Commercial Aviation: Status of Air Service to Small Communities and the Federal Programs Involved
Published: 2014-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Establishing and retaining reliable air service to small communities has been a challenge for decades. Communities seek access to air transportation services as a driver for attracting investment and generating employment. To incentivize service, Congress established two programs to help support air service to small communities—EAS and SCASDP. Airports are categorized by DOT's Federal Aviation Administration and described in terms of “hub” size based on the number of passengers served annually. Airports range from large hubs with at least 7.3 million passengers in 2012 to nonprimary airports with fewer than 10,000 passengers. Airports receiving subsidized EAS service are either nonhub or nonprimary, and SCASDP airports are small hub or smaller.
This testimony discusses (1) the airline industry factors affecting air service to small communities, (2) the federal programs and policies that support air service to small communities, and (3) other options for improving access to air service for these communities. The testimony is based on previous GAO reports issued from 2003 through 2014; analysis of industry data for years 2007 through 2013; and selected updates on EAS and SCASDP programs. To conduct these updates, GAO reviewed program documentation and interviewed DOT officials and industry representatives.
section_title: What GAO Found
paragraphs: Air service to small communities has declined since 2007 due, in part, to higher fuel costs and declining population, and for some communities, compounded by more attractive service (i.e., larger airports in larger cities) within driving distance. In fact, airports of all sizes have lost capacity in the number of available seats, and largely for flights as well. However, medium-hub and small-hub airports have proportionally lost more service than large-hub or nonhub airports (see figure).
The two primary programs, designed to help small communities retain air service, administered by the Department of Transportation (DOT), face challenges.
The Essential Air Service (EAS) program, which received about $232 million in 2013, provided subsidies to airlines that served 117 eligible non-Alaskan communities in 2013. For the most part, only airports in eligible communities that received EAS-subsidized service have experienced an increased number of flights since 2007. However, the service may not always be the most cost-effective option for connecting people to the national transportation network, and the total and per-community EAS subsidies have grown since 2008. Legislation to control costs was recently enacted which limited access to EAS, for example by changing eligibility requirements.
The Small Community Air Service Development Program (SCASDP) is a grant program to help small communities enhance air service at small-hub or smaller airports. DOT can award no more than 40 grants a year, thus SCASDP assists fewer communities than does EAS. Further, unlike EAS, funding for SCASDP—$6 million in 2013—has decreased since the program was created in 2002. Past reviews of SCASDP's effectiveness have found mixed success, with about half or less of the grants achieving their goals.
Multimodal and community-based approaches can be used to help small communities connect to the nation's transportation network. Multimodal solutions, such as bus access to larger airports or air taxi service, could be more cost-effective than current programs. In addition, some communities have had success with attracting air service through methods such as financial incentives and marketing support.

section_title: Letter
paragraphs: I appreciate the opportunity to testify before you today on the status of air  service to small communities in the United States and the current issues  affecting this service. Communities of all sizes seek access to air  transportation services as a driver for attracting investment and  generating employment and providing mobility for citizens. However, the  economics of the airline industry has traditionally made it difficult to  establish or sustain viable air service in smaller communities.
Many small communities have struggled with limited air service since  Congress deregulated commercial air service in 1978 to allow a  competitive market for passenger air service to develop. Since  deregulation, airlines have largely been free to decide where in the United  States they want to operate, how often they want to fly there, the type of  aircraft, and how much they want to charge. Small and rural communities  have found it difficult to retain and enhance their air service. Anticipating  this difficulty, Congress created the Essential Air Service (EAS) in 1978  and, later in 2002, the Small Community Air Service Development  Program (SCASDP)—both under the U.S. Department of Transportation  (DOT)—to help small communities maintain air service. Since 2000, the  overall aviation industry has experienced significant turmoil—including the  two economic downturns, the terrorist events of September 11, 2001, and  rising fuel costs—which has curtailed passenger demand and led to  numerous bankruptcies and restructurings. Although airline profitability  has rebounded over the last 4 years, fundamental changes in the industry  have added to small communities’ challenges in retaining or enhancing  their air service.
