Commercial Aviation: Programs and Options for Providing Air Service to Small Communities
Published: 2007-04-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress established two key programs to help support air service to small communities--the Essential Air Service (EAS) providing about $100 million in subsidies per year and the Small Community Air Service Development Program (SCASDP) that provides about $20 million per year in grants. As part of its reauthorization of the Federal Aviation Administration (FAA), the Congress is examining the status and outcomes of these programs. This testimony discusses (1) the history and challenges of the EAS program, (2) the implementation and outcomes of the SCASDP and (3) options for reforming EAS and SCASDP. The testimony is based on previous GAO reports, interviews with Department of Transportation officials and industry representatives as well as program updates.
section_title: What GAO Found
paragraphs: EAS subsidies support air service to many small communities that would likely not have service if EAS subsidies are discontinued. Since 1997, funding for EAS has increased from $25.9 million in 1997 to $109.4 million in 2007 and the number of communities has generally increased. The federal government is spending a median of about $98 per passenger, with subsidies ranging from about $13 to $677 per passenger. Concerns exist about the costs of the program, particularly given the federal government's long-term structural fiscal imbalance. In addition, according to industry representatives, the number of air carriers flying aircraft suitable for EAS communities may decrease, raising concerns about the availability of appropriate aircraft to provide small community air service in the future. SCASDP grantees have used their grants to pursue a variety of goals and have used a variety of strategies, including marketing and revenue guarantees, to improve air service. Our analysis of the 23 grants completed by October 1, 2005, found that air service was sustained after the grant expired in a little less than half of the projects. Finally, although the program has seen some success, the number of applications for SCASDP grants has declined--from 179 in 2002 to 75 in 2006. As we have reported, options for reforming EAS, such as consolidating service into regional airports might make the program more efficient, but also could reduce service to some communities. Further, Congress may be able to use some "lessons learned" from marketing and other successful SCASDP strategies that may help it make the current programs more effective.

section_title: Letter
paragraphs: We appreciate the opportunity to testify today on issues related to the  Essential Air Service (EAS) and Small Community Air Service  Development (SCASDP) programs. These are the principal federal  programs that have been established to provide air service to small and  underserved communities. Congressional deliberations on the  reauthorization of the Federal Aviation Administration (FAA) are an  opportune time to examine the status of federal air service to small and  rural communities. As you know, small community air service helps  connect small communities to other parts of the country and the world.  However, such service has struggled over the past decade. The aviation  industry has experienced financial losses in the last few years, though  some airlines improved their financial conditions in 2006. However, the  improvement in profitability of some airlines has not benefited small  communities that face decreases in the number of available seats and  scheduled flights. According to a key industry association, flights to small  communities are the first flights to be eliminated due to their limited  profitability. Specifically, in July 2006 scheduled flights for small  communities were 26 percent below the number of scheduled flights in  July 2000. This has challenged small communities to obtain adequate  commercial air service at reasonable prices.
Although both EAS and SCASDP are designed to help support air service  to small communities, the programs have several differences. EAS,  established as part of airline deregulation in 1978, is designed to ensure  that small communities that received scheduled passenger air service  before deregulation continue to have access to the nation’s air  transportation system. In fiscal year 2007, Congress appropriated about  $109.4 million for the Department of Transportation (DOT) for EAS. These  funds are essentially used to provide subsidies to air carriers who provide  service to small communities. For fiscal year 2008, the administration, as  part of its reauthorization proposal, requested $50 million for the program.  Congress established SCASDP in 2000 and has appropriated $20 million  annually from 2002 through 2005 and $10 million for 2006 and 2007 for  DOT to award up to 40 grants each year to communities that have  demonstrated air-service deficiencies or higher-than-average fares. For  fiscal year 2008, the administration did not request funds for SCASDP.
While federal programs to support air service to small communities face  increasing financial expenditures, the federal government’s financial  condition and long-term fiscal outlook have deteriorated. We have  reported on the nation’s long-term fiscal imbalances and the need for a  fundamental and periodic reexamination of the base of government,  ultimately covering discretionary and mandatory programs as well as the  revenue side of the budget. Furthermore, in January 2007, we identified  the challenges federal aviation programs are facing meeting growing  infrastructure demands and constrained resources as part of one of GAO’s  high risk areas—namely, financing the nation’s transportation system.  These federal fiscal constraints lead to difficult policy choices for the best  use of scarce resources.
