# Montgomery

Regional Airport

Grant Application Under The



# Small Community Air Service Development Grant Program

DOCKET OST

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DUNS # 155618283 Congressional District #2Application of Montgomery Regional Airport

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# Proposal Contents

I. OVERVIEW OF THE M ONTGOMERY CHALLENGE

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S TATEMENT OF P ROBLEM

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2011: A S ERIOUS A IR S ERVICE D EFICIENCY

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T HE G RANT R EQUEST

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I MMEDIATE R ESULTS & E CONOMIC B ENEFITS

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A IRLINE T ARGETS

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P ROGRAM O VERVIEW

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N EED F OR G RANT S UPPORT

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G RANT A DMI NISTRATION

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P RIOR G RANT H ISTORY

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P AST A IR S ERVICE D EVELOPMENT A CTIVITIES

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P ROJECT S PONSOR

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II. MONTGOMERY MARKE T REVIEW

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MGM A IR S ERVICE

– C APACITY D OWN 14.5% S INCE 2004

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E NPLANEMENT H ISTORY

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T HE N UMBER O NE D EFICIENCY : A CCESS T O T HE O’H ARE G ATEWAY

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M ONTGOMERY F ARES

– S IGNIFICANTLY H IGHER

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III. OVERVIEW OF PRO POSAL

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T HE N EW A IR S ERVICE D EMANDS A T M ONTGOMERY

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G ENERAL A PPLICATION OF G RANT F UNDING

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T HE G RANT W ILL H ELP C REATE J OBS

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III. PROJECTIONS OF CHICAGO/O’HARE SERVI CE

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A IRLINE E XPENSE /R EVENUE P ERFORMANCE

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MGM

- ORD W ILL B E A SCASD S UCCESS

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IV. GRANT ADMINISTRA TION PLAN

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P ROGRAM F UND A LLOCATION

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T HE R ISK

- A BATEMENT P ROGRAM

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M ARKETING & A DVERTISING S UPPORT

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P OST

- G RANT S UPPORT

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V. SUMMARY OF APPLIC ATION

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## I. Overview of the Montgomery Challenge

Statement of Problem

In the past decade, Montgomery has emerged as one of the most vibrant

industrial centers in America. One of the reasons is the extensive investment made in the region by companies from not only the United States, but from Asia and Europe as well. In contrast to other regions, Montgomery, Alabama remains a vibrant example of economic growth.

However, this growth is dependent on viable and affordable air service. Due to changes in the airline industry, Montgomery has suffered material declines in both air service and in capacity. These have led to higher fares as well. The result is that the expanding US, Korean and Asian business base is experiencing reduced access to Montgomery. This is exacerbated by the congestion and delays at the region’s main portal, to the US and the globe, which is Atlanta.

20 11 : A Serious Air Service Deficiency

These growing deficiencies will be addressed by the implementation of access to Chicago/O’Hare, where both United and American operate

domestic and i nternational hubbing operations. The additional capacity this new service will provide will both reverse the declines in air access to MGM, as well as bringing much

- needed additional fare discipline to the market. This grant application is intended to prov ide revenue incentives to attract service from one of these carrier systems.

As an example of the air service challenges facing MGM , we can point to the average fares paid (including taxes) at both Birmingham and at Montgomery for the full year 2010:

The Grant Request

This grant application is intended to gain access to the Chicago/O’Hare hub of American or United, which will : a) provide needed new competition, b) reverse the capacity decline, c) provide some additional fare discipline, and d) recapt ure traffic leaking to ATL and BHM.

Montgomery is applying for a grant in the amount of $400,000, with a

hard

- dollar local match of 20%, resulting in a total program funding of $480,000. In addition, the Airport will negotiate other in

- kind support for Access to the global Chicago/O’Hare hub will address a range

of air service

deficiencies as well

as boost the MGM regional economy.Application of Montgomery Regional Airport

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th e carrier, depending if it is American (an incumbent) or United (a new

entrant.)

