interviews with aviation consultants and during an
    industry conference, this issue was noted as one of the most significant
    challenges to bringing and maintaining air service at small community
    airports.

    According to aviation consultants, some low-cost carriers may begin flying
    from medium density airports. Such a strategy might increase the impact of
    leakage, as more small community passengers become closer to airports
    where low cost service is provided. Some potential small community airport
    passengers may elect to drive to airports served by a low cost carrier to
    access lower fares. Service at the smallest community airports might thus
    be further reduced.

    DOT Additional Selection FactorsAppendix III

    Status of Grants Awarded, 2002 through 2005Appendix IV

    Source: GAO analysis of DOT data.

    aDOT has recovered all or portions of the grant awarded to the grantee.

    Source: GAO analysis of DOT data.

    aDOT has recovered all or portions of the grant awarded to the grantee.

    Source: GAO analysis of DOT data.

    Note: Program funds from 2002 and 2003 were reallocated to six cities in
    2004.

    Source: GAO analysis of DOT data.

    Summary of 10 Completed Small Community Air Service Development Program
    GrantsAppendix V

    This appendix provides information on the Small Community Air Service
    Development Grants that were completed as of December 31, 2004. For each
    grant, information is provided on the background of the application, the
    project funded by the grant, and the results achieved by the grant. The 10
    completed grants are:

    o Charleston, West Virginia

    o Daytona Beach, Florida

    o Fort Smith, Arkansas

    o Hailey, Idaho

    o Lynchburg, Virginia

    o Mobile, Alabama

    o Reading, Pennsylvania

    o Scottsbluff, Nebraska

    o Somerset, Kentucky

    o Taos, New Mexico

    Charleston, West Virginia

    At the time of the grant application, Charleston was served by five major
    airlines that had scheduled flights to 10 destinations. The application
    noted that despite this level of service, there was poor service to
    communities in the southwestern United States, Mexico, Central and South
    America. The application also noted that there were large numbers of local
    public and private firms, as well as academic entities that needed service
    to the Houston metro area.

    In 2002, Charleston proposed that the grant would be used to obtain new
    regional jet service between Charleston's Yeager Airport and Houston,
    Texas' Intercontinental Airport. The application stated that this new
    service from Continental Airlines would have benefits for Charleston and
    West Virginia, including:

    o serving a major origin and destination market for Charleston;

    o enhancing connectivity for the region, saving consumers considerable
    time when connecting from points throughout the Southwestern United
    States;

    o opening same-carrier service to the important industrial centers of
    northern Mexico;

    o giving West Virginia consumers an additional carrier choice; and

    o enabling businesses to save employee time by eliminating connecting time
    for traveling to and from Houston.

    Charleston desired two weekday nonstop round trips to Houston, plus two
    round trips on the weekend using 37-seat or regional jets. Charleston
    would require Continental to offer fares reasonably consistent with those
    charged on a per mile basis on other routes of similar length and with the
    same aircraft.

    Project Funded by Grant

    On June 26, 2002, Charleston was awarded a $500,000 Small Community Air
    Service Development Pilot grant to facilitate acquiring service to
    Houston. The community provided an additional $100,000 local match.
    Charleston allocated $500,000 as a revenue guarantee to reduce the risk of
    losses for Continental in the early months of the new service. The
    community also allocated $20,000 for expenses necessary to meet with the
    new carrier and to provide basic advertising and marketing support for the
    new service.

    Grant Outcome

    On October 1, 2002, Continental started new nonstop service from
    Charleston to Houston. Initially, the service provided two flights daily,
    with the exception of Saturday when one daily departure was provided. In
    January 2004, the service was reduced to one flight daily. Airport
    officials told us the reduction in the number of flights was a result of
    aircraft fleet utilization issues at Continental. However, according to an
    airport official, Continental subsequently resumed the second daily
    flight.

    The community stated in their final project report to DOT that the airport
    experienced an increase in enplanements and a reduction in passenger
    leakage as a result of the Charleston to Houston service. Additionally, as
    shown in table 5, the airport has experienced a 31.8 percent overall
    increase in enplanements in October 2004 versus October 2002 when the
    service first started. In 2004, the airport set a record for enplanements
    with 291,300 and experienced a 15.6 percent increase in overall
    enplanements versus 2002. An airport official told us enplanement levels
    continue to rise as the airport continues to expand its catchment area,
    and that service levels at the airport are comparable to communities that
    are double the size of the airport.1 In 2002, there were 11 carriers
    representing five major airlines serving the airport, and in 2004 there
    were 12 carriers serving the market.

    Table 5: Charleston, WV Passenger Enplanement Report for October 2002
    through October 2004, and Overall Yearly Totals for 2002-2004

                  2002     Percent change    2003     Percent    2004     Percent
                                from 2001         change from         change from
                                                         2002                2003
    October 22,366a              18.4%  21,710      -2.93%  29,474       35.8%
    Totals  251,942               4.1% 242,485      -3.85% 291,300       20.1%

    Source: Charleston, WV (Yeager Airport).

    aDenotes when new Continental service went into effect.

    One local official told us that the success of the new Charleston to
    Houston service had a secondary effect in obtaining an additional airline
    as well. In July 2004, Independence Air started serving the Charleston
    market. The official told us that the success of the Houston service, and
    the fact that Charleston had not experienced a drop in enplanements,
    showed Independence Air that Charleston could continue to handle
    additional service from another airline.

    Daytona Beach, Florida

    At the time of the grant application, Delta Air Lines and Continental
    Connection Carrier, Gulfstream were the only two carriers serving Daytona
    Beach. Delta provided daily service to Atlanta, Georgia, and Saturday
    service to Cincinnati, Ohio. Continental Connection provided 14 weekly
    nonstop flights to Tampa, Florida. However, the community in its grant
    application told DOT that the airport could handle an increase in
    scheduled commercial airline service, particularly to New York. The
    airport stated that they had a market area of 1,383,000 people, that the
    community had 8.5 million visitors to the area in 2000, and that more than
    325,000 of these visitors were from New York. Additionally, the grant
    application told DOT that the New York area provided the strongest pattern
    of in-migration to Volusia County/Daytona Beach, among all states,
    excluding Florida. Thus, the community in its grant application stated
    that it needed direct service to the New York area. According to the grant
    application, Daytona Beach used to have service to New York, but as of
    September 11, 2001, the service was discontinued despite having an 81
    percent average load factor (percentage of occupied seats on flights) for
    the last 12 months of service.

