Grant Proposal of Sp okane Airport Board

Small Community Air Service Development Program OST

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# Spokane Airport Board

Spokane International Airport

Grant Application Under The

DOCKET OST

- 2011

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DUNS # 058 614 496 Congressional District # 5Grant Proposal of Spokane Airport Board

Small Community Air Service Development Program OST

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## Table of Contents

TECHNICAL OUTLINE

................................ ................................ ................................ .. 3

I. SUMMARY OF PROPOS AL

................................ ................................ ........................ 4

S TATEMENT OF D EFICIENCY

................................ ................................ ................................ .. 4

P ROPOSED G RANT S OLUTION

................................ ................................ ................................ 4

S PONSORS & P ARTNERS

................................ ................................ ................................ ....... 4

II. THE AIR SERVICE CHALLENGE

................................ ................................ ............... 5

C URRENT A IR S ERVICE

................................ ................................ ................................ ........ 5

H ISTORICAL T RAFFIC S TATISTICS

................................ ................................ ........................... 5

A IRLINE S HARES A

T S POKA NE

................................ ................................ ............................... 6

F ARES A RE U P

... ................................ ................................ ................................ ................ 7

III. THE SOUTHERN CA LIFORNIA SERVICE GAP

................................ ......................... 8

GEG

- LAX: A S UBSTANTIAL H UB

- C ONNECT P ENALTY

................................ ................................ ... 8

T ODAY : A S M UCH A S F IVE H OURS A DDITIONAL F OR A R OUND

- T RIP

................................ .............. 9

S CHEDULE S HIFTS W ILL F URTHER R EDUCE LA B ASIN A CCESS

................................ ...................... 10

T HE S OLUTION

– N ONSTOP F LIGHTS

................................ ................................ ...................... 10

IV. THE GRANT STRUCT URE

................................ ................................ ...................... 12

R EQUIREMENTS

................................ ................................ ................................ ................ 12

M ARKETING P LANS

................................ ................................ ................................ ............ 13

D ISTRIBUTION OF F UNDING

................................ ................................ ................................ . 14

P OST

- P ROGRAM S UPPORT

................................ ................................ ................................ ... 14Grant Proposal of Sp okane Airport Board

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## Technical Outline

A . Airport and Community

Spokane Airport Board The Spokane

– Coeur d’Alene Region

Contact:

Mr. Lawrence Krauter, AAE, AICP CEO/Airport Director Spokane Int ernational Airport 9000 W Airport Dr # 204 Spokane, WA 99224

- 9438 (509) 455

- 6455

B . Additional Community Members

Greater Spokane Incorporated will be the community partner and will be responsible for community outreach and the accomplishment of the

mark eting and promotional efforts to assure the proposed new service is

a success.

C . Project Sponsor

The Spokan e A irport Board will function as the official sponsor of this application.

D . Project Description :

The grant is requested to respond to the l ack of nonstop service to the Los Angeles Basin. Currently, Spokane

- Coeur d’Alene is the largest population center in the Northwest without any nonstop flights to the Los Angeles Basin . The Airport and community are well aware that the US

airline industry is not in an expansion mode. However this air service

de ficiency is a strong revenue opportunity for the carrier(s) targeted.

The grant requests $ 1,0 00,000 with a local match of $2 0 0,000 to

establish a revenue

- guarantee program to reduce the initial risk to the carrier recruited. The Airport understands that this approach has been successful in other grant awards in establishing service in under

- served

markets.Grant Proposal of Spokane Airport Board

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## I. Summary of Proposal

Statement of Deficiency

Spokane

– Coeur d’Alene Region (the Region) is the largest population center in the Northwest that has no nonstop service to any of the major

commercial centers of Southern California.

This is the single greatest gap in service provided at Spokane International, and one that puts the region at a seve re business disadvantage compare d to other commercial and vacation points in the

Northwest.



### Proposed Grant Solution

The Airport and its community partners herein are requesting a grant in the amount of one million dollars, to be matched by a local contri bution of $2 0 0,000 to attract and retain a carrier to offer at minimum one daily round trip flight to access the business centers of the Los Angeles Basin.

