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entitled 'Commercial Aviation: Factors Affecting Efforts to Improve Air 
Service at Small Community Airports' which was released on January 17, 
2003.

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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

January 2003:

Commercial Aviation:

Factors Affecting Efforts to Improve Air Service at Small Community 

Airports:

GAO-03-330:

GAO Highlights:

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

Why GAO Did This Study:

The airline industry, facing unprecedented financial losses as a 

result of the economic downturn and the terrorist attacks, has taken 

steps to minimize losses, including reducing or eliminating service 

to some small communities.  In March 2002, GAO reported that small 

communities had almost 20 percent fewer departures in October 2001, 

as compared to October 2000.  GAO was asked to follow up on that work 

by examining the challenges small communities face in attracting and 

keeping the air service they desire and what  steps they have taken 

to overcome these challenges.

What GAO Found:

Small communities face a range of fundamental economic challenges in 

obtaining and retaining commercial passenger air service.  The 

smallest of these communities typically lack the population base and 

level of economic activity that would generate sufficient passenger 

demand to make them profitable to air carriers.  While larger 

communities in this group may have less difficulty in sustaining a 

base level of service, they may not be able to attract additional 

carriers to provide greater choice and lower fares.  Smaller 

communities located near larger airports may also face reduced demand 

because passengers choose to use the larger airport with lower fares 

or more choices for flights.  These communities also have difficulty 

because the airline industry is in turmoil, making less profitable 

operations increasingly vulnerable.

Communities have taken a variety of steps to try to obtain or improve 

air service, such as marketing to increase passengers demand for 

local service or offering financial incentives to airlines to attract 

new or enhanced service.  At communities GAO studied in depth, 

financial incentives were most effective in attracting new service.  

However, the additional service often ceased when incentives ended.  

Longer-term sustainability may rest on a communitys commitment to 

making air service a priority.  

GAO HIghlights Figure:

[See PDF for image]

[End of Figure]

Contents:

Letter:

Results in Brief:

Background:

Small Communities Face Challenges in Sustaining Desired Levels of Air 

Service:

Air Service Improvement Efforts Fall into Three Main Categories, but 

Financial Assistance Has Proven Most Effective:

Catalyst and Community Commitment Are Important Factors in Developing 

Successful Programs:

Implications for Federal Air Service Assistance to Small Communities: 

Nonhub Communities May Require Different Assistance Than Small Hubs:

Concluding Observations:

Agency Comments:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Background on Underlying Economic Principles:

Demand for Air Service:

Supply of Air Service:

The Traditional Supply and Demand Model:

Policy Issues and Market Response:

Hypothetical Example of Efforts to Improve Air Service:

Air Service Improvement Initiatives:

Appendix III: Air Service Improvement Efforts at 98 Nonhub 

and Small Hub Airports:

Appendix IV: Case Studies Describing Air Service Improvement Programs 
in 

12 Small Communities:

Mobile, Alabamas New Business Model:

Pensacola, Floridas Travel Bank Program:

Tallahassee, Floridas Revenue Guarantee Program:

Michigans Air Service Program:

Marylands Regional Air Service Development Program:

New Mexicos Air Service Assistance Program:

Eugene, Oregons Travel Banks:

Appendix V: Small Community Air Service Development Pilot Program 
Grants 

and Local Matching Funds 

(Fiscal Year 2002):

Appendix VIAir Service Improvement Efforts Planned at 

Nonhub and Small Hub Airports Using DOT Grants:

Appendix VIIGAO Contacts and Staff Acknowledgments:

GAO Contacts:

Acknowledgments:

Related GAO Products:

Tables:

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

Table 2: Types of Air Service Development Efforts Undertaken by 98 

Communities with Small Hub or Nonhub Airports:

Table 3: Major Types of Financial Incentive Programs:

Table 4: Summary of Features of Eugene, Oregons Travel Banks:

Figures:

Figure 1: Programs Used at the 12 Communities Studied:

Figure 2: Sustainability of Air Service Improvements at 11 Small 

Communities After Incentives Ended:

Figure 3: Factors Present in the 12 Communities We Studied:

Figure 4: Cessna Caravan Used by Rio Grande Air:

Figure 5: Six-Seat Cessna 414 Used by Sky Taxi:

Figure 6: Eclipse 500 Jets First Flight on August 26, 2002:

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

Community:

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

Service:

Figure 9: Twelve Communities We Studied in More Detail:

Figure 10: Communities Studied in Florida and Alabama and Other Nearby 

Competing Airports:

Figure 11: Walk-up Fares at Pensacola Regional Airport (August 2002 

versus May 2001):

Figure 12: Average Ticket Prices in Tallahassees Top-10 Markets (1st 

Quarter 2002 versus 1st Quarter 2001):

Figure 13: Pellston, Michigan and Other Nearby Competing Airports:

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

Figure 15: Cumberland and Hagerstown, Maryland and Other Nearby 

Competing Airports:

Figure 16: Boston-Maine Airways Enplanements at Cumberland and 

Hagerstown (January through September 2002):

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

Competing Airports:

Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso:

Figure 19: Eugene, Oregon and Other Nearby Competing Airports:

Figure 20: Shift in Market Share of Passenger Traffic at Eugene, Oregon 

(1998-2001):

Abbreviations:

ACAIS: Air Carrier Activity Information System:

AIR-21: Wendell H. Ford Aviation Investment and Reform Act for 

 the 21st Century:

ALPA: Air Line Pilots Association:

ATA: Air Transport Association:

BWI: Baltimore/Washington International Airport:

CAB: Civil Aeronautics Board:

DOT: U.S. Department of Transportation:

EAS: Essential Air Service:

FAA: Federal Aviation Administration:

NASAO: National Association of State Aviation Officials:

RAA: Regional Airline Association:

RAP: Regional Aviation Partners:

RFP: Request for proposals:

January 17, 2003:

Congressional Requesters:

The airline industry has undergone profound change since 2000. The 

change was set in motion partly by the economic downturn that began 

during early 2001, and the terrorist attacks further reduced passenger 

levels and sent many airlines revenues into a tailspin from which they 

have yet to recover. Many small communities, which already had 

relatively few flights to few destinations prior to those changes, lost 

additional service as airlines reduced capacity, streamlined fleets, 

and restructured networks.

In March 2002, we reported that airlines reduced the total number of 

daily departures from small communities by almost 20 percent between 

October 2000 and October 2001.[Footnote 1] You asked us to follow up on 

that work by examining the problems these communities were facing and 

the steps that communities were taking to attract and keep the air 

service they desired. We focused our efforts on the following 

questions:

* What challenges do small communities face in obtaining or retaining 

commercial passenger air service?

* What actions have state or local governmental units or small 

communities taken to enhance air service, and how successful have 

certain ones been?

* What factors, if any, affect the likelihood of success?

* What implications does this analysis have for federal efforts to 

assist small community airports?

To answer these questions, we analyzed Department of Transportation 

(DOT) information and contacted numerous state, airport, community, 

airline and industry trade group officials. We defined small 

communities as those served by small hub or nonhub airports.[Footnote 

2] This encompassed a wide variation in communities, from isolated 

areas with populations of a few thousand and no scheduled air service 

to urban areas with populations of several hundred thousand and service 

from multiple airlines. Using federal grant applications and interviews 

with officials throughout the aviation community, we identified 292 

small communities that had taken some steps (many as part of state-

commissioned air service studies) to try to increase passenger demand 

or increase or enhance the supply of air service. To determine what 

challenges they faced, what actions they had taken to improve air 

service, and how successful some of these communities have been, we 

interviewed officials at 98 airports where efforts appeared to be more 

extensive. To develop further information on the factors that may 

increase the likelihood of success, we studied 12 of these communities 

in more detail.[Footnote 3] We selected these communities principally 

because they had used a variety of programs to improve their air 

service. We also selected them because they varied in population, level 

of economic activity and geographic location. We conducted our work 

from March 2002 to December 2002 in accordance with generally accepted 

government auditing standards. Additional information on our scope and 

methodology appears in appendix I.

Results in Brief:

The nations small communities face a range of fundamental economic 

challenges in obtaining and retaining the commercial airline service 

they desire or making their existing service more attractive to 

potential passengers. The smallest of these communities, usually served 

by nonhub airports, typically lack the population base and level of 

economic activity that would generate sufficient passenger demand to 

make them profitable to air carriers. Larger communities in this group, 

often served by small hub airports, may have enough people to support 

some level of air service, but not enough to attract additional 

carriers to compete at that community airport, thereby providing 

greater choice and possibly lower fares. Further, if a small community 

is located within driving distance of a larger airport, this already-

limited demand is often diluted because passengers may drive to the 

larger airport for better service or cheaper fares. These challenges 

are exacerbated by an airline industry in economic turmoil. Wall Street 

analysts have estimated projected industry losses approaching $8 

billion in 2002. Some carriers have taken significant steps to cut 

costs and/or minimize losses by reducing service. At some small 

communities, this can mean eliminating service altogether.

Information on efforts to develop air service at 98 small communities 

showed that actions taken to obtain or enhance air service fall into 

three main categories: (1) conducting studies to determine whether 

adequate demand for new or enhanced service exists, (2) undertaking 

marketing efforts to increase demand for service, and (3) offering 

financial incentives for air carriers to introduce or expand service. 

Following is a description of each type of action:

* Airport and community officials studies addressed such matters as 

the type of service and destinations desired by the community, the 

extent to which passengers may use other airports nearby rather than 

the local facility, and the parity of local airfares with comparable-

sized communities.

* Officials used a variety of marketing strategies to educate the 

community about the importance of using local air service. These ranged 

from meeting with local business leaders to advertising through radio, 

television, newspaper, or billboards. Some communities provided 

marketing funds directly to airlines because airlines often do not 

advertise service to smaller communities.

* Financial incentives to air carriers included revenue guarantees 

(payments from communities to airlines if actual revenues did not reach 

agreed-upon targets), pledges of a certain level of passenger activity 

by local businesses, state subsidies, and an arrangement in which an 

airport provided the ground crew for a carriers flights.

While studies and marketing can play an important role in air service 

improvement efforts, financial incentives may offer the best 

opportunity to attract the new or additional air service desired by a 

community. Eleven of the 12 communities we studied in depth took such 

actions, resulting in new or enhanced air service or lower fares, at 

least during the life of the program. However, even financial 

incentives may have difficulty bringing about service that can be 

sustained after the incentives end. Of the five communities for which 

the financial incentive program had ended, only one--at a community 

with a small hub airport--retained the enhanced service after the 

program finished. The experiences of the four other communities--all 

with nonhub airports--illustrate the difficulty of sustaining service 

enhancements once the financial incentive or other subsidy ends.

A communitys population is a key factor in its efforts to attract or 

retain air service, yet size is largely beyond a communitys control. 

Our detailed review of 12 projects identified two other factors, more 

directly within a communitys control, which were used to increase the 

likelihood of success. The first factor was the presence of a catalyst 

or driving force--normally local airport or community officials--who 

advocated air service improvements and spearheaded a program for 

change. Such a catalyst--important for beginning air service 

improvement efforts--was present in each of the 12 communities we 

reviewed. For example, state, city, and airline officials worked 

together in Taos, New Mexico, to begin new air service through the use 

of financial incentives. The second factor was a tangible community 

action signaling that obtaining improved air service was a priority. 

Three of the 12 communities took this action in various ways, such as 

by offering to pledge funds to a carrier providing new or enhanced air 

service in return for future travel. For example, Eugene, Oregon, 

obtained additional service from two airlines because numerous local 

businesses pledged travel funds to demonstrate their support for the 

service. These actions helped one community to initially attract air 

service and then develop sustainable service. Four other communities 

that relied on funds from the state or local government, without taking 

this additional action, lost the service when the subsidy ended.

The findings have potential implications for federal efforts to help 

small communities improve their air service.[Footnote 4] For example, 

our work for this report and recent work on air service to small 

communities indicates that there may be significant differences in the 

barriers faced by small hub and nonhub communities in developing 

sustainable commercial air service, and that effective approaches to 

addressing those communities barriers vary accordingly. One small hub 

airport was able to use one-time seed money to attract additional air 

service. However, for nonhub airports we visited with smaller 

populations and less economic activity, one-time assistance was not 

sufficient to sustain the service. Yet ongoing financial assistance is 

no guarantee of viable air service. In other studies we conducted on 

the Essential Air Service (EAS) program, we found that subsidies paid 

directly to air carriers have not produced an effective transportation 

solution for passengers at many small communities.[Footnote 5] As 

airlines alter their operations in response to financial pressures, 

there may be an increasing demand for the federal government to assist 

small communities in attracting and maintaining air service. In 

selecting communities for assistance, federal efforts will be enhanced 

by recognizing variations among those communities, establishing 

realistic goals, and identifying some indicators of local commitment.

Background:

In 1978 the Congress deregulated the airline industry, phasing out the 

federal governments control over domestic fares and routes served and 

allowing market forces to determine the price, quantity, and quality of 

service. Most major network carriers, free to determine their own 

routes, developed hub-and-spoke networks.[Footnote 6] These carriers 

provide nonstop service to many spoke cities from their hubs. The 

airports in the small spoke communities include the smallest airports 

in the nations commercial air system. Depending on the size of those 

markets (i.e., the number of passengers flying nonstop between the hub 

and the spoke community), the network airlines may operate their own 

large jets or use regional affiliate carriers to provide service, 

usually with regional jet or turboprop aircraft.[Footnote 7] However, 

low-fare 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. If passengers at 

many small communities wish to use the service of low-fare carriers, 

they have to drive to those airports.

The nations commercial airports are categorized into four main groups 

based on the annual number of passenger enplanements--large hubs, 

medium hubs, small hubs, and nonhubs.[Footnote 8] The 31 large hubs and 

35 medium hub airports together enplaned the vast majority--89 percent-

-of the more than 709 million U.S. passengers in 2000. In contrast, the 

71 small hubs enplaned about 8 percent, and the 409 nonhub airports 

enplaned only 3 percent of U.S. passengers.

While airline deregulation has allowed increased competition and led to 

lower fares and better service for most air travelers, some small 

communities have suffered from relatively limited service and high 

airfares. The Congress, concerned about air service to small 

communities, established two programs--the EAS program and the Small 

Community Air Service Development Pilot Program--targeted at those 

communities air service needs.

* The Congress established the EAS program as part of the Airline 

Deregulation Act of 1978. In general, the program guarantees that 

communities that received air service prior to deregulation will 

continue to receive air service.[Footnote 9] If an air carrier could 

not continue service to a community without incurring a loss, DOT (and 

before its sunset, the Civil Aeronautics Board) could then use EAS 

funds to award a subsidy to that carrier or another carrier willing to 

provide service. These subsidies are intended to cover the difference 

between a carriers projected revenues and expenses and provide a 5 

percent profit margin. As of July 1, 2002, the EAS program provided 

subsidies to air carriers to serve 114 communities, 79 of these in the 

continental United States. We reported in August 2002 that this number 

is expected to increase. Appropriations for the EAS program for fiscal 

year 2002 totaled $113 million.

* More recently, the Congress authorized the Small Community Air 

Service Development Pilot Program as part of AIR-21 (P.L. 106-181) to 

help small communities enhance their air service. Under this program 

DOT is authorized to award grants to 40 communities served by small hub 

or nonhub airports that have demonstrated air service deficiencies or 

higher than average airfares. Priority is given to communities that 

provide local matching funds. Congress appropriated $20 million for 

fiscal year 2002 for this program. The legislation contained provisions 

to allow DOT to work with and coordinate efforts with other federal, 

state, and local agencies to increase the viability of service to small 

communities.

Small Communities Face Challenges in Sustaining Desired Levels of Air 

Service:

The challenges now faced by small communities in obtaining or enhancing 

air service center on two main issues--(1) limitations created by 

having a small population base from which to draw passengers and (2) an 

airline industry that, for the most part, is losing money and seeking 

ways to return to profitability. In economic terms, these challenges 

can be understood in terms of demand (the number of passengers, the 

level of service they desire, and the price they are willing to pay to 

obtain it) and supply (the potential providers and their costs in 

providing the service). A small population base may not generate 

sufficient demand to attract or retain competitive air service because 

the demand may be too low to generate a profit for airlines. As a 

result, the service that small communities obtain often does little to 

stimulate demand. Instead, if the community is located within driving 

distance of a larger airport, residents may forgo the local service and 

drive to a larger airport, where they have more choices and often pay 

lower fares. While small communities have reported that limited service 

is a long-standing problem, it has been exacerbated by the second main 

issue--the current financial condition of most major U.S. airlines. Hit 

with declining revenues brought on by the economic downturn and events 

of September 11, most carriers have taken steps to minimize losses and 

cut costs. The airlines use sophisticated computer models to help them 

identify whether certain markets can be served profitably. These 

proprietary models take into account such considerations as the 

carriers operating costs, estimated passenger traffic, and competition 

in the market (including the type of aircraft competitors used, the 

number of daily flights they scheduled, and the fares they charged). 

Small markets, which may offer little opportunity for profit, are prime 

candidates for cost-cutting considerations.

Challenges Created by Limited Demand:

The demand-related challenges that small communities face are linked to 

their limited populations,[Footnote 10] relatively low levels of 

economic activity, and (for those communities located relatively close 

to larger airports) the tendency of residents to use other airports 

with better service and lower fares. Population is a critical factor 

because it partly determines the level of demand that carriers can 

expect in considering whether to provide service. The smallest of the 

communities in our review had such a limited population base as to make 

it difficult to attract and retain service from even one carrier. In 

those communities that had larger populations--such as those with small 

hub airports--passengers may have relatively limited air service; that 

is, service from a limited choice of carriers to relatively few nonstop 

destinations, often at comparatively high fares.