    According to Daytona Beach's grant application, air service had suffered
    in the community due to the large amount of traffic leakage to nearby
    airports. Daytona estimated that 50 percent to 60 percent of their leakage
    was to either Orlando (65 miles) or Jacksonville (90 miles). Community
    officials in the grant application said that this high traffic leakage was
    a direct result of a lack of competitive air service, inadequate seat
    inventory, and resulting fare differentials at Daytona Beach International
    Airport. At the time of the grant application, Orlando had approximately
    354 daily departures and Jacksonville had 220 daily departures. Daytona at
    the same time had an average of 7 daily departures.

    According to the grant application, higher fares flying out of Daytona
    versus the nearby airports of Orlando and Jacksonville contributed to this
    leakage. Daytona Beach officials told DOT that on average, their airport's
    fares were 13 percent higher to the same cities than Orlando, and 15
    percent higher than Jacksonville when purchased 21 days in advance. The
    community noted in the grant application that weaker load factors and
    additional seats at Orlando and Jacksonville have led to higher fares in
    Daytona. In order to increase this air service, Daytona Beach stated in
    their grant application that it desired twice daily regional jet service
    to New York area's Newark Airport. The new service provided by Continental
    Airlines was scheduled to begin on December 14, 2002.

    Project Funded by Grant

    On June 26, 2002, Daytona/Volusia County was awarded a $743,333 Small
    Community Air Service Development Program grant. The local community
    provided an additional $165,000 for a total project cost of $908,333. The
    community allocated $743,333 to Continental Airlines for a revenue
    guarantee for the initial 12-month ramp-up period. The community's goal
    was to make this service self-sufficient in the second year. Additionally,
    the community provided $165,000 for advertising and marketing for
    Continental's new service. Components of the marketing program included:
    newsprint advertising, newsletter advertising, Web site promotions, media
    press releases, radio advertising, ribbon cutting ceremonies, and magazine
    advertising in both Daytona Beach and New York areas.

    Grant Outcome

    On December 12, 2002, Continental Airlines began service between Daytona
    Beach and Newark Airport. Continental operated two daily trips utilizing
    50 seat regional jets. The revenue guarantee between Daytona Beach and
    Continental for service to Newark lasted 1 year until December 11, 2003.
    Table 6 shows the quarterly passenger totals for this service.

    Table 6: Quarterly Passenger Totals between Daytona Beach and Newark

         Period      1st Quarter   2nd Quarter   3rd Quarter   4th Quarter Totals
                            2003          2003          2003          2003
    Passengers         12,545        14,480        13,663        10,491 54,247
    Load Factor           73%           81%           78%           79%    78%

    Source: Daytona Beach International Airport.

    Note: 4th Quarter Totals Ended December 11, 2003, when the revenue
    guarantee between Continental and Daytona Beach ended.

    A local official told us that the project has been a success. The Daytona
    Beach to Newark service continued to operate as of September 30, 2005. In
    addition, following the completion of the revenue guarantee, Continental
    extended its agreement 2 years with the airport to provide service between
    Daytona Beach and Newark. The agreement expires in December 2005, but a
    local official expects the agreement to be renewed with Continental to
    continue providing this service.

    In addition, according to a community official, passenger traffic has
    risen 30 percent at the airport in the last 2 years since the grant. The
    airport now has service to Cleveland, Ohio, and seasonal commuter service
    to Tampa, Florida. Also, Delta has increased its service to 12 flights per
    day and has brought in larger aircraft to serve those flights. In their
    final report to DOT, one community official told DOT that the service
    expansion would not have been possible without the DOT grant. An airline
    official told us that the grant was successful because even with the grant
    completed, Daytona Beach still has service to the New York area.

    Fort Smith, Arkansas

    At the time of the grant application, Fort Smith was served by eight daily
    round-trips via American Eagle Airline to Dallas/Ft. Worth, Texas, and
    three daily round-trips by Northwest Airlink to Memphis, Tennessee.
    Airport officials noted in their grant application that they had
    inadequate service to the North and East at the time of the grant
    application. Furthermore, the grant application told DOT that business
    travelers in the region noted that excessive backtracking was a reason
    they did not use the Fort Smith airport for travel to markets in the North
    and East.

    According to an airport official, the airport suffers traffic leakage to
    other airports. Fort Smith loses passengers primarily to Tulsa, Oklahoma
    (118 miles), Oklahoma City, Oklahoma (183 miles), and to a lesser extent,
    Little Rock, Arkansas (159 miles). A local official estimated this leakage
    to be approximately 46,000 enplanements per year.

    To overcome this lack of service to the North and the East, Fort Smith
    proposed to obtain service to St. Louis, Missouri, or Chicago, Illinois.
    The community previously had service to St. Louis, but problems in the
    service resulted in its cancellation in 1999. The community believed that
    this lost service led business travelers in the area to use alternate
    airports to provide service to markets in the North and East. Thus, the
    community believed that initiation of service to St. Louis or Chicago
    would help answer this untapped demand. Additionally, the grant
    application stated that officials at Fort Smith needed to overcome other
    challenges to improve the airport, including:

    o the general lack of understanding of the airline industry within the
    business community had created unrealistic expectations;

    o business travelers were not fully considering the productivity losses
    sustained due to the use of other airports;

    o the terrorist attacks of September 11, 2001, and the weak economy, had
    created uncertainty among potential travelers; and

    o a general community perception that local air service was limited and
    available fares were high.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Fort Smith $108,520 and the
    local community provided $20,000. The application stated that the town
    would (1) develop an aggressive marketing campaign to illustrate
    advantages of flying from Fort Smith and associated productivity savings,
    (2) conduct market research and prepare professional presentations to
    prospective airlines and (3) utilize a public/private partnership to
    demonstrate market demand and community support for new service. Fort
    Smith allocated the grant funding in the following manner:

    o Business Traveler Campaign-$51,700

    o Leisure Traveler Campaign-$38,200

    o Brochures and Direct Mail-$8,620

    o Airline Presentations-$15,000

    o Special Events-$10,000

    o Promotional Materials-$5,000

    Grant Outcome

    On October 7, 2002, American Connection began providing three daily round
    trips from Fort Smith to St. Louis. The service was initially provided
    with Jetstream 41 turboprop aircraft. Table 7 provides quarterly
    enplanements for this service. American Connection posted its strongest
    monthly performance with 1,144 enplanements in June 2003.