The veracity of Montgomery’s need to address this deficiency is underscored by the increasing delays, misconnections, and other operational problems at Atlanta Jackson

- Hartsfield International Airport. In fact, Hyundai Motors

– a major emp loyer in the region

- has advised repeatedly that these issues are becoming problematic in regard to that company’s future expansion plans in Alabama. This air service deficiency, therefore, is a serious economic issue.

Today, top

- tier jobs such as those generated by Hyundai are critical to the nation’s emergence from the current recession. The service that this grant will facilitate will help preserve and increase such employment in

Alabama.

Therefore, Montgomery Regional Airport and the Montgomery Area Chamber of Commerce hereby respectfully submit this application for a grant under the Small Community Air Service Development Program.

Immediate Results & Economic Benefits

The grant requested will successfully accomplish the following:

 Resolve A Clear Air Service Deficiency . Montgomery and its important global industries need to replace the capacity lost over the past five years as the airline industry has contracted.

 Engender New Investment . Atlanta being the current major gateway for MGM is increasin gly pro blematic to the economic growth of Alabama and to Montgomery. The problems of congestion, delays and misconnections at ATL are not going to be addressed in the near future. Opening access to O’Hare will give

immediate relief from this traffic bottle neck.

Airline Targets

As a practical matter, there are only two airline targets for this grant, American or United. Both are currently undergoing substantial strategic shifts that will not likely be completely addressed until late 2011:

 United , currently, is the r esult of the 2010 merger w ith Continental

. The fleet plan for this carrier is not fully determined, particularly in

the role of 50

- 66 seat jets, which are the airliners that are best

suited for the MGM

- ORD route.

 American is in the pro cess of spinning off its American Eagle subsidiary. It is clear that they are re

- structuring their regional feed system. It is believed that this situation will clarify by the end of the fourth quarter. The Airport and community are requesting a grant in

the amount of $400,000, with a 20%

hard

- dollar match, to

recruit American or United to implement

service to their gl obal hub at ORD.Application of Montgomery Regional Airport

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The grant will be used to recruit one o f these carri ers. It is uncerta in at this time which will be ready to negotiate first, but it will be by the end of

2011. This dovetails with the natural time lines of the 2011 SCASD

program.

The Airport would ask the Department’s indulgence in this issue. Analyses in dicate that either AA or UA will equally meet the community’s

needs.

Program Overview

The proposed grant will fund a mechanism that has been used successfully in many prior Small Community Air Service Development

Grants.

A structured agreement will determine exact cost and revenue projections for the service, with shortfalls

– if any

– determined after each three

month period. Specific requirements will be included regarding flight reliability, fare levels, and service quality.

A part of the $480,000 fund will be used to market and promote the new

service in the MGM service area. This will be accomplished by laser

focused electronic media, including e

- mail, social media, and direct contact with key travel generators in the region.

Need For Grant Support

The Department is well aware of the current difficult s ituation in the airline industry. Carriers today seek to avoid risk, and that includes situations that involve initiation of new service, even in markets where the traffic demand is high and the potential for success great.

Today, in light of the enormou s financial challenges facing the airline industry, some form of economic risk

- reduction must be in place to attract new service such as that which is proposed in this document. Preliminary

discussions with the carriers have made clear that such would be

n ecessary to attract this service.

Due to the low level of interest in risk

- taking on the part of the airline industry, the majority of the funds will be applied to a revenue risk offset program for the carrier.

Analysis by the Airport show a very strong demand for O’Hare service, and very strong flow traffic to/from both carrier’s route systems beyond ORD. However, the carriers are clear that without some form of revenue safety

- net, their interest in MGM

- ORD is very low.

The proposed program is for one year, and the majority of these funds will be applied to a revenue guarantee that will be drawn upon only if reasonable, pre

- determined traffic and revenue generation goals are not With jet

- A at $3 a gallon, airlines are not prone to gamble in opening new

markets to smaller

communities.

This grant will give the carrier a safety net in establishing

service to ORD.Application of Montgomery Regional Airport

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met. The community intends to have this program in effect for one year,

and any DOT revenue

- guarantee funds not used will be relinquished to the Department.