This testimony discusses (1) the airline industry factors affecting air  service to small communities, (2) the federal programs and policies that  support air service to small communities, and (3) other options for  improving access to air service for these communities. This statement is  drawn from several GAO reports issued since 2003, as well as additional  government, industry, and academic reports related to this topic. We have  updated the information related to our previous work on the EAS and  SCASDP programs through (1) a review of DOT’s documents and  interviews with appropriate DOT officials within the Office of Secretary of  Transportation (OST), (2) analysis of passenger enplanement and DOT’s  airline activity data for the period 2007 through 2013, and (3) interviews  with relevant industry stakeholder groups. Related GAO products are  footnoted throughout the statement. The reports and testimonies cited in  this statement contain more detailed explanations of the methods used to  conduct our work. DOT reviewed a draft of this statement and provided  technical comments, which we incorporated where appropriate.
The work upon which this testimony is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Air service in the United States is highly concentrated, with 88 percent of  all passenger boardings at the 62 large- or medium-hub airports (see fig.  1). Small airports refer to small-hub, nonhub, and commercial-service  nonprimary airports, each with less than 0.25 percent of all annual  passenger boardings, or less than 1.8 million total boardings in 2012.
Many small communities across the United States have access to the  more than 450 small airports with scheduled passenger service, provided  mostly by regional airlines that are under contract with mainline network  airlines, like Delta Air Lines or United Airlines. The airport categories in  figure 1 also determine the allocation of Airport Improvement Program  (AIP) grants for airport capital improvements. FAA awarded nearly $3  billion in grants to all airports in fiscal year 2013, for safety, capacity, and  environmental capital improvements. The grants offset the fees that  airports charge users, so they are critical for small airports hoping to  retain or attract airport users. For example, any airport with at least  10,000 passengers is assured at least $1 million in annual grant funding.
The EAS program has historically provided the most direct support to  small community air service. Anticipating that airlines would focus their  resources on generally more profitable, high-density routes, Congress  established the EAS program as part of the Airline Deregulation Act of  1978. Under the EAS program, if an airline cannot provide air service to  eligible communities without incurring a loss, DOT provides an airline a  subsidy to serve those communities. The program was initially enacted  for 10 years, it was then extended for another 10 years, and in 1996, the  10-year time limit was removed. Congress has, over time, revised  eligibility requirements, such as maximum subsidy amounts per  passenger, and operating requirements, such as providing service with  two-engine, two-pilot planes. The program now provides subsidies to  airlines to serve small airports that are (1) at least 70 driving miles from  the nearest medium- or large-hub airport, or (2) requires a per-passenger  EAS subsidy less than $200 unless such point is greater than 210 miles  from the nearest medium- or large-hub airport. The amount of subsidies  varies by location. Operating airlines receiving the subsidies must provide  direct service to a nearby medium- or large-hub airport so that  passengers can connect to the national air transportation network. Our  discussion of EAS in this testimony does not include communities in  Alaska receiving EAS-subsidized air service since the requirements for  communities in Alaska are different and are not representative of the  program in the rest of the country.
Congress also established SCASDP as a pilot program in 2000 in the  Wendell H. Ford Aviation Investment and Reform Act for the 21st Century  (AIR-21), to help small communities enhance their air service. AIR-21 authorized the program for fiscal years 2002 and 2003, and subsequent  legislation reauthorized the program through fiscal year 2008 and  eliminated the “pilot” status of the program. Further, the FAA  Modernization and Reform Act of 2012 reauthorized funding for SCASDP  through fiscal year 2015. The law establishing SCASDP allows DOT  considerable flexibility in implementing the program and selecting projects  to be funded. Grant funds can be used to cover various projects that can  be reasonably related to improving air service to the community, such as  any new advertising or promotional activities, or for studies to improve air  service and traffic. The law defines basic eligibility criteria and statutory  priority factors, but meeting a given number of priority factors does not  automatically mean DOT will select a project. SCASDP grants may be  made to single communities or a consortium of communities, although no  more than 40 grants may be awarded in a given year and no more than  four grants each year may be given in the same state.