    Table 7: American Connection's Quarterly Enplanement Numbers Fort Smith to
    St. Louis

                  1st Quarter    2nd Quarter   3rd Quarter   4th Quarter   Totals
    2002                                                        2,641    2,641
    2003             2,484          2,543         3,829         1,310   10,166

    Source: Fort Smith Airport Commission.

    Note: The American Connection service did not begin until the 4th quarter
    of 2002. The service ended 1 month into the 4th quarter of 2003.

    At the end of the third quarter in July 2003, American Airlines announced
    its plans to downsize its St. Louis hub. Daily departures out of St. Louis
    were reduced from 417 to 207 on November 1, 2003. Additionally, 26 feeder
    cities, including Fort Smith, lost service to St. Louis as of November 1.
    An airline official stated that had American not downsized St. Louis, the
    service from Fort Smith to St. Louis would have continued if passenger
    levels remained the same.

    According to Fort Smith's quarterly reports to DOT, an indirect benefit
    that Fort Smith has seen since the grant application is that American
    Airlines and Northwest Airlink have transitioned from turboprop service to
    a regional jet service. According to airport officials, passenger loads
    are high and the airport continues to gain seats they lost from the
    termination of the St. Louis service. Additionally, as shown in table 8,
    the community has seen an overall increase in passenger numbers from 2002
    to 2004.

    Table 8: Quarterly Enplanements for Fort Smith, Arkansas 2002-2004

                  1st Quarter    2nd Quarter   3rd Quarter   4th Quarter   Totals
    2002            18,500         23,393        22,382        23,669   87,944
    2003            19,737         23,839        24,004        22,913   90,493
    2004            19,990         23,977        24,337        24,624   92,928

    Source: Fort Smith Airport Commission.

    Fort Smith officials stated that the money spent on marketing and studies
    helped their cause despite losing service to St. Louis. An official told
    us that the studies were helpful because they showed prospective airlines
    that they could fly profitably from Fort Smith. The official told us that
    due to the flight reductions at Chicago and St. Louis, the studies are
    important because local officials are now looking to acquire service to
    Detroit, Michigan via Northwest Airlines. Airport officials told us that
    Detroit can serve as an alternative to Chicago and St. Louis. A local
    official told us that Detroit will provide Fort Smith travelers access to
    the northeastern part of the country as well as Europe and Japan. Local
    officials told us that the studies performed under the grant put the
    airport in a position to talk with airlines about potential service to
    Detroit.

    Hailey, Idaho

    At the time of grant application, Hailey's Friedman Memorial Airport had
    scheduled commercial air service to Seattle/Tacoma, Washington, and Salt
    Lake City, Utah. Seattle service was provided by de Havilland Dash 8 (37-
    seat) and Salt Lake service was provided by Embraer 120 (30 seat
    aircraft). Hailey's application stated that it was a resort destination
    community with an economy dependent on tourism. It stated that Los
    Angeles, California, was the area's number one market. The purpose of the
    grant request was to:

    o provide air service improvements to stimulate air travel and reduce
    travel expense between Sun Valley2 and Los Angeles;

    o stimulate local economic activity by improving air service between Sun
    Valley and Los Angeles;

    o improve air access from the Sun Valley region to key destinations in the
    western United States; and

    o improve air service to a rural region whose airport, Friedman Memorial
    Field, is significantly restricted by high altitude and mountainous
    terrain.

    The grant application told DOT that the airport's location does not allow
    for certain aircraft to be able to land at Friedman Memorial Airport.
    Elevation of the airport (5,300 ft.) and the length of its runway (6,600
    ft.) present a challenge for the airport. The high altitude and short
    runway restrict the types of aircraft that can utilize the airport. During
    winter months, flights are sometimes  diverted due to low visibility
    conditions. During the summer, flights are weight-restricted due to the
    higher density altitude caused by warmer temperatures. A community
    official told us that this difficult operating environment is a factor
    hampering air service.

    Additionally, the grant application told DOT that the airport experiences
    leakage. Other airports used by potential Friedman passengers include
    Boise (154 miles), Magic Valley/Twin Falls (64 miles), Pocatello (150
    miles), and Idaho Falls Regional Airport, Idaho (140 miles). Additionally,
    a local official told us that the expense of flying into Hailey is also a
    challenge.

    In order to increase its air service, the community proposed new service
    to Los Angeles. Horizon Airlines would provide daily round trip service
    from Friedman Memorial Airport in Hailey to Los Angeles on 70-seat
    turbo-props.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided the City of Hailey $600,000.
    The community provided a local match of $271,743. The community allocated
    $644,344 of their money to cover a revenue shortfall for Horizon Airlines
    for a 12 month ramp up period. The community estimated that it would take
    up to 12 months for passenger projections to reach full maturity. An
    airport official told us that the grant allowed the airline to overcome
    the initial risk of operating a new route by providing a subsidy for the
    first year.

    Additionally, Hailey allocated $175,000 for marketing, including direct
    sales, direct mail, print advertising, internet marketing, and radio
    advertising. Marketing would be targeted to people living in the Los
    Angeles area that may be interested in visiting nearby Sun Valley and
    residents in the Sun Valley area that may be interested in travel to Los
    Angeles for business or personal reasons.

    Grant Outcome

    On December 15, 2002, Horizon Air commenced scheduled service from Hailey
    to Los Angeles via Horizon Air with one daily round trip until December
    17, 2003. In the community's final project report to DOT, it told DOT that
    the recreational nature of Hailey and the nearby Sun Valley market
    generated more traffic in the first and third quarters, versus the second
    and fourth quarters. The two higher seasons where more traffic occurred
    were in the winter and the summer months, which are peak tourist seasons
    in the area. In their final report to DOT, the community told DOT that
    Hailey's projections for the first year had been 27,366 origin and
    destination passengers, which would lead to a 53.6 percent load factor. As
    shown in table 9, their actual passenger totals were 19,335 passengers and
    a 41.5 percent load factor.

    Table 9: Horizon Air's Hailey to Los Angeles Passenger Totals with Revenue
    Guarantee

         Period    12/15/02-12/31/02       1st       2nd      3rd      4th Totals
                                       Quarter   Quarter  Quarter  Quarter
                                          2003      2003     2003     2003
    Passengers              1,373     5,388     3,568    6,902    2,104 19,335
    Load Factor               63%       46%       29%      54%      28%    41%

    Source: Hailey, ID Final Report to DOT.