There are several target carriers, including, but not limited to, American, Delta, Alaska, United a nd Southwest, all of which have large operations in the Los Angeles Basin, and which can benefit from this opportunity.

S ervice to LAX, BUR, LGB, ONT or SNA will be satisfactory to meeting this deficiency.



### Sponsors & Partners

The official sponsor of the application is Spokane Airport Board

.

The community sponsorship will be directed and coordinated by the Greater Spokane Incorporated . This organization will be responsible for the community contribution, the marketing strategies, and other activities

to assure that the proposed service is a success.



### Mr. Lawrence Krauter , AAE, AICP CEO/Airport Director Spokane International Airport
9000 W Airport Dr # 204 Spokane, WA 99224

- 9438 (509) 455

- 6455Grant Proposal of Spokane Airport Board

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## I I. The Air Service Challenge

Current Air Service

Spokane International Airport has year

- round service operated by six

carriers to six connectin g hub airport s, plus service to Boise, Oakland,

Portland , and Las Vegas. 1

Pertinent to this application, t he map clearly indicates the gap in nonstop
access to Southern California.



### Historical Traffic Statistics

In the past five years, capacity, depar tures, and passengers have declined at Spokane. Based on YTD data, enplaned passengers a re tracking to decline another 1 0 % in 2011 compared to 2010

.

The additional service to the Los Angeles Basin is expected to stimulate ridership by offering additional seats a nd nonstop flights. 2

1 Not yet reflected in filed schedules, Southwe st has announced that it will cease service in the GEG

SEA market. This will further reduce capacity and departures v 2010.

2 Year 2011 departures and seats are as filed by airlines with Innovata. LLC as of July 20, 2011. Spokane

– Coeur d’Alene Region is the largest population center in the

Northwest that has no nonstop service to any of the major commercial

centers of Southern

California

Year 2007 2008 2009 2010 2011 (Est) PCT Chg

Enplaned 1,743,380 1,715,763 1,527,955 1,592,126 1,427,971

- 18

. 1 %

Dept. Seats 2,338,827 2,326,174 1,966,07 9 2,085,982 1,942,232

- 17.0%

Departures 24,109 23,818 19,536 21,044 18,357

- 23.9%Grant Proposal of Spokane Airport Board

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### Airline Shares At Spokane

Alaska and Southwest are the largest carriers at Spokane International

. Pertinent to this application, Southwest captures the second

- largest share of the traffic between GEG and the Los Angeles Basin.

Of concern, and as will be outlined below, as of July 20, 2011, the schedules filed by Southwest indicate a 4% reduction in capacity to be in place by the second quarter of 2012. However, not as yet reflected in published schedules is the Southwest’ s announce ment that it is dropping all flights between Spokane and Seattle in early 2012 as well.

This indicates almost a 20% reduction in Southwest capacity at Spokane. The data above clearly show WN to have the lowest average fares at the airport , and the loss of this capacity, plus the loss of Southwest’s service

in SEA

- GEG, the airport’s largest single O&D market

, will have a negative

effect on fare levels.

The loss of WN capacity will also effect O&D passengers to the LA Basin. Southwest today has 38% of this market, and the reduced seats could cut the O&D severely. Furthermore, the reduction in Southwest capacity will likely result in upward pressure on fare levels in the specific GEG

– LA

Basin markets.

For this reason, this grant application is extremely im portant to the Spokane

- Coeur d’Alene Region. The nonstop service that the grant will support will restore not only some of the lost capacity, but it will

stimulate the demand base as well.Grant Proposal of Spokane Airport Board

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### Fares Are Up...

Average fares charged by airlines at GEG have edged up by almost 4.5% between 4Q 2009 and 4Q 2010. 3

The decline in ca pacity planned by carriers at GEG in 2011

- 2012 will

tend to increase fares in the months ahead. The reduction in Southwest presence at GEG will also tend to push fare levels up.

