# NEWPORT NEWS/WILLIAMSBURG INTERNATIONAL AIRPORT (PHF)

DUNS Number: 099594624 Congressional District VA

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# APPLICATION UNDER
THE SMALL COMMUNITY AIR SERVICE
DEVELOPMENT GRANT PROGRAM

USDOT Docket DOT

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# June 11, 2012

Prepared By:
Peninsula Airport Commission
900 Bland Boulevard

Suite G Newport News, Virginia 23602Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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# TABLE OF CONTENTS

A. Executive Summary

................................ ................................ ................................ ....................... 2

B. Airport Contact Information

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

C. Problem Statement

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

C.1 Historical Capacity

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

C.2 Forecasted Capacity

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

C.3 Historical Fares

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

C.4 Present Day Fares

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

D. Proposed Use of Funds

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

D.1 Economic Model

................................ ................................ ................................ ...................... 11

D.2 Loss of Nonstop New York City/Boston Service

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

D.3 Lack of Hub Conne ctivity

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

E. Project Proposal

................................ ................................ ................................ ............................... 18

E.1 Funding Mix

................................ ................................ ................................ .............................. 18

E.2 Grant Fo rm

................................ ................................ ................................ ............................... 19

E.3 Marketing Plans

................................ ................................ ................................ ....................... 19

E.4 Post

- Program Support

................................ ................................ ................................ ............ 20

F. Letter s of Support

................................ ................................ ................................ ........................... 21Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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## A. Executive Summary

Within the course of a three week period in Spring 2012

, the Newport News/Williamsburg International Airport ( PHF ) saw a 50% reduction in daily departing seats

, which resulted in combined March

- April 2012 enplanement levels 35 % lower than the same period in 2011. Th e decrease in seat capacity was a result of Southwest Airlines ’ decision to withdraw AirTran Airways ’ service from PHF effective March 2012 . As a competitive respons e to that decision, Delta Air Lines reduced seat capacity by 54%

. Perhaps no other airport having applied for
SCASD grant funds has faced such a decrease in seat capacity due to the acquisition of AirTran Airways by Southwest Airlines

.

Some key facts f rom the enclosed application for a Small Community Air Service Development Grant include:

1. Much of t he growth in passenger enplanements at the airport since 1998 wa s due to the presence of AirTran Airways and the fare discipline that result ed from the

pres ence of a low fare carrier in the market. The PHF average one way gross fare has historically been 11% below the average one way gross fare out of Norfolk International Airport (ORF) due to 1) heavy competition on the ATL hub route between AirTran Airways and Delta Air Lines and 2) low fares to traditionally high fare markets such as
LGA and BOS

.

2. The withdrawal of AirTran Airways and overall reduction in departing seats resulted in the loss of 75 full time equivalent airport, airline, concession and TSA e mployees.

3. Reduction in visitation to the region is anticipated to result in a loss of over $150 million in annual economic impact

. 1

4. 66% of all departing seats from PHF are on aircraf t with 50

- seats or less.

5. O ne way historical gross airfare out of PHF has traditionally been lower than the national one way gross fare. However

, in the period ending 4Q2008, the average one way gross fare out of PHF eclipsed the national average and has remained higher than
the national average in every quarter since then

.

6. The loss of nonstop LGA and BOS flights with AirTran Airways has increased the passenger disutility valuation of time by $ 31.5 million

. 2

7. An increased demand over the CLT hub was created w ith the loss of AirTran Airways connectivity over the ATL hub and the subsequent decrease in Delta Air Lin es seat capacity over ATL . But, PHF is currently seat capacity constrained over both the ATL and CLT hubs . This ostensibly is causing passengers to connect thru ATL and CLT, or other hubs, from the other airports in the region

.

1 This figure is based on reported economic impact per enplanement of $705 as determined by the 2011 Commonwealth of Virginia Department of Aviation “Virginia Airport System Economic Imp act Study” conducted by
SH&E.

2 Passenger value of time was estimated by applying an inflation rate of 2.7% which is equal to the CPI

- U for the Washington D.C.

- Baltimore region to the reported business and leisure intercity travel value of time in “The Val ue of Saving Travel Time: Departmental Guidance for Conducting Economic Evaluation” published by the USDOT on April 9, 1997. For further model information, please see Section D.1.Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 3 8. 20% of the Top 10 O+D city pairs (DFW and IAH), and 35% of the Top 20 city pairs (DFW, IAH, HOU, ORD, SAT, STL and MSP) are located in the Ohio Valley, Upper Midwest or South Central portions of the United States . But, PHF currently does n ot have a nonstop flight to DTW, ORD, MSP, DFW or IAH

.

9. The presen c e of adequate seat capacity out of PHF stimulates traffic at the three airports in the region (PHF, RIC and ORF)

. PHF traffic in March and April wa s down 57,534 passengers. Logic would di ctate that if the passengers were not flying out of PHF, then ORF and RIC would see an increase equal to the decrease in passengers flying out of PHF. But

, this is turning out not to be the case. Du ring the same time period, ORF and RIC we re up 12,490 pa ssengers
, meaning that 45,044 fewer passengers flew in March and April 2012 out of three airports. Therefore, adequate seat capacity, hub connectivity and key point

- to

- point destinations are necessary in keeping the region’s passenger traffic up

.

10. Milit ary and government facilities on the Peninsula generate 60% of all military and
government b ookings out the three airports in the region. Recent coordination with the GSA has increased the number of city pairs and resulted in an increase in PHF’s
capture of locally generated military and government bookings. This lead to a record level of enplanements at PHF in 2010. However, the loss of seat capacity is beginning to impact both the GSA’s and PHF’s ability to adequately serve our military and
government t raffic.