section_title: The Airline Industry Is Adapting to Economic Pressures that Creates Challenges to Maintaining Air Service to Small Communities
subsections: section_title: Service to Small Communities Has Declined since 2007
paragraphs: Air service to small airports as measured by the number of flights and  seats available has mostly declined since 2007, but so has service to  airports of all sizes. Small airports generally serve small communities. As  figure 2 shows, medium-hub, small-hub, and nonhub airports saw the  largest net declines proportionally in flights and available seats since  2007, and the largest airports experienced the smallest declines. The  smallest airports—commercial service nonprimary airports—experienced  a slight increase in flights but a decline in available seats. Further,  according to a recent Massachusetts Institute of Technology (MIT) study,  23 airports in small communities lost all service between 2007 and  2012. Airports receiving EAS-subsidized air service saw about a 20- percent increase in flights and about an 8-percent increase in available  seats since 2007 as some regional airlines serving EAS communities  switched to smaller aircraft.
section_title: Economic Factors Have Contributed to the Decline in Service to Small Communities
paragraphs: The reduced capacity for airline service in the United States since 2007 is  attributable to a combination of factors, including higher costs, industry  consolidation, and the last recession, which reduced demand. These and  other factors also have had an effect on air service for small communities.
First, the price of jet fuel more than quadrupled from 2002 through  2012 in nominal terms and endured a temporary spike where the price  doubled over the 2007–2008 period. As a result of increased fuel  prices, fuel costs have grown to become airlines’ single largest  expense at nearly 30 percent of airline operating costs in 2012.  According to a study by MIT, regional aircraft—those mostly used to  provide air service to small communities with between 19 and 100  seats—are 40 to 60 percent less fuel efficient than the aircraft used by  their larger, mainline counterparts—those with more than 100 seats.
According to the study, fuel efficiency differences can be explained  largely by differences in aircraft operations, not technology, as the  operating costs per passenger for regional aircraft are higher than  mainline aircraft because they operate at lower load factors and are  flown fewer miles over which to spread fixed costs.
Second, many small communities have lost population over the last  30 years. In previous work, we have found that population movement  has decreased demand for air service to small communities.  Geographic areas, especially in the Midwest and Great Plains states,  lost population between 1980 and 2010, as illustrated in figure 3  below. As a result, certain areas of the country are less densely  populated than they were 35 years ago when Congress initiated the  EAS program. For small communities located close to larger cities  and larger airports, a lack of local demand can be exacerbated by  passengers choosing to drive to airports in larger cities to access  better service and lower fares.
The effect of industry consolidation on the level of service to small  communities is reflected in “capacity purchase agreements”— agreements between mainline airlines and their regional partners. Under  these agreements, a mainline airline pays the regional airline  contractually agreed-upon fees for operating certain flight schedules. In  recent years, according to a 2013 MIT study, mainline airlines have  shifted a larger percentage of their small community service to regional  airlines. However, according to another 2013 MIT study, these mainline  airlines have been reducing the total amount of capacity for which they  contract by eliminating previous point-to-point service between nearby  smaller airports, thus, reducing the level and frequency of service  provided.
section_title: Federal Programs and Policies Support Service to Small Communities but Face Challenges
paragraphs: Two federal programs continue to support air service to small  communities but also face some challenges. EAS provides subsidies to  operating airlines that provide air service to eligible communities in order  to maintain the service and SCASDP provides competitive grants to small  communities to attract and support local air service.
subsections: section_title: EAS Subsidies Are Increasing and Recent Program Changes Are Intended to Limit Eligibility
paragraphs: Subsidies provided to airlines serving EAS airports continue to increase.  In 2009, we found that EAS subsidies had increased over time.  Specifically, the average annual subsidy that DOT provided for EAS  service per community for U.S. states, excluding Alaska, almost doubled  from $1 million in 2002 to $1.9 million in 2013. In addition, the  appropriations Congress made available to EAS increased from about  $102 million in fiscal year 2003 to about $232 million in fiscal year 2013  (see table 1 below).  According to DOT, the appropriation for the EAS  program for fiscal year 2014 is $246 million.  to serve those communities. However, we have found that aircraft  serving airports that provide EAS service were far less full than aircraft  serving airports that did not receive such assistance. In 2009, we found  that planes serving airports in 2008 with EAS service were only about 37  percent full versus an industry average of about 80 percent. This was  due, in part, to EAS subsidized service not having the destinations,  frequency, or low fares that passengers prefer. Further, according to DOT  officials, the population around some of the very small airports is too low  to result in very high passenger loads. Since then, the load factor for  these flights—the percentage of available seats filled by paying  passengers—increased somewhat and was roughly 49 percent versus  the industry average of 83 percent in 2013. This may be due, in part, to  more regional airlines serving these EAS airports with smaller aircraft, as  a result of changes in the EAS program that we recommended in 2009.