3 Five quarters shown. Fares are those net to the airlines, exclusive of federal fees and taxes. Spokane has experienced a more significant d rop in capacity than any other top 100 airport in

Western North America

. Data Table Oliver Wyman Aviation Daily, July 22, 2011 page 10Grant Proposal of Spokane Airport Board

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## III. The Southern California Service Gap

The Southern California region is a very important part of the traffic

demand for the Spokane

– Coeur d’Alene region. The lack of nonstop access to this region hinders econ omic growth and makes the region served by Spokane less attractive as a leisure destination for Southern

California consumers.

Over 325,000 annual O&D

– more than 11% of the airport’s total traffic. is generated to and from points in Southern California. The core Los Angeles Basin airports of LAX, BUR, LGB, SNA and ONT comprise over 233,000 GEG O&D. The nonstop serv ice that this grant will recruit will
generate additional passengers in the market

.



### GEG

- LAX: A Substantial Hub

- Connect Penalty

A review of the average 2010 itinerary miles for GEG consumers to and

from LAX illustrated the disadvantage faced by consumer s going to or

from GEG to Southern California

.

Routing efficiency at 100% is the equivalent of an straight line, nonstop flight. Consumers in the LAX

- Spokane market today must fly 16% mor e miles ( a.k.a. the “ hub connect penalty ” ), which translates int o additional

travel time and deters demand in the market.Grant Proposal of Spokane Airport Board

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### Today: As Much As Five Hours Additional For A Round

- Trip

The current connecting service can entail an additional five hours or more

to round trip travel time compared to nonstop flight s . The current connecting service is incon venient to the point that the GEG regional

economy is affected. A nonstop flight between LAX and GEG is projected

to have a block time of 2.33 hours. The current air access can be double

that amount of time.

Examples:

The current service to points in Southern

California adds as much

as 5 hours additional RT

travel time.

This suppresses demand and p uts GEG at an economic disadvantage.

A nonstop flight will address this deficiency.Grant Proposal of Spokane Airport Board

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### Schedule Shifts Will Further Red uce LA Basin Access

Today, Southwest is the second largest carrier between the region and points in the Los Angeles Basin. Of the 233,000 O&D, Southwest captures over 85,000. 4

Southwest, in a major route reorganization, on July 25, 2011 announced

that it will be reducing service at Spokane in 2012 . In fact, the carrier is cutting back seat capacity at GEG by 19% between now and th e second quarter of 2012.

The loss of this capacity and the loss of the fare discipline in the markets could easily result in a 25% reduction in passengers between GEG and

the LA Basin.

This represents a serious reduction in access to Southern Californi a, and opens an opportunity for a carrier to begin nonstop flights to a gateway airport in the Los Angeles Basin.



### The Solution

– Nonstop Flights

The Airport and the community believe that the addition of nonstop service to a major airport gateway in the LA Basin will tap into strong additional passenger demand, and put Spokane on a more level playing field with other regions in attracting SoCal business and leisure traffic.

While it is not an exact science to estimate the true stimulation of the

addition of nonstop flights into a market such as GEG

, the data are clear and compelling:

4 Source: Year 2010 O&D for GEG

- LAX/BUR/ONT/LGB/SNA. Aviation DataMinerTM analysis of DOT

data. As of 2012, it won’t be heading for Seattle from Spokane... and the airline

w ill be cutting capacity by

almost 20% at GEG.Grant Proposal of Spokane Airport Board

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 The reduction in travel time, as noted above, will stimulate market

demand.

 Other markets with nonstop service to Los Angeles Basin airports experience very high load facto rs. GEG will be no different. 5

Using LAX as the example airport, and assuming a 75% load factor, the

basic cost metrics for a 130

- seat A

- 319 are encouraging:

Basically, it appears that limited market stimulation would be required to support the new service. Part of the nonstop capacity would replace the expected 2012 loss caused by incumbent service reductions. The remainder would repr esent a 11.1% stimulation

. 6 Historical market data is instructive. Between 2007, when nonstop service to the Los Angeles basin was offered from GEG, and 2010, total passengers have dropped by approximately 50,000.

5 For the full year ending 1Q 2010, United Airlines nonstops between LAX and BOI averaged 79%

loa d factors.

