Commercial Aviation: Issues Regarding Federal Assistance for Enhancing Air Service to Small Communities
Published: 2003-03-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Small communities have long faced challenges in obtaining or retaining the commercial air service they desire. These challenges are increasing as many U.S. airlines try to stem unprecedented financial losses through numerous cost-cutting measures, including reducing or eliminating service in some markets, often small communities. Congress will be considering whether to reauthorize its federal assistance programs for small communities. GAO was asked to describe the kinds of efforts that states and local communities have taken to enhance air service at small communities; federal programs for enhancing air service to small communities; and issues regarding the type and extent of federal assistance to enhance air service to small communities.
section_title: What GAO Found
paragraphs: Small communities have taken a variety of steps to try to obtain or improve air service, such as marketing to increase passengers' demand for local service or offering financial incentives to airlines to attract new or enhanced service. At communities GAO studied in depth, financial incentives were most effective in attracting new service. However, the additional service often ceased when incentives ended. The two key federal programs to help small communities with air service face increasing budgetary pressures and questions about their effectiveness. Demand for these programs is heavy and may increase as airlines reduce service to communities. The Essential Air Service program subsidizes carriers that provide air service to eligible small communities. However, program costs have tripled since 1995, and fewer passengers use the subsidized local service. Most choose to drive to their destination or to fly to and from another nearby airport with more service or lower fares. The Small Community Air Service Development Pilot Program, in its first year of operation, provided $20 million in grants to help small communities enhance service. Most programs funded appear similar to those undertaken by communities and may not result in sustainable service enhancements. Questions about the efficacy of these programs highlight issues regarding the type and extent of federal assistance for small community air service. Reauthorization provides an opportunity for the Congress to clarify the federal strategy for assisting small communities with air service.

section_title: Letter
paragraphs: Thank you for inviting us to testify today on the issue of air service at  small communities. These communities have long faced challenges in  obtaining or retaining the commercial air service they desire. These  challenges are increasing as many U.S. airlines try to stem unprecedented  financial losses through numerous cost-cutting measures, including  reducing or eliminating service in some markets. Small communities feel  such losses disproportionately because they may have service from only  one or two airlines. For them, reductions can mean no air service at all.
Over the past several years, we have issued a number of products  examining air service provided to small communities. These reports have  examined the use of regional jets, changes in the amount and type of  service that small communities receive, options to enhance the long-term  viability of the federal Essential Air Service (EAS) program, and efforts to  improve air service at small communities. In light of continuing concerns  about small community air service and upcoming opportunities for the  Congress to reauthorize federal assistance programs for small  communities, we would like to summarize some key elements of our  recent work. Today, my testimony addresses three topics: (1) the kinds of  efforts that states and local communities have taken to enhance air service  at small communities; (2) federal programs for enhancing air service to  small communities; and (3) issues regarding the type and extent of federal  assistance to enhance air service to small communities.
In recent years, states and local communities have undertaken a variety of  efforts to enhance their air service. Our analysis of these efforts at nearly  100 small communities found that they comprise three main types: studies  to evaluate potential markets, marketing efforts to increase consumer  demand, and financial incentives to encourage airlines to either start or  enhance air service. Financial incentives tended to offer the most promise  for attracting new or additional air service. However, once the incentives  ended, the additional service often ended as well. Longer-term  sustainability of these air service improvements appears to depend on the  community’s size and its ability to demonstrate a commitment to that air  service, either by providing a profitable passenger base or through direct  financial assistance.
The two key federal programs for helping small communities with air  service face increasing budgetary pressures and questions about their  effectiveness.     The EAS program, authorized under the Airline Deregulation Act of  1978, guarantees that small communities served before deregulation  continue to receive a certain level of scheduled air service. Its costs  have more than tripled since fiscal year 1995, and indications are that  without changes to the program, the demand for EAS subsidies will  soon exceed its $113 million appropriation. At the same time, aggregate  passenger levels at EAS-subsidized airports continue to fall. Often less  than 10 percent of a community’s potential passengers use the  subsidized local service; the rest choose to drive to their destination or  drive to a larger airport that offers lower fares or more frequent service  to more destinations. In 2000, the median number of passengers on  each EAS-subsidized flight was just three.