    A local official in the final project report told DOT that the 70-seat de
    Havilland Dash 8-400Q is a large aircraft for the market, thus resulting
    in lower load factors. The official told DOT that the flight Horizon
    Airlines provides would be best served by a 50-seat aircraft. According to
    Hailey officials, there are no 50 seat regional jets that have the
    capability to serve the market, given the airport's current limitations.

    In 2004, upon completion of the Small Community Air Service Development
    Program grant, Horizon Airlines stopped providing year round service to
    Hailey. Instead, the community contracted with Horizon to provide seasonal
    service between Hailey and Los Angeles. Additionally, with the grant
    completed, a local Hailey company provided Horizon Airlines a revenue
    guarantee to continue to fly the service into Hailey. The company official
    told us that the grant provided the company justification to promote air
    service in the community. The official's goal is to make the service
    between Los Angeles and Hailey self-sufficient in 5 years so a revenue
    guarantee is no longer needed. In addition, a local official told us that
    the grant helped start new air service provided by Horizon Airlines
    between Oakland, California, and Hailey.

    A local official told us that the grant has reduced passenger leakage to
    Boise and Twin Falls, Idaho. However, a local official told us that one
    problem that the community still encounters is that flights are diverted
    to Twin Falls due to weather. An airport official told us that if a new
    instrument landing system were introduced, up to 30 percent of the flights
    that are now diverted could land in Hailey. Currently, under Hailey's
    agreement with Horizon Airlines, the community pays for the costs of
    busing passengers from Twin Falls to Hailey when planes are diverted due
    to weather. An airline official told us that the grant definitely
    succeeded and met their expectations for being able to provide service
    between Hailey and Los Angeles for part of the year.

    Lynchburg, Virginia

    At the time of the grant application, Lynchburg had service to Atlanta,
    Georgia; Charlotte, North Carolina; and Philadelphia and Pittsburgh,
    Pennsylvania. The Atlanta service was provided by Atlantic Southeast
    Airlines/Delta Connection, and the Charlotte, Philadelphia, and Pittsburgh
    service was provided by US Airways/Air Midwest/Shuttle America. According
    to the April 19, 2002, grant application, Lynchburg had recently lost
    service from United Express/Atlantic Coast to Washington's Dulles Airport.
    Furthermore, the community had experienced a recent overall decline in
    service at the time of the grant application. From April 1999 to April
    2002 the community had lost 580 weekly departing seats and 23 weekly
    departing flights.

    According to the grant application, to fill its air service deficiency and
    recapture lost traffic, Lynchburg proposed an upgrade to small jet service
    from turboprop for service to Atlanta and Pittsburgh. Additionally, the
    community wanted an upgrade to a larger turboprop for service to
    Charlotte. According to the grant application, the objectives of the
    application were to:

    o Establish additional service that will meet the needs of the region.

    o Capture passengers from the service area that use other airports due to
    insufficient services.

    o Build additional ridership at the airport as a result of offering
    service options that are competitive with those found at communities of
    comparable size.

    o Strengthen the economic base of the region.

    o Enhance levels of air service in Lynchburg.

    Lynchburg noted in its grant application that it had higher airfares
    relative to other nearby airports in the region such as Newport News,
    Roanoke, and Charlottesville, Virginia. For example, in a study the
    community found that fares between Lynchburg and Los Angeles are 19.7
    percent greater than from Roanoke (55 miles), 227.8 percent greater than
    Newport News (213 miles), and 23.9 percent greater from Charlottesville
    (66 miles) based on 3- day advance purchase business fares. Overall, in
    the community's grant application, only one market (Chicago O'Hare) in the
    five sample locations provided had a community that exceeded fares offered
    at Lynchburg.

    In addition, the grant application stated that the airport suffered a
    great deal of passenger leakage to nearby airports. In the application,
    the community noted that a recent study concluded that 38.4 percent of the
    traffic generated by the population residing within Lynchburg's catchment
    area travel to other airports was due to lower fares and wider
    availability of air service. It was estimated that 9 percent of the
    traffic was leaking to Roanoke (55 miles) and 13 percent to
    Raleigh/Durham, North Carolina (180 miles), to utilize low fare air
    service. Six other nearby airports also accounted for approximately 17
    percent leakage out of the community, according to the application. The
    community told DOT in its application that some of this leakage could not
    be recaptured due to low fare service at Raleigh/Durham. However, the
    community also told DOT that much of the lost traffic was due to consumer
    preference for larger and more comfortable aircraft.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Lynchburg $500,000, while the
    local community provided $100,000 in matching funds for a total of
    $600,000. Lynchburg allocated $475,000 of the program for a 12-month
    revenue guarantee for Delta upgrading to small jet aircraft (32 seats or
    greater). The remaining $125,000 was used for advertising and marketing
    for the airport's newly upgraded service. This sum included payments for
    consulting services to negotiate with the target carrier and marketing
    efforts after the recruitment to the benefit of both the new carrier and
    incumbents as well.

    Grant Outcome

    Lynchburg Airport and Delta negotiated a revenue guarantee to upgrade
    their Lynchburg to Atlanta service from 30-seat turboprops to 40-seat
    regional jets beginning on May 4, 2003. The service provides three
    roundtrips a day between Lynchburg and Atlanta, and helped increase
    Delta's passenger capacity in this market by 25 percent. Additionally, on
    May 2, 2004, US Airways upgraded its Lynchburg to Charlotte service from
    19 seat turboprops to 37-seat Dash-8 turboprops. This upgrade in service
    was provided without a revenue guarantee from Lynchburg. In a quarterly
    progress report to DOT, an airport official told DOT that US Airways had
    upgraded its service partly due to the success of the new Delta jet
    service. The Charlotte service provides the airport six daily departures.
    In total, upgraded US Airways and Delta flights provided Lynchburg with
    nine daily departures and 342 passenger seats.

    Lynchburg has, however, lost air service from US Airways to Pittsburgh and
    Philadelphia since the 2002 grant application. An airport official told us
    that the service was lost due to the economic problems facing major
    airlines, a general unwillingness for people to fly after September 11,
    and US Airways reducing its operations in Philadelphia.