The number of EAS communities being served by airlines with aircraft  smaller than 15-seats doubled from 2009 through 2013. In 2009, 16 EAS  communities were served using 9-seaters, but 32 EAS communities were  served with this aircraft in 2013. Great Lakes is one of the few remaining  regional airlines that flies 19-seat turboprops, while other small regional  airlines such as Cape Air, SeaPort, and Air Choice One—fly smaller 9- seat aircraft not subject to some FAA rules for operating scheduled  service flights.engine turboprop aircraft.)
section_title: Small Community Grants Have Had Limited Effectiveness in Retaining Air Service
paragraphs: Small-hub and smaller airports are eligible for SCASDP grants provided  the airport is not receiving sufficient air service or had unreasonably high  airfares. Congress has provided funding for SCASDP since fiscal year  2002—ranging from a high of $20 million for fiscal years 2002 through  2005 to a low of $6 million in fiscal years 2010 through 2013. In fiscal  year 2013, DOT awarded 25 grants totaling almost $11.4 million to  airports in 22 states (see table 2). While funding for SCASDP is  significantly less than funding for the EAS program, some small  community airports depend on SCASDP grant awards as a means to  stimulate economic development and attract business to the area  surrounding the airport through enhanced air service. According to DOT,  the appropriation for SCASDP for fiscal year 2014 is $5 million.
We and others who have examined SCASDP have observed that the  grant program has had limited effectiveness in helping small communities  retain air service. In 2005, we found that initial SCASDP projects  achieved mixed results.reported air service improvements were self-sustaining after their grant  had been completed. At that time, we recommended that DOT evaluate  the program again before the program was reauthorized.
Specifically, about half of the airports that  In response to our recommendation, the DOT Assistant Secretary for  Aviation and International Affairs requested the DOT Office of Inspector  General (OIG) to review the program’s effectiveness in improving air  service to small communities. The review included 40 grants awarded  between 2002 and 2006 (excluding feasibility studies) that had been  closed for 12 months or more as of March 31, 2007, and determined  whether the projects could sustain themselves without continued federal  financial support. The OIG found that 70 percent of the grants in the  review failed to fully achieve their objectives; specifically, 50 percent of  the grants were unable to achieve any of their articulated grant objectives  or were unable to sustain grant benefits beyond the grant completion and  20 percent were either partially able to obtain or achieve all of their grant  objectives or were voluntarily terminated. The remaining 30 percent of the  grants were successful in achieving their grant objectives and sustaining  the resulting benefits for at least 12 months. The OIG made  recommendations to improve the grant award process by (1) giving  priority to communities with better developed grant applications, (2)  requiring communities requesting non-marketing grants to use a part of  the funding awarded to them to implement a marketing program, and (3)  evaluating the impact of the “same project limitation” on program  effectiveness and seek legislative changes, if necessary. According to the  OIG’s report, DOT concurred with each of the recommendations and took  the appropriate actions to implement them. Most recently, an academic  study conducted by an MIT researcher evaluated 115 SCASDP grants  from 2006 through 2011 and found that less than 40 percent of the grants  met their primary objectives.
On the other hand, SCASDP grants have been used to fund some  successful projects. We found in 2005 and 2007 that SCASDP grantees  pursued a variety of goals and strategies for supporting air service, and  some of the grants resulted in successfully meeting their intended  purposes.variety of project goals and strategies to improve air service to their  community, including (1) adding flights, airlines, and destinations; (2)  lowering fares; (3) upgrading the aircraft serving the community; (4)  obtaining better data for planning and marketing air service; (5) increasing  enplanements; and (6) curbing the loss of passengers to other airports.  For example, our 2005 report found that 19 of the 23 completed grants  resulted in some kind of improvement in service, either in terms of an  added carrier, destination, flights, or change in the type of aircraft.