If seat capacity is not regained

, PHF would effectively los e 9 years of growth in enplanement levels and seat capacity

, which will r esult in a further loss of direct employment and the associated regional job loss resulting from a reduced total economic impact. Our goal s with the grant funds are : 1) restore nonstop service to the New York and Boston markets , 2) up

gauge aircraft flying and/or frequency into the CLT hub and establish nonstop service to Chicago O’Hare International and/or Dallas

- Fort Worth International Airport

.



## B. Airport Contact Information

Newport News/Williamsburg International Airport

Peninsula Airport Commission Ken R. Spirito, A.A.E.
Executive Director 900 Bland Boulevard, Suite G Newport News, Virginia 23602

- 4319 Phon e: (757) 877

- 0221 Fax: (757) 877

- 6369 kspirito@flyphf.com

www.flyphf.comApplication Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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## C. Problem Statement

On March 10, 2012, PHF underwent a significant reduction in seat capacity when AirTran Airways terminated service

. This ended a 16 year relationsh i p between AirTran Airways and the Peninsula Airport Commission that began in 1995 with ValuJet . The decision to terminate AirTran Airways service at PHF was a direct result of the acquisition of AirTran Airways by Southwest Airlines. Prior to the termination of service, AirTran Airways offered 9 daily non

stop flights to 4 destinations : Hartsfield

- Jackson Atlanta International Airport ( 4 daily flights ), LaGuardia Airport ( 2 daily flights ), Boston

- Logan International Airpor t ( 1 daily flight and 1 seasonal flight ) and Orlando International Airport ( 1 daily flight ). The 9 daily flights provided 1,053 daily departing seats and resulted in AirTran Airways represent ing 45 % of the departing seats out of PHF for the YE4Q2011

.

F urt h er exacerbating the problem was a competitive response from Delta Air L ines to the withdrawal of AirTran Airways from PHF . As Delta Air L ines no longer had to compete against
AirTran Airways to the Atlanta hub, Delta Air L ines down gauged aircraft i n February 2012 from three (3 ) MD

- 88 daily departures, one (1) CRJ900 daily departure and one (1) CRJ700 daily departure totaling 568 daily departing seats to six ( 6 ) CRJ200 flights totaling 300 departing seats. Coupled with the loss of the four daily fligh ts between PHF and ATL on AirTran Airways B717’s, the region lost 736 departing seats to the Atlanta hub and 1,037 seats (or 44 % of daily departing seats) to all destinations in total.

The loss of AirTran Airways , and the competitive response by Delta Air Lines , has resulted inApplication Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 5 sig n ificant negative ramifications in terms of both direct and indirect economic impact . The withdrawal of AirTran Airways and reduction in operating revenues and/or need for federal
workers resulted in the loss of 75 full time equivalent airport, airline, concession and TSA employees. In addition, the reduction in visitation to the region is anticipated to result in a loss of over $150 million in annual eco n omic impact. 3

Post AirTran Airways departure, the airport is served by four (4) airlines offering non

- stop service to five (5) destinations (see Figure 1 ). These four airlines provide an average of 18.4 daily departures and 1,033 daily departing seats for an average aircraft size of 56.1 seats per departure

. The average aircraft size is driven by the fact that 86 % of all departures a nd 66 % of all departing seats are on aircraft with 50

- seats or less. With airlines examining the role of the
50

- seat regional jet in their system

, PHF could see further reductions in departin g seats as carriers switch out 50

- seat aircraft with 70

- seat aircraft and reduce frequencies to keep load factors high. Frontier Airlines resumed seasonal less

- than

- daily service into PHF on March 1, 2012 and started daily year

- round nonstop flights to DE N on May 22, 2012. Allegiant Airlines started less

- than

- daily nonstop Orland

- Sanford operations in November 2011 adding an equivalent 86 daily departing seats to the PHF market. Despite these two capacity increases, PHF is still down over 45% in departing seat capacity from February 2012 levels. This decrease is even more pronounced when year

- over

- year average daily departing seats during the peak month of passenger enplanements ( July ) are compared

. July 2012 average daily departing seats equal 1,049 whi ch is 54% below July 2011 average daily departing seats of 2,280.

3 This figure is based on reported economic impact per enplanement of $ 705 as determined by the 2011 Commonwealth of Virginia Department of Aviation “Virginia Airport System Economic Impact Study” conducted by
SH&E.Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 6 Historical enplanement levels at PHF since 1990 exhibits three distinct periods of activity. From 1990 to 1998 the enplanement levels were fairly level primarily due to the fact that PHF experienced relatively low load factors ranging from 35% to 50%. Beginning in 1999, PHF grew at a very high compounded annual rate of growth of over 16.4 % with enplanements more than doubling from 205,000 in 1999 to 510,000 by 2005. A majority of this gr owth occurred between 2003 and 2005 with enplanements growing by 172,300 in the span of two years. The last period of activity wa s from 2005 to 2011 with enplanement levels remaining relatively flat. However, 2010 wa s a record year in enplanements at PHF due to increased number of GSA city pairs, the introduction of Frontier Airlines, and both Delta Air Line s and US Airways increasing frequencies into the ATL and CLT hubs.