The Small Community Air Service Development Pilot Program (“Pilot  Program”), authorized as part of the Wendell H. Ford Aviation  Investment and Reform Act for the 21st Century (AIR-21), P.L. 106-181,  provides grants to communities to enhance local air service. In fiscal  year 2002, 180 communities (or consortia of communities) requested  over $142.5 million in air service development grants—more than seven  times the $20 million appropriated. The program funded some  innovative approaches, such as Mobile, Alabama’s, program to provide  ground handling services to an airline, but the majority of the grants  funded the same types of projects noted earlier—studies, marketing  activities, and financial incentives. If these communities experience the  same results as the other state and local efforts we identified, their  efforts are unlikely to attract new or enhanced service, or if they do,  the service will last only as long as these funds are available. However,  it is too early to evaluate the long-term effectiveness of these efforts.
Questions about the efficacy of the two federal programs highlight issues  regarding the type and extent of federal assistance for small community  air service. The EAS program appears to be meeting its statutory  objectives of ensuring air service to eligible communities, yet the program  has not provided an effective transportation solution to most travelers to  or from those communities. The Pilot Program also appears to have met  its statutory objective of assisting communities in developing projects to  enhance their access to the national air transportation system. Yet  whether any of the projects funded will prove to be effective at developing  sustainable air service is uncertain. Reauthorization provides an  opportunity for the Congress to clarify the federal strategy for assisting  small communities with commercial air service.
subsections: section_title: Background
paragraphs: The nation’s small community airports, while large in number, serve only a  small portion of the nation’s air travelers and face issues very different  from those of larger airports. Airports that are served by commercial  airlines in the United States are categorized into four main groups based  on the annual number of passenger enplanements—large hubs, medium  hubs, small hubs and nonhubs. In 2001, the 31 large hub airports and 36  medium hub airports (representing about 13 percent of commercial  service airports) enplaned the vast majority—89 percent—of the more  than 660 million U.S. passengers. In contrast, those normally defined as  small community airports —the 69 small hub airports and 400 nonhub  airports—enplaned about 8 percent and 3 percent of U.S. passengers,  respectively. There are significant differences in both the relative size and  type of service among these communities, as shown in Figure 1.
Officials from small communities served by small hub and nonhub airports  reported that limited air service is a long-standing problem. This problem  has been exacerbated by the economic downturn and events of September  11. Fundamental economic principles help explain the situation small  communities face. Essentially, these communities have a smaller  population base from which to draw passengers, which in turn means they  have limited potential to generate a profit for the airlines. Relatively  limited passenger demand, coupled with the fact that air service is an  inherently expensive service to provide, make it difficult for many such  communities to attract and keep air service.
The recent economic downturn and events of September 11 dealt a severe  financial blow to many major airlines, and the results of these losses can  be felt in even the smallest communities. United Airlines and US Airways  are in bankruptcy proceedings, and one Wall Street analyst is projecting  industry losses of $6.5 billion for 2003, the third straight year of multi- billion dollar losses. While major airlines often do not serve small  communities directly, many have agreements with smaller regional airlines  to provide air service to small communities. This provides feeder traffic  into the larger network. Consequently, financial problems for major  airlines and their resulting cost-cutting efforts may ultimately affect the air  service a small community receives.
Complicating the financial situation for both major and regional airlines is  the growing presence of low-fare airlines, such as Southwest Airlines.  Low-fare airlines’ business model of serving major markets, not small  communities, has helped these airlines better weather the economic  downturn. Airport officials have reported that these airlines’ low fares  attract passengers from a large geographic area, and many small airports  face significant “leakage” of potential local passengers to airports served  by low-fare airlines. In a March 2002 report, we found that almost half of  the nonhub airports studied were within 100 miles of a major airline hub  or an airport served by a low-fare airline, as illustrated in Figure 2.  Further, over half of the 207 small community airport officials we surveyed  said they believed local residents drove to another airport for airline  service to a great or very great extent. Eighty-one percent of them  attributed the leakage to the availability of lower fares from a major airline  at the alternative airport.
Local, state, and federal governments all play roles in developing and  maintaining air service for small communities. Air service is a local issue  because commercial airports in the United States are publicly-owned  facilities, serving both local and regional economies. Many state and local  governments provide funding and other assistance to help communities  develop or maintain local air service. The federal government has assisted  in developing air service both through the EAS program, which subsidizes  air service to eligible communities and the Pilot Program, which provided  grants to foster effective approaches to improving air service to small  communities. The assumption underlying these efforts is that connecting  small communities to the national air transportation system is both  fundamental for local economic vitality and is in the national interest.