We found these successes include grantees that identified a  In 2007, we also found that a review of 59 grantees’ final reports for  completed projects indicated that 48 of these increased enplanements as  a result of their SCASDP grant. In addition, the 2008 DOT OIG report  found that grants targeting the introduction of new service rather than  expanding existing service were more successful and noted that grants  targeting existing service may be less likely to succeed because mature  markets may provide less of a growth opportunity than well-selected new  markets or may reflect attempts by communities to resuscitate a failing  service. Lastly, the recent MIT study highlighted three communities— Appleton, Wisconsin; Bozeman, Montana; and Manhattan, Kansas—that  were able to effectively use the grants to expand service in their  communities.
In addition, DOT program officials we interviewed highlighted other  benefits that have resulted from SCASDP grants that they said extend  beyond the completion dates of the grants. For example, the officials  stated that one recipient of a 2011 grant recently reported that simply  obtaining the federal grant allowed the community to obtain a line of credit  and prove to an airline that the grantee was able to support sustained and  profitable service, even though the federal grant funds were not  expended. In another example, the officials stated that one recipient of a  2002 grant reported in 2011 that while unable to establish air service prior  to receiving its grant, the grant enabled the community’s airport to  establish and sustain air service to the area and has resulted in  substantial economic benefits for the community.
section_title: Legislation, Regulations, and Airport Policies Affect Service to Small Communities
paragraphs: In addition to the federal programs previously discussed, other legislative  and regulatory policies could affect the provision of air service to small  communities.
Perimeter rules. Airlines operating out of Reagan National,  LaGuardia, and Dallas Love Field Airports are restricted in the  distance that they can travel. The purposes of these rules vary but  are intended, in part, to help encourage air service to smaller  communities closer to the airport. However, the restrictions at Dallas  Love Field will end later this year, and the number of exemptions to  the perimeter rule at Reagan National has increased.
Safety regulations. A new federal law that increased the qualification  requirements for pilots to be hired at U.S. airlines has caused some  concerns related to a potential future shortage of qualified pilots. In  July 2013, FAA, as required by law, issued a new pilot qualification  rule that increased the requirements for first officers who can fly for  U.S. passenger and cargo airlines and requires that first officers now  hold an airline transport pilot certificate, just as captains must hold,  requiring, among other things, a minimum of 1,500 hours of total time  as a pilot. Regional airlines—most likely to provide air service to  small communities—have been disproportionally affected by the new  rule because, prior to the new rule, more of their pilots did not meet  the new minimum qualifications compared to their larger, mainline  airline counterparts. Earlier this year, we found that 11 of the 12  regional airlines that were interviewed reported difficulties finding  sufficient numbers of qualified pilots over the past year. Furthermore,  five of these regional airlines reported to us that they were limiting  service to some smaller communities because they did not have pilots  available to provide that service. For instance, Great Lakes Airlines  recently canceled service to ten small communities reportedly due to  a lack of available pilots. Similarly, Silver Airways provided DOT with  the required notice of its intent to discontinue scheduled service to five  small communities reportedly for the same reason. However, given  that the congressional mandate to increase pilot qualifications for  airline pilots only recently went into effect, some market adjustments  are to be expected, and such adjustments could continue to affect air  service in smaller community markets.
section_title: Multimodal and Nongovernmental Transportation Options Could Help Small Communities
subsections: section_title: A Multimodal Approach Could Be Used to Connect Communities
paragraphs: In July 2009, we concluded that a multimodal approach—one that relies  on for example, bus service to larger airports or air taxi service to connect  communities—is an alternative to providing scheduled air-service  connectivity to small communities. For some communities that receive  EAS subsidies—for example, those that have limited demand for the  service due to proximity to other airports or limited population—other  transportation modes might be more cost effective and practical than  these subsidies. This approach may be of use to small communities that  have not been able to generate sufficient demand to justify the costs for  provision of air service, resulting in rising per-passenger subsidies.