Relative to larger communities, small communities also tend to have 

lower levels of economic activity, as measured by such things as jobs 

or per capita income. In general, the level of economic activity 

present in small communities is positively correlated with the amount 

of air service those small communities received. We reported in March 

2002,[Footnote 11] for example, that for every additional 25,000 jobs 

in a county, jet departures increased by 4.3 departures per week, and 

turboprop departures increased by 4.8 per week. Similarly, for every 

additional $5,000 in per capita income, jet departures increased by 3.3 

per week and turboprop departures increased by 12.7. In other words, if 

two small communities were similar except that community A had $5,000 

more in income per capita than community B, community A can be expected 

to have 16 more departures per week than community B.[Footnote 12] 

Changes in these same factors will also cause changes in demand and 

service within a community over time.

Ironwood, Michigan, illustrates the effect of declining population and 

lowered economic activity on a communitys passenger enplanements. 

Ironwood is located in the western portion of Michigans Upper 

Peninsula. After the communitys various iron and copper mines closed 

in the 1980s and 1990s, its population decreased from about 14,000 in 

the 1980s to about 6,800 today. Annual enplanements dropped from about 

14,000 annually in the 1980s to 1,800 in 2001. Ironwood now receives 

subsidized air service through the EAS program. However, according to 

the manager of Ironwoods airport, many passengers choose to use an 

airport 90 miles away in Rhinelander, Wisconsin, because it offers 

better service and lower fares.

The relationship between population and economic activity can also be 

seen in the levels of air service at the 12 small communities we 

studied in detail. These communities varied substantially in size and 

economic activity (see table 1). The larger communities tended to have 

higher levels of per capita income, larger manufacturing earnings, and 

more air service.

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

City: Mobile; : : State: AL; County population: 400,063; Employment 

(total full and part time): 220,979; Per capita income: $22,677; 

Manufacturing earnings: $923,085; Number of carriers: 6; Enplanements: 

389,280; Awarded DOT funds: X.

City: Eugene; : : State: OR; County population: 323,271; Employment 

(total full and part time): 188,965; Per capita income: $25,584; 

Manufacturing earnings: $1,041,093; Number of carriers: 3; 

Enplanements: 374,174; Awarded DOT funds: [Empty].

City: Pensacola; : : State: FL; County population: 294,323; Employment 

(total full and part time): 178,360; Per capita income: $22,360; 

Manufacturing earnings: $354,989; Number of carriers: 7; Enplanements: 

524,811; Awarded DOT funds: [Empty].

City: Tallahassee; : : State: FL; County population: 240,047; 

Employment (total full and part time): 175,034; Per capita income: 

$26,564; Manufacturing earnings: $113,835; Number of carriers: 8; 

Enplanements: 467,914; Awarded DOT funds: [Empty].

City: Nonhubs; : : State: [Empty]; County population: [Empty]; 

Employment (total full and part time): [Empty]; Per capita income: 

[Empty]; Manufacturing earnings: [Empty]; Number of carriers: [Empty]; 

Enplanements: [Empty]; Awarded DOT funds: [Empty].

City: Hagerstown; : : State: MD; County population: 132,130; Employment 

(total full and part time): 76,094; Per capita income: $24,267; 

Manufacturing earnings: $430,662; Number of carriers: 1; Enplanements: 

25,923; Awarded DOT funds: [Empty].

City: Cumberland; : : State: MD; County population: 74,740; Employment 

(total full and part time): 38,472; Per capita income: $21,098; 

Manufacturing earnings: $157,379; Number of carriers: 1; Enplanements: 

4,815; Awarded DOT funds: [Empty].

City: Roswell; : : State: NM; County population: 61,306; Employment 

(total full and part time): 28,138; Per capita income: $19,651; 

Manufacturing earnings: $74,980; Number of carriers: 1; Enplanements: 

16,706; Awarded DOT funds: [Empty].

City: Hobbs; : : State: NM; County population: 55,206; Employment 

(total full and part time): 28,942; Per capita income: $20,229; 

Manufacturing earnings: $13,228; Number of carriers: 1; Enplanements: 

2,342; Awarded DOT funds: [Empty].

City: Carlsbad; : : State: NM; County population: 51,473; Employment 

(total full and part time): 25,776; Per capita income: $21,007; 

Manufacturing earnings: $42,009; Number of carriers: 1; Enplanements: 

7,355; Awarded DOT funds: [Empty].

City: Pellston; : : State: MI; County population: 31,540; Employment 

(total full and part time): 21,902; Per capita income: $27,336; 

Manufacturing earnings: $80,400; Number of carriers: 1; Enplanements: 

31,571; Awarded DOT funds: X.

City: Taos; : : State: NM; County population: 30,065; Employment (total 

full and part time): 16,096; Per capita income: $17,815; Manufacturing 

earnings: $7,662; Number of carriers: 1; Enplanements: 1,233; Awarded 

DOT funds: X.

City: Ruidoso; : : State: NM; County population: 19,531; Employment 

(total full and part time): 10,464; Per capita income: $17,745; 

Manufacturing earnings: $4,464; Number of carriers: 0; Enplanements: 

13; Awarded DOT funds: X.

Source: GAO analysis of Census Bureau, FAA Air Carrier Activity 

Information System (ACAIS), and other data.

Notes: X indicates the community was awarded a Small Community Air 

Service Development Pilot Program grant.

Pellston, Michigan and Ruidoso, New Mexico, were initially selected to 

receive Small Community Air Service Development Pilot Program funds but 

later declined to participate in the program. Pellston withdrew because 

Northwest Airlines, which is the one carrier that operates there, was 

not interested in participating. Ruidoso withdrew because the community 

decided that it wanted flights to El Paso as opposed to Albuquerque, 

but the carrier involved in the program was not willing to operate 

there at this time. Ruidosos award was a joint award with Taos as part 

of the Taos/Ruidoso consortium.

The number of carriers for Mobile, Eugene, Pensacola, and Tallahassee 

is for 2001 or before the air service improvement programs began.

The number of carriers for all the nonhub airports is for the 1st 

quarter of 2000.

[End of table]

Small communities may also experience passenger leakage--that is, 

passengers seeking more choices, better schedules, or lower fares 

choose to drive to a larger airport instead. Leakage is a widespread 

challenge to air service at small communities. Of the 98 airport 

officials we interviewed, 83--including all 12 of the communities we 

studied in detail--cited leakage as a problem. Some small communities 

airports are relatively close to a major airport, making it easy for a 

small communitys passengers to use the larger airport. For example, a 

Maryland aviation official reported that many passengers drive 75 miles 

to the Baltimore/Washington International Airport. But even airport 

officials in Tallahassee, Florida, reported that passengers drove to 

such airports as Jacksonville (160 miles) in search of lower fares. In 

earlier work on air service to small communities, we also found leakage 

to be widely reported as a challenge for small community 

airports.[Footnote 13]

To the extent that airline passengers make their decisions on the basis 

of price, leakage away from small community airports to larger airports 

may increase as low-fare carriers expand their operations. Southwest 

Airlines added more than 20 cities to its system between 1990 and 

November 2002 for a total of 58 cities served, and JetBlue Airways, 

which began service in February 2000, now serves 20 cities. DOT data 

indicates that low-fare carriers share of U.S. domestic passengers has 

also grown from 5.5 percent in 1990 to 18 percent in 2001. According to 

the DOT Inspector General in an October 2002 report, low-fare carriers 

have continued to expand between September 2000 and September 2002. 

They offered 11 percent more seats, and their share of domestic air 

service (as measured in available seats) increased from 16 to 19 

percent. Their expansion to additional cities may shift even more 

demand away from small community airports as passengers choose to drive 

to airports served by low-fare carriers.[Footnote 14]

Small Communities Are Vulnerable to Carrier Cost-Cutting:

Against the backdrop of relatively limited demand, small communities 

face an additional set of challenges in that the nations air carriers-

-the suppliers of the service--are facing considerable problems in 

operating profitably. Carriers are for-profit entities that need to 

recoup their costs and earn a profit. But in 2001 and 2002, the major 

airlines generally did not do so. Losses were in excess of $6 billion 

in 2001, and Wall Street analysts expected losses to exceed $8 billion 

in 2002. Just 2 years ago, most major U.S. carriers were earning 

profits.

One reason for the lack of profitability is a downturn in passenger 

revenues. Between June 2001 and June 2002, six major U.S. network 

airlines experienced drops in revenue passenger miles of between 8 and 

20 percent. The drop in passengers included high-yield business 

travelers, according to the Air Transport Association (ATA). This group 

of flyers has become more price sensitive in the current economic 

climate. That is, they began to behave more like leisure travelers, who 

forgo the flexibility of refundable, often last-minute tickets, in 

exchange for the lower prices of seats booked well in advance. ATA also 

reported that average domestic fares in September 2002 were almost 18 

percent below September 2000 fares.

A second reason for the lack of profitability is that air service is 

expensive to provide, partly because of carriers high operating costs, 

which are incurred whether an aircraft is flown empty or full. These 

costs include labor, fuel, and maintenance. ATA data show that labor, 

fuel, and fleet costs make up almost 60 percent of carriers total 

operating expenses and that increases in airline labor costs and 

aviation taxes have outpaced inflation. Carriers have taken many 

actions to lower their costs and restructure their operations since 

September 2001. However, they have not yet returned to profitability. 

Another major part of the expense of providing air service is station 

costs, according to airline officials. These stations require staff to 

handle passengers, bags, and cargo. One airline official estimated that 

it can cost as much as $200,000 to set up a station for new service, 

and annual station operating costs can range from $370,000 to 

$550,000.[Footnote 15]

Small communities may become cost-cutting targets because they are 

often a carriers least profitable operation. To a degree, small 

communities shared in the overall service reductions that most carriers 

made in response to the economic slowdown and the events of September 

11. We earlier reported that daily departures from 202 small 

communities had decreased by 19 percent between October 2000 and 

October 2001, with more of the reductions occurring after September 

11.[Footnote 16] The DOT Inspector General reported recently that 

nonhub airports experienced a greater loss of direct service to and 

from 31 large airports than other airports, losing 17 percent of 

scheduled flights between September 2000 and September 2002. By 

comparison, small, medium, and large hub airports reductions ranged 

from 5 to 10 percent.[Footnote 17]

Even if the reductions in service to small communities were, in the 

aggregate, no greater than the reductions in larger communities, the 

effect on those small communities can be greater. In small communities, 

a service reduction can often mean not fewer flights, but a loss of 

service altogether, either from a competing carrier or from the only 

carrier providing service. For example, of the 202 communities included 

in our March 2002 study, the number of small communities served by only 

one airline increased from 83 in October 2000 to 95 in October 2001. 

Further, between September 2001 and September 2002, carriers notified 

DOT that they planned to eliminate service to 30 communities, 15 of 

which had service from only one carrier.[Footnote 18] Also, the 

remaining service might be so limited that it creates additional 

incentive for potential passengers to drive to larger airports. One 

state aviation official termed this cycle of reduced service and 

subsequently increased leakage as the death spiral.:

Air Service Improvement Efforts Fall into Three Main Categories, but 

Financial Assistance Has Proven Most Effective:

Among the 98 communities we contacted that had taken steps to develop 

an air service improvement program, efforts tended to fall into three 

main categories. Over 75 percent of communities undertook some sort of 

study, such as examining the potential demand for new or enhanced air 

service. In addition, 78 percent conducted some sort of marketing 

activity to educate the public about the air service available or to 

inform carriers about potential for new or expanded service 

opportunities. Finally, 45 percent of the communities offered some sort 

of financial incentive to encourage carriers to provide the new or 

additional service. Small hub airports were slightly more likely than 

nonhub airports to implement these three types of efforts (see table 

2). To assist readers understanding of the economic effect of various 

programmatic or policy mechanisms to attract additional air service, 

appendix II discusses in more detail the general economic principles 

that underlie the level and type of air service at small communities.

Table 2: Types of Air Service Development Efforts Undertaken by 98 

Communities with Small Hub or Nonhub Airports:

Type of effort: Studies[A]; Nonhub airports: (81 airports): Number: 60; 

Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports: 

(17 airports): Number: 15; Small hub airports: Percent of total: 88%; 

[Empty]; Combined total: (98 airports): Number: 75; Combined total: 

Percent of total: 77%.

Type of effort: Marketing; Nonhub airports: (81 airports): Number: 60; 

Nonhub airports: Percent of total: 74%; [Empty]; Small hub airports: 

(17 airports): Number: 16; Small hub airports: Percent of total: 94%; 

[Empty]; Combined total: (98 airports): Number: 76; Combined total: 

Percent of total: 78%.

Type of effort: Financial incentives; Nonhub airports: (81 airports): 

Number: 33; Nonhub airports: Percent of total: 41%; [Empty]; Small hub 

airports: (17 airports): Number: 11; Small hub airports: Percent of 

total: 65%; [Empty]; Combined total: (98 airports): Number: 44; 

Combined total: Percent of total: 45%.

Type of effort: Other; Nonhub airports: (81 airports): Number: 15; 

Nonhub airports: Percent of total: 19%; [Empty]; Small hub airports: 

(17 airports): Number: 0; Small hub airports: Percent of total: 0%; 

[Empty]; Combined total: (98 airports): Number: 15; Combined total: 

Percent of total: 15%.

Source: GAO analysis.

Notes: Columns will not add to total number of airports shown because 

some airports undertook multiple efforts.

The air service development programs were in various stages at the time 

we spoke with officials. We did not include programs in the table above 

that were in the proposal stage at the time of our discussions. We 

included communities with ongoing programs and communities that had 

completed their programs. In a few cases, we included communities that 

had developed financial incentive programs but had to put them on hold 

or discontinue their efforts due to the events of September 11, air 

carrier problems, or for other reasons.

[A] Studies included both those conducted at a statewide level and 

those conducted or commissioned by an individual airport.

[End of table]

On the basis of our in-depth review at 12 of these communities, it 

appears that some sort of financial incentive is particularly important 

in translating a desire for new or enhanced service into an actual 

program that puts this service in place. However, even this level of 

effort may not be sufficient to sustain the service over the long term. 

Four of the five communities that had completed their service 

improvement efforts were unable to sustain the enhanced level of 

service.

Studies Aid in Determining Communities Air Service Needs:

Of the 98 airports we contacted, 75 reported conducting a study of 

their air service or participating in a multi-airport study. Studies 

covered such topics as potential demand for air service, types and 

levels of service desired by the community, extent of leakage to other 

airports, and barriers the community may need to overcome. These 

studies emanated from a variety of sources:

* Airports with enough staff and expertise often developed and 

conducted studies themselves. For example, staff of the Mobile 

(Alabama) Regional Airport developed numerous service and leakage 

analyses in-house.

* Some airports worked with aviation consultants to develop studies. 

Chico (California) Municipal Airport, for example, worked with a 

consulting group to analyze tickets purchased through travel agents, 

review air service profiles, and create marketing materials.

* Some studies were done at the state level. Among the states we 

contacted, for example, Arizona, North Carolina, Mississippi, and 

Pennsylvania had commissioned statewide studies evaluating levels of 

air service and fares and developing recommendations for ways to 

improve scheduled commercial air service.

By themselves, studies have no direct effect on the demand for, or 

supply of, air service. However, while studies do not directly result 

in improved air service, they can play a key role in helping 

communities determine if there is adequate potential passenger demand 

to support new or improved air service. If adequate potential demand 

does not exist, then communities can avoid using scarce resources to 

pursue scheduled air service that the community cannot adequately 

support. If adequate potential demand does exist, studies can provide 

more specific information about the size of aircraft and level of 

service that could be supported and any marketing or financial 

incentives that might be needed.

Marketing Efforts Help to Inform the Community of Air Service:

Of the 98 airports we contacted, 76 reported using some form of 

marketing to try to increase potential passengers awareness of the air 

service or to try to inform carriers about the airport in an effort to 

attract new air service. The amount spent annually on these activities 

varied from a few thousand dollars to several hundred thousand dollars 

at some of the small hub airports. These efforts took different forms, 

such as the following:

* Some communities developed basic advertising campaigns. For example, 

the Chamber of Commerce in Paducah, Kentucky, implemented a Buy Local, 

Fly Local advertising campaign, which included newspaper, radio, and 

television ads along with a billboard campaign.

* Chattanooga, Tennessee, implemented a marketing incentive program. It 

dedicated funds to marketing a carriers new or enhanced service. The 

Chattanooga airport provides funds to carriers designated specifically 

for marketing. For each new destination, new entrant carriers receive 

$50,000, and incumbent carriers receive $30,000.

* Some communities made presentations to airlines to try to obtain new 

or additional service. For example, the Olympia (Washington) Regional 

Airport hired a consultant to prepare a presentation to attract service 

from Big Sky Airlines. The package included a proposed schedule, travel 

agent survey, estimated traffic, and a pro forma model of service. Big 

Sky initiated service between Olympia and Spokane on November 13, 2002. 

This was Olympias first scheduled service since 1995.