    Despite this loss in service, Lynchburg's enplanements have risen since
    2002. (See table 10.) Additionally, total passenger traffic has increased
    from 100,274 in 2002 to 120,174 in 2004. The airport in their final
    project report to the DOT credits this increase in traffic to the upgrade
    in jet service, lowering of fares at the airport, and increased service at
    the airport.

    Table 10: Quarterly Enplaned Passengers for Lynchburg, Virginia for
    2002-2004

                  1st Quarter    2nd Quarter   3rd Quarter   4th Quarter   Totals
    2002            11,132         13,820        12,263        12,676   49,891
    2003             9,984         11,367        12,194        14,649   48,194
    2004            12,434         16,012        15,278        16,763   60,487

    Source: Lynchburg, VA, Airport.

    An airport official told us that the program was a success because it
    resulted in an additional three sustainable jet flights daily.
    Additionally, Delta Air Lines on April 5, 2004, deemed the upgraded jet
    service a success and agreed to continue providing the service without a
    revenue guarantee after the Small Community Air Service Development
    Program revenue guarantee ended in May 2004.

    Furthermore, the community's final report to DOT noted that the airport
    has seen an increase in enplanements and a decrease in leakage. The
    community told DOT that this has occurred due to the upgrade in jet
    service and a lowering of fares at the airport. The community still has
    the same amount of weekly departures as before the grant, but the upgrade
    in jet service has led to more available passenger seats for the community
    than in January 2002. Despite this increase in passenger seats, airlines
    at Lynchburg airlines' load factors have risen since the 2002 grant
    application.

    Mobile, Alabama

    At the time of the grant application, Mobile was served by Delta Air
    Lines, US Airways Express, Continental Express, and Northwest Airlink.
    These four airlines provided Mobile service to Atlanta, Georgia;
    Dallas/Fort Worth, Texas; Charlotte, North Carolina; Houston, Texas; and
    Memphis, Tennessee. In previous years, however, Mobile had experienced a
    decline in air service. Between 1996 and 2002, six airlines cancelled
    service on seven routes. According to the grant application, since
    September 2001, the community had lost service to Chicago, Illinois;
    Cincinnati, Ohio; Birmingham, Alabama; and Washington, D.C. Furthermore,
    since July 2001, the community has gone from 28 daily departures to 20,
    and has declined from 10 nonstop cities to 5.

    According to the grant application, fares had been a long-standing problem
    for Mobile. Mobile stated that it had paid up to 40 percent higher average
    fares than counterparts since 1995. These higher fares had led Mobile
    passengers to drive to nearby airports such as Pensacola, Florida (60
    miles), Gulfport, Mississippi (70 miles), and New Orleans, Louisiana (150
    miles) to access lower fares or direct service.

    To obtain additional service, Mobile proposed to develop an
    airport-airline business model to enable more profitable air service at
    the airport. Under the model, Mobile Airport Authority would own and
    operate the airline ground stations, charging the airline on a per turn
    (one arrival and subsequent departure) basis for its use of equipment and
    staff. The airline station staff would be airport employees, and the
    airport would provide all the equipment required to handle ground
    operations. An airport official told us that the community believed that
    this initiative would help airlines with their high start up costs in a
    market. If several airlines serve the airport, the program can reduce cost
    and inefficiency by not having to duplicate staff, equipment, and
    operations. In addition to developing the airport-airline business model,
    the goals of the grant according to the grant application were to:

    o recruit new service from US Airways Express; additional frequencies to
    Charlotte and new service to selected US Airways cities; and

    o recruit nonstop service to target cities of New York, Orlando, Chicago,
    and Birmingham.

    At the time of the application, the Mobile Airport Authority had already
    established the new airport-airline program for US Airways. Responding to
    an announcement that US Airways would completely withdraw from Mobile
    after September 11, 2001, the Airport Authority hired 10 former station
    employees and took over handling ground operations for US Airways. In
    turn, US Airways maintained one local employee and kept open some service.
    The goal of the program was to use the business model to prevent other
    airlines from pulling out of the market or to recruit carriers into the
    market.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Mobile $456,137 for the
    airport-airline business model, and the city of Mobile contributed $20,000
    toward the project for a total of $476,137. The grant allowed Mobile to
    allocate $144,645 to purchase appropriate ground handling and office
    equipment to continue to operate the existing station. The equipment they
    were utilizing at the time for US Airways was on loan from a previous
    tenant. In addition, $311,492 of the program was allocated as funding for
    direct operating expenses for personnel, supplies, and maintenance for the
    existing station for 1 year of operation. The remaining $20,000 was
    allocated toward marketing support for any new service that participated
    in the new airport-airline program.

    Grant Outcome

    Mobile successfully retained US Airways service to Charlotte. An airline
    official told us before the grant that the Mobile to Charlotte service was
    not performing as well as expected, and that the airline was planning to
    leave the market. The airline official told us that much of the problem
    was due to US Airways staff not being used efficiently. This was due to US
    Airways having a limited number of flights, which led to high ground
    station costs per flight. The airline official told us that the Small
    Community Air Service Development Program grant for US Airways was enough
    of a cost savings to keep them in the market.

    Currently, there are eight Airport Authority staff allocated to the
    program. The staff is put through a training program sponsored and paid
    for by US Airways, with the exception of lodging and food which is paid
    for by the airport. One airport official told us that they were not sure
    how much they were saving US Airways, but US Airways continues to provide
    Mobile air service. After the training takes place, the staffing
    initiative is administered and funded by the airport. There are no local
    taxes or funding supporting the program.

    Additionally, Mobile officials told us that station cost program was
    successful in securing new service from American Airlines. On April 11,
    2005, Mobile announced that American Airlines would operate two daily
    round-trip flights between Mobile and Dallas/Ft. Worth, Texas, beginning
    June 9, 2005, using 44-seat Embraer ERJ-140 jets. An airport official told
    us that Mobile's station cost program was the reason for American's
    decision. The airport official convinced American that Mobile was prepared
    to take over ground station costs until the airline made a profit with its
    new service.

    US Airways and American Airlines are the only airlines in Mobile to
    utilize the airport's station cost offer so far. Airport officials told us
    that they have offered the ground station program to other air carriers
    serving Mobile, but none of the carriers expressed interest in the
    program. An airport official told us that the program would not work as
    well for incumbent airlines because ground staff would likely lose their
    jobs. If other carriers chose to participate, the Authority would probably
    not need to hire all airline staff. The authority would economize the
    operations with the staff that they already have employed and increase
    staff as needed. However, an airport official told us that it would work
    well for airlines like US Airways that are planning to pull out of the
    market, and for smaller carriers coming into the market where the start-up
    costs are prohibitive.