The community believes that this request fills both the intent and the spirit of Congress in implementing this program. The community has a pressing air service deficiency t hat is threatening to slow the strong economic growth in the Montgomery region.

Grant Administration

This application is submitted jointly by the Montgomery Regional Airport

and a community coalition led by the Montgomery Chamber of

Commerce. The community support for this application is broad and encompasses the entire business base of the region.

The unique community enthusiasm for business development that will support this new service is showcased by the growing investment in the region by Hyu ndai. The community competed with cities across the nation for this huge auto facility. It was the enthusiasm and drive of the business community that convinced this Korean conglomerate to invest in Montgomery. This local pride will assure that the new Chi cago service is a success, and that the Department’s grant dollars provide a solid air

service return on their investment.

Prior Grant History

The community was honored to have been awarded a Small Community Air Service Grant in 2005. The objective of th at grant was to support implementation of nonstop service to the Northwest Airlines hub at Detroit to better support the Alabama auto industry.

Unfortunately, a set of events precluded the ultimate use of the 2005 grant. At the bottom line, Northwest Air lines found itself in Chapter 11 bankruptcy and therefore in a contraction mode. As a result, the grant

was not utilized.

Past Air Service Development Activities

The airport and the community have worked very hard to retain existing

service and recruit n ew carriers to the market. In the very tough environment of the past five years, it has been a very difficult challenge.

Northwest Airlines service to Detroit

– which in 2004/2005 accessed a
strong auto

- related industry

– was very close to being recruited , thanks to the grant that the Department awarded the community. However, the difficulties that carrier encountered leading up to and after its Chapter 11 filing in 2005 shortstopped the Airport’s recruitment efforts.Application of Montgomery Regional Airport

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In 2009, the Airport was successful i n recruiting American Airlines (Eagle) flights to Dallas/Ft.Worth. This has helped fill the gap left when

Continental discontinued service to its Hous ton Intercontinental hub in

2008

.

The airport and the Chamber are continually reviewing the needs and

opp ortunities represented by the growth in the auto industry in the region. This application is one product of these studies. The access problems caused by the congestion at ATL will be greatly relieved with service to the global hub at O’Hare.

Project Spon sor

The official sponsor of this project is the Montgomery Airport Authority. The community partnership is a coalition of civic organizations led by the Montgomery Chamber of Commerce.

The community and the Airport appreciate the time and efforts of the Department in reviewing this application, and look forward to a favorable decision. Please direct any correspondence regarding this matter to

Mr. Phil Perry

Executive Director Montgomery Airport Authority 4445 Selma Highway Montgomery, Alabama 36108

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## I I. Montgomery Market Review

The air service market area of Montgomery Regional Airp ort comprises all or parts of 16 counties, with a population base of approximately 771,737 and a city population alone of 205,764 according to the 2010 census. The city itself experienced a growth of 2.1% between 2000 and 2010.

The role of Montgomery

– beyond that of being the capital of Alabama

– is a commercial center. Well situated at the intersection of Interstate 65 and Interstate 85, the community has experienc ed population and economic growth in the past decade.

But this strong location for manufacturing and logistic s also allows relatively easy access to much larger Birmingham and Atlanta, facilitating loss of passenger traffic to those airports. This grant a pplication is intended to implement service that will begin to materially reverse this

loss. The Hyundai factory

has established Montgomery as a global manufacturing

center.

This grant will

establish additional needed connectivity to MGM’s Asian city
partners.Application of Montgomery Regional Airport

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MGM Air Service

– Capacity Down 1 4. 5% Since 2004

Montgomery Regional Airport is currently accessed from the rest of the air transportation system via three air line systems providing service to four connecting hubs; Delta to Atlanta , American to Dallas/Ft. Worth, and US Airways to Charlotte. But seat capacity has steadily declined

– down almost 15 percent since 2005. In that year, it had service to five airline hub gateways. Today, it is just three.

Despite growth in both population and economic activity, changes in the airline industry have

resulted in MGM losing almost 15% of its seat capacity

since 2005.