In light of these challenges, part of my testimony today will discuss  options for reforming small community air service. But first, I will address  (1) the history and challenges of the EAS program and (2) the  implementation and outcomes of SCASDP. Then I will highlight (3)  options for reforming EAS and SCASDP. My statement is based in part on  the reports that we have issued related to these programs, in addition to  recent interviews with and data from key stakeholders. We obtained  information on the status of projects from the Office of the Secretary of  the Department of Transportation (OST) and obtained information on the  current issues in providing service to small communities from DOT and  industry representatives. Based on assessments conducted during  previous reviews, we concluded that the data are reliable for the purposes  of this testimony. Appendix IV contains a list of our related testimonies  and reports. We conducted our work on EAS from March through  December 2002 and our work on SCASDP from September 2004 through  October 2005 and updated information in April 2007 in accordance with  generally accepted government auditing standards.
EAS provides service to many communities that would otherwise not  receive air service. Without these subsidies, air service for many EAS  communities would likely end, since EAS air carriers have to prove that  they cannot serve EAS communities at a profit to be eligible for EAS  payments. However, costs and other concerns about the program exist. In  recent years, a growing number of communities have received subsidies  under EAS—expanding from 95 communities in fiscal year 1997 to 145 in  fiscal year 2007. Similarly, funding for EAS has risen over this 10-year  period—from $25.9 million in fiscal year 1997 to $109.4 million in fiscal  year 2007. The median expenditure per passenger is about $98; subsidies  to communities range from about $13 to $677 per passenger. While the  total number of communities has risen, communities do drop out of the  EAS program—some because their costs exceeded the program cap on  costs per passenger. Furthermore, industry and DOT officials have raised  concerns about the effect of the potential decrease in the number of air  carriers and smaller aircraft suitable for EAS communities on the future  EAS program. The limits on the federal budget, the increased costs along  with concerns about the future of air carriers and planes to serve small  communities, raise questions about ways to improve the program.
DOT has awarded 182 grants in the 5 years of the SCASDP program—74 of  these are currently completed. In our review of the 23 grants completed in  2005, we found that SCASDP grantees pursued a variety of goals and  strategies for supporting air service, and some completed grants have been  successful; however, the number of SCASDP grant requests has been  declining. The goals grantees are pursuing include trying to add flights and  destinations, or trying to obtain lower fares. The different strategies  grantees are employing to improve air service include offering subsidies or  revenue guarantees to airlines, marketing, and hiring personnel. We could  not assess the overall effectiveness of the program, since few projects had  been completed at the time; however, we found a little less than half had  resulted in a self-sustaining improvement to air service. In response to our  2005 recommendation, the Department of Transportation’s Inspector  General (DOT IG) began a review of completed grants in March 2007 at  DOT’s request. The results of this review should provide further  information on successful grants. Finally, although a number of  communities found the grants helpful in attaining self-sustaining service,  the number of applications for SCASDP has declined—from 179 in 2002 to  75 in 2006. According to officials we interviewed, fewer communities  might be applying due to a number of factors, including the fact that DOT’s  selection process favors communities that provide some matching funds  that some communities might not be able to fund.
We have reported on options for changing EAS to potentially make it more  efficient, including (1) targeting subsidized service to more remote  communities, (2) better matching capacity with community use, (3)  consolidating service to multiple communities into regional airports, and  (4) changing the form of the federal assistance from carrier subsidies to  local grants. Although these options might make the program more  efficient and less costly, they could also reduce service to some areas. In  addition, the 2003 Vision 100-Century of Aviation Reauthorization Act  (Vision-100) provided for a number of initiatives for the EAS program  including marketing grants and an initiative whereby communities who  forego their EAS subsidy for 10 years can get a grant for twice the amount  of one year’s EAS subsidy. These initiatives have not been implemented  due partly to a lack of interest from EAS communities and a lack of  dedicated funding. The administration’s FAA reauthorization proposal  would repeal some of these programs and initiatives. Regarding SCASDP,  as we recommended, the DOT IG is conducting an evaluation of completed  projects. The results of such an evaluation will be useful as Congress is  considering the reauthorization of this program and could result in  identifying “lessons learned” from successful projects. These lessons could  be shared with other small communities that are trying to improve air  service, and, if needed, to reform and refocus the program.
subsections: section_title: Background
paragraphs: Before I discuss these issues in detail, let me sketch the background of the  EAS and SCASDP programs.