    Reading, Pennsylvania

    At the time of the grant application, Reading was served by US Airways
    with two daily flights to Philadelphia, Pennsylvania, and four daily
    flights to Pittsburgh, Pennsylvania. The community noted that lack of
    other air service and the fares at the airport caused 91 percent of
    Reading's ticketed passengers to leak to nearby airports. Additionally, at
    the time of the grant application, the airport enplanement numbers were
    half of the volume generated in 1989.

    In the community's grant application, Reading indicated that they have
    attempted to have talks with US Airways regarding service improvements and
    with additional carriers about providing service to Reading. The community
    told DOT that they had discussions with US Airways to return service to
    pre-September 11 levels. Additionally, they had discussions with Delta Air
    Lines for new service to Atlanta, Georgia, or Cincinnati, Ohio; Air Tran
    for service to Atlanta, Georgia, and Florida; and Northwest Airlink for
    service to Detroit, Michigan.

    Reading's 2002 application desired to (1) implement a marketing campaign
    to raise awareness of flying from Reading, (2) retain a marketing and air
    service consultant to develop and manage the airport's local advertising
    campaign, and (3) develop the Reading Connection to provide regularly
    scheduled bus service to Philadelphia to demonstrate the demand for air
    service that has been reduced.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Reading $470,000 for the total
    project and Reading added a local match of $30,000. Reading allocated
    $300,000 to subsidize the Reading Connection bus service, $50,000 towards
    general airport advertising, $50,000 for consultant services, and $70,000
    toward advertising and promotion of new carrier services at the airport.

    The Reading Connection was a bus service between Reading and Philadelphia
    that was intended to demonstrate demand to airlines that there was a need
    for increased air service at Reading. General airport advertising included
    radio promotions, print advertising, press releases, direct mail pieces,
    email newsletters, and website development. The consultant services were
    used to retain a marketing and air service development consultant to
    manage the airport's local advertising, public relations, and community
    outreach programs. The advertising and promotion component would be used
    to aggressively market a new carrier's entrance into the Reading market.
    Elements of the program included: billboards, radio, print, direct mail,
    and community receptions.

    Grant Outcome

    Reading Airport lost all commercial air service as of September 2004. The
    community lost service to Philadelphia and Pittsburgh via US Airways and
    was unable to recruit new additional service. A local official told us
    that US Airways stopped serving Reading because they felt the bus service
    would be in direct competition with the airline. Additionally, the
    official told us that Reading's proximity to nearby airports in
    Philadelphia, Allentown, and Harrisburg, Pennsylvania, made Reading a low
    priority for air service in Pennsylvania.

    According to a local official, the Reading Connection's bus service
    operated until the subsidy provided by Small Community Air Service
    Development Program was completed.3 After the grant, the service could not
    be sustained on its own, and the service ended. However, a local
    entrepreneur has since started the service again without subsidy and
    provides five round trips daily between Reading and Philadelphia.
    According to a local official, although the grant did not work the first
    time, the name recognition that the original grant provided has led to the
    demand for the bus service now.

    Scottsbluff, Nebraska

    At the time of the grant application, Scottsbluff was served by Great
    Lakes Airlines with three daily round trip flights to Denver, Colorado.
    The community told DOT that for travelers that travel to Lincoln or Omaha,
    Nebraska the connections and fares were poor through Denver. A local
    official told us that the 450 miles from Scottsbluff to Omaha could be
    driven faster than flying to Denver and waiting several hours for a
    connecting flight to Omaha.

    Additionally, a local official told us that people in western Nebraska
    feel separated from the rest of the state. In the grant application, the
    community noted that the lack of intrastate service hinders government
    entities, businesses, educational institutions, and individuals traveling
    for personal reasons. Thus, Scottsbluff in its 2002 grant application
    proposed to support the development of an intra-state air service,
    provided by Westward Airways, linking eastern and western Nebraska.
    Scottsbluff previously had similar intra-state service, but operations
    ceased in November 1995 when the carrier declared bankruptcy. This
    previous service had been provided under the Essential Air Service
    program. An airport official told us that there is no direct competition
    for the Westward Airways intra-state service.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Scottsbluff $950,000 for the
    project, and the local community provided $750,000 in funding for a total
    of $1,700,000. Westward Airways in conjunction with Scottsbluff provided
    the intra-state service. The grant allocated $867,893 to be used to fund
    pre-operating expenses. These expenses included all the costs the company
    anticipated during the 6 month pre-operating period. Examples of these
    expenses include administrative and flight operations personnel wages and
    benefits, personnel training, professional fees, facility rent and
    insurance, and aircraft acquisition. The remaining $832,107 was allocated
    to fulfill the company's working capital requirement. Working capital
    requirements included funds for cash flow operations and forecasted growth
    phases.

    Grant Outcome

    Westward Airways commenced their Nebraska intra-state service in June 2004
    and ceased operations in July 2005. The service consisted of two daily
    weekday roundtrips that stop in Scottsbluff, North Platte, Lincoln, and
    Omaha, Nebraska. All Westward Airways flights in Nebraska were conducted
    on the Pilatus PC-12 aircraft, a pressurized aircraft capable of 300 miles
    per hour cruising speeds at altitudes up to 30,000 feet. As shown in table
    11, Scottsbluff service had 234 passengers in April 2005.

    Table 11: Scottsbluff Total Enplanements June 2004-April 2005

                          June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr.
                          2004 2004 2004  2004 2004 2004 2004 2005 2005 2005 2005
    Scottsbluff Total  1041  997 1151  1145 1248 1108 1099  852  791  945  891
    Passenger
    Enplanements
    Westward Airways    149  130  143   166  205  173  177  138  152  215  234
    Scottsbluff
    Passenger
    Enplanements

    Source: Scottsbluff County, Nebraska.

    Note: Westward Airways started service in Scottsbluff, Nebraska on June 1,
    2004.