Unlike studies, marketing efforts can have a direct effect on 

increasing demand for air service, if these efforts succeed in 

increasing the passenger base or reducing the amount of leakage to 

other airports. Marketing directed at airlines can have a direct effect 

on the supply of air service if the marketing efforts succeed in 

attracting new carriers or more service from existing carriers. The 

effect of marketing efforts is more difficult to ascertain, but many 

airport managers said educating passengers about available air service 

was an important step to increasing demand for air service. For 

example, an official from Shenandoah Valley (Virginia) Regional Airport 

said he believed marketing was a useful tool for airports to increase 

demand. He pointed to the fact that the airports annual enplanements 

more than doubled--from 8,000 to 20,000--since the airport began its 

marketing and public relations campaign in 1996.

The Michigan Air Service Program is another example of how marketing 

efforts can help to enhance air service to small communities. Michigan 

provides airports with under 150,000 annual enplanements with grants 

that can be used for marketing, air carrier recruitment, or capital 

improvements. Pellston Regional Airport, one of the 12 airports we 

studied in detail, has received such funding and used it for marketing. 

Pellston has received over $100,000 since fiscal year 1998, which the 

community has used for promotional materials; newspaper, radio, and 

televisions ads; and a newsletter. The airport has used the Fly From 

Nearby theme to communicate to the community the importance of using 

their local airport. While Pellstons enplanements declined from 1998 

to 2001, they appear to have stabilized and as of August 2002, 

officials reported enplanements were up 11 percent from 2001. In 

addition, Pinnacle Airlines (operating as Northwest Airlink) provided 

regional jet service between Pellston and Detroit from June to 

September 2002. Though airport officials could not directly link the 

marketing program to the increasing enplanements, they said it had 

helped maintain passenger demand for air service at Pellston.

Financial Incentives Provide Carriers With Greater Assurance for Making 

a Profit:

Forty-four of the airports we contacted had created a financial 

incentive for a carrier to enter a market or to enhance the level of 

service already provided. Financial incentives all share the same basic 

characteristic--they mitigate some of the financial risk by providing a 

carrier with greater assurance about the financial viability of the 

service being provided. In practice, the incentives take a number of 

different forms with varying levels of complexity (see table 3). For 

example, in 2002, the community of Lancaster, Pennsylvania paid a 

subsidy of $195,000 to Colgan Air to offset some of the airlines costs 

to begin providing service to the community. Ski communities in 

Colorado, Montana, and Wyoming provided airlines with revenue 

guarantees--payments to the airlines if revenues fell short of targets-

-in exchange for additional flights during the ski or summer tourist 

season. Stockton, California set up a travel bank--funds businesses 

pledged to use in the future to purchase tickets on the new service. 

Participating businesses will have 3 years to use these funds for 

travel; and at the end of the period, any unused funds will be given to 

the airline. The complexity of these programs varies in part due to the 

number of participants. For example, while airport officials can take 

action to reduce airport fees, subsidy or revenue guarantee programs 

may require government assistance, and travel banks require cooperation 

from many community businesses. See appendix III for information on the 

type of programs used at the 98 airports we contacted.

Table 3: Major Types of Financial Incentive Programs:

Type of financial incentive: Reduced airport fees; Description: Airport 

reduces fees charged to carriers--landing fees, lease rates, or fuel 

flowage fees in exchange for air service. (This is often only one 

element of an air service improvement program.); Prevalence among 

nonhub airports studied: (total = 81): Number: 10; Prevalence among 

nonhub airports studied: Percent of total: 12%; [Empty]; Prevalence 

among small hub airports studied: (total = 17): Number: 7; Prevalence 

among small hub airports studied: Percent of total: 41%.

Type of financial incentive: Subsidies; Description: Financial 

assistance to a carrier assists with start-up, operating or other 

costs. Carrier may receive a set amount per period or reimbursement for 

expenses incurred, sometimes up to a cap.; Prevalence among nonhub 

airports studied: (total = 81): Number: 10; Prevalence among nonhub 

airports studied: Percent of total: 12%; [Empty]; Prevalence among 

small hub airports studied: (total = 17): Number: 1; Prevalence among 

small hub airports studied: Percent of total: 6%.

Type of financial incentive: Revenue guarantees; Description: Community 

and carrier officials set revenue targets and communities pay carriers 

only if revenue from operations does not meet agreed-upon target. 

Payments are often capped.; Prevalence among nonhub airports studied: 

(total = 81): Number: 9; Prevalence among nonhub airports studied: 

Percent of total: 11%; [Empty]; Prevalence among small hub airports 

studied: (total = 17): Number: 3; Prevalence among small hub airports 

studied: Percent of total: 18%.

Type of financial incentive: Travel bank; Description: Businesses or 

individuals pledge future travel funds to a carrier providing new or 

expanded air service. Travel funds are deposited in an account, 

administered by a business entity (such as the Chamber of Commerce) and 

pledging businesses draw against these funds (often using credit card 

supplied for this purpose) to purchase tickets.; Prevalence among 

nonhub airports studied: (total = 81): Number: 4; Prevalence among 

nonhub airports studied: Percent of total: 5%; [Empty]; Prevalence 

among small hub airports studied: (total = 17): Number: 3; Prevalence 

among small hub airports studied: Percent of total: 18%.

Type of financial incentive: Other; Description: [Empty]; Prevalence 

among nonhub airports studied: (total = 81): Number: 6; Prevalence 

among nonhub airports studied: Percent of total: 7%; [Empty]; 

Prevalence among small hub airports studied: (total = 17): Number: 3; 

Prevalence among small hub airports studied: Percent of total: 18%.

Source: GAO analysis.

Note: The air service development programs were in various stages at 

the time we spoke with officials. We did not include programs in the 

table above that were in the proposal stage at the time of our 

discussions. We included communities with ongoing programs and 

communities that had completed their programs. In a few cases, we 

included communities that had developed financial incentive programs 

but had to put them on hold or discontinue their efforts due to the 

events of September 11, air carrier problems, or for other reasons.

[End of table]

Analysis of 12 Projects Indicates Financial Incentives 

Are Key to Increasing Service, but No Guarantee of Success:

We studied 12 communities that had taken a variety of actions to 

improve air service; all but 1of the 12 communities instituted some 

form of financial incentive program for the carrier to attract 

additional service.[Footnote 19] All of these communities had 

undertaken some combination of studies or marketing in the past. 

However, the officials at many of these airports pointed out that while 

studies provided useful information about passengers demand for 

service and marketing is useful for informing passengers about the air 

service, financial incentives were the most effective tool to attract 

new air service. According to an official with the airport in Eugene, 

Oregon, for example, the airport conducted studies and marketing, but 

it did not attract additional air service until the community 

eventually implemented a travel bank program. As figure 1 shows, the 

four small hub communities implemented varying financial incentives: 

travel banks, a revenue guarantee, and a model in which the airport 

provided the ground crew for a carriers operation.

Figure 1: Programs Used at the 12 Communities Studied:

[See PDF for image]

[End of figure]

Officials in Mobile also used studies and marketing but developed a new 

staffing model after two airlines announced that they planned to cease 

service there. United Express indicated that it dropped service as a 

result of the effects of September 11. US Airways subsequently 

announced that it would be forced to discontinue service because United 

Express supplied their ground staff (i.e., ticket agents and baggage 

handlers). Officials decided that they needed to develop a new strategy 

to attract and retain carriers. Airport officials adopted a model under 

which the airport supplies the ground crew and equipment and charges 

participating carriers a fee for the service. With this new business 

model in place, US Airways decided to continue serving Mobile. 

Officials said they believe that this new way of conducting business 

may help encourage other carriers to serve Mobile because there will be 

fewer barriers for airlines wishing to begin new service since the 

airport will supply staff and equipment.

Of the seven nonhub communities that implemented some form of financial 

incentives, each used subsidies to air carriers. Some of these 

subsidies were provided by the state, while cities, counties, or some 

combination of these sources funded the others. Our conversations with 

community and carrier officials indicated that these financial 

incentives were key to attracting carriers and actually putting the 

service in place.

The experience to date in these communities shows that the long-term 

sustainability of the service after incentives end is 

uncertain.[Footnote 20] Financial incentives helped attract new or 

better service, leading officials in all 11 communities to rate their 

programs as successful in the short term. At 6 of the 11 communities, 

the programs were ongoing as of November 1, 2002. The remaining five 

communities had completed their programs--that is, they had moved 

beyond the initial period in which they were able to offer some form of 

financial incentive. Of these five communities, only one--Eugene, a 

small hub airport--retained the additional air service after the 

incentives had ended. The four others--all nonhub airports with low 

demand for air service--lost the additional service when the incentives 

ended. Figure 2 shows the status of each program.

Figure 2: Sustainability of Air Service Improvements at 11 Small 

Communities After Incentives Ended:

[See PDF for image]

[End of figure]

While each community confronts unique challenges and has adopted 

various programs to try to address these challenges, we believe that 

the performance to date of the six ongoing programs provides some 

indication of the likelihood of sustainability of the air service after 

the incentives end. Following are descriptions of the six ongoing 

programs:

* Mobile. The Mobile program--where the airport authority, rather than 

the airline, provides ground crew and equipment and charges 

participating airlines a fee for this service--differs from many of the 

other financial incentive programs because there is not a specific time 

period or set amount of funding for the program. Rather, airport 

officials said they will consider their staffing initiative successful 

in the short-term if US Airways continues to provide air service to 

Mobile. Longer-term success will be measured by whether additional 

airlines choose to participate. To date, no airline other than US 

Airways, the initial participant, has done so.

* Pensacola and Tallahassee. Pensacola appears to be on track to reach 

sustainable service in 2003, and Tallahassee is renewing its revenue 

guarantee in order to retain the current levels of air service. While 

both airports used financial incentives to obtain AirTran service, 

Pensacola used a travel bank (businesses pledged future travel funds) 

and Tallahassee used a revenue guarantee program (the city guaranteed 

to pay AirTran if their revenues from the new service did not meet 

agreed-upon targets). An AirTran official said that they chose to serve 

both cities because they believed that these cities were capable of 

supporting service. In the short term, both programs have been 

successful because passengers have received lower average airfares. 

However, both agreements were reached before September 11, after which 

overall passenger loads throughout the country dropped dramatically. 

Further, airport and air carrier officials said that Delta, a major 

carrier serving these cities, has adopted a pricing strategy of 

matching AirTrans low fares as well as adding flights and capacity to 

counterbalance AirTrans entry into the Tallahassee market. Tallahassee 

airport officials said depressed demand and low airfares have resulted 

in lower-than-anticipated revenue and slower progress toward 

profitability. The Pensacola airport manager said that his airports 

load factors (percent of occupied seats on flights) are now approaching 

the goal of 70 percent, and he believes that when the travel bank ends 

in September 2003, the service will be self-sustaining. Tallahassee 

officials said that profitability for AirTrans operation, initially 

projected for the end of the revenue guarantee (September 30, 2002), 

will probably not materialize until the third quarter of 2003. As of 

November 2002, officials stated that AirTran had requested an extension 

of the program and an additional $1.5 million revenue guarantee in 

order to continue service. Tallahassee agreed to renew the $1.5 million 

revenue guarantee for another year beginning in November 2002.

* Cumberland and Hagerstown. Neither of these airports with state-

subsidized air service appears likely to sustain service when 

incentives end, based on the low level of passenger demand. While a 

Maryland official said they set a load factor target of 60 percent for 

the service, actual load factors in September 2002 (after 9 months of 

operation) were 12 percent.

* Taos. Taos, which has received state and local subsidies since 2000, 

also continues to struggle to generate enough passenger demand. Though 

the state renewed the original 1-year state grant twice for a total of 

$570,000 (in addition to local matching funds), monthly enplanements 

have not exceeded 295 (March 2000). According to an airline official, 

the service is still not profitable.

Available studies presaged some communities inability to develop 

sustainable service. A consulting study of potential service for Hobbs 

and Ruidoso concluded that these communities would be unable to support 

additional service without some form of subsidy. As predicted, when the 

state-supplied subsidy ended, the communities were unable to sustain 

the service, and the carrier quickly discontinued service. Similarly, a 

consultant studying Cumberland and Hagerstown suggested that these 

markets would only support service with a small aircraft, such as one 

with eight seats. Further, the consultant concluded that Hagerstown 

showed the least promise because of existing service to the hub in 

Pittsburgh. Nonetheless, officials decided to go ahead with service to 

both communities using 19-seat aircraft because they thought passengers 

would be more inclined to fly in larger planes.

Catalyst and Community Commitment Are Important Factors in Developing 

Successful Programs:

Our review of programs at 12 communities indicates that while each 

community confronts unique factors that could affect its air service 

improvement efforts, success in starting a program and improving its 

air service is predicated in part on the communitys size. Simply put, 

smaller communities have fewer potential passengers to sustain service. 

However, size is largely beyond a communitys control. We identified 

two other factors, more directly within a communitys control, that 

were important for success. The first, the presence of a catalyst for 

change, was particularly important in getting the program started so 

that the sustainability of enhanced service could be tested. The 

catalyst--normally state, community, or airport officials--provides 

the critical impetus to recognize air service deficiencies and begin a 

program for change. However, the long-term sustainability of any air 

service appears related more to a second factor--a community consensus 

that air service is a priority. This second factor involves recognizing 

that enhanced air service is likely to come at a price and developing a 

way in which the community agrees to participate. We did not find 

indicators that communities broadly supported air service development 

in a number of the communities we studied (see fig. 3).

Figure 3: Factors Present in the 12 Communities We Studied:

[See PDF for image]

[End of figure]

Most Communities Had a Catalyst for Change:

All of the communities we studied had a catalyst or driving force 

behind their air service improvement efforts. These individuals 

recognized the need for air service improvements and led the program 

for change. Not all small communities or airports had such a change 

agent. Several airport managers we spoke with during our study said 

they had not taken any steps to improve air service. Some said that 

they had no local funds for air service development, and some did not 

know what steps they should take to help improve demand for or supply 

of air service.

Some of the catalysts were state aviation or economic development 

officials spearheading air service improvement efforts on a broad scale 

through statewide studies, grant programs to fund airports air service 

improvement efforts, or statewide meetings or other methods to 

disseminate information on successful practices. This was the case for 

the program we reviewed in Michigan. Since 1998, Michigans Aviation 

Services Division has spent $1.5 million to improve air service by 

performing studies assessing local air service and providing grants to 

16 small community airports to aid them in attracting carriers and 

educating the public about the importance of air service.[Footnote 21] 

Officials at several small community airports in Michigan said that the 

state program is helpful because they lack local resources for these 

efforts.

At individual airports, the catalyst was generally some combination of 

airport officials and local government or community leaders. At Taos, 

New Mexico, the mayor led efforts to work with airline officials to 

attract new air service to the area, and in Eugene, Oregon, and 

Pensacola, Florida, airport officials worked with the local Chambers of 

Commerce and business leaders to develop travel banks. Having community 

leaders involved can provide important perspective for airport and 

airline officials on the type of air service the community desires and 

is useful for enlisting community support to increase local demand. For 

example, the Pensacola Airport manager said that involving key 

community leaders in air service development efforts helped convince 

other business leaders to lend their support to the program. Sometimes 

the impetus came largely from one source. In Mobile, Alabama, for 

example, airport officials came up with a new business model designed 

to attract or retain carriers by eliminating the need for the airline 

to find and retain local staff.

Community Consensus on the Priority of Service Underscores Commitment:

Communities must be committed to supporting any new or enhanced air 

service. While this element can be difficult to quantify, indicators do 

exist. For example, the ability of a community to pledge funds for 

future air travel as a part of a travel bank demonstrates its 

commitment to air service. This pledge provides the carrier with 

guaranteed demand and revenue for the life of the travel bank and may 

change passengers travel habits by encouraging passengers to try the 

new service. Eugene airport and community officials said that broad-

based community support for the air service is more important than the 

total funds collected for the travel bank. Eugenes airport has used 

travel banks to attract service to two new destinations and in both 

cases, kept the additional service after the travel banks were 

completed. In each instance, more than 50 businesses contributed to 

each travel bank, indicating widespread support for the additional 

service although total funds pledged to each travel bank were less than 

$500,000. In Pensacola over 300 businesses and individuals pledged $2.1 

million to its airport travel bank.[Footnote 22]

Conversely, the inability or unwillingness of a community to contribute 

funds for new air service may indicate that the community did not view 

air service as a priority. For example, the service from Cumberland and 

Hagerstown to Baltimore/Washington International Airport was begun with 

$4.25 million in state funds. Local communities did not contribute any 

matching funds, and a state aviation official said that neither 

community was interested in developing a travel bank. Since the 

subsidized air service started in December 2001, actual demand is 

significantly below set targets.

Officials we spoke with said that it is critical that stakeholders also 

agree on clear goals for air service and have specific agreements with 

airlines on departure times, funding, and time frames for the program. 

Officials from the New Mexico communities said they did not begin the 

program with full agreement on the air service goals (such as 

destinations to be served) and program structure (such as specific 

contract provisions for reimbursement). A Roswell official said that 

she eventually agreed to the proposed destinations and structure so the 

program would not be delayed. Further, while the communities had an 

agreement with the airline on the frequency of service to be provided, 

the carrier determined the flight times, which were not always 

convenient for travelers, according to consortium officials. The 

agreement also placed few limits on reimbursement of funds to the 

airline--that is, the equipment, staff, and training costs that would 

be reimbursed. The funds were depleted less than 4 months after the 

service began, and the service was discontinued shortly thereafter. 