Mr. Chairman, as you know, Congress established EAS as part of the  Airline Deregulation Act of 1978 to help areas that face limited service.  The act guaranteed that for 10 years communities served by air carriers  before deregulation would continue to receive a certain level of scheduled  air service by authorizing DOT to require carriers to continue providing  service at these communities. If an air carrier could not continue that  service without incurring a loss, DOT could then use EAS funds to award  that carrier a subsidy. In 1987, Congress extended the program for  another 10 years, and in 1998, it eliminated the sunset provision, thereby  permanently authorizing EAS.
To be eligible for this subsidized service, communities must meet three  general requirements. They (1) must have received scheduled commercial  passenger service as of October 1978, (2) may be no closer than 70  highway miles to a medium- or large-hub airport, and (3) must require a  subsidy of less than $200 per person (unless the community is more than  210 highway miles from the nearest medium- or large-hub airport, in which  case no average per-passenger dollar limit applies). Air carriers apply to  DOT for EAS subsidies. DOT selects a carrier and sets a subsidy amount to  cover the difference between the carrier’s projected cost of operation and  its expected passenger revenues, while providing the carrier with a profit  element equal to 5 percent of total operating expenses, according to  statute.
Funding for EAS has come from a combination of permanent and annual  appropriations. The Federal Aviation Reauthorization Act of 1996 (P.L.  104-264) permanently appropriated the first $50 million of such funding— for EAS and safety projects at rural airports—from the collection of  overflight fees.  Congress has appropriated additional funds from the  general fund on an annual basis. The Department of Transportation’s  reauthorization proposal suggests changing the source of program funding  to a mandatory appropriation of $50 million per year from the Airport and  Airway Trust Fund. A new, small aviation fuel tax would be used to  generate this $50 million. Furthermore, according to DOT officials, since  $50 million would not sufficiently support all currently subsidized service,  communities would be ranked in order of isolation, with Alaskan  communities at the top of the list. Thus, some of the EAS communities  currently receiving EAS subsidies under the roughly $100 million Congress  has appropriated in recent years, might no longer receive air service.
Turning now to SCASDP, Congress authorized it as a pilot program 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.
The Office of Aviation Analysis in DOT’s Office of the Secretary is  responsible for administering the program. The law establishing SCASDP  allows DOT considerable flexibility in implementing the program and  selecting projects to be funded. 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 four grants each year may be in the  same state. Both small hubs and non hubs are eligible for this program.  Thus, small hubs, such as Buffalo Niagara International Airport in Buffalo,  New York, which enplaned over 2.4 million passengers in 2005, and small,  nonhub airports, such in Moab, Utah (with about 2,600 enplanements) are  eligible. SCASDP grants are available in the 50 states, the District of  Columbia, Puerto Rico, and U.S. territories and possessions. DOT’s  SCASDP awards have been geographically dispersed.
Figure 1 shows the location of all SCASDP grants awarded as of August 31,  2006, as well as communities receiving EAS subsidies as of April 1, 2007.
section_title: The EAS Program Provides Service to Small Communities While Increasing EAS Subsidies Raise Concerns about the Cost and Efficiency of the EAS Program and Its Service Providers
paragraphs: Mr. Chairman, as you know EAS provides service to many communities  that otherwise would not receive air service. However, the increase in the  number of communities receiving subsidies and the cost of these subsidies  raise concerns over the funding needed to provide this service in an  environment of federal deficits. For example, the funding for EAS has  grown from $25.9 million in 1997 to $109.4 million in 2007. Furthermore,  the federal median subsidy for providing air service to EAS communities is  about $98 per passenger; the subsidies varied among communities from  about $13 to over $677 per passenger in 2006. Finally, the number of air  carriers flying smaller aircraft suitable for EAS communities may decrease  and some industry officials are beginning to voice concerns about the  availability of appropriate planes to provide small community air service  in the future.