C.1 Historical Capacity The leveling off of historical enplanements though is not d ue to saturated demand in the market place, but rather a function of decreasing seat capacity . This wa s a result of i ndustry
consolidation and aggressive capacity control by the carriers due to unpredictable fuel prices. Figure 2 presents a comparison be tween the rolling 12

- month total annual departing seats

, passenger enplanements and daily departures at PHF from December 1990 to December 2011. Not surprisingly, t he historic seat capacity and number of daily departures out of PHF follow a similar patte rn as the annual enplanement levels, particularly in the early 2000s when PHF was seeing record growth in enplanements. The peak 12

- month period of departing seats occurred in April 2007 (May 2006

- April 2007 period) when 858,700 seats departed the airport on 10,570 departures for an average aircraft size of 81.2 seats/departure. At this point of time,
the PHF

- wide load factor was 62.1%

, which was below the national average. In 2008

, when industry con s olidation coupled with record fuel prices forced airli nes to restrict capacit y, PHF saw a contraction in available capacity

. There has been a 12.3% reduction in departing seats since the peak which, c oupled with an increasing enplanement level, has increased the average load factor to 72.3%.

C.2 Forecasted C apacity The forecasted seat capacity out of PHF for the next year demonstrates the impact that the loss of AirTran Airways and the subsequent seat reduction by Delta Air Lines will have on PHF’s ability to provide adequate service to the region. Prior to the withdrawal of AirTran Airways, PHF had approximately 62,750 monthly departing seats . In April 2012, which was the first full month post AirTran Airways withdrawal, this decreased to 29,700 monthly departing seats. As can be seen in Figure 3 , the rema inder of 2012 and first half of 2013 have an average of 3 1,3 00 monthly departing seats. On a rolling 12

- month basis, this equates into
a total o f 375,400 seats for the period April 2012

- March 2013

, which represent s the first full
12

- month period absent Ai rTran Airways in the PHF market. This represents a 56.3 % decline from the peak number of departing seats in April 2007.

C.3 Historical Fares Much of th e growth in passenger enplanements since 1998 at PHF wa s due to the presence of
AirTran Airways and the f are discipline that result ed from the presence of a low fare carrier in
the market. AirTran Airways had the positive effect of lower ing air fares in the region while also providing much needed connectivity to popular origination/destination cities such as New York City, Boston and Orlando.Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 7 Figure 4 (see Page 8 ) compares the historical one way gross airfare out of PHF against the national one way gross fare from 1Q2000 to 4Q2011. As can be seen in the graph, the one way gross historical airfare out of PH F has traditionally been lower than the national one way gross fare. How e ver in the period ending 4Q2008, the average one way gross fare out of PHF eclipsed the national average and has remained higher than the national average in every quarter since then. Since 4Q2008, the PHF average one way gross fare is $179.75 compared to the national one way gross fare of $168.35, or 6.8% greater. The trend of PHF having higher average one way gross airfares than the national average is anticipated to continue in the near future due to the withdrawal of AirTran Airways out of the PHF market. The fare discipline of AirTran Airways resulted in the PHF average one way gross fare being 11% below the average

one way gross fare out of ORF.

The aggressive competition bet ween AirTran Airways and Delta Air Lines on the ATL route and the nonstop AirTran Airways flights to the LGA and BOS markets were the primary reasons for the lower one way gross airfare out of PHF. To illustrate this, the average Delta
Air Lines ticket ou t of PHF to ATL was $52 lower than the ave r age Delta Air Lines ticket between ORF

- ATL between 2002 and 2011. Furthermore, the average one way gross airfare
between PHF

- LGA on AirTran Airways was $56 lower than the US Airways nonstop average one

way gross airfare between ORF

- LGA. Similarly, PHF

- BOS average one way gross fare was $61
lower on AirTran Airways than the average one way gross airfare out of ORF.

C.4 Present Day Fares Absent the presence of AirTran Airways in the PHF market and the lost fare disc ipline, one could expect the average one way gross airfare to increase going forward. Figure 5 comparesApplication Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 9Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 10 the average roundtrip itinerary fare (e.g. the total fare paid by the customer inclusive of government taxes and fees) be tween 1Q1995 and 3Q2001. This timeframe covers the period during which PHF was the only airport in the region that had a low cost carrier. This could serve as a useful proxy for future airfare decisions by carriers out of PHF now that ORF and RIC have lo w cost carrier connectivity to the destinations PHF lost as a result of the AirTran Airways withdrawal. B etween 1Q1995 and 3Q2001

, the average roundtrip airfare out of PHF was $ 45 lower than ORF and $105 lower than RIC.

To determine how carriers are c urrently pricing flights out of PHF, airline websites for a 7

- day,
14

- day and 30

- day booking window to ATL, LGA and BOS were queried. 4 The results suggest that passengers flying out of PHF are paying much higher fares than a comparable ticket out of ORF. The average 7

- day advance purchase between PHF and LGA, BOS and ATL on Delta Air Lines is $577 more expensive than comparable tickets booked out of ORF. Tickets booked on US Airways 7

- days in advance are more in

- line between ORF and PHF with PHF booked tickets $133 more expensive. This trend holds true when examining 14

- day and 30

- day advanced purchase tickets with Delta Air Lines tickets purchased out of PHF being $360 more expensive 1 4

- days out from travel and $223 more expensive 30

- days out. Ticket s purchased o n US Airways are $50 more expensive 14

- days out and $40 more expensive
30

- days out. Overall, the average fare discrepancy for travel between PHF and ATL, LGA and BOS was $230 more expensive than travel between ORF and ATL, LGA and BOS.

Broad ening this analysis to the T op 5 AirTran Airways connecting cities out of PHF (HOU, FLL, LAS, MDW and DFW) for YE4Q2011 further supports the conclusion that passengers flying out of PHF over the ATL or CLT hub are paying higher fares. 5 Fares to the Top 5 AirTran Airways cities for this timeframe averaged $326

. Based on 30

- day advance purchase on either Delta Air Lines or US Airways, the average itinerary fare is $502, or a nominal increase of $176. A 30

- day advance purchase window is typically a leisure or discretionary business passenger. As the purchase window closes, fares will increase exponentially.