The Administration’s budget proposal for fiscal year 2004 substantially  reduces funding for small community air service. The budget would  reduce EAS funding from $113 million in 2003 to $50 million in 2004 and  would change the program’s structure by altering eligibility criteria and  requiring nonfederal matching funds. The 2004 budget proposal does not  include funds for the Pilot Program.
section_title: Local and State Air Service Improvement Efforts Fall Into Three Main Categories, but Financial Assistance Has Proven Most Effective
paragraphs: Our recent review of nearly 100 small community air service improvement  efforts undertaken by states, local governments, or airports showed that  communities attempted three main categories of efforts (see Table 1):    studies, like those used by communities in Texas and New Mexico, to  determine the potential demand for new or enhanced air service;    marketing, like Paducah, Kentucky’s, “Buy Local, Fly Local” advertising  campaign, used to educate the public about the air service available or  Olympia, Washington’s, presentations to airlines to inform them about the  potential for new or expanded service opportunities; and  financial incentives, such as the “travel bank” program implemented by  Eugene, Oregon, in which local businesses pledged future travel funds to  encourage an airline to provide new or additional service.
Studies by themselves have no direct effect on the demand for or supply of  air service, but they can help communities determine if there is adequate  potential passenger demand to support new or improved air service.  Marketing can have a more direct effect on demand for air service if it  convinces passengers to use the local air service rather than driving or  flying from another airport. While the specific effect is difficult to  ascertain, an airport official from Shenandoah Valley, Virginia, pointed out  that his airport’s annual enplanements more than doubled—from 8,000 to  20,000—after a marketing and public relations campaign. Marketing the  airport to airlines may also have a direct effect on the supply of air service  if the efforts succeed in attracting new airlines or more service from  existing airlines.
Financial incentives most directly affected the level of air service provided  in the communities we studied. Financial incentives mitigate some of the  airline’s risk by providing some assurance about the financial viability of  the service. The incentives take a number of different forms, as shown in  Table 2. Some programs provided subsidies to airlines willing to supply  service. Some provided revenue guarantees, under which the community  and airline established revenue targets and the airline received payments  only if actual revenues did not meet targets.
Financial incentives can attract new or enhanced air service to a  community, but incentives do not guarantee that the service will be  sustained when the incentives end. We studied the efforts of 12  communities in detail, all but one of which used a financial incentive  program. Of these, five had completed their program but only Eugene,  Oregon, was able to sustain the new service after the incentive program  ended. At the other four—all nonhub airports smaller than Eugene—the  airline ceased service when the incentives ended.
However, while a community’s size is important, it is largely beyond a  community’s control. We identified two other factors, more directly within  a community’s control, that were also important for success. The first, the  presence of a catalyst for change, was particularly important in getting the  program started. The catalyst was normally state, community, or airport  officials who recognized the air service deficiencies and began a program  for change. More important to the long-term sustainability, however, was a  community consensus that air service is a priority. This second factor  involves recognizing that enhanced air service is likely to come at a price  and developing a way in which the community agrees to participate. At  many of the communities we studied, there was not a clear demonstration  of community commitment to air service.
section_title: Two Federal Programs Which Aid Small Communities Face Budgetary Pressures and Questions About Their Effectiveness
paragraphs: The two major federal efforts to help small communities attract or retain  air service are the EAS program and the Pilot Program. The Congress  established EAS as part of the Airline Deregulation Act of 1978, due to  concern that air service to some small communities would suffer in a  deregulated environment. The act guaranteed that communities served by  airlines before deregulation would continue to receive a certain level of  scheduled air service. If an airline cannot provide service to an eligible  community without incurring a loss, then the Department of  Transportation (DOT) can use EAS funds to award that airline, or another  airline willing to provide service, a subsidy. Funding for EAS was $113  million for fiscal years 2002 and 2003. The other major program, the Pilot  Program, was authorized as part of the Wendell H. Ford Aviation  Investment and Reform Act for the 21st Century (AIR-21). The Pilot  Program’s mission is to assist communities in developing projects to  enhance their access to the national air transportation system. The Pilot  Program differs from EAS because communities, not airlines, receive the  funds and the communities develop the program that they believe will best  address their air service needs. The Congress appropriated $20 million in  both fiscal years 2002 and 2003 for this effort.
subsections: section_title: EAS Costs Are Increasing but Passenger Usage Is Not
paragraphs: The EAS program costs have increased dramatically since 1995, but the  actual number of passengers using EAS-subsidized air service has  dropped. Total program funding increased from $37 million in 1995 to $113  million in 2002 (2002 constant dollars). Further, during this period of time,  the subsidy per community nearly doubled, from almost $424,000 to over  $828,000. However, the total passenger enplanements at EAS-subsidized  communities decreased about 20 percent (between 1995 and 2000) falling  from 592,000 to 477,000. As a result, the per passenger subsidy (for  continental U.S. communities) increased from $79 to an estimated $229 in  2002, a nearly 200-percent increase. Table 3 provides more information.