subsections: section_title: EAS Provides Service to Many Communities Where Certain Factors Make Maintaining Service in Small Communities Difficult
paragraphs: In fiscal year 2007, EAS provided subsidies to 145 communities. In fiscal  year 2005, the most recent year for which passenger data is available, the  EAS program supported over 1 million passengers. As we have noted in  past reports, if EAS subsidies were removed, air service might end at many  small communities. Since air carriers have to show financial data to  support a subsidy calculation—proving the service is not profitable to  run—it is likely that if the subsidy is no longer available commercial air  service would end.
Several factors may help explain why some small communities, especially  nonhubs, face relatively limited air service. First, small communities can  become cost-cutting targets of air carriers because they are often a  carrier’s least profitable operation. Consequently, many network carriers  have cut service to small communities, replaced by regional carriers.  Second, the “Commuter Rule” that FAA enacted in 1995 brought small  commuter aircraft under the same safety standards as larger aircraft—a  change that made it more difficult to economically operate smaller  aircraft, such as 19-seat turboprops. For example, the Commuter Rule  required commuter air carriers that flew aircraft equipped with 10 or more  seats to improve ground deicing programs and carry additional passenger  safety equipment. Additionally, the 2001 Aviation and Transportation  Security Act instituted the same security requirements for screening  passengers at smaller airports as it did for larger airports, sometimes  making travel from small airports less convenient than it had been. Third,  regional carriers have used fewer turboprops in favor of regional jets,  which had a negative effect on small communities that have not generated  the passenger levels needed to support regional jet service. Finally, many  small communities experience passenger “leakage”—that is, passengers  choosing to drive longer distances to larger airports instead of using closer  small airports. Low-cost carriers have generally avoided flying to small  communities but have offered low fares that encourage passengers to  drive longer distances to take advantage of them.
section_title: Demand for EAS Subsidies Has Grown Over the Past Decade
paragraphs: Mr. Chairman, although less than the 405 communities served with the  help of EAS subsidies in 1980, the number of communities served by EAS  has grown over the past 10 years, as has the amount of funds appropriated  for the program. As shown in table 1, for fiscal year 2007, EAS is providing  subsidies to air carriers to serve 145 communities—an increase of 50  communities over the 1997 low point. The funding for EAS has also grown  from $25.9 million in 1997 to $109.4 million in 2007. Excluding Alaska, this  amounts to an average of about $754,500 per EAS community in fiscal year  2007. Appendix I lists EAS communities and their current subsidy  amounts.
While the total number of communities receiving service through EAS  subsidies has generally increased, some communities have dropped from  the program. For example, according to DOT officials 11 communities that  had EAS subsidized service in 2006 were no longer in the program in 2007.  Four of these were terminated by DOT because their subsidy rose above  the EAS cap—Bluefield, WV; Enid, OK; Moses Lake, WA; and Ponca City,  OK. Seven communities secured non-subsidized service. These  communities included Hana, HI; Kalaupapa, HI; Kamuela, HI; Pierre, SD;  Riverton, WY; Rock Springs, WY; and Sheridan, WY.
section_title: EAS Subsidies Vary In Relation to Numbers of Passengers
paragraphs: The level of subsidy per passenger at EAS communities varies greatly. At  some locations, the level of subsidy per passenger is modest. For example,  in 2006, of the 110 airports receiving EAS service for which data were  available, 30 communities had subsidies of less than $50 per passenger.  Some communities with relatively low subsidies per passenger included  Escanaba, MI ($12.96) and Morgantown, WV ($13.68) both with almost 36  passengers per day. In contrast, 30 communities also had subsidies per  passenger greater than $200. The highest subsidy at that time was $677 for  Brookings, SD, and Lewistown, MT had an average subsidy of almost $473.  These two areas had fewer than 3 passengers per day. Airports may  maintain EAS service when subsidies exceed $200 dollars if they are more  than 210 highway miles from a large or medium hub.