## D

. Proposed Use of Funds

PHF has two service gaps that are the focus of current air service develop m ent initiatives:

4 The individual queries were based on business passenger preferred departure times (0800 hours from PHF and 17 00 hours on the return trip). Tickets were restricted economy tickets and did not include any special pricing promotions. Analysis was conducted on June 4, 2012 and used the following dates: 7

- day advance purchase departing PHF on June 11 and returning on June 13. 14

- day advance purchase departing PHF on June 18 and returning on June 20. 30

- day advance purchase departing PHF on July 9 and returning on July 11.

5 MDW and HOU destinations were substituted with IAH and ORD respectively.Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 11 1) replacing lost service to Ne w York City and Boston and 2) increasing hub connectivity thru increased seat capacity and frequency to the CLT hub and by establishing new nonstop service to hub airports in the Ohio Valley, Upper Midwest and South Central portions of the United States (U SDOT WAC Regions 4, 6 and 7) 6

. We recognize that the three New York airports are capacity controlled and carriers will require significant justification to use valuable slots to
serve the PHF market. To illustrate these service gaps, Figure 6 depicts the Top 48 O+D markets out of PHF for the year ending December 31, 2011 and identifies which markets are currently served by a nonstop flight and which markets were lost whe n AirTran Airways withdrew from the market on March 10, 2012.

P rior to AirTran Airways withdrawing from the market, PHF served 5 of the Top 10 O+D city pai r s with nonstop flights (ATL, LGA, BOS, MCO and DEN) with direct competition on the
Atlanta route being provided by AirTran Airways and Delta Air Line s . After the departure of AirTran Airways

, PHF serves 2 of the Top 10 city pairs (ATL and DEN) with no direct competition on either route . It should be noted that Allegiant Airways backfilled the Orland o market when it initiated service in November 2011 to Orlando

- Sanford International Airport (SFB) . It is fully anticipated that the Orlando

- Sanford market will be included in the Top 10 city pairs by the end of this calendar year.

D.1 E conomic Model

T he following sections present the results of a modeling effort conducted by PHF staff that attempts to quantify the lost efficiency and disutility of passenger’s time resulting from the lost nonstop flights to the New York City and Boston markets as well a s the lack of hub connectivity in the Ohio Valley, Upper Midwest and South Central portions of the United
States . The model first quantifies the inefficiency of the route using the following formula:

The lower the product the more inefficient the route is in terms of trip miles

The second portion of the model attempts to quantify the value of the disutility of time experienced by the passenger. Time saved in travel has an economic value to p assengers for two reasons. First, the time may be devoted to other activities preferred by the traveler

, such as remunerative work in the case of a business passenger. Sec ond, if the travel is associated with unpleas a nt conditions (e.g. crowded aircraft, terminals or delays ) ; then reducing travel time will be perceived as a positive for the traveler. 7 For example, p assengers flying out of
PHF to the New York City and Bosto n markets experience longer flight times due to the introduction of a hub connection

, which results in a perceived disutility in flying out of PHF over competing nonstop service offered out of ORF by Delta Air Lines. To quantify the passenger valuation o f the disutility of time, the total enroute time thru the ATL, CLT and PHL hubs were compared to the nonstop enroute time currently offered from ORF

. 8 Additional

6 WAC Region 4 con sists of the states of Michigan, Ohio, Indiana, Illinois and Wisconsin. WAC Region 6 consists of the states of Minnesota, Iowa, Missouri, Kansas, Nebraska, South Dakota and North Dakota. WAC Region 7 consists of the states of Arkansas, Louisiana, Texas a nd Oklahoma.

7 “The Value of Saving Travel Time: Departmental Guidance for Conducting Economic Evaluation”, USDOT Report dated April 9, 1997.

8 Passenger value of time was estimated by applying a n inflation rate of 2.7 % which is equal to the CPI

- U for the Washington D.C.

- Baltimore region to the re ported business and leisure intercity travel value of time in “The Value of Saving Travel Time: Departmental Guidance for Conducting Economic Evaluation” published by the USDOT on April 9,
1997.Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 12 factors that were included in the model addressed business/leisure travel split and connection
times in the hub. 9

D.2 Los s of Nonstop New York City /Boston Service The lack of nonstop service to the New Y ork City and Boston markets represents a significant economic impact to the region. Post AirTran Airways departure, the travelling public from

PHF suffers from a hub connecti vity penalty by having to connect thru ATL via Delta Air Line s

or thru CLT or PHL via US Airways to reach New York or Boston.

Figure 7 presents annual passengers and one way average fare on AirTran Airways to LGA and BOS fro m YE4Q2006 to YE4Q2011. During this period, the PHF market combined averaged 275 daily passengers to LGA and BOS markets with an average one way fare of $117. Despite a decline in total passengers, the annual revenue generated on the route by AirTran Airways
incr eased $775,000 from $8.9 million in 2006 to $9.7 million in 2011.

LaGuardia Market

– H ub Connectiv i ty Penalty
Based on YE4Q2011, US Airways had a 2.5% share of the PHF

- LGA market with PHL being the preferred hub connect ion . The total air miles between PH F and LGA nonstop is 288 miles

9 In business intensive markets (LGA, ORD), the split was assumed to be 60% business/40% leisure. In leisure intensive markets the split was 40% business/60% leisure. All other markets we re assumed to have a 50%/50% split. Fully loaded hourly rate for business passenge rs was determined by applying an overhead factor of 3.0. Leisure passenger hourly rates were not adjusted. Total travel time is equal to the block time only and does not include any time associated with travel to/from the airport or time at the airport p rior to aircraft departure. Lastly, a hub productivity discount was applied to the business passenger value of time spent in the hub. The discount was determined by taking the number of minutes above 40 minutes in the hub and dividing by 60 minutes. To control for excessively long connection times, the maximum discount was 50% which equates into a 70 minute connection. It is believe d that connection times below 40 minutes and above 70 minutes represent higher disutility due to either worry over missing the connection or having an excessively long connection time.Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 13 while total air mile s between PHF

- PHL

- LGA route is 294, or a 2% hub connect penalty over the nonstop PHF

- LGA route.