Officials said that in the future, they would be more specific in their 

air service agreements.

Implications for Federal Air Service Assistance to Small Communities: 

Nonhub Communities May Require Different Assistance Than Small Hubs:

Findings from our review of 98 small community airports--including our 

detailed review at 12 of those--coupled with our other work on air 

service to small communities and the EAS program, have potential 

implications for ongoing federal efforts to help small communities 

improve their air service. In fiscal year 2002, DOT projects it will 

provide approximately $120 million in financial assistance to assist 

various small communities with air service--almost $100 million in 

direct subsidies to air carriers to serve certain small communities 

under the EAS program and $20 million in grants under the Small 

Community Air Service Development Pilot Program. Both programs face 

heavy demand for funds. Our work on this report and recent work on air 

service to small communities indicates that there may be significant 

differences in the barriers faced by small hub and nonhub communities 

in developing sustainable commercial air service and that the 

approaches to addressing the communities barriers vary accordingly. 

Some communities with small hub airports were able to marshal local 

resources to develop air service improvement efforts. For these 

communities, a one-time grant may be sufficient to develop sustainable 

air service. In contrast, at four communities we studied with nonhub 

airports, when the financial incentives ended, the air service ended. 

These communities may not have the resources available locally to 

develop such a program. If financial assistance is provided to nonhub 

communities in hopes of attracting new or enhanced service, the 

assistance may need to be longer term. Yet, ongoing financial 

assistance is no guarantee of viable air service. Our previous work on 

the EAS program indicated that direct subsidies to air carriers have 

not been an effective transportation solution for passengers at small 

communities.

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

Airports:

To address air service needs at small communities, Congress has 

appropriated increasing sums over recent years. In fiscal year 1997, 

the amount appropriated for the EAS program was $26 million; by fiscal 

year 2002, it was $113 million together with another $20 million for 

the newly created Small Community Air Service Development Pilot 

Program. Indications are that these sums only partially address the air 

service development desires of the nations small communities. More 

specifically:

* As we reported earlier this year, the amount of money needed to fully 

fund the EAS program as currently authorized is likely to increase 

further in the near future.[Footnote 23] As of July 2002, DOT 

subsidized service to 114 communities, 79 of them in the continental 

United States. Between September 2001 and September 2002, carriers had 

notified DOT of their intent to discontinue service to 15 subsidy-

eligible communities. With the continuing financial deterioration of 

the industry, that number may increase yet further.

* While DOT had $20 million available for grants to 40 small 

communities under its Pilot Program, demand for the funds far exceeded 

this amount. In all, DOT received 180 applications from communities in 

47 states, and the applications totaled over $142.5 million, or more 

than seven times the amount available. By December 2002, DOT had 

awarded grants totaling about $20 million to 40 communities (or 

consortia of communities).[Footnote 24] The grants, which ranged in 

size from $44,000 to $1,557,500, were applied to such purposes as 

studies, marketing programs, financial incentives, and other 

transportation options. The expectation in awarding such grants is that 

the communities that receive them will be able to parlay the grant into 

an ongoing program that can be self-sustaining. For example, in a 

community that is trying to enhance its existing service, the grant 

might help provide a revenue guarantee to the airline for the first 

months of the expanded operation, with the expectation that the 

expanded service will stimulate the market, creating a sustainable base 

of passengers. The grants are not designed to be renewable. The 

authorizing legislation contains provisions to allow DOT to coordinate 

efforts with other federal, state, and local agencies to increase the 

viability of service to small communities, which could include 

disseminating information on best practices identified by the 

program.

Seed Money Approach May Work Only in Limited Circumstances; Nonhubs 

May Require Continuing Assistance to Sustain Air Service:

Although it is too early to ascertain the pilot programs success, with 

the grants having been effective only since October 2002, our review of 

the efforts already attempted by small communities suggests that a 

seed money approach may have limited effectiveness in creating 

sustainable programs. Under current regulations for the pilot program, 

communities served by small hub or smaller airports are eligible to 

apply for a grant. However, based on our review of the programs 

launched by the 12 communities we studied in detail, the communities 

served by nonhub airports have been less able to successfully develop 

air service over the longer term. In such communities, the smaller 

populations and lower level of economic activity meant that when the 

financial incentives provided through some outside funding source 

ceased, the additional or enhanced air service also ceased. For 

example, additional service to four small communities in New Mexico 

ceased when the funds were depleted.

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

a seed money approach are those with a larger population and economic 

activity base--generally communities with small hub airports. For 

example, the experience of Eugene, Oregon, with a population of over 

200,000[Footnote 25] and a financial commitment from the community 

demonstrated that a limited financial incentive program can yield 

sustainable enhanced air service. For communities with adequate size 

and resources, such a strategy can continue to challenge them to use 

the one-time infusion of money to jump-start the potential market into 

a sustainable program. For communities with smaller, nonhub airports, 

ongoing financial assistance may be necessary. We believe that our 

earlier work on the EAS program provides insights on strategies that 

may be more effective for developing air service to nonhub communities. 

The EAS program essentially provides one type of ongoing federal 

financial assistance to those communities--a direct grant to air 

carriers that operate to and from those communities. However, we found 

that providing funds to the carrier, rather than the community, has 

often not produced the type of air service that meets the travel 

desires of the communities residents. Faced with relatively high 

airfares and limited service options, travelers to or from most EAS-

subsidized communities leak to other airports. As a result, 

federally-subsidized air service tends to serve only a small portion of 

the potential passenger traffic at these communities. On average, each 

flight to or from an EAS-subsidized community carries only three 

passengers. In our earlier report, we suggested a number of options 

that could be examined to enhance the long-term viability of the EAS 

program. These options include eliminating subsidized service to 

certain communities that were relatively nearby other larger airports 

(where most local travelers had demonstrated a clear preference for 

using the competing large airport), providing eligible communities with 

direct grants to allow them to tailor air service to unique local 

needs, and allowing communities to use air carriers that operated 

aircraft smaller than those currently permitted.

Alternatives to Scheduled Commercial Air Service Are Developing, but 

Passenger Acceptance Is Unknown:

Some small communities may find it difficult to generate the level of 

demand needed to support scheduled, commercial air service even with a 

substantial subsidy. For these communities, alternative transportation 

programs are developing that could offer an opportunity for connection 

to the national air transportation network. These innovative 

alternatives may meet some small communities needs, but they raise 

significant questions. Whether passengers will embrace alternatives 

such as 9-seat aircraft--particularly in light of the long-recognized 

aversion of many passengers to comparatively larger 19-seat turboprop 

aircraft--remains to be seen.

Smaller Aircraft:

Some communities that do not have the population or demand to support 

service from 19-seat turboprop aircraft have received service from 

smaller aircraft. In New Mexico, Rio Grande Airlines is flying 9-seat 

Cessna aircraft between Albuquerque and some of the states smaller 

communities, including Taos. (See fig. 4.) Such an alternative may be 

appropriate since a community like Taos, with a population of 

6,200,[Footnote 26] generated only a limited level of demand. Taos 

received service to Albuquerque from a carrier flying 19-seat turboprop 

aircraft in the past. According to a state aviation official, the 

carrier ceased service because it was not profitable; the aircraft were 

too large and costly. Rio Grandes smaller, less costly aircraft better 

match seating capacity to Taos demand. Whether that service can become 

self-sustaining depends on many factors, including the carriers 

ability to offer more economical airfares or its ability to connect to 

the larger network through codesharing.[Footnote 27] Rio Grande has 

established marketing and codeshare arrangements with Great Plains 

Airlines to connect passengers beyond Albuquerque.[Footnote 28] 

However, some state officials and airport managers have noted that many 

passengers do not like to fly on these smaller aircraft, and this may 

depress demand for the service.

Figure 4: Cessna Caravan Used by Rio Grande Air:

[See PDF for image]

[End of figure]

Another potential approach combines the idea of smaller aircraft with a 

more flexible taxi approach to scheduling flights. In Oregon, 

communities lacking air service are testing a new air taxi business. 

SkyTaxi, which had its inaugural flight in April 2002, is a blend of an 

airline and a charter company that primarily serves communities in 

Oregon, Washington, and Northern California. According to company 

officials, SkyTaxi franchises use 6-seat (4-passenger) Cessna 414 

aircraft (see fig. 5) and have a comparable seat price to regional 

carriers that serve spoke airports, but also provide the on-demand 

service of a charter. Individuals, private entities, or local 

governments can invest in a SkyTaxi franchise that includes a franchise 

license fee, purchase of aircraft, and other ongoing fees such as 

operations and marketing. Using a dispatch system similar to a ground 

taxicab service, passengers call for an aircraft to pick them up at a 

given location and fly them to another community. This business model 

is still relatively new. It may be necessary to educate the traveling 

public about this new option for air travel.

Figure 5: Six-Seat Cessna 414 Used by Sky Taxi:

[See PDF for image]

[End of figure]

Finally, other efforts are also under way to develop new jet aircraft 

that are small (six seats or less) and less costly than other types of 

jet aircraft now available for commercial applications. Two aircraft 

companies, Eclipse and Safire, are in the developmental and testing 

phases of their aircraft programs. Eclipse has determined that the 

original engines selected for its jet did not provide adequate thrust. 

As of January 2003, Eclipse had not yet selected a replacement engine 

provider. (See fig. 6.):

Figure 6: Eclipse 500 Jets First Flight on August 26, 2002:

[See PDF for image]

[End of figure]

In the future, these aircraft may be options for small communities that 

cannot support scheduled, commercial air service with bigger aircraft. 

These smaller aircraft may be targeted toward personal or corporate use 

and not scheduled, commercial air service. However, nonscheduled 

airlines may use the aircraft to serve smaller communities in a charter 

capacity.

Other Options:

Combining several small underutilized airports or investing in other 

forms of transportation to connect small communities to the national 

air transportation network may serve as solutions for very small 

communities that, by themselves, cannot support any form of air 

service. Regionalization--combining two or more airports and their 

resources into one regional airport so that services and passengers can 

be consolidated--is a way for communities to possibly streamline costs 

and create greater demand at an airport. Intermodalism--the concept of 

using alternatives such as buses, shuttle vans, or trains to connect to 

air service at larger airports--is another alternative for small 

communities. However, we found that many communities are not interested 

in either of these concepts. Communities have a strong sense that air 

service is important not only for transportation needs but also for 

economic development. For example, Salem, Oregon officials believe that 

despite its proximity to Portland, Salem can attract and support new 

air service from their community. Though Salem appears to have an 

adequate population base to support air service (139,320 in 2001), the 

airport is located just 47 miles from the Portland International 

Airport, a medium hub. Salem no longer receives scheduled air service. 

A shuttle bus service supplements travelers own vehicles to transport 

passengers between Salem and the Portland airport.

Concluding Observations:

Small communities are facing increasingly difficult challenges in not 

only attracting new air service but also retaining their current 

service. Many network air carriers, experiencing unprecedented 

financial losses, are taking steps to minimize losses such as cutting 

unprofitable service. Some Wall Street analysts have projected that 

airline losses will continue into 2004. Because service to small 

communities is often relatively unprofitable, these communities may be 

hard hit. This could place further pressure on the EAS program as 

additional communities qualify for federally-subsidized air service. It 

could also increase the demand for grants under the Small Community Air 

Service Development Pilot Program, which in fiscal year 2002 already 

had requests far in excess of available funds.

Our work looking at both small community air service and the EAS 

program indicates that there is not a one size fits all solution to 

assist small communities maintain or improve their access to the 

national air service system. Communities that want to increase the 

demand for or supply of air service may need to consider some 

combination of available tools, including marketing or financial 

incentives. However, the effectiveness of the methods chosen, 

especially financial incentives, will likely depend to a large extent 

on the community size. Of those small hub airports we visited, one was 

able to use a seed money approach to attract new air service and 

sustain it after the grants ended. The evidence suggests, however, that 

small communities served by nonhub airports may need continuing 

assistance to sustain air service improvements. These communities 

generally have limited local resources and greater need for ongoing 

assistance to attract, retain, or enhance air service. Further, some 

communities that desire scheduled air service but do not have demand 

adequate to support it may need to examine other alternate 

transportation solutions, such as small aircraft providing on-demand 

service.

Underlying any successful air service improvement efforts is a 

communitys commitment to the air service. We found that the likelihood 

of successful initiatives to obtain additional air service increases 

when the small community demonstrates that enhanced air service is a 

priority--for example, by financially participating in air service 

improvement programs and, more importantly, by providing sufficient 

passenger demand at the local airport. Without adequate demand for air 

service, long-term financially viable service is unlikely. Our EAS work 

demonstrated, for example, that small communities with an average of 

only three passengers per flight required substantial EAS subsidies to 

maintain their service. Furthermore, low-fare carriers are expanding 

the number of destinations they serve, and many travelers are choosing 

to bypass flights from local airports and use other larger nearby 

airports to obtain lower fares or more air service. Such actions create 

new options for local travelers but further diminish already-limited 

demand for air service from small communities. As passenger demand 

diminishes, small communities become even less attractive targets for 

airlines to serve.

Agency Comments:

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

comment. We also provided sections of our draft report for technical 

comment to state or airport officials for the 12 communities we studied 

in detail. DOT, state, and airport officials offered technical 

comments, which we incorporated into this report as appropriate.

We are sending copies of this report to the Secretary of 

Transportation, the Regional Airline Association, and other interested 

parties. We will also send copies to others upon request. In addition, 

this report also will be available at no charge on our Web site at 

http://www.gao.gov.

If you or your staff have any questions about this report, please 

contact me, HeckerJ@gao.gov, or Steve Martin at (202) 512-2834, 

MartinS@gao.gov. Other key contributors to this report are listed in 

appendix VIII.

Signed by JayEtta Z. Hecker:

JayEtta Z. Hecker

Director, Physical Infrastructure Issues:

List of Congressional Requesters:

The Honorable Don Young

Chairman

The Honorable James Oberstar

Ranking Minority Member

Committee on Transportation and Infrastructure

House of Representatives:

The Honorable John Rockefeller, IV

The Honorable Olympia Snowe

The Honorable Ron Wyden

United States Senate:

The Honorable William Lipinski

The Honorable John Mica

The Honorable John Peterson

House of Representatives:

[End of section]

Appendix I: Objectives, Scope, and Methodology:

The objectives of this project were to identify (1) challenges that 

small communities face in obtaining or retaining commercial passenger 

air service; (2) what actions state and local governmental units or 

small communities have taken to enhance air service and how successful 

they have been; (3) what factors, if any, affect the likelihood of 

success; and (4) what implications this analysis has for federal 

efforts to assist small community airports.

For this study, we included all nonhub and small hub airports, which 

various statutes define as small communities.[Footnote 29] For 

enplanement data, we used the carrier-submitted data for nonhub and 

small hub airports that comprises the Federal Aviation Administration 

(FAA) Air Carrier Activity Information System (ACAIS). The ACAIS 

database categorizes airports by the number of annual enplanements.

To identify (1) challenges faced by small communities in obtaining or 

retaining desirable and economical air service and (2) steps 

governmental units or communities had taken to try to improve air 

service or lower fares, we reviewed all 180 applications submitted to 

the Department of Transportation (DOT) for grants under the Small 

Community Air Service Development Pilot Program. These applications 

provided information on a range of issues relating to air service at 

these communities, including the type and amount of air service at the 

community, level of airfares, challenges faced, and information about 

previous air service improvements undertaken. We also interviewed state 

aviation officials from all 50 states to gather information about the 

states role in air service improvement efforts and suggestions for 

specific airports to contact that had undertaken air service 

improvement programs. We interviewed officials at several airlines 

(AirTran Airways, American Airlines, Northwest Airlines, US Airways, 

Big Sky Airlines, Boston-Maine Airways, Colgan Air, Rio Grande Air, and 

Mesa Air Group) to discuss air service issues and identify air service 

improvement efforts. We also interviewed officials from the National 

Association of State Aviation Officials (NASAO), Regional Airline 

Association (RAA), Regional Aviation Partners (RAP), and Air Line 

Pilots Association (ALPA).

After identifying 292 airports as having taken some steps (often 

studies and marketing) to improve air service, we then contacted 

airport or community officials at 98 communities where available 

information suggested that more extensive improvement efforts had been 

undertaken. We discussed with officials the air service challenges 

faced by the community and gathered more specific information about the 

types of air service improvement programs implemented or ongoing 

between 1997 and 2002. We asked for information about the specific type 

of steps undertaken, costs (if known), time frames, goals, status, and 

the officials self-defined perspective of project success. We allowed 

officials associated with the project to define its success because 

each community faced unique challenges and had defined their own air 

service needs. Officials could determine whether their communitys 

needs had been met by the program.

To identify the factors that contribute to the effectiveness of air 

service development initiatives, we developed case studies of 

individual community efforts. We adopted a case study methodology 

because, while the results cannot be projected to the universe of small 

communities, case studies are useful in illustrating the range and 

complexity of programs communities implemented, specific problems 

encountered and the outcome of the program. We selected 12 communities 

in 6 states for a more in-depth review. We chose these sites 

principally because they had used a variety of programs to try to 

improve their air service. We also selected them because they varied in 

population, level of economic activity, and geographic location. The 

communities were served by a mix of small hub and nonhub airports. We 

visited the states and met with airport and community officials to 

discuss air service challenges, the type of programs implemented, 

project costs, the success of the program, and any lessons learned that 

might help other communities contemplating a similar program. We also 

gathered information about the type and amount of air service before 

and after the improvement effort as well as the level of enplanements 

(i.e., passenger boardings) and airfares.