    Westward Airways intra-state service added 10 weekly flights from
    Scottsbluff, increasing the airport's weekly departures from 18 to 28. The
    community in its final report to the DOT stated that the program increased
    enplanements and reduced passenger leakage at the airport. However, the
    final project report said that initial passenger enplanements were not as
    robust as expected. It noted that the market had taken longer to develop
    because travelers are extremely price sensitive. In July 2005 Westward
    Airways had financial difficulties and ceased operations.

    Figure 9: Westward Airways Pilatus PC-12 Aircraft

    Somerset, Kentucky

    At the time of the grant application, Somerset did not have commercial air
    service. Passengers in the region travel to Lexington, Kentucky (80
    miles), Louisville, Kentucky (130 miles), and Cincinnati, Ohio (150 miles)
    to utilize commercial air service. According to the grant application,
    because Somerset is not located on the interstate highway system, access
    to these nearby commercial airports is more difficult.

    The community told DOT in the grant application that the lack of
    commercial air service in the region limits the community's ability to
    attract additional industry and recreational travelers. In the grant
    application, Somerset noted that the nearest airport at Lexington offered
    only a modest amount of nonstop service at a relatively high average fare.
    Thus, the community noted that an air traveler wanting to go to or from
    the Somerset region was faced with the alternative of driving a
    considerable distance and paying high prices for air travel. The community
    noted that these factors tended to constrain air travel demand and the
    economic development of the Somerset region.

    As a result, Somerset in association with the counties of Casey, McCreary,
    Pulaski, Russell, and Wayne proposed to conduct a feasibility study to
    determine the potential for commercial air service for the
    Somerset-Pulaski County Airport. If feasible, the study would also
    identify a mechanism to implement an appropriate level of service. The
    objectives of the application included:

    o identifying the level of demand under different operating
    scenarios-operators, equipment, frequencies, destinations, and fares;

    o preparing materials for presentation to potential carriers; and

    o contacting potential carriers to determine implementation needs.

    Project Funded by Grant

    The grant provided Somerset with $95,000 and the community provided a
    local contribution of $18,000. The grant was used to complete a
    feasibility study for commercial air services in the region and also
    provided the community with funds to solicit potential airlines.
    Specifically the study goals were to look at (1) potential travel demand
    for the airport, (2) development of proposed operating scenarios, (3)
    economics of operating scenarios, (4) identification of potential
    operators, and (5) development of Somerset-Pulaski County air service
    marketing plan.

    According to the grant application, the potential demand projections would
    allow Somerset to estimate demand if air service was available to the
    region. The development of proposed operating scenarios would help
    determine possible service options, scheduling, and selection of
    appropriate aircraft. The economics of operating scenarios would determine
    potential operating scenarios of location and aircraft and rank them
    accordingly based on their economic potential. Identification of potential
    operators would place emphasis on air carriers with the appropriate
    equipment to serve the Somerset market. Lastly, a marketing plan would be
    developed to include identifying future budgetary needs.

    Grant Outcome

    Somerset developed an air service development plan study to document the
    air service needs of the community. A local official told us that the
    community learned from the development plan that they can support new air
    service. The community is currently attempting to attract commuter air
    service to help with tourism, to attain more industry, and for better
    jobs. According to the local official the air service development plan has
    led to initial talks with airlines with regard to providing service to
    Somerset.4

    Community officials told us that they predict people using the airport
    would be interested in saving time and money by flying out of Somerset.
    The community's feasibility study found that 30 percent of businesses in
    the Somerset area stated that good air transportation access is important
    or very important for business expansion. For recreation, one local
    official told us that the community attracts six to seven million tourists
    per year, and that the number could increase if commercial air service
    were provided.

    Community officials told us that they believe that given the drive time
    and costs, such as gas and parking fees at other airports, passengers will
    utilize Somerset's airport. However, one local official told us that to
    see the new service succeed the community must support it and market it
    extensively. For example, this official suggested that local businesses
    could tell their employees to fly the routes served by Somerset to keep
    the load factors high.

    Furthermore, community leaders told us that the study has had indirect
    benefits as well. The study has spurred spin-off improvements at the
    airport and community, including new lights at the airport, a new
    Instrument Landing System and a new inter-modal transportation park.
    Additionally, the community is in the process of building a new $2 million
    terminal at the airport, and are adding $1.5 million in airport
    infrastructure.

    Taos, New Mexico

    Taos had scheduled commercial air service at the time of the grant
    application via Rio Grande Air to Albuquerque, New Mexico. The service,
    provided on 9-seat Cessna Caravans, began in August 1999 with scheduled
    service between Taos, Los Alamos, and Albuquerque, New Mexico. In January
    2000, the state helped supplement this service when they awarded a grant
    of $100,000 which was matched by the Town of Taos, the Village of Taos Ski
    Valley, and the county of Los Alamos. In October 2001, the state awarded a
    grant of $190,000 to help fund service between Taos, Ruidoso, and
    Albuquerque, New Mexico. Taos provided $25,000 in matching funds, the
    Village of Taos ski valley provided $25,000, and Ruidoso provided
    $150,000. In 2002, Taos and Ruidoso jointly applied for a Small Community
    Air Service Development Program grant. The primary objective of the grant
    was to fund Rio Grande's service to Albuquerque. Ruidoso eventually
    decided to withdraw from the grant due to their desire to obtain service
    to El Paso, Texas.

    According to an airport official, the elevation of the Taos airport (7,091
    ft.) and the length of the runway (5,800 ft.) pose landing problems for
    aircraft: the runway is too short and narrow to land many types of
    airplanes. He told us that if the runway situation improved they would try
    to get larger aircraft to serve Taos. At the time of the grant
    application, the community noted that there is a reluctance of some
    travelers to fly on small aircraft that serve Taos. Along with reluctance
    to fly small aircraft, the application noted that capturing local
    passengers that drive to Albuquerque is a problem. The community noted in
    its grant application that many travelers and travel agents in other
    markets were not aware of Rio Grande Air. Additionally, the community
    described the air service at the time of the grant application provided by
    Rio Grande as fragile due to its relative newness.

    The goals of the grant application were to:

    o fortify Taos' air service,

    o expand advertising and promotion to solidify support for the service,

    o create a self sustaining air service for Taos' mountain resort
    communities, and

    o provide a link to new air service through ground transportation
    connections and other communities of the Taos/Enchanted Circle region.

    The application sought funds to continue service by Rio Grande Air to
    Albuquerque at the time of the grant. At the time of the grant
    application, the service was only 2 years old and the community considered
    it fragile.