As would be expected, a low number of passengers are associated with  high subsidies. Of the 110 airports receiving EAS service for which data  were available, 17 airports had fewer than 5 passengers per day. Such  airports typically have a subsidy per passenger greater than $200—15 of  the 17 exceed the $200 threshold. Communities with less than 5  passengers per day also constitute half those with subsidies exceeding  $200 (15 of 30). In contrast, 47 communities had at least 20 passengers per  day, more than the capacity of a single 19-seat aircraft flight. All 47 of  these airports had subsidies of less than $100 per passenger. See Appendix  II for EAS Subsidies per Enplanement.
section_title: Future Approach to EAS Service Uncertain Due to Changes in Air Carriers and Equipment
paragraphs: DOT and industry officials we interviewed raised questions about the  future of the EAS service as currently provided. As of April 1, 2007, 12  regional air carriers served the subsidized communities in the continental  United States. The carriers serving the communities in the continental  United States typically used turboprop aircraft seating 19 passengers,  whereas in Alaska and Puerto Rico, the most commonly used aircraft  seated 4 to 9 passengers.
DOT and industry officials pointed out that 19-seat aircraft are no longer  being manufactured, and some of the current EAS carriers appear to be  migrating to the use of larger aircraft. DOT officials noted that EAS  carriers are getting out of the business that uses 19-seat aircraft, and are  moving into larger aircraft. In addition, industry consultants noted that as  the current fleet of 19-seat aircraft ages, maintenance costs will likely rise,  which will make operating 19-seat aircraft more expensive. Because 19- seat aircraft are the backbone of EAS service in the contiguous 48 states,  their aging or discontinuation would significantly affect the program.  Figure 2 shows an example of a 19-seat Turbo Prop aircraft commonly  used to provide EAS service.
Finally, DOT and industry officials with whom we spoke were not  convinced that the emerging technology of Very Light Jets (VLJs) could fill  this gap, especially in the short term. They noted that current business  models discussed for VLJs did not anticipate their use for the kind of small  communities served by EAS. DOT did provide a SCASDP grant to  Bismarck, ND for developing a business model for point to point,  reservation responsive air service using VLJs. The grantee has developed  the business plan; however, given the lack of operating VLJs, they changed  the type of aircraft the business would use until the aircraft become more  available. We will be completing a more comprehensive report on VLJs for  the subcommittee later this year.
section_title: The Small Community Grant Program Has Funded Some Successful Projects
paragraphs: Mr. Chairman, we found that SCASDP grantees pursued several goals and  strategies to improve air service, and that air service was sustained after  the grant expired in a little less than half of the 23 completed projects in  2005—the time of our initial review. The DOT IG’s office began reviewing  completed grants in March 2007 which should provide more information  on the results of completed grants. Although the program has seen some  success, the number of applications for SCASDP grants has declined for a  variety of reasons.
subsections: section_title: SCASDP Grants Show Promise and Warrant Further Evaluation
paragraphs: At the time of our initial review of SCASDP, in 2005, it was too soon to  determine the overall effectiveness of the program because there was not  much information available about the “post” grant period. Once awarded,  it may take several years for grants to be implemented and completed.  There have been 182 grant awards made in the 5 years of the program. Of  these, 74 grants are completed as of April 1, 2007—34 from 2002, 19 from  2003, and 21 from 2004. No grants from 2005 or 2006 are yet completed. In  addition, as of April 4, 2007, DOT had terminated seven grants it initially  awarded. See Appendix III for a list of all SCASDP grants from 2002  through 2006.
Our review of the 23 projects completed by September 30, 2005, found  some successful results. The kinds of improvements in service that  resulted from the grants included adding an additional air carrier,  destination, or flights; or changing the type of aircraft serving the  community. In terms of numbers, airport officials reported that 19 of the  23 grants resulted in service or fare improvements during the life of the  grant (see fig.3). In addition, during the course of the grant, enplanements  rose at 19 of the 23 airports. After the 23 SCASDP grants were completed,  14 resulted in improvements that were still in place. Three of these  improvements were not self-sustaining; thus 11 self-sustaining  improvements were in place after the grants were completed.
Since our review of the 23 completed projects, 51 more have been  completed for a total of 74. We reviewed the fifty-nine available final  reports. A review of the grantees’ final reports for these projects indicated  that 48 increased enplanements as a result of their SCASDP grant.