To identify implications for other federal programs relating to air 

service at small communities, we reviewed recently completed relevant 

studies, along with information on the DOT Small Community Air Service 

Development Pilot Program. We reviewed relevant legislation, DOT 

guidance for the program, program applications, the grant amounts 

awarded, and selected grant agreements. We also interviewed DOT 

officials to discuss the selection process and status of the program.

We conducted our work from March 2002 to December 2002 in accordance 

with generally accepted government auditing standards.

[End of section]

Appendix II: Background on Underlying Economic Principles:

Economic principles provide the foundation to explain the level and 

type of air service any community receives.[Footnote 30] The 

independent and interdependent forces of supply and demand are critical 

to understand how a communitys air service changes over time as the 

national, regional, and local marketplaces evolve. In the short run, 

for small community airport managers and local policymakers purposes, 

the knowledge of what factors influence the travel decisions of 

potential passengers and airlines service decisions are essential to 

identify policies that may affect the level of service a community 

receives. In the long run, a small communitys ability to maintain 

commercial air service--without public financial assistance--depends 

on the effectiveness of various policies to fundamentally alter 

travelers choices to increase demand for local air service.

Demand for Air Service:

Demand for air service in a region stems from the collective demand of 

individual consumers. As a result, the economic factors that influence 

consumers choices and decisions are critical to understanding demand 

for air service. The influence of prices--fares, in this case--on a 

potential passengers decision-making process is no different for air 

service than with other products or services. All else being equal, 

consumers are willing to purchase more tickets for air travel the lower 

the airfare.

Variation in demand for air service between different communities 

results in large part from differences in community size and economic 

factors that influence consumers choices. The population of the 

community and region surrounding an airport, residents level of 

income, economic activity, the quality and type of air service 

available at the local airport, the distance to the nearest competing 

airport, and the quality and type of service offered at that competing 

airport are a few factors that create differences in passenger demand 

between communities. All else being equal, demand for air service is 

generally greater in communities with more population and employment, 

higher per capita income, and greater economic activity. Similarly, all 

else being equal, communities that are more geographically isolated--

further from the nearest competing airport--will generally have greater 

demand for air service because the cost of accessing alternative forms 

of air travel is higher, and thus there is less passenger leakage 

from the community.

Passenger leakage refers to individuals either driving away from 

their local community airport to an alternative airport for service, or 

simply driving to their final destination. Potential passenger leakage 

is a critical factor in determining a communitys demand for air 

service. Passenger leakage occurs for a number of reasons, however, the 

two primary reasons are the difference in airfares and the quality of 

service between a local and competing airport. All else being equal, 

communities generally experience greater levels of passenger leakage if 

a competing airport, within reasonable driving distance, is able to 

attract travelers by offering better service--more destinations, 

greater flight frequency, larger planes--or lower fares.

Supply of Air Service:

Just as market demand for air service is derived from individual 

consumers demand for service, the potential air service supplied in a 

region is determined by the economic factors that influence individual 

carriers decisions and corporate goals. Broadly speaking, a producer 

or supplier of a good or service must receive some minimum price as 

compensation in order to remain in business. This concept holds true 

for air carriers when determining whether to serve certain markets, and 

if so, with what type of aircraft and with what daily frequency. Unless 

a carrier is able to charge a fare that covers the operational costs of 

a flight at a minimum, it will not provide service to a market. All 

else being equal, carriers are willing to provide additional service as 

airfares rise.

The economic factors that affect the supply of air service to a market, 

as well as changes to supply over time, are the number of carriers 

serving the community, labor, fuel, and capital costs, government 

policies and regulations, fleet distribution (i.e., size and type of 

aircraft available in the carriers fleet), airport expenses (such as 

landing fees, ground and terminal crew costs, and gate charges), and 

relative market and route profitability. Changes to airlines cost 

structures can directly affect the supply of air service. Fuel price 

spikes, renegotiated labor contracts that increase wages, new 

government safety or security regulations, and increased airport 

landing fees are all examples of factors that affect structural costs 

and cause airlines to reconsider markets served and route structure.

The Traditional Supply and Demand Model:

The traditional supply-and-demand model provides a simple conceptual 

framework to broadly discuss (1) air service in small communities and 

(2) the economic factors that create and explain differences in service 

between communities and variations in service within communities over 

time. The size of a community and the corresponding demand for air 

travel is arguably the most important element in determining whether a 

community receives commercial air service. For each community, unless a 

certain minimum level of demand for air travel exists, carriers are 

unable to provide sustainable service at fares that cover costs.

Figure 7 illustrates the demand (D) for air service in two hypothetical 

communities--H a high-demand community and L a low-demand community--

and the potential supply (S) representing carriers willingness to 

provide service to the communities at different fare levels.[Footnote 

31] As discussed previously, all else being equal, an inverse 

relationship exists between airfares and the number of seats demanded 

by consumers; whereas, carriers are willing to supply additional seats 

as fares rise. Demand for air service in community H (as illustrated by 

the line labeled DH) is shown to be greater than the demand from 

community L (as illustrated by the line labeled DL). At an average 

airfare of F (shown on the vertical axis), the quantity of seats 

demanded in one month (shown on the horizontal axis) in the high-demand 

community, QH, exceeds that of the low-demand community, QL. Another 

way to consider this is that to purchase the same number of seats, QH, 

consumers are willing to pay more per seat in the high-demand 

community, F, than consumers in the low-demand community, FL.

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

Community:

[See PDF for image]

[End of figure]

Incorporating supply to the model, community H is shown to receive 

scheduled commercial air service because a price exists (FH*) at which 

carriers quantity supplied is equal to passengers quantity demanded. 

Another way to consider this is that passengers willingness to pay 

(FH*, as shown on the demand curve, DH) for a level of service (QH*) is 

the same as what carriers are willing to accept for providing the 

service (FH*, as shown on the supply curve, S). The level and type of 

service being provided may not be adequate in the minds of community 

members; nevertheless, the community receives service. Conversely, 

community L receives no air service due to the lack of demand. 

Potential passengers in the community are not willing to pay ticket 

prices for any level of service that carriers would be willing to 

accept as compensation for the provision of service (a price does not 

exist where quantity supplied and quantity demanded are equal).

Policy Issues and Market Response:

The challenge for policymakers in attracting, maintaining, or improving 

market-provided, commercial air service in the long run to small 

communities is to identify the most effective short-term policies that 

attempt to grow (or maintain) the market to sustainable levels. 

Granted, policymakers only have the tools to influence a few of the 

economic factors that affect the supply of and demand for air service 

in a community. A communitys population and its geographic location 

(in relation to other communities with airports) are fixed in the short 

run.[Footnote 32] However, local planners can undertake programs that 

attempt to alter potential passengers travel choices and decisions, 

with the objective of capturing a communitys potential passenger base 

by reducing leakage. In addition, airport managers may introduce 

programs that attempt to reduce the cost burden carriers face when 

serving or beginning service in a community. Ultimately, however, some 

communities may not have the sheer size or level of economic activity 

or be able to compete with the lower fares and/or better service of a 

nearby airport, to maintain the necessary demand for air service. Thus, 

for certain smaller communities, sustainable service, without some form 

of government intervention, may be unachievable in the long term.

Government intervention in the form of a subsidy to carriers (for 

example, a cost-sharing agreement) may enable a small community to 

receive air service that commercial carriers would otherwise not serve. 

The example discussed above of the low-demand community that does not 

receive market-provided air service, is revisited in figure 8. The 

government subsidy effectively lowers the carriers costs, creating an 

environment in which it can afford to provide service to the community. 

The amount of air service provided to the community is illustrated by 

QSUB. The effect of the subsidy is illustrated graphically by shifting 

the supply curve outward from S to SSUB. For the same amount of service 

(QSUB), the average fare passengers face with the subsidized service, 

FSUB, is less than the minimum that the carrier would have been willing 

to accept in a situation with no subsidy, FNS. The end result of the 

program is government-subsidized air service in a community that 

otherwise would not receive commercial air service. Without the 

subsidy, the carrier would not provide service because passengers would 

not be willing to pay any price that carriers would be willing to 

accept for providing service (the supply and demand curves do not 

intersect).

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

Service:

[See PDF for image]

[End of figure]

The DOT Essential Air Service (EAS) program provides an example of how 

government intervention can enable a small community to receive air 

service that commercial carriers would otherwise not serve. In general, 

the EAS program provides a subsidy to carriers that serve certain 

communities. The subsidy is calculated to cover the difference between 

a carriers projected revenues and expenses and provide a minimum 

amount of profit.

Hypothetical Example of Efforts to Improve Air Service:

In the short term, a number of different programs may be successful at 

providing or enhancing a communitys air service. However, to be 

successful at sustaining air service in a community in the long run 

without prolonged government intervention, a program will need to 

target factors that ultimately influence consumers decisions and 

increase passenger demand in the market. The following hypothetical 

scenario provides a general example of how a policy can potentially 

increase the level of air service in a community.

The local small community market: Consider a community that receives 

air service but at levels that the community deems inadequate (i.e., a 

single carrier, with poor on-time performance, that operates only a few 

daily flights to one destination on small aircraft at relatively 

expensive airfares). Because of the relatively poor service at the 

local airport and increased availability of service elsewhere, many or 

most potential local passengers drive to other nearby airports for 

better service and lower fares. As a result of the high level of 

passenger leakage, demand in the local community has been declining, 

and the carrier is considering dropping the market.

The policy and objectives: The local airport and community-planning 

bodies initiate a program that provides (for a fee) the ground and 

terminal labor and capital necessary for airport operations (i.e., 

similar to the Mobile, Alabama business model). The short-term 

objective of the initiative is to encourage the carrier to remain in 

the community and improve service (i.e., frequency of flights, number 

of destinations, on-time performance) by lowering its local operational 

costs. The long-term goal of policymakers is also to improve service, 

but by increasing demand through reduced passenger leakage.

The potential market response following program implementation: 

Following the programs introduction, the reduced costs create an 

incentive for the carrier to improve service by offering a greater 

frequency of daily flights, adding an additional destination, and 

enhancing on-time performance. The improved service at the local 

airport may alter the choices and travel decisions of potential 

passengers in the community. As a result, more passengers may choose to 

use this service rather than driving elsewhere, so demand increases due 

to a reduction in passenger leakage. The increase in demand increases 

load factors, thus potentially improving the markets profitability, 

which in turn may attract new carriers into the community offering 

additional flight destinations and frequencies. The introduction of a 

competitor at the airport further increases supply and creates 

competition between the carriers for passenger traffic. At the then-

current level of demand, average airfares drop and the total amount of 

seats demanded at that new lower fare level increases. The addition of 

other carriers also may increase flight frequency and destinations and 

thus may increase demand as passengers reconsider their mode and trip 

choices. The cycle continues to evolve over time as changes in the 

local, regional, and national marketplace occur.

The above example may paint too rosy a picture for what policymakers in 

smaller communities could expect from initiatives aiming to attract or 

improve service. This may be especially true at this time, because the 

current climate in the aviation marketplace consists of the exact 

opposite story: the downward spiral of declining demand and increasing 

costs, resulting in service being reduced or eliminated in certain 

markets.

Air Service Improvement Initiatives:

The EAS program and the hypothetical scenario presented above are 

examples of policies with a supply-side orientation--the direct impact 

of an initiative is aimed at the supplier of the service, the carriers. 

Other programs that attempt to grow a market may be demand oriented, 

where the focus of the initiative is on potential passengers. For 

instance, a marketing proposal aimed at educating potential travelers 

in a region about air service from a local airport is a demand-oriented 

program. Regardless of orientation, the goal of policymakers developing 

short-term initiatives such as travel banks, revenue guarantees, cost-

sharing agreements, direct subsidization, and consumer education 

(marketing) is to attract, maintain, or improve air service in their 

community. Ultimately, a sustainable level of service will result from 

the effectiveness of various policies to change travelers decisions 

and increase demand within a community. In the long run, some 

communities simply do not have the size and level of economic activity 

necessary to maintain commercial service without a government subsidy. 

Others may simply be unable to curb passenger leakage because they 

cannot compete with larger airports within relatively close driving 

distance that offer better service from more carriers, especially low-

fare carriers.

[End of section]

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

Airports:

[See PDF for image]

[End of figure]

Source: GAO.

Notes: The air service development programs were in various stages at 

the time we spoke with officials. We did not include programs in the 

table above that were in the proposal stage at the time of our 

discussions. We included communities with ongoing programs and 

communities that had completed their programs. In a few cases, we 

included communities that had developed financial incentive programs 

but had to put them on hold or discontinue their efforts due to the 

events of September 11, air carrier problems, or for other reasons.

[A] Studies included both those conducted at a statewide level and 

those conducted or commissioned by an individual airport.

[End of table]

[End of section]

Appendix IV: Case Studies Describing Air Service Improvement Programs 
in 

12 Small Communities:

We visited 6 states for a more in-depth review of 12 communities air 

service improvement programs. As shown in figure 9, the states visited 

were spread across the United States. We reviewed several communities 

in New Mexico because they were working together on state-funded air 

service improvement efforts. Other communities, such as Mobile, were 

operating a program independently.

Figure 9: Twelve Communities We Studied in More Detail:

[See PDF for image]

[End of figure]

Mobile, Alabamas New Business Model:

Mobile, Alabama has faced challenges in retaining service, despite its 

growing economic base. In 2001, six carriers provided nonstop service 

from Mobile to 10 destinations. In October 2001, United Express, which 

was sharing ground staffing (e.g., ticketing and baggage operations) 

and equipment with US Airways Express, discontinued service to Mobile. 

When it did so, US Airways Express had no personnel or equipment to 

assist with ground service.

Figure 10: Communities Studied in Florida and Alabama and Other Nearby 

Competing Airports:

[See PDF for image]

[End of figure]

Officials with the Mobile Airport Authority suggested that it could 

manage US Airways ground services, streamlining those operations and 

saving the carrier some money. Airport officials said they recognized 

that doing so could be a solution to a problem inherent to small 

community airports--relatively high market entry costs associated with 

establishing a ground station and operations at an airport with limited 

passenger demand.

According to Mobile Airport Authority officials, this new business 

model costs about $26,000 per month. The model, which began after 

September 11, 2001, has three components that are aimed at reducing an 

airlines start-up costs:

* The airport provides staff for all airline ground operations. Those 

staff are fully trained in airlines systems and operations, including 

checking in passengers and baggage, selling and issuing tickets, and 

marshalling aircraft into and out of the assigned parking positions. As 

of November 2002, the airport had nine staff allocated to the program.

* The airport provides all ground handling equipment (e.g., baggage 

carts and tugs) for aircraft. The airport is currently using ground 

equipment on loan from a previous tenant and planning to purchase 

equipment at a cost of nearly $145,000.

* The airport charges a fee of $315 (as of October 2001) for services 

provided for each scheduled turn (i.e., arrival and departure).

Mobile was able to retain service from US Airways Express. To date, US 

Airways is the only airline involved in the model; no other incumbent 

airlines have expressed interest in participating. Mobile officials 

believe this is because airlines would need to lay off their own ground 

staff in order for the program to be feasible. According to airport 

officials, the model will be most attractive to new carriers who do not 

currently have ground personnel on staff or to carriers thinking of 

leaving Mobile due to staff costs. Recently, DOT awarded Mobile 

$456,137 from the Small Community Air Service Development Pilot Program 

to fund the purchase of ground equipment and pay for program operation 

expenses for 1 year. Officials are hopeful their staffing program will 

help attract other carriers to Mobile.

Pensacola, Floridas Travel Bank Program:

While travelers at Pensacola, Florida have enjoyed air service from 

several carriers, they have had to contend with high airfares and 

leakage to neighboring airports. Pensacola, located in the panhandle of 

Florida, is about 1 hours drive from small hubs located at Fort Walton 

Beach, Florida and Mobile, Alabama. Pensacola Regional Airport 

officials have undertaken a variety of strategies to address these 

problems. In 1998, Pensacola airport officials approached incumbent 

carrier Delta Air Lines requesting that they lower fares to match those 

available at Fort Walton Beach. The meetings with Delta were 

unsuccessful. Pensacola officials had also been in ongoing discussions 

with Southwest Airlines and recognized that any service possibilities 

from Southwest were not likely in the immediate future.

In August 2001, AirTran Airways approached Pensacola and requested a 

pro forma study of operational costs to determine the costs to operate 

from the Pensacola Regional Airport. The airline was requesting 

information because they were engaged in negotiations with airport 

officials related to the planned terminal expansion at Fort Walton 

Beach. According to an AirTran official, they decided to move because 

of problems concerning the planned terminal expansion at Fort Walton 

Beach, including the timing of construction, location of AirTran 

operations during construction, amount of construction that AirTran was 

expected to pay for, and overall increased costs to AirTran. The 

airport manager in Pensacola said he had heard about other airports 

using travel banks and acted quickly to develop a travel bank. AirTran 

began service in Pensacola in November 2001 with three daily nonstop 

flights to Atlanta.

The following are elements of Pensacolas program:

* Travel Bank: Pensacolas travel bank was the product of a large 

community effort involving support from numerous community 

stakeholders. The Chamber of Commerce, Pensacola city officials, and 

airport officials conducted outreach for the travel bank over a 3-week 

period, and persuaded 327 businesses and individuals to contribute a 

total of $2.1 million for a 2-year period. The businesses contractually 

agreed to dedicate a portion of their travel budget to fly on AirTran. 