On the surface, this appears rather minor, but another viewpoint is to consider the increased travel time b etween PHF and the New York City markets. The two daily flights AirTran Airways offered between PHF and LGA departed PHF at 8:00a arriving LGA at 9:14a and departing PHF at 4:49p arriving LGA at 5:59p for an average block time of 1 h our and 12
minutes. T he most efficient block time thru PHL on US departs PHF at 5:43a arriving in PHL at 6:52a then departing PHL at 7:24a and arriving at LGA at 8:30a for a total block time of 2
h ou rs and 47 minutes. Thus, a roundtrip between PHF and LGA on US Airways thru P HL
increase d travel time by 3 hours and 10 minutes.

Enroute time on the nonstop LGA flights offered by AirTran Airways and connecting flights offered by US Airways totaled 58,000 person hours which resulted in an economic valuation of $12. 2 million doll ars YE4Q2011. On a per passenger basis, this equates into approximately $ 261.92 in lost productivity due to travel time. Quantifying the CY2012 lost economic value of time based on passengers flying thru the ATL hub on Delta Air Line s or thru the PHL /CLT hub s for US Airways results in a total value of the disutility of time of $28. 1 million or $ 616.75 per passenger. As a result, it is estimated the loss of nonstop AirTran Airways service to LGA results in an increased passenger valuation of the disutilit y of time of $1 6

. 6 million per year

.

Boston Market

– Hub Connectivity Penalty Based on YE4Q2011, US Airways had a 6.5% share of the PHF

- BOS market with PHL being the preferred c onnect ing point, although 30% of US passengers are connecting over the CLT hub. The total air miles between PHF and BOS nonstop is 464 miles while total air miles between
PHF

- PHL

- BOS route is 480, or a 3.3% hub connect penalty over the nonstop PHF

- BOS route. For those passengers connecting over the CLT hub, the penalty is 54% as the total air miles on a
PHF

- CLT

- BOS route is 1,008 miles.

S i milar to the LGA market, the hub penalty over the PHL hub appears rather minor, but the increased travel time between PHF and the B OS market also exhibits a lack of efficiency. The two daily fli ghts AirTran Airways offered between PHF and BOS departed PHF at 6:45a arriving BOS at 8:12a and departing PHF at 5:29p arriving BOS at 7:00p for an average block time of 1
h our and 29 minutes. The most efficient block time on US Airways thru PHL d eparts PHF at 9:25a arriving in PHL at 10:35a then departing PHL at 11:15a and arriving at BOS at 12:32p for
a total block time of 3 h our s and 7 minutes. Thus, a roundtrip between PHF and BOS on US Airways thru PHL increases travel time by 3 hours and 16 minutes

.

Enroute time on the nonstop AirTran Airways and connecting US Airways flights thru the CLT or PHL hubs totaled 70

, 2 00 person hours which resulted in an economic valuation of $ 13.0 million dollars YE4Q2011. On a per passenger basis, this equates into approximately $ 298.99 in lost productivity due to travel time. Quantifying the CY2012 lost economic value of time based on passengers flying thru the ATL hub on Delta Air Line s or thru the PHL /CLT hub s for US Airways results in a total value of the disuti lity of time of $28. 0 million or $ 641.93 per passenger. As a result, it is estimated the loss of nonstop AirTran Airways service to BOS results in a n increased passenger valuation of the disutility of time of $ 14.9 million per

year

. 10

10 While the BOS flight had a higher number of total person hours than the LGA flight , the total passenger valuation of disutility of time was lower. The reason for the apparent discrepancy is due to the higher business passenger split on the LGA route and the higher valuation placed by business travelers on their time.Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 14 Combined Impact on Pa ssenger Valuation of Disutility for LGA and BOS Markets On a combined basis, the nonstop PHF

- LGA and PHF

- BOS routes offered by AirTran Airways represented a combined passenger valuation of the disutility of time of $2 5.3 million which has increased to $5 6. 8 million due to addit i onal travel time associated with hub connections in ATL, CLT or PHL . This is a nomi n al increase in disutility valuation of $31. 5 million

.

D. 3 Lack of Hub Connectivit y The second service gap that exists at the airport is the constrai ned capacity into the CLT hub and a lack of connectivity to a hub in USDOT WAC Regions 4, 6 and 7

. As of YE4Q2011, 20% of the Top 10 O+D city pairs (DFW and IAH), and 35% of the Top 20 city pairs (DFW, IAH, HOU, ORD, SAT, STL and MSP) are located in the O hio Valley, Upper Midwest or South Central portions of the United States. Demand to the heartland from PHF is fairly high with approximately 23% of all YE4Q2011 originating passengers at PHF bound for destinations in USDOT WAC Regions 4, 6 or 7 (see Figur e 8 ). However, as can be seen in Figure 9 , the percentage of Southeast Virginia demand (defined as the O+D demand generated by the RIC, PHF and ORF markets combined) that is captured by PHF is low for each of the five heartland hubs and for the CLT hub. PHF generally captures between 5

- percent and 23

- percent of regional demand primarily due to the fact that both RIC and ORF have 53.6 daily nonstops to the six airports with an average aircraft size of 72.6 seats in June 2012.