For SCASDP grants DOT awarded from 2002 though 2004, we surveyed  airport officials to identify the goals they had for their grants. We found  that grantees had identified a variety of project goals to improve air  service to their community. These goals included adding flights, airlines,  and destinations; lowering fares; upgrading the aircraft serving the  community; obtaining better data for planning and marketing air service;  increasing enplanements; and curbing the loss of passengers to other  airports. (See fig. 4 for the number and types of project goals identified by  airport directors.)
Finally, in our 2005 report, we recommended DOT evaluate the SCASDP  grants after more were completed to identify promising approaches and  evaluate the effectiveness of the program. DOT officials told us that they  asked the DOT IG to conduct such a study, which the IG began in March  2007. DOT expects to have preliminary observations available by the  middle of May. Results from this work may help identify potential  improvements and “lessons learned.”
section_title: Grantees Used Many Strategies to Improve Air Service in Their Communities
paragraphs: To achieve their goals, grantees have used many strategies, including  subsidies and revenue guarantees to the airlines, marketing, hiring  personnel and consultants, and establishing travel banks in which a  community guarantees to buy a certain number of tickets. (See fig. 5.) In  addition, other strategies that grantees have used are subsidizing the start- up of an airline, taking over ground station operations for an airline, and  subsidizing a bus to transport passengers from their airport to a hub  airport. Incorporating marketing as part of the project was the most  common strategy used by airports. Some airline officials said that  marketing efforts are important for the success of the projects. Airline  officials also told us that projects that provide direct benefits to an airline,  such as revenue guarantees and financial subsidies, have the greatest  chance of success. According to these officials, such projects allow the  airline to test the real market for air service in a community without  enduring the typical financial losses that occur when new air service is  introduced. They further noted that, in the current aviation economic  environment, carriers cannot afford to sustain losses while they build up  passenger demand in a market. The outcomes of the grants may be  affected by broader industry factors that are independent of the grant  itself, such as a decision on the part of an airline to reduce the number of  flights at a hub.
section_title: The Number of Grant Applications Has Declined
paragraphs: Since the inception of the program, there has been a steady decline in the  number of applications. In 2002 (the first year SCASDP was funded) DOT  received 179 applications for grants; and by 2006 the number of  applications had declined to 75. Grant applications for 2007 are not due  until April 27, 2007. According to a DOT official, almost all applications  arrive on the last day, so the number of 2007 applications cannot be  estimated at this time. DOT officials said that the past decline was, in part,  a consequence of several factors, including: (1) many eligible airport  communities had received a grant and were still implementing projects at  the time; (2) the airport community as a whole was coming to understand  the importance DOT places on fulfilling the local contribution  commitment part of the grant proposal; and (3) statutory changes in 2003  that prohibited communities or consortiums from receiving more than one  grant for the same project, and that established the timely use of funds as  a priority factor in awarding grants. According to DOT officials, DOT has  interpreted that a project is the “same project” if it employs the same  strategy. For example, once a community has used a revenue guarantee, it  cannot use a revenue guarantee on another project.
A DOT official noted that, with many communities now completing their  grants, they may choose to apply for another grant. Some communities  have received second grants; however DOT officials indicate first time  applicants get more weight in the grant selection process. Revisiting  selection criteria may increase the access to SCASDP grants and increase  service to small communities.
section_title: Options Exist for Reforming EAS and Evaluating SCASDP
paragraphs: Mr. Chairman, let me now turn to a discussion of options both for the  reform of EAS and the evaluation of SCASDP. I raise these options, in part,  because they link to our report on the challenges facing the federal  government in the 21st century, which notes that the federal government’s  long-term fiscal imbalance presents enormous challenges to the nation’s  ability to respond to emerging forces reshaping American society, the  United States’ place in the world, and the future role of the federal  government. In that report, we call for a more fundamental and periodic  reexamination of the base of government, ultimately covering  discretionary and mandatory programs as well as the revenue side of the  budget. In other words, Congress will need to make difficult decisions  including defining the role of the federal government in various sectors of  our economy and identifying who will benefit from its allocation of  resources. Furthermore, given that we have reported that subsidies paid  directly to air carriers have not provided an effective transportation  solution for passengers in many small communities, these programs may  be ones for which Congress may wish to weigh options for reforming EAS  and assess SCASDP’s effectiveness once DOT completes its review of the  program.