The local bank involved issued each participating business a credit 

card account, which is used to draw funds toward the purchase of 

AirTran airline tickets. Using their credit card accounts, businesses 

can purchase tickets from travel agents, the Internet, and other 

distribution channels. If the businesses do not spend the funds they 

have allocated to the account within the 2-year period, the remaining 

funds are transferred to AirTran Airways, and they receive vouchers 

with AirTran, which they have 1 year to redeem. While Pensacola 

passengers can fly to any of AirTrans destinations (via Atlanta), 

AirTran determines the flight schedule. If AirTran reduces their 

flights from three per day, files for bankruptcy, or sells more than 50 

percent of their stock, then businesses participating in the travel 

bank can be released from the agreement.

* Reduced Airport Fees: Pensacola agreed to cover the difference in 

operational costs between Fort Walton Beach and Pensacola, which 

amounts to approximately $375,000 per year. A consortium of local 

government and business entities[Footnote 33] agreed to cover this 

additional cost--for the first 2 years of AirTrans operations.

* Moving Costs: The airport agreed to pay the $39,000 cost of moving 

AirTran operations from Fort Walton Beach to Pensacola.

* Marketing: Pensacolas airport includes a staff that conducts 

marketing and works closely with AirTran to promote Pensacolas air 

service. The airport budgets $50,000 per year for AirTran (for the 

duration of the travel bank--2 years).

Pensacolas financial incentive program has been a success in the 

short-term. Pensacola has seen a dramatic drop in airfares since 

AirTran began air service in August 2001. (See fig. 11.) According to 

Pensacola Airport officials, as of August 2002, the walk-up fares for 

Pensacola to Atlanta were $300, about 70 percent lower than in 2001. 

Furthermore, two regional airlines (affiliated with Delta) began 

serving more destinations since AirTran began service. According to 

Pensacolas airport manager, this is likely due to AirTrans presence. 

AirTrans load factors in July 2002 were at 67 percent, approaching the 

program goal of 70 percent. As of November 2002, Pensacola had four 

AirTran flights daily using a mix of regional and mainline jets. The 

airport manager said that the service is attractive to travelers, and 

he believes that given the increasing passenger demand at the airport, 

service will become self-sustaining by the end of the program.

Figure 11: Walk-up Fares at Pensacola Regional Airport (August 2002 

versus May 2001):

[See PDF for image]

[End of figure]

Tallahassee, Floridas Revenue Guarantee Program:

Tallahassee, the state capital of Florida, had nonstop service to 11 

destinations from 8 carriers (as of August 2001), but has been faced 

with relatively high airfares. As a result, large numbers of its 

potential passengers chose to fly out of other area airports, including 

those as far away as Orlando, Jacksonville, Tampa, and Atlanta. 

According to airport officials, high fares were a major barrier to 

Tallahassees economic development because they discouraged businesses 

from locating there.

To attract and keep businesses, airport officials began an effort to 

improve existing air service and attract new service. Officials said 

they were not successful in either persuading Delta or US Airways to 

lower fares or in attracting Southwest Airlines. The state issued a 

request for bids to carriers who could provide guaranteed airfares to 

employees of the state government--the primary employer for 

Tallahassee. AirTran, a low-fare carrier was the only respondent to the 

request for proposals (RFP). The city had a history of working with the 

state to secure a low-fare carrier. The state indicated that it would 

only award the contract to AirTran if it would provide service to 

Tallahassee. AirTran agreed to provide service if some kind of 

assistance was provided in turn. Working with officials from the city 

and the governors office, Tallahassee reached an agreement with 

AirTran to begin service to Atlanta, Tampa, and Miami as of November 

15, 2002. The city agreed to provide a revenue guarantee of $1.5 

million (raised through the sale of city-owned real estate) to help 

AirTran mitigate start-up risks. Under this program, the city 

guaranteed for a 1-year period that AirTran would earn gross passenger 

revenues of $4,154 per block hour.[Footnote 34] If the revenue fell 

short of this goal, the city would make up the difference, up to a 

total of $1.5 million.[Footnote 35] In addition, the city agreed to pay 

AirTran up to $250,000 for marketing and $350,000 of operational 

incentives creating a package totaling $2.1 million. To ensure 

ridership of the new service, employees of the state and the city of 

Tallahassee were required to use AirTran when possible.

Tallahassees airfares have declined since November 2001. Fares in 8 of 

Tallahassees top 10 markets decreased by 36 percent or more. For 

example, fares from Tallahassee to Atlanta declined by 60 percent. (See 

fig. 12.) Passenger traffic has also increased since AirTran began 

service. On a year-over-year basis, passenger volumes have improved by 

27 percent for the year through November 2002.

Figure 12: Average Ticket Prices in Tallahassees Top-10 Markets (1st 

Quarter 2002 versus 1st Quarter 2001):

[See PDF for image]

[End of figure]

AirTrans service from Tallahassee has not yet been profitable. In an 

effort to reclaim passengers after September 11, AirTran and its 

competitors lowered fares dramatically. Even with increasing load 

factors, the airline was unable to generate enough revenue to meet the 

preset revenue goal. Consequently, AirTran exhausted the $1.5 million 

revenue guarantee within the programs first 3 months. According to 

airport representatives, AirTran service was predicted to be self-

sufficient by the third quarter of 2002, but the events of September 11 

and the resulting decline in passenger traffic has pushed the target 

for self-sufficiency to the third quarter of 2003. As of September 

2002, Tallahassee learned that AirTran might suspend service in 

November 2002 unless it had received a renewal of the full $1.5 million 

revenue guarantee. The renewed agreement would include a monthly cap of 

$125,000.

According to a Tallahassee airport official, Air Tran and the 

Tallahassee city commissioner were able to come to an agreement to 

renew the $1.5 million revenue guarantee. Funding for the revenue 

guarantee is coming from the proceeds of additional land sold by the 

city of Tallahassee. The revenue guarantee was renewed for a 1-year 

period beginning November 15, 2002. The new contract with AirTran 

provides that regional jets may be used in place of the larger B-717 

jets, which would allow AirTran to better match frequency and capacity. 

While the block hour guarantee for the B-717 jets will remain the same 

($4,154), the regional jet block hour guarantee will be two-thirds of 

the amount. AirTran officials are hopeful this new agreement with 

Tallahassee will allow the Tallahassee market to become self-sufficient 

and profitable.

Michigans Air Service Program:

After a 1986 state survey of businesses indicated that air service was 

ranked third most important in terms of cultivating business, the then-

governor of Michigan established a state program to assist the states 

smaller airports.[Footnote 36] Since 1988, the Michigan Air Service 

Program has provided grants to the states airports (generally those 

with annual enplanements under 150,000) to aid in three distinct 

categories--marketing local airport service, air carrier recruitment 

and retention, and capital improvements and equipment.[Footnote 37] 

These grants are funded by the states aviation fuel tax, and airports 

are required to provide a local match to the state funding. Between 

fiscal years 1998 and 2002, Michigan awarded over $1.3 million to small 

airports for marketing and carrier recruitment projects and spent 

another $265,000 for projects that benefit airports statewide.[Footnote 

38] In the last 5 fiscal years, the airports at Alpena, Houghton 

County, Marquette, Pellston, and Sault Ste. Marie were among the 16 

airports that have received state grant funds. We reviewed the efforts 

of Pellston, Michigan in more detail.

Figure 13: Pellston, Michigan and Other Nearby Competing Airports:

[See PDF for image]

[End of figure]

The Pellston Regional Airport of Emmet County is located near a major 

resort and tourist area in part because of its proximity to Mackinac 

Island. Northwest Airlines[Footnote 39] offers the only air service 

from Pellston--three flights daily to Detroit using 34-seat 

turboprops.[Footnote 40] A roundtrip business fare between Pellston and 

Detroit exceeded $400.[Footnote 41] However, Pellston is only 85 miles 

north of Traverse City, which has over three times as many daily 

departures provided by three carriers, including service to Chicago and 

Detroit.[Footnote 42] As a result, about 50 percent of Pellstons 

passengers leak, primarily to Traverse City.

Pellston has received over $100,000 in state grant funds since fiscal 

year 1998 and has used the vast majority of the funds to market the 

airport. A lesser amount has been used to recruit and retain air 

carriers. According to a state aviation official, the community of 

Pellston has contributed over $12,000 to these projects; the Petoskey 

Regional Chamber of Commerces Air Service Task Force has been 

instrumental in raising the local share of the airports marketing 

funds. Pellston has used its state marketing grants to develop 

promotional materials such as newspaper, radio, and TV ads highlighting 

the states Fly From Nearby theme and a newsletter that updates the 

community on airport projects. The airport has used carrier recruitment 

and retention grants to examine possible one-stop service to 

Chicago.[Footnote 43] The Pellston airport manager believes that these 

marketing efforts are benefiting their enplanement levels.

Pellstons enplanements declined 16 percent between 1998 and 2001. For 

the first 8 months of 2002, passenger traffic had increased, compared 

with the same period in 2001, an indication that the airport was 

successfully handling the fallout from the industrys financial woes 

and the September 11 attacks. Figure 14 illustrates the changes in 

Pellstons enplanements between 1998 and 2001.

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

[See PDF for image]

[End of figure]

Michigan had an experience in which its efforts to obtain and maintain 

commercial passenger service were not successful--at Benton Harbor. 

Michigan officials reported two significant lessons learned in their 

efforts at Benton Harbor to develop sustainable air service: (1) the 

community needs to provide long-term support for air service and (2) 

factors contributed by other modes of transportation should be 

considered when undertaking service initiatives. Officials recognized 

these lessons after the state agreed to a risk-sharing arrangement with 

Northwest to provide service to Benton Harbor. The airline initiated 

service to Benton Harbor in June 1995. However, a major highway to 

South Bend, Indiana was completed about the time the service was 

initiated, easing southwest Michigan residents access to the multiple-

carrier service at the South Bend Airport. According to the state 

officials, this factor, together with the initial reliability problems 

with Northwest service; Benton Harbors proximity to three other 

airports with lower service or better fares; and other issues resulted 

in the eventual termination of the service in 2000. However, this was 2 

years beyond the agreed-upon service period. Enplanements at Benton 

Harbor peaked in 1996, the first full year of service, at 7,501 and 

declined each year thereafter, to 5,586 in 1999. In 2000, only 2,821 

passengers had enplaned when the service was suspended in August. 

Benton Harbor is still without commercial air service, and the airport 

manager there believes it is probably more feasible to develop into a 

general aviation airport serving private jets and other aircraft.

Michigan and local airport officials we contacted expressed overall 

satisfaction with the states program. State officials indicated that 

they elicit feedback in annual meetings with airport officials, 

maintain regular telephone and in-person contact with airport 

officials, and survey airport customers every 2 years. In our 

discussions with managers of airports that had received state grants 

since 1998, they expressed support of and satisfaction with the 

assistance the state has provided over the years.

Marylands Regional Air Service Development Program:

In 1998, US Airways discontinued service between Hagerstown, Maryland 

and the Baltimore/Washington International Airport (BWI). The cessation 

of this service left Hagerstown (a community of 37,000, located 

approximately 75 miles northwest of Baltimore on I-70) with scheduled 

service to Pittsburgh, Pennsylvania.[Footnote 44] As of September 2001, 

Cumberland (a community of 22,000, 65 miles further west of Hagerstown 

on I-68) lost all scheduled service with the cessation of service to 

Pittsburgh.

Figure 15: Cumberland and Hagerstown, Maryland and Other Nearby 

Competing Airports:

[See PDF for image]

[End of figure]

Maryland state economic and transportation officials evaluated several 

possible ways to increase air service to small communities, including a 

state-owned and -operated airline, but decided on a program of state-

subsidized air service. In July 2000, the state appropriated $4.25 

million for the Maryland Aviation Administration to finance scheduled 

air service that effectively links to the national and international 

air transportation system underserved regions of the State that are 

capable of supporting scheduled air service for the 2-year subsidy 

program.[Footnote 45]

Several communities initially expressed interest in participating in 

the program. The state contracted with a consultant to study the 

potential of each of those communities. Ultimately, the other 

communities chose not to participate, and the state selected Hagerstown 

and Cumberland. The consultants report recommended that the program 

use an eight-seat aircraft because of the relatively thin Cumberland 

and Hagerstown markets (i.e., relatively few people would likely fly in 

those markets). The communities involved chose to use a carrier with 

19-seat aircraft because they believed that service on a larger 

aircraft was more acceptable to the traveling public. One of the issues 

state officials discussed with the airport and community leaders was 

possible local efforts to generate additional revenue to help with the 

costs of starting new service, such as a travel bank. The legislation 

did not require communities to contribute local matching funds, and a 

state official said the communities declined to participate in a travel 

bank.

Boston-Maine Airways, doing business as Pan Am Clipper Connection, 

began operations in Maryland with a 19-seat J-31 Jetstream turboprop 

aircraft in December 2001. Flights originated in Cumberland and stopped 

in Hagerstown on their way to BWI. The carrier agreed to provide three 

flights daily on weekdays and two daily flights on weekends in return 

for biweekly payments of $170,268. The states agreement with Boston-

Maine included some provisions for reductions in payments commensurate 

with reductions in service (e.g., cancelled flights).

Passenger enplanements peaked in March 2002 with a total of 398 (an 

average of about 13 passengers per day, or 5 per flight) flying from 

Cumberland and Hagerstown. Since that time, they have declined each 

month and in September 2002 totaled 192, or less than 7 passengers per 

day (an average of just over 2 passengers per flight) departing from 

Cumberland and Hagerstown. Figure 16 shows the change in enplanements 

during the first 9 months of service.

Figure 16: Boston-Maine Airways Enplanements at Cumberland and 

Hagerstown (January through September 2002):

[See PDF for image]

[End of figure]

It appears unlikely that this air service will become self-sustaining 

if current trends continue. The consultant estimated that this service 

would require an annual subsidy of $2 million, even with a 70-percent 

load factor--or 13 passengers per flight--and a $90 one-way fare. 

However, in September 2002, enplanements averaged about 2 passengers 

per flight, and November 2002 fares were $70 one way (Cumberland to 

BWI). Based on enplanements to date and their declining trend, it 

appears unlikely that this service will become self-sufficient unless 

enplanements and fares increase significantly. A state official agreed 

with this assessment.

A number of factors appeared to have played a role in the low 

enplanements. First, while Maryland generally had state and local 

stakeholders committed to the goal of improving air service, there were 

no indications that either community regarded air service to BWI as a 

priority. For example, the communities did not pledge to use the 

service or contribute any funding for the service. Also, the sites 

selected did not appear capable of supporting air service with a 19-

seat aircraft. The consultant report projected that Hagerstown would 

generate only about seven passengers per day. Finally, the Cumberland 

Airport manager stated that weather conditions coupled with equipment 

problems at the Cumberland Airport resulted in many flights being 

cancelled or delayed. He said that it did not take many delays or 

cancellations before passengers chose not to fly to BWI, but to instead 

drive or use the existing shuttle van service. He also indicated that 

he preferred to drive to BWI.

New Mexicos Air Service Assistance Program:

New Mexicos small communities experienced limited scheduled air 

service and relatively high fares. State officials said that residents 

of the small communities that have commercial airports generally do not 

fly from their local facilities. Rather, they tend to fly either from 

the states largest airport, Albuquerque (which in November 2002 

offered nonstop service to 36 different destinations from 12 carriers, 

including 2 low-fare carriers), or from airports in Texas, such as 

Midland (which offered nonstop service to 8 different destinations from 

4 carriers). State aviation and local airport officials said that while 

air service is important to New Mexicos small communities because of 

their remoteness and lack of other transportation options, residents 

have become used to driving long distances. Combined with the presence 

of low-fare carriers within 250 miles of most residents, it is 

difficult for small airports to attract adequate demand for air 

service.

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

Competing Airports:

[See PDF for image]

[End of figure]

In 1998, the New Mexico Municipal League and the New Mexico Airport 

Managers Association spearheaded an effort to develop a state air 

service assistance program to provide funding for new air service to 

small communities. State officials said that the program was intended 

to provide seed money for new service. The legislature authorized the 

New Mexico Air Service Assistance Program and appropriated a total of 

$900,000 for fiscal years 1999 through 2002. Under the program, an 

eligible recipient (a consortium of municipalities or other public 

entities) that provides airline service from one or more nonhub 

airports to a small hub or larger airport can receive a grant of up to 

$200,000 per year. A 50-percent local match is required.[Footnote 46] 

Subsequent legislation reauthorized the program through 2007 and 

modified the funding to provide the program with a percentage of state 

gross receipts. State officials estimated that this will provide 

approximately $600,000 for fiscal year 2003, but amounts may vary. To 

date, state grants have been used to subsidize new service to several 

communities.

Taos and Ruidoso:

In Taos, a town of 6,200 approximately 130 miles drive northeast from 

Albuquerque, local community and Rio Grande Air officials, with the 

assistance of state aviation officials, acted as catalysts to improve 

air service. The mayor said that air service is necessary for economic 

development. Rio Grande Air, a small carrier using nine-seat Cessna 

single engine aircraft,[Footnote 47] began operations between Taos, Los 

Alamos, and Albuquerque in August 1999--the first scheduled air service 

to Taos in 13 years, according to state officials. The previous carrier 

had abandoned service after not having attracted sufficient passenger 

demand to offset the costs of operating its 19-seat aircraft. State and 

Rio Grande Air officials said that they hoped that by using smaller 

aircraft, costs would be lower, fares would be lower, and the air 

service would eventually be economically viable.