The grant will be key to reversing this

trend.Application of Montgomery Regional Airport

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Enplanement History

In conjunction with declines in capacity, enplanements registered at Montgomery Regional Airport have not kept pace with the rapid economic growth and globalization of the industrial base.

Because of declining service levels, passenger traffic at MGM has yet to

recover to the levels of 2004 . This is solely due to airline industry capacity reductions. The new service to Chicago/O’Hare will reverse this trend.

The Number One Deficiency: Access To The O’Hare Gateway

One of the most glaring deficiencies in MGM air service is lack of nonstop service to the global hub at Chicago/O’Hare.

Montgomery’s economy is now heavily auto

- centric, yet there is limited

seats and access to the industrial centers in the US Midwest. Furthermore, there is a huge challenge in that Montgomery is closely tied to key Asian industrial points, such as Seoul, Tokyo, Shanghai, and Taipei by virtue of the Hyundai plant. There is a pressin g need for more access to these points. Both of the hubbing carriers at ORD (American and United) can provide this access.

The additional capacity that this service would add will bring more fare discipline into the MGM market, as well as substantially re duce travel time to important automotive centers in Illinois, Michigan, Wisconsin , and

Indiana. Business and leisure travel to/from points in the upper Midwest today entail a lot of extra flying for MGM

consumers.

Today, getting to Chicago requires flying almost 20%

more miles than a nonstop routing.Application of Montgomery Regional Airport

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Montgomery Fares

– Significantly Higher

Fares at MGM average significantly higher than at either Birmingham or at Atlanta. Below are average one

- way fares pa id, including federal fees and taxes in Montgomery’s top 15 O&D markets for 2010.

Only in a few markets are fares comparable to BHM, and in all cases

fares at ATL are much lower.

The addition of Chicago/O’Hare service, which this grant will make possible, will help address this cost imbalance that is resulting in strong leakage to both BHM and ATL. MGM consumers need to pony up an average of almost 30% more to fly out of the local airport.

Opening service to ORD will bring additional discipline

to airline pricing at

MGM.Application of Montgomery Regional Airport

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## I II . Overview of Proposal

The New Air Service Demands At Montgomery

Montgomery to day is one of the leading auto manufacturing centers in the world. The Hyundai facility is manufacturing more than 1300 vehicles per day, and employs more than 2600 . Including indirect employment (first

and second

- tier suppliers) the Hyundai investment has resulted in an

estimated 6000 jobs.

Korean

- based Hyundai Heavy Industries , a global leader in the heavy industries sector, announced it plans to build a manufacturing plant in Montgomery and held a ground breaking event in the Summer of 2010.

The facilit y, Hyundai Power Transformers USA, will be located in

Interstate Industrial Park. The facility is scheduled for completion in early 2012 and will employ 1000 . The plant will produce industrial transformers that weigh up to 500 tons and are used mostly by u tility companies.

Both companies are global industries and support jobs across the nation. To support these jobs, adequate and affordable air access is essential. Unfortunately, airlines have cut capacity and fares have literally skyrocketed. The new capa city that Chicago/ORD service can provide will be a major step in addressing both of these challenges.

Today, the need for US and global access for Montgomery is more critical than ever. Unfortunately, the main gateway remains the Delta Air Line ’ s hub at Atlanta Jackson

- Hartsfield International Airport. An important part

of the nation’s a ir transportation infrastructure, ATL remains congested and delay

- prone. Without question, access to another major global portal is necessary to assure that MGM has adequate air access and more reasonable fare levels from the rest of the nation and the glo be.

Furthermore, there is a substantial demand for nonstop service from Montgomery to the Chicago area

. T he data support s the contention that

such service will quickly become profitable on a fully

- allocated flight

sector basis.

General Application of Grant Funding

The grant requested in this application will be applied only to provide

assurances regarding the levels of revenue the target airline will attain, based on reasonable, pre

- negotiated passenger projections.