When potentially cost-effective alternatives, such as bus service to other  airports, are not used, the costs of subsidies may be higher than  necessary to link these communities to the nation’s passenger aviation  system.
In 2009, we recommended that DOT assess whether other forms of air  service or other modes of transportation might better serve some  communities and at less cost. While DOT did not conduct such an  assessment, the department took action to implement the options we  identified in the report and achieved the intent of our recommendation.  Further, the Future of Aviation Advisory Committee—a committee that  provides information, advice, and recommendations to the Secretary of  Transportation on U.S. aviation industry competitiveness and capability to  address evolving transportation needs—recommended in 2011 that a  task force be established to examine the EAS program and identify rural  multimodal service opportunities for EAS-eligible communities, among  other things. Although no provisions have been enacted into law to  specifically promote intermodal alternatives to the EAS program, DOT (1)  convened a working group in 2011 to study this area and (2) added new  language to its SCASDP 2012 Request for Proposals, such language that  carried forward in the 2013 request, to clarify that intermodal solutions to  air service—for example, cost-effective bus service—are eligible for  grants. In 2009, we also suggested that Congress consider re-examining  EAS program’s objectives and statutory requirements to include the  possibility of assessing multimodal solutions for communities.  Considering options to the current EAS program, such as multimodal  transportation, may help Congress identify opportunities to limit the  financial strain on the EAS program.
section_title: Local Community Approaches to Attracting Air Service Have Had Some Success
paragraphs: GAO-06-21. under $100,000. However, according to DOT, this example would be  considered as a type of in-kind contribution, which is discussed below.
Marketing and advertising services—agreements whereby airports or  communities purchase the marketing or advertising on behalf of the  airline’s new service designed to build awareness for a new service  and develop demand so that the service can become self-sustaining.  Many small airports are located in multi-airport regions in which  passengers will drive long distances to nearby airports to save on  price, so such advertising is of increasing importance to attract  passengers to fly from their local airport. For example, according to  the 2009 TRB report, Huntsville, Alabama, used a SCASDP grant to  support its airport’s “Huntsville Hot Ticket” program that sent e-mail  fare alerts to customers when fare specials were announced, and  allowed customers to book tickets directly on the airport’s  flyhuntsville.com website.
Non-financial (in-kind) contributions—assistance referring to products,  goods, or services that otherwise might have to be paid for, but which  third-party providers can donate instead. For example, local  advertising firms may provide billboards or local media may provide  newspaper or TV coverage.
Each of these incentives has certain advantages and associated risks or  disadvantages, but more airports in smaller communities tend to use  revenue guarantees, likely because those communities recognize that  they need to share in the airlines’ financial risk of serving smaller markets.  However, few incentives tend to be undertaken as the only type of  incentive, that is, for example, revenue guarantees are usually combined  with other forms of incentives, such as cost or fee waivers. In addition,  given that the service may fail, the use of federal funds to support the  minimum revenue guarantees effectively requires the federal government  to share this potential risk. In its 2008 review of SCASDP, the DOT OIG  reported that airlines operating in small communities typically have limited  resources to invest in marketing designed to stimulate demand, and using  funds for marketing programs in support of other incentive programs— such as revenue guarantees or cost subsidies—can stimulate demand by  increasing awareness of airport services and mitigate “leakage” of  passengers to surrounding airports.
Chairman LoBiondo, Ranking Member Larsen, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact Gerald L.  Dillingham, Ph.D., at (202) 512-2834 or dillinghamg@gao.gov. In  addition, contact points for our Offices of Congressional Relations and  Public Affairs may be found on the last page of this statement. Individuals  making key contributions to this testimony statement include Paul  Aussendorf, Assistant Director; Cathy Colwell, Assistant Director; Vashun  Cole; Bonnie Pignatiello Leer; Joshua Ormond; and Amy Rosewarne. The  following individuals made key contributions to the prior GAO related work  include: Amy Abramowitz, Dave Hooper, John Mingus, and Sara Ann  Moessbauer.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.