To determine which hubs w ould reduce the disutility of time for passengers at PHF, a hub connectivity analys i s w as conducted

. The economic valuation of passenger disutility of time for a new nonstop service to a heartland hub was determined based on several assumptions. First, t he carrier offering nonstop service would gat her 80% market share. Second, theApplication Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 15 remaining market share would be retained by the existing carrier(s) with passenger flow to the carrier’s hub(s) remaining proportionate to existing conditions. Third, in order to effectively compare the pre

- nonstop and post

- nonstop economic valuation of disutility, the model did not include market stimulation. Rather, the model simply reallocated YE4Q2011 passengers and thus should not be interpreted to represent a full post

- n onstop market demand. In actuality, the stimulative effects of a new nonstop flight to a previously un

- served market would overstate the economic valuation of disutility since more passengers would be flying and thus more person hours included in the mode l. The economic valuation did not include the up

- gauging of aircraft into the CLT hub as PHF currently has nonstop connectivity to CLT.

Detroit Metro Wayne Airport (DTW) The first hub analyzed was the lack of nonstop connectivity to DTW. For the YE4Q2011 , a total of 2,229 originating passengers at PHF were terminating at DTW. The predominant routing for originating PHF passengers was over the CLT hub for US Airways with the secondary routing over the PHL hub for US Airways. There were no reported passen gers connecting over the ATL hub on either Delta Air Line s or AirTran Airways. Enroute time on the US Airways flights totaled 8,166 person hours which resulted in an economic valuation of $1. 52 million dollars YE4Q2011, or $ 682.18 per passenger.

A no nstop PHF

- DTW route would carry 1,783 passengers and reduce the roundtrip travel time from the current 7 hour 20 minute average per passenge r to a 4 hour 4 minute average per

passenger and would reduce the disutility valuation by $ 639,000 per year

. The in troduction of a new nonstop service, coupled with some passengers continuing to connect thru the CLT, PHL or ALT hubs to reach DTW, results in a cumulative passenger disutility of time valuation of $395.18 on a roundtrip basis

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Page 16 Chicago O’Hare (ORD)
The s econd hub analyzed was the lack of no n s top connectivity to ORD. For the YE4Q2011, a total of 6,683 originating passengers at PHF were terminating at ORD. The predominant routing for originating PHF passengers was over the CLT hub for US Airways with the
secondar y routing over the ATL hub for Delta Air Lines and the tertiary routing over the PHL hub for US Airways. The enroute time for all passengers flying thru the CLT, ATL and PHL hubs totaled 27,543 person hours and yielded an economic valuation of $5. 43 milli on dollars YE4Q2011, or $8 13. 21 per passenger. Similar to the LGA route, the ORD route had a 60% business passenger demand and 40% leisure passenger demand.

A nonstop PHF

- ORD route would carry 5,346 passengers and reduce the roundtrip travel time from th e current 8 hour 14 minute average per passenger to a 4 hour 36 minute average per passenger and would reduce the disutility valuation by $2.18 million per year . The introduction of a new nonstop service, coupled with some passengers continuing to connect thru the CLT, PHL or ALT hubs to reach ORD, results in a cumulative passenger disutility of
time valuation of $ 487.74 on a roundtrip basis.

Minneapolis

- St.Paul (MSP) The third hub analyzed was the lack of no n s top connectivity to MSP. For the YE4Q2011, a
total of 5,890 originating passengers at PHF were terminating at MSP. The predominant routing for originating PHF passengers was over the ATL hub for Delta Air Lines and AirTran Airways with the secondary routing over the CLT hub for US Airways and the tertiar y routing over the PHL hub for US Airways. The enroute time for all passengers flying thru the CLT, ATL
and PHL hubs totaled 29,836 person hours and yielded an economic valuation of $5. 49 million dollars YE4Q2011, or $9 33.33 per passenger.

A nonstop PH F

- MSP route would carry 4, 7 1 2 passengers and reduce the roundtrip travel time from the current 10 hour 8 minute average per passenger to a 6 hour 24 minute average per passenger and would reduce the disutility valuation by $1.72 million per year . The
intr oduction of a new nonstop service, coupled with some passengers continuing to connect thru the CLT, PHL or ALT hubs to reach MSP, results in a cumulative passenger disutility of
time valuation of $641.39 on a roundtrip basis.

Dallas/Ft. Worth (DFW) The f ourth hub analyzed was the lack of no n s top connectivity to DFW. For the YE4Q2011, a total of 13,923 originating passengers at PHF were terminating at DFW. The predominant routing for originating PHF passengers was over the ATL hub for Delta Air Lines and AirTran Airways with the secondary routing over the CLT hub for US Airways and the tertiary routing
over the PHL hub for US Airways. The enroute time for all passengers flying thru the CLT, ATL and PHL hubs totaled 67,60 4 person hours and yielded an economic val uation of $ 12.54 million dollars YE4Q2011, or $ 900.56 per passenger.

A nonstop PHF

- DFW route would carry 11,138 passengers and reduce the roundtrip travel time from the current 9 hour 43 minute average per passenger to a 6 hour 50 minute average

per pas senger and would reduce the disutility valuation by $3.34 million per year . The introduction of a new nonstop service, coupled with some passengers continuing to connect thru the CLT, PHL or ALT hubs to reach DFW, results in a cumulative passenger disutil ity of
time valuation of $660.42 on a roundtrip basis.