In January 2000, the state awarded a $100,000 grant, which was matched 

by the Town of Taos, the Village of Taos Ski Valley, and the County of 

Los Alamos. A second state grant, for $79,000, was awarded in May 2000. 

Service to Durango, Colorado was added. However, Rio Grande Air 

officials decided to discontinue service to Los Alamos, effective 

February 2001 because the service had little ridership.

Rio Grande Air began providing service between Ruidoso and Albuquerque 

in July 2001. Ruidoso--a city of roughly 7,700 located approximately 

185 miles southeast of Albuquerque--had no scheduled air service at the 

time. In October 2001, the state awarded a grant of $190,000 to help 

fund service between Taos, Ruidoso, and Albuquerque. Taos provided 

$25,000 in matching funds; the Village of Taos Ski Valley $25,000; and 

Ruidoso $150,000.

In February 2002, Taos and Ruidoso jointly applied for a grant from the 

DOT Small Community Air Service Development Pilot Program. The 

principal objective of the grant was to help fund Rio Grandes service 

from both communities to Albuquerque. The communities also envisioned 

an extensive marketing campaign to boost enplanements. The application 

sought $500,000 from DOT, which would be matched with $200,000 from the 

state and $200,000 from the participating communities. However, the 

airport manager at Ruidoso said that city officials later decided that 

service to El Paso, Texas, would better meet the communitys needs. 

When a Rio Grande Air official said that the funds were inadequate to 

provide service to El Paso, Ruidoso elected to withdraw from the 

consortium. Rio Grande discontinued service to Ruidoso in May 2002. In 

September 2002, DOT finalized a grant of $500,000 to Taos. Taos 

replaced Ruidosos portion of the matching funds with funding supplied 

by another nearby community, according to a DOT official.

Despite considerable financial assistance since 2000 and the promise of 

future assistance, officials with the state of New Mexico and Rio 

Grande Air said that the long-term outlook for sustainable air service 

is uncertain. Carrier officials said that they had to overcome some 

initial difficulties. One major problem was that Rio Grande Air service 

did not have visibility in the reservation system used by many 

individuals and travel agents. A traveler needed to be aware of the 

service and contact Rio Grande directly in order to make reservations. 

In addition, the carrier confronted other marketing barriers for Taos 

passengers traveling to or from a location beyond Albuquerque (i.e., 

a city for which a Taos passenger would need to connect at 

Albuquerque). The carrier lacked a codeshare arrangement with any other 

airline to allow for seamless travel between a passengers origin and 

destination. For example, travelers flying from Taos to Chicago would 

have to pick up their bags in Albuquerque and recheck them with the 

airline with which they were flying to Chicago. An airline official 

said that Rio Grande Air has since secured a codesharing agreement with 

Great Plains Airlines (which has in interline agreement with American 

Airlines). This also provides Rio Grande with visibility in the 

reservation system. Even with these improvements, enplanements have not 

been increasing overall, as shown in figure 18.[Footnote 48]

Figure 18: Rio Grande Air Enplanements in Taos and Ruidoso:

[See PDF for image]

[End of figure]

Carlsbad, Hobbs, and Roswell:

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

Roswell, all located in the southeastern part of the state. In 2000, 

Mesa Air provided all three communities with service to Albuquerque 

using 19-seat turboprop aircraft. In addition, Mesa provided Roswell 

with service to Dallas. Community officials said that they desired 

service to one or more additional hub airports within a 500-mile radius 

of the communities, such as Phoenix or Dallas. The three formed a 

consortium to work with New Mexico state aviation officials to obtain a 

state grant to fund additional service to their communities. Consortium 

officials said they sent an RFP to 11 airlines but only 1--Big Sky 

Airlines--responded.

Big Sky began service from the three communities to Denver and Dallas 

with 19-seat Metro turboprop aircraft beginning in October 2000, using 

$200,000 of state funds and $300,000 in local matching funds. By 

January 2001, the carrier had exhausted all $500,000 in state and local 

funds. Roswell and Carlsbad officials said that when the carrier 

requested additional funding, they declined to provide any. Local 

officials said the service had been unreliable with up to one-third of 

the flights cancelled due to weather or mechanical problems. Big Sky 

discontinued service to these communities in March 2001. Hobbs (Lea 

County) agreed to provide $35,000 per month in additional funding to 

the carrier, according to the airport supervisor. However, in January 

2002, the carrier discontinued service to Hobbs when Lea County 

officials also declined to provide any further financial assistance. 

The airport official said that the carrier had difficulty establishing 

sufficient passenger demand, in large part because weather and 

mechanical problems forced the cancellation of many flights.

While the state program had both state and local stakeholders committed 

to the goal of improving air service, there were key steps and 

underlying elements missing from the program, which ultimately resulted 

in the relative lack of success. For example, there were few steps 

taken to educate potential passengers about the new service. Officials 

said that they believed marketing would have helped develop demand for 

the service. Also, key local stakeholders in the consortium did not all 

agree on their goal for air service (e.g., destinations to be served). 

However, the most important element was the relatively small size of 

the communities and their lack of potential demand for air service. For 

example, an August 2000 consultant study found that of these three 

communities, only Roswell had adequate potential demand to support 

unsubsidized air service. Carlsbad and Hobbs would require some form of 

subsidies or financial incentives.

A state aviation official said that there are very few carriers willing 

to supply air service to the small communities in New Mexico. He cited 

the fact that only one carrier responded to the Roswell consortium and 

said that they have continued to renew the grants to Rio Grande Air 

because no other carriers have come forward to serve those communities.

Eugene, Oregons Travel Banks:

Eugene Airport/Mahlon Sweet Field is a small hub airport located 120 

miles south of Portland in Eugene, Oregon. The airport has an estimated 

catchment area population of over 700,000. Before implementation of the 

travel banks, Eugene had service from three airlines (United, United 

Express, and Horizon) to four destinations (Portland, Seattle, Denver, 

and San Francisco). Community and airport officials believed that 

additional carriers and destinations would increase competition for the 

dominant carrier (United), lower fares, and help stem passenger leakage 

to Portland International Airport.

Figure 19: Eugene, Oregon and Other Nearby Competing Airports:

[See PDF for image]

[End of figure]

The airport manager and president of the local Chamber of Commerce 

developed the idea of obtaining financial pledges from local businesses 

to set up a travel bank to secure service to Phoenix from America 

West Airlines. The Chamber of Commerce and airline negotiated the 

amount of funds needed in the travel bank as well as the exact service 

to be provided (e.g., number of daily flights and the type of 

aircraft). Interested businesses in the community were then asked to 

commit future travel dollars to the carrier and sign an 

agreement[Footnote 49] that guaranteed business flyers would use the 

new service. The agreement also included various protections for 

participants investments. The funds were held by the airline, which 

issued corporate accounts to participating businesses. The 

participating companies had 24 months to use the funds, after which any 

remaining funds reverted to the airline and were available as ticket 

vouchers for another 12 months. After that point, any funds remaining 

in the bank would go to the airline. Eugenes airport also committed 

$300,000 over 2 years for marketing to promote the new service.

With the success of the first travel bank, Eugene officials looked into 

the possibility of a second travel bank for Los Angeles service. After 

negotiating an agreement with Horizon Air, the Chamber of Commerce 

again successfully sought pledges from area businesses. This bank 

became operational 1 year after the first travel bank, and 

participating businesses had used 81 percent of the funds within the 

first 18 months. Table 4 provides more detail about the America West 

and Horizon Air travel banks.

Table 4: Summary of Features of Eugene, Oregons Travel Banks:

Airline: America West; Implementation dates: September 1999 - September 

2001; Service provided as of 10/18/02: 3 flights daily to Phoenix using 

CRJ200 (50-seat jets); Travel bank pledges: 65 businesses contributed 

$461,000; Marketing commitment: Airport pledged $300,000 in marketing 

funds over 2 years.

Airline: Horizon Air; Implementation dates: September 2000 - September 

2002; Service provided as of 10/18/02: 2 flights daily to Los Angeles 

using CRJ700 (70-seat jets); Travel bank pledges: 57 businesses 

contributed $452,000; Marketing commitment: Airport pledged $300,000 in 

marketing funds over 2 years.

Source: GAO analysis of data from Eugene airport officials.

[End of table]

One Eugene Airport official said that travel banks offer a number of 

advantages over other types of financial incentives. The travel banks 

advantages include:

* providing airlines a guarantee of sustained support over the initial 

periods, when risks are typically higher and:

* helping the new carrier overcome frequent flyer programs of incumbent 

airlines, existing travel habits, incentives provided to travel agents 

who book on the incumbent carriers, and corporate purchase agreements.

As of October 2002, the two travel banks had added five flights and 290 

seats daily to the Eugene market. They also brought more jet service to 

Eugene. The airport manager believes the travel banks were successful 

in adding competition to the market, alleviating high fares, and 

stemming some of the passenger leakage to Portland.

Our analysis of Eugene enplanement data shows that the travel banks 

played a role in the shift in market share between the dominant 

carrier--United--and the other carriers at Eugene from 1998 to 2001. 

Over that period, Uniteds market share decreased from 71 percent of 

the market to 58 percent. (See fig. 20.) Additionally, since both 

America West and Horizon have maintained their Phoenix and Los Angeles 

service after the end of each travel bank, we concluded that the travel 

banks have generated long-term success in Eugene. The Eugene airport 

manager said the community is exploring the possibility of additional 

travel banks with other carriers.

Figure 20: Shift in Market Share of Passenger Traffic at Eugene, Oregon 

(1998-2001):

[See PDF for image]

[End of figure]

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

enplanements.

[End of section]

Appendix V: Small Community Air Service Development Pilot Program 
Grants 

and Local Matching Funds (Fiscal Year 2002):

City: King Cove, Sand Point, Akutan, Cold Bay, False Pass, Nelson 

Lagoon; State: AK; Total federal funds requested: $240,000; Total 

federal funds granted: $240,000; Total matching funds: $25,000.

City: Mobile; State: AL; Total federal funds requested: 456,137; Total 

federal funds granted: 456,137; Total matching funds: 20,000.

City: Fort Smith; State: AR; Total federal funds requested: 108,520; 

Total federal funds granted: 108,520; Total matching funds: 20,000.

City: Lake Havasu City; State: AZ; Total federal funds requested: 

403,478; Total federal funds granted: 403,478; Total matching funds: 

275,000.

City: Chico; State: CA; Total federal funds requested: 44,000; Total 

federal funds granted: 44,000; Total matching funds: 30,000.

City: Santa Maria; State: CA; Total federal funds requested: 217,530; 

Total federal funds granted: 217,530; Total matching funds: 24,170.

City: Lamar; State: CO; Total federal funds requested: 250,000; Total 

federal funds granted: 250,000; Total matching funds: 55,000.

City: Telluride; State: CO; Total federal funds requested: 300,000; 

Total federal funds granted: 300,000; Total matching funds: 210,000.

City: Daytona Beach; State: FL; Total federal funds requested: 743,333; 

Total federal funds granted: 743,333; Total matching funds: 165,000.

City: Augusta/Aiken; State: GA/SC; Total federal funds requested: 

759,004; Total federal funds granted: 759,004; Total matching funds: 

1,421,266.

City: Mason City; State: IA; Total federal funds requested: 600,000; 

Total federal funds granted: 600,000; Total matching funds: 405,000.

City: Hailey; State: ID; Total federal funds requested: 600,000; Total 

federal funds granted: 600,000; Total matching funds: 344,243.

City: Marion; State: IL; Total federal funds requested: 212,694; Total 

federal funds granted: 212,694; Total matching funds: 5,000.

City: Fort Wayne; State: IN; Total federal funds requested: 1,178,000; 

Total federal funds granted: 398,000; Total matching funds: 112,000.

City: Manhattan; State: KS; Total federal funds requested: 500,000; 

Total federal funds granted: 388,350; Total matching funds: 43,150.

City: Somerset; State: KY; Total federal funds requested: 95,000; Total 

federal funds granted: 95,000; Total matching funds: 18,000.

City: Paducah; State: KY; Total federal funds requested: Up to 754,000; 

Total federal funds granted: 304,000; Total matching funds: 107,000.

City: Lake Charles; State: LA; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 300,000.

City: Presque Isle; State: ME; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 100,000.

City: Brainerd, St. Cloud; State: MN; Total federal funds requested: 

1,000,000; Total federal funds granted: 1,000,000; Total matching 

funds: 3,460,000.

City: Cape Girardeau; State: MO; Total federal funds requested: 

500,000; Total federal funds granted: 500,000; Total matching funds: 

125,000.

City: Meridian; State: MS; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 140,000.

City: Asheville; State: NC; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 578,000.

City: Bismarck; State: ND; Total federal funds requested: 1,557,500; 

Total federal funds granted: 1,557,500; Total matching funds: 512,500.

City: Scottsbluff; State: NE; Total federal funds requested: 950,000; 

Total federal funds granted: 950,000; Total matching funds: 750,000.

City: Taos; State: NM; Total federal funds requested: 500,000; Total 

federal funds granted: 500,000; Total matching funds: 400,000.

City: Binghamton; State: NY; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 100,000.

City: Akron/Canton; State: OH; Total federal funds requested: 950,000; 

Total federal funds granted: 950,000; Total matching funds: 800,000.

City: Baker City; State: OR; Total federal funds requested: 300,000; 

Total federal funds granted: 300,000; Total matching funds: 661,000.

City: Reading; State: PA; Total federal funds requested: 470,000; Total 

federal funds granted: 470,000; Total matching funds: 30,000.

City: Rapid City; State: SD; Total federal funds requested: 1,500,000; 

Total federal funds granted: 1,400,000; Total matching funds: 

1,400,000.

City: Johnson/Kingsport/Bristol; State: TN/VA; Total federal funds 

requested: 615,000; Total federal funds granted: 615,000; Total 

matching funds: 230,000.

City: Abilene; State: TX; Total federal funds requested: 85,010; Total 

federal funds granted: 85,010; Total matching funds: 126,250.

City: Beaumont/Port Arthur; State: TX; Total federal funds requested: 

510,000; Total federal funds granted: 500,000; Total matching funds: 

1,062,000.

City: Moab; State: UT; Total federal funds requested: 280,000; Total 

federal funds granted: 250,000; Total matching funds: 0.

City: Lynchburg; State: VA; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 100,000.

City: Bellingham; State: WA; Total federal funds requested: 301,500; 

Total federal funds granted: 301,500; Total matching funds: 33,500.

City: Rhinelander; State: WI; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 100,000.

City: Charleston; State: WV; Total federal funds requested: 500,000; 

Total federal funds granted: 500,000; Total matching funds: 100,000.

City: Casper; State: WY; Total federal funds requested: 500,000; Total 

federal funds granted: 500,000; Total matching funds: 700,000.

City: Total; State: [Empty]; Total federal funds requested: 

$21,480,706; Total federal funds granted: $19,999,056; Total matching 

funds: $15,088,079.

Source: DOT.

Note: Total matching funds may not include the value of in-kind 

services, improvements, and equipment:

[End of table]

[End of section]

Appendix VI: Air Service Improvement Efforts Planned at Nonhub and 
Small 

Hub Airports Using DOT Grants:

State: Alaska; City: King Cove, Sand Point, Cold Bay, Nelson Lagoon, 

False Pass, Akutan; Studies: X; Marketing: [Empty]; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Alabama; City: Mobile; Studies: [Empty]; Marketing: [Empty]; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

State: Arkansas; City: Fort Smith; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Arizona; City: Lake Havasu City; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: X; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: California; City: Chico; Studies: X; Marketing: [Empty]; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

City: Santa Maria; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: X; Financial Incentives: Revenue guarantee: 

[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial 

Incentives: Subsidy: [Empty]; Financial Incentives: Financial other: 

[Empty]; Financial Incentives: Other: [Empty].

State: Colorado; City: Lamar; Studies: X; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: X.

City: Telluride; Studies: [Empty]; Marketing: X; Financial Incentives: 

Travel banks: [Empty]; Financial Incentives: Revenue guarantee: 

[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial 

Incentives: Subsidy: [Empty]; Financial Incentives: Financial other: 

[Empty]; Financial Incentives: Other: X.

State: Florida; City: Daytona Beach; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: X; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Georgia; City: Augusta; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: X; 

Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

State: Iowa; City: Mason City; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: X; Financial Incentives: Reduced airport fees: [Empty]; 

Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Idaho; City: Hailey; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: X.

State: Illinois; City: Marion; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Indiana; City: Fort Wayne; Studies: X; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: X; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Kansas; City: Manhattan; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: X; Financial Incentives: Reduced airport fees: [Empty]; 

Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Kentucky; City: Paducah; Studies: X; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

City: Somerset; Studies: X; Marketing: [Empty]; Financial Incentives: 

Travel banks: [Empty]; Financial Incentives: Revenue guarantee: 

[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial 

Incentives: Subsidy: [Empty]; Financial Incentives: Financial other: 

[Empty]; Financial Incentives: Other: [Empty].