subsections: section_title: Examine Options for Enhancing EAS
paragraphs: In previous work, we have identified options for enhancing EAS and  controlling cost increases. These options include targeting subsidized  service to more remote communities than is currently the case, improving  the matching of capacity with community use, consolidating service to  multiple communities into regional airports, and changing the form of  federal assistance from carrier subsidies to local grants; all of these  options would require legislative changes. Several of these options formed  the basis for reforms passed as part of Vision-100. For various reasons  these pilot programs have not progressed, so it is not possible to assess  their impact. Let me now briefly discuss each option, stressing at the  outset that each presents potential negative, as well as positive, impacts.  The changes might positively affect the federal government through  lowered federal costs, and participating communities through increased  passenger traffic at subsidized communities, and enhanced community  choice of transportation options. Communities that could be negatively  affected might include those in which passengers receive less service or  might lose scheduled airline service.
subsections: section_title: Targeting Subsidized Service to More Remote Communities
paragraphs: One option would be to target subsidized service to more remote  communities. This option would mean increasing the highway distance  criteria between EAS-eligible communities and the nearest qualifying  airport, and expanding the definition of qualifying nearby airports to  include small hubs. Currently, to be eligible for EAS-subsidized service, a  community must be more than 70 highway miles from the nearest medium-  or large-hub airport. In examining EAS communities, we found that, if the  distance criterion were increased to 125 highway miles and the qualifying  airports were expanded to include small-hub airports with jet service, 55  EAS-subsidized communities would no longer qualify for subsidies—and  travelers at those communities would need to drive to the nearby larger  airport to access air service.
Limiting subsidized service to more remote communities could potentially  save federal subsidies. For example, we found that about $24 million  annually could be saved if service were terminated at 30 EAS airports that  were within 125 miles of medium- or large-hub airports. This estimate  assumed that the total subsidies in effect in 2006 at the communities that  might lose their eligibility would not be obligated to other communities  and that those amounts would not change over time. On the other hand,  the passengers who now use subsidized service at such terminated  airports would be inconvenienced because of the increased driving  required to access air service at the nearest hub airport. In addition,  implementing this option could potentially negatively impact the economy  of the affected communities.
The administration’s reauthorization proposal also would prioritize  isolated communities, but in a somewhat different way. Under its  approach, if insufficient funding for all communities exists, the  communities would be ranked in terms of driving distance to a medium or  large hub, with the more isolated communities receiving funding before  less isolated communities. This change would protect isolated  communities, but could result in subsidies being terminated for  communities with relatively low per passenger subsidies.
section_title: Better Matching Capacity with Community Use
paragraphs: Another option is to better match capacity with community use. Our past  analysis of passenger enplanement data indicated that relatively few  passengers fly in many EAS markets, and that, on average, most EAS  flights operate with aircraft that are largely empty. In 2005, the most recent  year for which data are available, 17 EAS airports averaged fewer than 5  passenger boardings per day. To better match capacity with community  use, air carriers could reduce unused capacity—either by using smaller  aircraft or by reducing the number of flights.
Better matching capacity with community use could save federal  subsidies. For instance, reducing the number of required daily subsidized  departures could save federal subsidies by reducing carrier costs in some  locations. Federal subsidies could also be lowered at communities where  carriers used smaller—and hence less costly—aircraft. On the other hand,  there are a number of potential disadvantages. For example, passenger  acceptance is uncertain. Representatives from some communities, such as  Beckley, West Virginia, told us that passengers who are already somewhat  reluctant to fly on 19-seat turboprops would be even less willing to fly on  smaller aircraft. Such negative passenger reaction may cause more people  to drive to larger airports—or simply drive to their destinations.  Additionally, the loss of some daily departures at certain communities  would likely further inconvenience some passengers. Lastly, reduced  capacity may have a negative impact on the economy of the affected  community.
section_title: Consolidating Subsidized Service Provided to Multiple Communities into Service at Regional Airports
paragraphs: Another option is to consolidate subsidized service at multiple  communities into service at regional airports. For example, in 2002 we  found that 21 EAS subsidized communities were located within 70  highway miles of at least one other subsidized community. We reported  that if subsidized service to each of these communities were regionalized,  10 regional airports could serve those 21 communities.