Houston Intercontinental (IAH)
The last hub analyzed was the lack of no n s top connectivity to IAH. For the YE4Q2011, a total of 8,784 originating passengers at PHF were terminating at IAH. The predominant r outing forApplication Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 17 originating PHF passengers was over the ATL hub for Delta Air Lines and AirTran Airways with the secondary routing over the CLT hub for US Airways and the tertiary routing over the PHL hub for US Airways. The enroute time for all passengers fly ing thru the CLT, ATL and PHL hubs totaled 40,123 person hours and yielded an economic valuation of $7. 24 million dollars YE4Q2011, or $8 24.16 per passenger.

A nonstop PHF

- IAH route would carry 7,027 passengers and reduce the roundtrip travel time from the current 9 hour 1 0 minute average per passenger to a 6 hour 18 minute average per passenger and would reduce the disutility valuation by $ 2.18 million per year . The introduction of a new nonstop service, coupled with some passengers continuing to conne ct thru the CLT, PHL or ALT hubs to reach IAH , results in a cumulative passenger disutility of

time valuation of $ 575.96 on a roundtrip basis

.

Conclusion: Heartland Hub Analysis Figure 10 summarizes the results of the passenger valuation of disutility analysis. The most efficient heartland hub s within the Ohio Valley, Upper Midwest or South Central regions of the
United States for connection, in terms of decreasing the passenger valuation of disutility of time, is either Dallas

- Ft. Worth International Airport with a $3.5 million dollar decrease or Chicago

- O’Hare International Airport with a $2.3 million dollar decrease

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## E. Project Proposal

As with the case of many small hub airports across the country, the shifting airline industry
has caused tremen dous difficulty in attracting new air service. Carriers are relen tlessly focused on maintaining the costs the can control at a minimum and have come to the conclusion that the quickest way to improve their bottom line is to maximize asset utilization and have strict capacity controls . To illustrate this, total flying hours in CY2011 by carriers required to file on DOT Form 41 w as 24% lower than CY2010

. Additionally, the consolidation of the industry either through acquisition or merger has resulted in an unprecedented level of market power by the carriers. 11

As such, small hub airports have to change the dynamics of air service development by closing the perceived opportunity cost of carrier’s initiating service. The objective of our proposal
then is to reduce the costs of prospective carriers by lowering the barriers to entry thru sharing th e financial risk of initiating service to PHF

. In particular, the Peninsula Airport Commission would utilize departmental funding thru a SCASD grant to 1) reestablis h lost New York and Boston service , 2) up

- gauge aircraft into the CLT hub and 3) to establish a
new connection to Chicago

- O’Hare and /or Dallas

-

Ft. Worth.

E.1 Funding Mix The proposed funding mix for the grant application includes direct and non

- direct ai rport funds in the form of advertising and waived landing and terminal fees, regional commitment from a consortium of Economic Development Agencies that form a regional partnership and USDOT grant funds. Our total grant request from DOT is for $2,000,000.

11 A commonly held measurement of market power that is used by the Department of Justice is the H erfindahl

Hirschman Index (H HI) which is used by the DOJ and FTC in horizontal merger reviews. According to the DOJ/FTC Horizontal Merger Guidelines , any industry is highly concentrated if the HHI is above 2

, 500 points. The DOJ/FTC considers any proposed merger that moves the HHI b y more than 200 points in highly concentrated industries to be worthy of additional scrutiny. The HHI for all FAA defined small, medium and large hub airports was calculated by PHF staff at 2,862 for CY2005, ostensibly before industry consolid ation, and for CY 2010 at 2,990 . A dditionally, 42 % of all small, medium and large hub airports had a negative (e.g. towards more concentration and higher HHIs) shift in market concentration above 200 points in the same timeframe. 

# PARTNER INVESTMENT %

OF TOTAL

Airport Funds $ 400 ,000 11%

Marketing/Advertising Support $275,000

Waiver of Landing/Terminal Fees $125,000

Regional Air Service Enhancement (RAISE) $1,200,000 3 3 %

USDOT Grant Award $2,000,000 56%



### TOTAL $3, 600 ,000 100%Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 19 The airport will provide 11 % of total grant request with local funding providing 3 3 % of the request. Thus, the community is ready and willing to invest $1.6 million in matching funds to attract much needed air service to the region.

E .2 Grant Form The grant funds will be used to attract a carrier (s) to provide nonstop jet service to one or more of the targeted destinations indicated above. The program will be for 1 2 months . At the end of the period, any unused federal grant funds will be relinqu ished back to the Department.

The majority of program funds will be allocated as a revenue guarantee for the carrier (s)

. Due

to 1) the lack of nonstop service, 2) the cutbacks in incumbent capacity and 3) the previous success of nonstop LGA and BOS servi ce out of PHF ; it is strongly felt that the new service will
be revenue

- positive shortly after the start of operations. The relative suc cess of the New York City and Boston markets are demonstrated by the historical daily passengers to these markets as illustrated in Figure 7 (see Page 12). To determine the potential for new nonstop service to DFW and ORD, PHF has histori cally captured 30% of the historical SEVA regional O+D demand to the world’s largest hub airport (ATL)

. A ssuming that this capture rate is achieved for ORD, CLT and DFW hubs; the PHF market could generate a total of 192 daily O+D passengers to
these markets (in addition to the number of daily passengers connecting over the hubs)

.

However, given the fact that US carriers are not expanding their fleet , and are flying their
existin g fleet less frequently, an incentive program designed to help offset the opportunity

costs of moving an existing aircraft

– or reducing frequency into

– a particular market will be

necessary.

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

 The agreed upon cost for each segment operated, including a profit hurdle.

 The agreed upon allocation of revenues and ancillary fees . Local revenues on the flight will be allocated fully. Connecting revenues will be allo cated based on an agreed
prorate.