Two key factors will likely continue to increase EAS program costs in the  future. First, more communities may require subsidized service. As of  February 2003, the EAS program served 125 communities, up from the 114  served only 7 months earlier. Of these, 88 are in the continental United  States and 37 are in Alaska, Hawaii, and Puerto Rico. According to DOT  officials, more small communities will likely lose unsubsidized commercial  service in the future—especially those served by one airline. Some of these  communities could be eligible to receive an EAS subsidy. In October 2001,  there were 98 small communities being served by one carrier. Of the 98, 25  have smaller populations and lower levels of employment than the typical  EAS-subsidized community, 21 have lower levels of income per capita, and  35 have lower levels of manufacturing earnings. Second, EAS-subsidized  communities tend to generate limited passenger revenue because  surrounding populations are small and the few travelers generated in each  community tend to drive to their destinations or fly from other, larger  airports for lower airfares and improved service options. EAS community  airports may serve less than 10 percent of the local passenger traffic; over  half of the subsidized communities in the continental U.S. are within 125  miles of a larger airport. This low demand and “passenger leakage” to  other airports depress the revenue carriers can make from EAS routes,  making the program less attractive to airlines and increasing subsidy  costs.
There are clear questions about the EAS program’s effectiveness. In a  recent report on the EAS program, we outlined a number of options that  the Congress could consider to enhance the long-term viability of the  program. For example, one option was to target subsidized service to  more remote communities with fewer other transportation options.  Another option was to restructure or replace subsidies to airlines with  local grants. This could enable communities to better match their  transportation needs with locally available options. Some of the options  discussed in our report were incorporated in the Administration’s fiscal  year 2004 budget proposal.
section_title: Demand Is Heavy for Pilot Program Funds but It Is Too Early to Assess Program Effectiveness
paragraphs: In its first year of operation, small communities demonstrated an  extraordinary demand for air service development funds. DOT received  180 applications requesting over $142.5 million—more than seven times  the funds available—from communities in 47 states. By December 2002,  DOT had awarded nearly $20 million in grants to 40 small communities (or  consortia of communities). The grants ranged in amount from $44,000 to  over $1.5 million. Some of the grants are being used for such innovative  ideas as the following:    Mobile, Alabama, a small hub, received a grant of $457,000 to continue  providing ground handling service for one of its airlines. While this is a  common practice in Europe, a Mobile official told us that he is only aware  of one other airport in the United States that provides these services for an  airline.
Baker City, Oregon, received a grant of $300,000 to invest in an air taxi  franchise. Baker City has a small population and is in a fairly remote part  of Oregon that does not have scheduled airline service. The community  decided to pursue an alternative to scheduled service and purchased an air  taxi franchise from SkyTaxi, a company that provides on-demand air  service.
Casper, Wyoming, received a grant of $500,000 to purchase and lease back  an aircraft to an airline to ensure that the airline serves the community. It  is fairly unusual for a community to approach air service development by  purchasing an aircraft to help defray some of the airline’s costs and  mitigate some of the airline’s risk in providing the service.
However, the majority of these grants funded the same types of projects  discussed earlier—studies of a community’s potential market, marketing  activities to stimulate demand for service or to lure an airline, and  financial incentives such as subsidies to airlines for providing service. If  these communities experience the same results as the other state and local  efforts we identified, their efforts are unlikely to attract new or enhanced  service for the small communities using them, or if they do, the service  will only last as long as these funds are available.
Since final grant agreements were signed in December 2002, it is too early  to determine how effective the various types of initiatives might prove to  be. Additionally, some of the funded projects contain multiple components  and some are scheduled to be implemented over several years. Therefore,  it might be some time before DOT is able to evaluate the initial group of  projects to determine which have been effective in initiating or enhancing  small community air service over the long-term.
section_title: Implications for Future Federal Efforts to Assist Small Communities
paragraphs: As air service to small communities becomes increasingly limited and as  the national economy continues to struggle, questions about the efficacy  of those programs highlight issues regarding the type and extent of federal  assistance for small community air service.