Fundamentally, this is not a s ubsidy

– if the revenue targets are met, no funds will be due the carrier. The program will simply provide a safety net to offset the airline’s legitimate initial risks in opening a new nonstop

market. This proposal is for a

risk

- abatement program, not an airline subsidy.

This approach has proven successful in many SCASD grant

awards across the

nation since 2002.Application of Montgomery Regional Airport

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This approach has been used successfully at a number of other small airports with the assistance of SCASD program grants. It will also be successful at Montgomery.

The Grant Will Help Create Jobs

Montgomery has seen enplanements fall during a period of unprecedented local economic growth. The reasons are clear: because of financial challenges in the airline industry, and not any factors in the MGM

economy, capacity has remained static. We can conclude the following

from this situation.

 Service Reductions : Capacity has been cut by almost 15% in the

last five years, in spite of the local economy growing strongly. Montgomery is an underserved market

.

 Fare levels compared to Birmingham and Atlanta (the two major sources of leakage from MGM) are much higher. This grant will be a major factor is applying far e discipline in the market

The lack of nonstop service to Chicago itself is a cause of leakage that this grant will address. Currently, the routing efficiency (the actual miles a consumer must fly, compared to nonstop flights) is only 81%. The need to

con nect through ATL or CLT is time

- consuming, expensive, and engenders additional leakage from MGM.

The Montgomery Airport Authority and the Montgomery Chamber of Commerce would respectfully submit that the Small Community Air Service Development Grant Progr am was designed to address this type of situation. It is further noted that the grant will result in materially

improved air service, with minimal risk to the scarce funds allocated by Congress to this program.Application of Montgomery Regional Airport

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## III. Projections of Chicago/O’Hare Service

Airline Expense/Revenue Performance

The route and market proformas accomplished by the Airport show that when fully developed, the MGM

- ORD market is clearly one that this grant can attract and make successful for both the community and for the

airline. Below are cost projections based on the 50

- seat ERJ

- 145 airc raft operated by American

– American Eagle. The data for 50

- seat CRJ airliners operated by the United system are nearly identical.

These data represent the market subsequent to the initial ramp period, which the grant is intended to address. The Ai rport would point out that the grant is intended only to reduce the risk level to encourage the carrier to enter the market. While these data reflect analyses of the American Airlines system distribution at O’Hare, the results from a review of the

United s ystem would not vary materially. Airlines are looking

for markets where the increasing costs of “regional” jets can be better supported.

The strong unmet

market demand at

MGM makes ORD

service a solution to that problem.Application of Montgomery Regional Airport

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MGM

- ORD Will Be A SCASD Success

The data compiled by the Airport clearly show that the Chicago

– Montgomery market meet the criteria set by congress in developing the Small Community Air Service Development Grant Program . This award will accomplish the following:

 It will address an immediate air service deficiency

 It will enhance economic development in the region

 It will incubate service that would help address a capacity shortage and have the effect of bringing more fare discipline into

the market.

The Airport and the Community respectfully ask the Department to review these compelling data, and give favorable consideration to a grant that will address a demonstrable air service deficiency at Montgomery.Application of Montgomery Regional Airport

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## IV. G rant Administration Plan

Program Fund Allocation

The program is intended primarily to provide a revenue guarantee to reduce the carrier’s initial risk in entering and building the Chicago route from Montgomery. In addition, there will be a local marketing effort that will engender local awareness and support for the new service.

The Risk

- Abatement Program

Montgomery Regional Airport and the community are in on

- going contact

with many carriers regarding new service opportunities . These include American and United. Upon favorable notification of grant award, the Airport will enter into substantive negotiation s with American Airlines to secure two daily nonstop Eagle flights to Chicago/O’Hare.

The Airport will propose the following, with the final agreement subject to Department approval:

 Provision for two daily ( with reduced week

- end) frequencies, timed

to c onnect with the carrier’s flight banks at ORD;

 A pre

- agreed per

- segment cost for the operation. This will include a fuel factor (escalator and deflator) and will be based on historical American Eagle (or alternatively, United Express) published costs

for ERJ (or CRJ) aircraft. The cost will include a reasonable profit hurdle to be agreed upon.