    Project Funded by Grant

    The June 26, 2002, grant agreement provided Taos with $500,000. The Town
    of Taos, Taos Ski Valley Incorporated, and Taos Aviation Services provided
    $200,000. The State of New Mexico provided another $200,000 in state
    funding for the project, bringing the overall project total to $900,000.

    The application allocated $634,423 of the program's cost to cover a
    revenue guarantee for Rio Grande Airways during the initial phases of
    service. In addition, the application allocated the Town of Taos $265,577
    for advertising and promotion of the continuing service. The advertising
    and promotion component includes billboards, newspapers, magazines,
    television, and radio advertisements. The advertising and promotion
    program was used to target the drive market visitor, business travelers,
    and in-state tourists.

    Grant Outcome

    Rio Grande continued to provide service to Albuquerque until June 2004. At
    that time, the service was discontinued because the airline went bankrupt.
    An airline official from Rio Grande Airline told us that the support from
    the community had not sustained after the Small Community Air Service
    Development Program funding was completed. He also told us that there were
    many setbacks that the grant could not control, such as a tremendous
    drought in the region leading to a weak ski season, a major forest fire
    that caused a drop in enplanements and a drop in the overall economy after
    September 11. Additionally, the Rio Grande official told us that the
    airline needed more planes to improve their economies of scale to support
    itself. The official also told us that an airline cannot succeed if all
    the overhead costs have to be applied to just two aircraft, since the
    aircraft become too expensive to operate.

    However, the Rio Grande official told us that the service, when operating,
    helped build enplanements and a steady growth in passengers for Taos. An
    airport official told us that the project was a success because the
    community had a taste of air service and that there is now a demand for
    service from Taos to Albuquerque. Table 12 shows the passenger traffic for
    Rio Grande Airways from the 2002 grant application year through May 2004.

    Table 12: Rio Grande Airways Total Passengers (Arrivals and Departures)
    from Taos from 2002 Grant Application to 2004 Termination of Service

                      1st Quarter     2nd Quarter     3rd Quarter     4th Quarter
    2002                 1,429           1,169           1,432           1,283
    2003                 1,494           1,242           1,768           1,653
    2004                 1,974           1,046

    Source: Taos Airport.

    Notes: Taos agreed to the Small Community Air Service grant in June 2002.

    Includes total passengers through May 2004, the service was terminated in
    June 2004.

    In 2003, Taos and a consortium of New Mexico communities received another
    Small Community Air Service Development grant. The grant provided
    intrastate service for Gallup, Taos, and Las Cruces, New Mexico. The new
    service began in December 2004 and was provided by Westward Airways.
    However the service was discontinued in July 2005 when Westward Airways
    filed for bankruptcy.

    GAO Contact and Staff AcknowledgmentsAppendix VI

    Gerald L. Dillingham, (202) 512-2834 or dillinghamg@gao.gov

    In addition to the individual named above, other key contributors to this
    report were Glen Trochelman, Assistant Director and Robert Ciszewski,
    Catherine Hurley, Stuart Kaufman, Alexander Lawrence, Bonnie Pignatiello
    Leer, Maureen Luna-Long, and Nitin Rao.

    (540093)

    www.gao.gov/cgi-bin/getrpt?GAO-06-21.

    www.gao.gov/cgi-bin/getrpt?GAO-06-101SP.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Gerald Dillingham, (202)
    512-2834, dillinghamg@gao.gov.

    Highlights of GAO-06-21, a report to congressional addressees

    November 2005

    COMMERCIAL AVIATION

    Initial Small Community Air Service Development Projects Have Achieved
    Mixed Results

    Over the last decade significant changes have occurred in the airline
    industry. Many legacy carriers are facing challenging financial conditions
    and low cost carriers are attracting passengers away from some small
    community airports. These changes, and others, have challenged small
    communities to attract adequate commercial air service.

    To help small communities improve air service, Congress established the
    Small Community Air Service Development Program in 2000. This study
    reports on (1) how the Department of Transportation (DOT) has implemented
    the program; and (2) what goals and strategies have been used and what
    results have been obtained by the grants provided under the program.

    What GAO Recommends

    GAO recommends that DOT evaluate the Small Community Air Service
    Development Program in advance of the program's reauthorization in 2008.
    Also, to improve the effectiveness of the Air Service Development Zones,
    GAO is recommending that DOT clarify what support and services it will
    provide to the designated communities.

    DOT, in commenting on a draft of this report, said it generally agreed
    with the report and would consider the recommendations as they go forward
    with the program.

    The Small Community Air Service Development Program grants are awarded at
    the discretion of the Secretary of Transportation. GAO found that DOT
    considered the statutory eligibility criteria and priority factors as well
    as other factors in evaluating proposals and in making awards. The number
    of grant applications has declined since 2002. DOT officials see this as a
    consequence of the large number of ongoing grants and the impact of 2003
    legislative changes. In surveying airport directors we found that grantee
    airports generally responded positively to DOT's process for awarding
    grants, about two-thirds were satisfied with the clarity of the selection
    criteria, while about one-third of directors at airports not receiving
    grants were satisfied with the clarity. DOT oversight is based on reviews
    of grantee reports and reimbursement requests, and DOT has terminated some
    projects and reallocated the unexpended funds to others.

    Individual grant projects had goals including adding flights, airlines and
    destinations, lowering fares, obtaining better planning data, increasing
    enplanements, and curbing the loss of passengers to other airports.
    Grantees used a number of strategies to achieve their goals, including
    subsidies and revenue guarantees to the airlines, marketing to the public
    and to the airlines, hiring personnel and consultants, and establishing
    travel banks. Results for the 23 projects completed by September 30, 2005
    were mixed: about half of the airports reported air service improvements
    that were self-sustaining after the grant was over. Some projects were not
    successful due to factors beyond the project, such as an airline decision
    to reduce flights at a hub. However, it is too soon to assess the overall
    effectiveness of the program, because most funded projects are not
    complete-127 of the 157 awarded grants are ongoing. DOT designates one
    airport each year as an Air Service Development Zone. The communities
    selected in 2002, 2003, and 2004 expressed similar concerns about the
    usefulness of this designation. None of the communities could cite any
    effect the Air Service Development Zone had for them. Instead, communities
    expressed confusion as to what DOT's designation was supposed to provide.

    Small Community Air Service Development Program Awards
    *** End of document. ***