State: Louisiana; City: Lake Charles; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: X; Financial Incentives: Reduced airport fees: [Empty]; 

Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Maine; City: Presque Isle; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: X; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Minnesota; City: Brainerd/St. Cloud; Studies: [Empty]; 

Marketing: X; Financial Incentives: Travel banks: X; Financial 

Incentives: Revenue guarantee: [Empty]; Financial Incentives: Reduced 

airport fees: [Empty]; Financial Incentives: Subsidy: [Empty]; 

Financial Incentives: Financial other: X; Financial Incentives: Other: 

[Empty].

State: Missouri; City: Cape Girardeau; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: X; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Mississippi; City: Meridian; Studies: X; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: X; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: North Carolina; City: Asheville; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

X; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

State: North Dakota; City: Bismarck; Studies: X; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

State: Nebraska; City: Scottsbluff; Studies: X; Marketing: [Empty]; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: New Mexico; City: Taos; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: X; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: New York; City: Binghamton; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: X; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Ohio; City: Akron; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: X; Financial Incentives: Reduced airport fees: [Empty]; 

Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Oregon; City: Baker City; Studies: [Empty]; Marketing: [Empty]; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: Pennsylvania; City: Reading; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: South Dakota; City: Rapid City; Studies: X; Marketing: X; 

Financial Incentives: Travel banks: X; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Tennessee; City: Bristol/Johnson/; Kingsport; Studies: [Empty]; 

Marketing: X; Financial Incentives: Travel banks: [Empty]; Financial 

Incentives: Revenue guarantee: X; Financial Incentives: Reduced airport 

fees: X; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: Texas; City: Abilene; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

City: Beaumont/Port Arthur; Studies: X; Marketing: X; Financial 

Incentives: Travel banks: X; Financial Incentives: Revenue guarantee: 

[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial 

Incentives: Subsidy: [Empty]; Financial Incentives: Financial other: 

[Empty]; Financial Incentives: Other: [Empty].

State: Utah; City: Moab; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: [Empty]; Financial Incentives: Revenue 

guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: X.

State: Virginia; City: Lynchburg; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: X; Financial Incentives: Other: [Empty].

State: Washington; City: Bellingham; Studies: X; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: [Empty]; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Wisconsin; City: Rhinelander; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: X; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: West Virginia; City: Charleston; Studies: [Empty]; Marketing: X; 

Financial Incentives: Travel banks: [Empty]; Financial Incentives: 

Revenue guarantee: X; Financial Incentives: Reduced airport fees: 

[Empty]; Financial Incentives: Subsidy: [Empty]; Financial Incentives: 

Financial other: [Empty]; Financial Incentives: Other: [Empty].

State: Wyoming; City: Casper; Studies: [Empty]; Marketing: X; Financial 

Incentives: Travel banks: X; Financial Incentives: Revenue guarantee: 

[Empty]; Financial Incentives: Reduced airport fees: [Empty]; Financial 

Incentives: Subsidy: [Empty]; Financial Incentives: Financial other: 

[Empty]; Financial Incentives: Other: X.

Source: GAO analysis of DOT Small Community Air Service Development 

Pilot Program applications.

[End of table]

[End of section]

Appendix VII: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

JayEtta Z. Hecker (202) 512-2834

Steven C. Martin (202) 512-2834:

Acknowledgments:

In addition to those named above, Janet Frisch, David Hooper, Joseph 

Kile, Sara Ann Moessbauer, Ryan Petitte, Sharon Silas, Stan Stenersen, 

and Pamela Vines made key contributions to this report.

[End of section]

Related GAO Products:

Commercial Aviation: Financial Condition and Industry Responses Affect 

Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.

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

Program. GAO-02-997R. Washington, D.C.: August 30, 2002.

Commercial Aviation: Air Service Trends at Small Communities Since 

October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.

Proposed Alliance Between American Airlines and British Airways Raises 

Competition Concerns and Public Interest Issues. GAO-02-293R. 

Washington, D.C.: December 21, 2001.

State of the U.S. Commercial Airlines Industry and Possible Issues for 

Congressional Consideration, Speech by Comptroller General of the 

United States David Walker. The International Aviation Club of 

Washington: November 28, 2001.

Financial Management: Assessment of the Airline Industrys Estimated 

Losses Arising From the Events of September 11. GAO-02-133R. 

Washington, D.C.: October 5, 2001.

Commercial Aviation: A Framework for Considering Federal Financial 

Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.

Aviation Competition: Restricting Airline Ticketing Rules Unlikely to 

Help Consumers. GAO-01-832. Washington, D.C.: July 31, 2001.

Aviation Competition: Challenges in Enhancing Competition in Dominated 

Markets. GAO-01-518T. Washington, D.C.: March 13, 2001.

Aviation Competition: Regional Jet Service Yet to Reach Many Small 

Communities. GAO-01-344. Washington, D.C.: February 14, 2001.

Airline Competition: Issues Raised by Consolidation Proposals. GAO-01-

402T. Washington, D.C.: February 7, 2001.

Aviation Competition: Issues Related to the Proposed United Airlines-US 

Airways Merger. GAO-01-212. Washington, D.C.: December 15, 2000.

Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, 

and Passenger Traffic. RCED-00-34. Washington, D.C.: April 14, 2000.

Aviation Competition: Effects on Consumers From Domestic Airline 

Alliances Vary. RCED-99-37. Washington, D.C.: January 15, 1999.

FOOTNOTES

[1] U.S. General Accounting Office, Commercial Aviation: Air Service 

Trends at Small Communities Since October 2000, GAO-02-432 (Washington, 

D.C.: March 29, 2002). See list of related products.

[2] This definition is consistent with the definition of small 

community--small hubs or smaller--used for the Small Community Air 

Service Development Pilot Program authorized by the Wendell H. Ford 

Aviation Investment and Reform Act for the 21st Century (AIR-21), P.L. 

106-181, Section 203. A small hub airport boards from 0.05 to 0.249 

percent of all passengers. In 2000, 790,324 passengers boarded 

commercial aircraft at the average small hub airport. A nonhub 

airport boards less than 0.05 percent of all passengers for all 

operations of U.S. carriers in the United States. In 2000, 58,322 

passengers boarded commercial aircraft at the average nonhub airport. 

Small hubs and nonhubs are defined in 49 U.S.C. 41731. 

[3] The 12 communities we studied in more detail were: Mobile, Alabama; 

Pensacola and Tallahassee, Florida; Cumberland and Hagerstown, 

Maryland; Pellston, Michigan; Carlsbad, Hobbs, Roswell, Ruidoso, and 

Taos, New Mexico; and Eugene, Oregon. 

[4] In fiscal year 2002, DOT provided approximately $100 million in 

direct subsidies to air carriers to serve certain small communities 

under the Essential Air Service (EAS) program. DOT also awarded $20 

million in grants to 40 small communities to implement air service 

improvement programs under the Small Community Air Service Development 

Pilot Program, authorized by the Wendell H. Ford Aviation Investment 

and Reform Act for the 21st Century (AIR-21), P.L. 106-181, Section 

203. 

[5] See U.S. General Accounting Office, Options to Enhance the Long-

term Viability of the Essential Air Service Program, GAO-02-997R 

(Washington, D.C.: August 30, 2002).

[6] Network carriers are defined as carriers using a hub-and-spoke 

system. Under this system, airlines bring passengers from a large 

number of spoke cities to one central location (the hub) and 

redistribute them to connecting flights for their final destinations. 

The major network carriers are America West Airlines, American 

Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines, 

United Airlines, and U.S. Airways.

[7] Major network carriers contract with or separately operate regional 

affiliates to provide service to smaller communities. For example, 

United Airlines contracts with Atlantic Coast Airlines to fly 

passengers to and from its hub at Washington Dulles International 

Airport. However, Delta Air Lines purchased two of its regional 

affiliates, Comair and Atlantic Southeast Airlines, in 1999 to feed its 

hubs.

[8] The categories are based on the number of passengers boarding an 

aircraft (enplaning) for all operations of U.S. carriers in the United 

States. A large hub enplanes at least 1 percent of all passengers, a 

medium hub 0.25 to 0.99 percent, a small hub 0.05 to 0.249 percent, and 

a nonhub less than 0.05 percent. Nonhubs and small hubs are defined in 

49 U.S.C. 41731; medium hubs are defined in 49 U.S.C. 41714; and large 

hubs are defined in 49 U.S.C. 47134. A passenger flying from Baltimore 

to San Francisco who connects to a different flight in Cincinnati 

counts as two passenger enplanements--one at Baltimore and one at 

Cincinnati.

[9] To be eligible for subsidized service, communities must meet three 

general requirements. They must have been listed on a carriers Civil 

Aeronautics Board (CAB) issued service certificate and received 

scheduled commercial passenger service as of October 1978, may be no 

closer than 70 highway miles to the nearest medium or large hub 

airport, and must require a subsidy of less than $200 per person 

(unless the community is more than 210 highway miles from the nearest 

medium or large hub airport, in which case no average per-passenger 

dollar limit applies). For additional information on the EAS program, 

see GAO-02-997R.

[10] See table 1 for information on the county population for the 12 

communities included in our review.

[11] See GAO-02-432.

[12] The regression model holds other factors constant between the 

hypothetical communities A and B: population, manufacturing earnings, 

and distance from an airport served by a low-fare carrier.

[13] Over half of the airport managers responding to a survey said that 

local residents drove to another airport for airline service to a great 

or very great extent. Eighty-one percent of them attributed the leakage 

to the availability of lower fares from a major airline at the 

alternative airport. See GAO-02-432.

[14] In our previous work, we found that 47 percent of the 202 small 

communities were within 100 miles of an airport served by a low-fare 

airline or that served as a hub for a major carrier. We adopted DOTs 

definition of a low-fare airline and included AirTran, American Trans 

Air, Frontier, JetBlue, Southwest, Spirit, and Vanguard (no longer 

operating). See GAO-02-432.

[15] Costs depend on a number of variables, including the type of 

aircraft being operated. The estimates given were for 37-seat and 70-

seat aircraft.

[16] See GAO-02-432.

[17] U.S. Department of Transportation, Office of the Inspector 

General, Airline Industry Metrics: Trends on Demand and Capacity, 

Aviation System Performance, Airline Finances, and Service to Small 

Airports, Number CC-2003-001, (Washington, D.C.: October 7, 2002).

[18] Carriers are required to file a 90-day notice of intent to suspend 

or terminate service at EAS communities. DOT established an additional 

reporting requirement for air carriers in response to the emergency 

created by the events of September 11. From September 28, 2001, until 

March 31, 2002, DOT (under the Air Transportation Safety and System 

Stabilization Act, P.L. 107-42, Section 105) required air carriers to 

report any significant service reductions--i.e., terminations of all 

scheduled service or termination of the last nonstop service. 

[19] See app. IV for a more detailed description of each communitys 

program.

[20] As shown in figure 1, Pellston used studies and marketing. It was 

the only one of the 12 communities that did not implement a financial 

incentive program.

[21] The Michigan Air Service Program also provides funds to airports 

for capital improvements. Our study did not evaluate that portion of 

the program.

[22] An AirTran official cited another example (Wichita, Kansas), which 

was not one of the 12 communities we studied but demonstrates the 

importance of community consensus that air service is a priority. 

Wichita was a marginally potential community for AirTran to serve, the 

official said, (because the population is smaller than the communities 

normally selected for service under the airlines low-cost business 

model), but the community support shown for the air service convinced 

AirTran to launch service there. Wichita airport officials said almost 

400 organizations pledged a total of $7.2 million in travel funds for 

AirTran. In addition, the program included a revenue guarantee and 

marketing component. Officials reported that since AirTran began 

service, fares have dropped significantly and passenger enplanements 

increased from 112,000 in 2001 to 130,000 in 2002.

[23] GAO-02-997R.

[24] DOT announced the applicants selected for grants on June 26, 2002. 

Four communities involved in three grant awards withdrew from the 

program. Ruidoso, New Mexico withdrew from the Taos/Ruidoso consortium, 

but was replaced by Angel Fire and Red River, New Mexico with no change 

to the original grant award. Pasco, Washington and Houghton/Pellston, 

Michigan (consortium) declined DOTs grant offers, collectively 

totaling $320,000. Additionally, $14,944 remained available from the 

original allocation and, based on an arithmetic error, the award to 

Beaumont/Port Arthur, Texas was reduced from $510,000 to $500,000, 

making a total of $344,944 available for reallocation. On December 20, 

2002, DOT reallocated the available funds to Telluride, Colorado, 

($300,000) and Chico, California ($44,000).

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

[26] This was Taos population in 1995.

[27] Codesharing allows an airline to sell seats on its partners plane 

as if they were its own, enabling the airline to expand its route 

network without adding any planes.

[28] Great Plains has an interlining agreement with American Airlines 

that allows passengers to travel from a community served by Rio Grande 

Air to a community served by American Airlines on one ticket and 

without having to recheck bags when changing airlines.

[29] For example, the Wendell H. Ford Aviation Investment and Reform 

Act for the 21st Century (AIR-21), P.L. 106-181, defines small 

communities as including both nonhub and small hub community airports. 

The categories of airports--large hub, medium hub, small hub, and 

nonhub--are defined by statute. Nonhubs and small hubs are defined in 

49 U.S.C. 41731; medium hubs are defined in 49 U.S.C. 41714; and large 

hubs are defined in 49 U.S.C. 47134. The categories are based on the 

number of passengers boarding an aircraft (enplaned) for all operations 

of U.S. carriers in the United States. A large hub enplanes at least 1 

percent of all passengers, a medium hub 0.25 to 0.99 percent, a small 

hub 0.05 to 0.249 percent, and a nonhub less than 0.05 percent. In 

2000, there were a total of 546 commercial passenger airports: 31 large 

hubs, 37 medium hubs, 74 small hubs, and 404 nonhubs. The Federal 

Aviation Administration (FAA) sometimes defines hubs as geographic 

areas rather than as airports. In this report, however, when we discuss 

hubs, we are referring to airports.

[30] The ensuing discussion is intended only as a general overview. For 

a more detailed description of the economics of air service, interested 

readers should consult Handbook of Airline Economics, Darryl Jenkins, 

Executive Editor, New York, The McGraw-Hill Companies, 1995.

[31] For simplicity, the supply curve representing the relationship 

between average fares and seats available per month is illustrated as a 

straight line. However, because a carrier would not add an additional 

seat as fares increase but rather an entire flight (or larger aircraft) 

consisting of many seats, the supply curve is more accurately captured 

as a line increasing in a stepped fashion. 

[32] Of course, as illustrated by low-fare carriers expansion into new 

cities (e.g., Southwest launching service in Manchester, New 

Hampshire), service at those cities can change.

[33] Foundations for the Future (Pensacola Area Chamber of Commerce), 

the city of Pensacola, Escambia County, Santa Rosa County, the city of 

Milton, and the city of Gulf Breeze.

[34] A block hour is a common measure of aircraft usage. Block hours 

are measured from the time the aircraft backs away from the gate until 

the aircraft pulls into the gate at the destination. 

[35] The anticipated scheduled block time covered by the agreement was 

65 minutes per flight segment or 19.5 block hours per day for all 

flights.

[36] Michigan airports include the large hub at Detroit, a small hub at 

Grand Rapids, and several nonhub airports. There are no airports 

classified as medium hubs in Michigan. Three Michigan communities--Iron 

Mountain, Ironwood, and Manistee--are served by EAS-subsidized carriers 

that offer flights to Chicago or Milwaukee. 

[37] We did not analyze awards made in the capital improvements and 

equipment category.

[38] As an example of a statewide project, in fiscal year 1998 the 

state hired a consultant to assist community leaders and local 

travelers in understanding the dynamics of the industry. 

[39] Northwest Airlink partner Mesaba Airlines operates these flights.

[40] Northwest Airlink partner Pinnacle Airlines also operated two 

daily departures with 50-seat regional jets out of Pellston from June 

to September 2002 and, according to a Michigan Aeronautics official, 

plans future regional jet operations on a seasonal basis.

[41] The business fare indicated is based on a 1-day advance purchase 

fare from the Orbitz Web site, www.orbitz.com as of November 7, 2002.

[42] Traverse City is served by American Eagle, Northwest Airlink 

(Mesaba and Pinnacle), and United Express (Air Wisconsin) as of 

December 2002. 

[43] The state allocated additional recruitment and retention funds of 

$16,000 in fiscal year 2002 for Pellstons application to the U.S. DOT 

for a Small Community Air Service Development Pilot Program grant of 

$60,000. Pellston was awarded a grant and planned to use the funds to 

facilitate the introduction of seasonal regional jet service. However, 

according to DOT and Michigan aviation officials, Pellston declined the 

grant after Northwest Airlines reconsidered its willingness to 

participate in the initiative. 

[44] Ronald Reagan Washington National Airport and Washington Dulles 

International Airport are also nearby.

[45] The law authorized $5 million for a 3-year program but subsequent 

legislation reduced the amount to $4.25 million. Due to difficulty 

getting the carrier certificated as a Part 121 carrier, the service 

start date was delayed from June 2001 to December 2001. The subsidy 

program ends June 30, 2003.

[46] The regulations state that a 50-percent local match is required, 

but a state official explained that they require a 100-percent local 

match. In other words, the state pays 50 percent, and the local 

matching funds make up the other 50 percent.

[47] See figure 4.

[48] Taos enplanements peaked in the first quarter of each year, which 

corresponds with the ski season.

[49] These agreements were business-to-business contracts with the 

Chamber of Commerce as the focal point for agreements with the airline, 

a consulting firm, participating businesses, and later on, the bank 

that issued the credit card. 

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