6 Industry average costs were used for the A

- 319. Average fare was assumed to be that now captured by Southwest, plus a 15% nonstop premium. Total GEG O&D LAX/BUR/SNA/LGB/ONT dropped to 234,238 in 2010 from 284,791 in 2007. The grant will allow GEG to fill not only a current deficiency, but also one that is developing in the year ahead.Grant Proposal of Spokane Airport Board

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## IV

. The Grant Structure

The Airport and community are requesting a grant in the amount of $1 million, with a match in funding locally of $20 0,000.

This fund will be used to attract a carrier to provide nonstop jet service to one or more of the LA Basin gateways. The program will be for 12

mont hs only. At the end of that period, any unused federal grant funds will be relinquished back to the Department.



### Requirements

The majority of the total program funds will be allocated as a revenue

guarantee for the carrier. Because of the lack of current nonstop service, the cutbacks in incumbent capacity, and the success of Los Angeles Basin flights from other airports in the region (such as Boise), it is strongly felt

that the new service will be revenue

- positive very shortly after start of operations.

However, given the fact that US carriers are not expanding fleets, an incentive program that offsets the risk of moving an existing aircraft to

the GEG

- SoCal application will be necessary.

Flight Schedule

To be eligible for the program funds, an airline will need to commit to the following:

 Operation with an aircraft with 99 seats or greater;

 Operation on at least a 6

- day basis;

 Nonstop to one of the following LA Basin Airports:

Los Angeles International

Burbank John Wayne/SNA

Ontario Long Beach

 Fare levels within 10% of current connecting service (average);

 Commitment for one year of service;

 Commitment to good faith marketing of the new service.

While a current incumbent carrier at GEG would likely be the strongest candidate, the program will be open to any scheduled passenger carrier, operating jet aircraft of 65 seats or above.Grant Proposal of Spokane Airport Board

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Revenue Assurances

The Airport will negotiate a strict agreement with the target carrier outlining the following:

 The agreed

- upon cost for each segment operated, includ ing a profit hurdle.

 The agreed

- upon allocation of revenues. Local revenues on the flight will be allocated fully. Connecting/beyond revenues will be

allocated based in agreed prorate. 7

 The revenues and costs will be accounted for on a quarterly basis.

A ny short fall between agreed

- upon revenues and costs will be paid in arrears to the carrier. Any surplus over the agreed

- upon revenues and profit hurdle will be accrued to the next accounting period.



### Marketing Plans

The Greater Spokane Partnership will a dminister the community relations and regional marketing for the program.

 Being closely tied to the business base of the Spokane/Coeur d’Alene region, the Partnership will accomplish a comprehensive outreach to key commercial industries which have ties to Southern

California.

 The marketing plan will be tied to the specific carrier, and will focus on the following general activities as appropriate:

 Electronic media contact: e

- mail, social media, radio outlets, outlining the new service, the benefits of th e nonstop flight, and

the convenience.

 Because over 50% of the expected traffic originates in Southern California, there will be involvement with key GEG

- region leisure businesses, tapping directly into their internal contacts with customers and suppliers in the Los Angeles area.

 The Partnership and the Airport will conduct informational presentations with civic groups prior to and after service start.

 The target airline will be re quired to conduct at least one local social event prior to the start of se rvice.

7 With the exception of service to LAX, there is very little potential connecting traffic.Grant Proposal of Spokane Airport Board

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### Distribution of Funding

The majority of the funds will be allocated to the risk

- guarantee. Media and promotional costs in the GEG region allow wide coverage for a relatively low amount of funding.

Source Nonstop Flight

Revenue

Guarantee Local M arketing Support Total

DOT Funds $ 850,000 $ 150,000 $1,000,000

Community $ 150,000 $ 50,000 $ 200,000

Total $ 1,000,000 $ 200,000 $ 1,200,000



### Post

- Program Support

As the data indicate, there is currently a shortfall in access t o the LA Basin from the Spokane

- Coeur d’Alene Region, and with airline capacity cutbacks, this will become more severe in the year ahead.

As a result, the opportunity for th e target carrier is very strong. Subsequent to the end of the program, the Airport and the Partnership will continue community outreach and marketing support as necessary to

assure that the service continues.