 The revenues and costs will be accounted for on a yearly true

- up basis. Any shortfall between agreed

- upon revenues and costs will be paid in arrears to the carrier. Any surplus will be accrued to the next accounting peri od.

Using this model, the airport was successful in attracting Frontier Airlines to the airport in Spring 2010. The revenue guarantee for Frontier totaled $1.2 million of which the carrier has used $200,000 to offset changing route economics due to a combination of long stage length and record high fuel prices. Considering the stage length of the flight

, and the fact that a roundtrip flight from DEN to PHF effectively ties up an aircraft for the day ; the route has performed very well. As mentioned earlier, we ha ve every expectation that the LGA, BOS and additional hub connectivity would perform well out of PHF based on historical performance at

PHF

.

E.3 Marketing Plans As part of our standard air service development policy, PHF offers support for any new serv ice on a certificated carrier to the airport to a city that is not currently served or to a new carrier entering the market

. Marketing support to any new service generally includes:

 OutdoorApplication Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 20  Radio

 Newspaper

 Television

 Internet /Social Media

 Speaking Circui t

 Cooperative marketing with area attractions

 Direct marketing to area businesses

.

The marketing campaign to promote a new city launch would include : 1) a media blitz with press conferences, ribbon cutting and news interviews throughout the region ; b) c o

- sponsored promotional reception for travel agents, business and hospitality leaders and c) i nclusion in promotional opportunities at Chamber events and in collateral materials

.

Additionally, the airport will a bate landing fees, ticket counter charges, and joint use charges for 12 months

.

E.4 Post

- Program Support To ensure the success of new service, Peninsula area businesses through the Newport News Economic Development A uthority created RAISE (Regional Air Service Enhancement). RAISE is made up of economic development leaders from 7 municipalities:

1. City of Newport News
2. City of Hampton
3. James City County
4. York County
5. City of Williamsburg
6. City of Gloucester

7. City of P oquoson

Together, their support of committing finan c ial resources allows the R AISE to help attract new
air service.

The airport will provide monthly updates to the appropriate officials to report milestones and convey the community’s progress towa rd meeting the project’s stated objectives (or as dictated by the Department of Transportation). In the event that dynamics of the aviation industry and/or current negotiations impact the feasibility of the carriers targeted in our proposal, the airport wi ll work with the Department to amend its application, keeping within the confines of stated air service development objectives.Application Under Application Under Small C ommunity Air Service Development Grant Program USDOT Docket DOT

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Page 21 

## F. Letters of Support

In support of our application, we have enclosed letters from the following individuals and organizations :

1. Honorable Se nator Mark Warner, VA

2. Honorable Representative Rob Wittman, VA

- 01

3. US AirwaysA. APPLICANT INFORMATION (CHECK ALL THAT APPLY)

Not A Consortium

Community Now Receives EAS subsidy

Community (or Consortium member) prevoiusly received a Small Community Grant

If previous recepient: Date of Grant Expiration Date of Grant: N/A

B. PUBLIC/PRIVATE PARTNERSHIPS (LIST ORGANIZATION NAMES):

PRIVATE

1 1

2 2

3 3

4 4

5 5

C. PROJECT PROPOSAL (CHECK ALL THAT APPLY)

D. EXISTING LANDING AIDS AT LOCAL AIRPORT:

Regional Air Service Enhancement (RAISE) Intrastate Consortium

PUBLIC Interstate Consortium

Federal Funds Requested:

Carrier(s) Service Obtained:

Destination(s) Served: N/A

Start-Up Cost Offset

Secure Additional Service Marketing

Travel Bank
Surface Transportation

Launch New Carrier

Published Instrument Approach All applicants must

submit this information with their proposal, along with a completed Form SF424 on www.grants.gov SUMMARY INFORMATION SMALL COMMUNITY AIR SERVICE DEVELOPMENT PROGAM

DOCKET DOT-OST-2012-0069

Full ILS Outer/Middle Marker New Route
Subsidy

Revenue Guarantee

First Service
Other (explain below) Study Upgrade Aircraft

Service Restoration
Regional Service

Localizer OtherE. PROJECT COST (DO NOT ENTER TEXT INTO SHADED AREA):

F. IN-KIND CONTRIBUTIONS**

G.

H. LINE TOTAL SUBTOTAL DESCRIPTION

1 Federal Amount Requested 2,000,000 $

3a. Airport cash funds 275,000 $
3b. Non-airport cash funds 1,200,000 $ 2 State cash financial contribution

- $

Local cash financial contribution

In-Kind Contribution 5a. Airport in-kind contribution** 125,000 $ 3 TOTAL CASH FUNDS (3a+3b) 1,475,000 $

4 TOTAL CASH FUNDING (1+2+3) 3,475,000 $

6 TOTAL PROJECT COST (4+5) 

### 3,600,000 $ 5b. Other in-kind contribution**

- $

5 TOTAL IN-KIND CONTRIBUTION (5a+5b) 125,000 $

For funds in lines 5a (airport in-kind contribution) and 5b (other in-kind contribution), please describe the source(s) of fund(s) for

each:

Airport in-kind contribution is from waived landing fees and terminal fees.

IS THIS APPLICATION SUBJECT TO REVIEW BY STATE UNDER EXECUTIVE ORDER 12372 PROCESS?

IS THE APPLICANT DELINQUENT ON ANY FEDERAL DEBT? (IF "YES", THEN PROVIDE EXPLANATION) c. Program is not covered by E.O. 12372

No Yes (please explain below) a. This application was made available to the state under Executive Order 12372 Process review on (date):

______________

b. Program is subject to E.O. 12372, but has not been selected by the state for review