 It is understood that MGM

- ORD is not a market that is a long

- shot from potential profitability. The data definitely show that, with initial

risk

- offset in the start ing months, MGM

- ORD can be a strongly contributory route for either of the hubbing carriers (AA or UA) at Chicago. Therefore the period of the risk

- offset agreement will be for one year only, starting from the date of service initiation.

 Reliability is cr itical to the success of the service. Therefore, the agreement will include specific performance metrics. Schedule reliability: 98% controllable flight completion . On

- time arrivals

within 15 minutes of published schedule: 95%

. In addition to hard dollars, the community and the Airport offer a range

of non

- cash

incentives to attract

airlines.Application of Montgomery Regional Airport

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 Pricing dynamics will be driven by the market and by competing service options to Chicago and points served by the target carrier beyond OR D. However, the carrier must agree to price the service within the relative confines of service at other, similar markets at

ORD.

 The performance of the service, including reliability and passenger traffic, will be monitored by the Airport. The airline wi ll be required to provide revenue reports, including local ORD O&D and beyond traffic revenues, every three months subsequent to service

initiation.

 Risk

- abatement determination and settlement will be made at the

end of each three

- month period.

The Airport will seek DOT approval prior to any agreement with the target carrier under this grant.

Marketing & Advertising Support

The Community intends to implement an aggressive targeted program of advertising and marketing to assure that the new se rvice builds traffic quickly and with minimum draw on the revenue guarantee. These will

include:

 Pre

- Operational Media: A targeted program of newspaper and electronic media placement

– including targeted e

- mail and an aggressive social media program

- wil l begin 30 days prior to the

announced date of start

- up service. 1

 Community Outreach. There are only 100 daily departing seats envisioned in this program. Therefore the community outreach will be highly targeted on the specific industries that have a need for Chicago, Upper Midwest, and Asia access. These efforts will

include direct e

- mail, presentations at Chamber and other civic events, and liaison with the travel managers of key corporations in the MGM region.

1 This is now fairly close to a normal consumer booking window. Media placements earlier than is will

be diluted and ineffective. It has to be reliable,

or no funds.

The proposed agreement will entail specific performance requirements on the target carrier.Application of Montgomery Regional Airport

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Post

- Grant Support

Montgomery Regional Airport and the Montgomery Chamber of Commerce have a recognized program to support and build local businesses. This includes the carriers serving the Airport.

At the end of the grant period of one year, the new Chicago service will

c ontinue to receive aggressive marketing support in the community, as do all carriers at MGM. Therefore, the Department’s grant investment will be protected and enhanced into the future.Application of Montgomery Regional Airport

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## V. Summary of Application

The Montgomery Regional Airport believes that this application is consistent with the goals of the Small Community Air Service Development Grant Program.

 It meets the emer ging needs of the globalized MGM region

economy

– Access to ORD via either American or United will not only open up new access to the Midwest, but will give MGM

much

- needed new access to Asia. United’s nonstops to Tokyo have connectivity via its Haneda hu b. American has connectivity

over both Haneda and Narita via its one world Alliance relationship with Japan Air Lines. Both carriers have nonstops between Chicago and China.

 The ORD service will assist in recovering leakage to BHM and

ATL. The important l ocal MGM

- ORD traffic today involves a circuitous routing

– almost 20% more travel miles than nonstop flights. This literally drives consumers to use BHM and ATL.

 It will reduce the reliance on congested Atlanta Jackson

Hartsfield as the major gateway for Montgomery.

 It represents an opportunity for the target carriers. The Asian and other international traffic generated by MGM represent strong,

new net revenue streams for either of the target carriers.

 It will help to bring fare discipline to the MGM market. Today,

consumers at MGM are paying on average almost 30 % more than consumers at nearby Birmingham , resulting in significant leakage and lost economic impact to Montgomery.

Based on these data, the Airport would ask the department for favorable consideration to this application. The Airport and the community sin cerely appreciate the Department’s time

and efforts in reviewing this application.