The EAS program appears to be meeting its statutory objectives of  ensuring air service to eligible communities, yet the program clearly has  not provided an effective transportation solution for most travelers to or  from those communities. Subsidies paid directly to carriers support  limited air service, but not the quality of service that passengers desire,  and not at fares that attract local passenger traffic. As a result, relatively  few people who travel to or from some of these communities use the  federally-subsidized air service. Many travelers’ decisions to use  alternatives—whether another larger airport or simply the highway  system—are economically and financially rational.
Several factors—including increasing carrier costs, limited passenger  revenue, and increasing number of eligible communities requiring  subsidized service—are likely to affect future demands on the EAS  program. The number of communities that are eligible for EAS-subsidized  service is likely to increase in the near term, creating a subsidy burden that  could exceed current appropriations. Should the EAS program be fully  funded so that no eligible community loses its direct connection to the  national air transportation network? Should the EAS program be  fundamentally changed in an attempt to create a more effective  transportation option for travelers? In August 2002, we identified various  options to revise the program to enhance its long-term viability, along with  some of the associated potential effect.
The Pilot Program also appears to have met its statutory objective of  extending federal assistance to 40 nonhub and small hub communities to  assist communities in developing projects to enhance their access to the  national air transportation system. Yet whether any of the projects funded  will prove to be effective at developing sustainable air service is uncertain.  Relatively few communities offered innovative approaches to developing  or enhancing air service. Most of the initiatives that received federal grants  resembled other state or local efforts that we had already identified.  Evidence from those efforts indicated that some communities could  develop sustainable air service—but likely only small hub communities  that have a relatively large population and economic base. Among smaller,  nonhub communities, direct financial assistance to carriers was most  effective at attracting air service, but only as long as the financing existed.  If the Pilot Program is extended, will it essentially become another subsidy  program?
Reauthorization provides an opportunity for the Congress to clarify the  federal strategy for assisting small communities with commercial air  service. We believe that there may be a number of questions that need to  be addressed, including the following: What amount of assistance would  be needed to maintain the current federal commitment to both small hub  and nonhub airports? Would federal assistance be better targeted at  nonhub or small hub communities, but not both? Rather than providing  subsidies directly to carriers, should federal assistance be directed to  states or local communities to allow them to determine the most effective  local strategy? What role should state and local governments play in  helping small communities secure air service?
Mr. Chairman and members of the Subcommittee, this concludes my  statement. I would be pleased to answer any questions you or other  members of the Subcommittee might have.
section_title: Contact and Acknowledgment
paragraphs: For further information on this testimony, please contact JayEtta Hecker  at (202) 512-2834. Individuals making key contributions to this testimony  included Janet Frisch, Steve Martin, Stan Stenersen, and Pamela Vines.
section_title: Related GAO Products
paragraphs: Commercial Aviation: Factors Affecting Efforts to Improve Air Service  at Small Community Airports. GAO-03-330. Washington, D.C.: January 17,  2003.
Commercial Aviation: Financial Condition and Industry Responses  Affect Competition. GAO-03-171T. Washington, D.C.: October 2, 2002.
Options to Enhance the Long-term Viability of the Essential Air Service  Program. GAO-02-997R. Washington, D.C.: August 30, 2002.
Commercial Aviation: Air Service Trends at Small Communities Since  October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.  “State of the U.S. Commercial Airlines Industry and Possible Issues for  Congressional Consideration”, Speech by Comptroller General of the  United States David Walker. The International Aviation Club of  Washington: November 28, 2001.
Financial Management: Assessment of the Airline Industry’s Estimated  Losses Arising From the Events of September 11. GAO-02-133R.  Washington, D.C.: October 5, 2001.
Commercial Aviation: A Framework for Considering Federal Financial  Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001.
Aviation Competition: Restricting Airline Ticketing Rules Unlikely to  Help Consumers. GAO-01-832. Washington, D.C.: July 31, 2001.
Aviation Competition: Challenges in Enhancing Competition in  Dominated Markets. GAO-01-518T. Washington, D.C.: March 13, 2001.
Aviation Competition: Regional Jet Service Yet to Reach Many Small  Communities. GAO-01-344. Washington, D.C.: February 14, 2001.
Airline Competition: Issues Raised by Consolidation Proposals. GAO-01- 402T. Washington, D.C.: February 7, 2001.
Aviation Competition: Issues Related to the Proposed United Airlines-US  Airways Merger. GAO-01-212. Washington, D.C.: December 15, 2000.
Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, and  Passenger Traffic. GAO/RCED-00-34. Washington, D.C.: April 14, 2000.