Regionalizing service to some communities could generate federal savings.  However, those savings may be marginal, because the total costs to serve a  single regional airport may be only slightly less than the cost to serve other  neighboring airports. The marginal cost of operating the flight segments to  the other airports may be small in relation to the cost of operating the first  flight. Another potential positive effect is that passenger levels at the  proposed regional airports could grow because the airline(s) would be  drawing from a larger geographic area, which could prompt the airline(s)  to provide better service (i.e., larger aircraft or more frequent departures).
There are also a number of disadvantages to implementing this option.  First, some local passengers would be inconvenienced, since they would  likely have to drive longer distances to obtain local air service. Moreover,  the passenger response to regionalizing local air service is unknown.  Passengers faced with driving longer distances may decide that driving to  an altogether different airport is worthwhile, if it offers better service and  air fares.
As with other options, the potential impact of regionalization on the  economy of the affected communities is unknown. Regionalizing air  service has sometimes proven controversial at the local level, in part  because regionalizing air service would require some communities to give  up their own local service for the potentially improved service at a less  convenient regional facility. Even in situations where one airport is larger  and better equipped than others (e.g., where one airport has longer  runways, a superior terminal facility, and better safety equipment on site),  it is likely to be difficult for the other communities to recognize and accept  surrendering their local control and benefits. Some industry officials to  whom we spoke indicated regional airports made sense, but selecting the  airports would be highly controversial.
section_title: Changing Carrier Subsidies to Local Grants
paragraphs: Another option is to change carrier subsidies into local grants. We have  noted that local grants could enable communities to match their  transportation needs with individually tailored transportation options to  connect them to the national air space system. As we previously  discussed, DOT provides grants to help small communities to enhance  their air service via SCASDP.
Our work on SCASDP identified some positive aspects of the program that  could be beneficial for EAS communities. First, for communities to receive  a SCASDP grant, they had to develop a proposal that was directed at  improving air service locally. In our discussion with some of these  communities, it was noted that this approach required them to take a  closer look at their air service and better understand the market they  serve—a benefit that they did not foresee. In addition, in some cases  developing the proposal caused the airport to build a stronger relationship  with the community. SCASDP also allows for flexibility in the strategy a  local community can choose to improve air service, recognizing that local  facts and circumstances affect the chance of a successful outcome. In  contrast, EAS has one approach—a subsidy to an air carrier.
However, there are also differences between the two programs that make  the grant approach problematic for some EAS communities; these  differences should be considered. First, because SCASDP grants are  provided on a one-time basis, their purpose is to create self-sustaining air  service improvements. The grant approach is therefore best applicable  where a viable air service market can be developed. This viability could be  difficult for EAS communities to achieve because, currently, the service  they receive is not profitable unless there is a subsidy. While some EAS  communities might be able to transition to self-sustaining air service  through use of one of the grants, for some communities this would not be  the case. Such communities would need a new grant each year. In  addition, the grant approach normally includes a local cash match, which  may be difficult for some EAS communities to provide. This approach  could systematically eliminate the poorest communities, unless other  sources of funds—such as state support or local industry support—could  be found for the match, or some provision for economically distressed  communities is made.
section_title: Vision-100 Small Community Pilot Programs and Initiatives Have Not Progressed
paragraphs: Congress authorized several pilot programs and initiatives designed to  improve air service to small communities in Vision-100. These programs  and initiatives have not progressed for various reasons. In two cases,  communities have not indicated interest in the programs. In one instance  Congress decided to prevent DOT from implementing the program. In  three cases, DOT officials cited a lack of sufficient funds to implement the  programs.
Vision-100 authorized the Community Flexibility Pilot Program, which  requires the Secretary of Transportation to establish a program for up to  10 communities that agree to forgo their EAS subsidy for 10 years in  exchange for a grant twice the amount of one year’s EAS subsidy. The  funds may be used to improve airport facilities. DOT has solicited  proposals for this program; however, according to a DOT official, no  communities expressed any interest in participating. This is likely because  no community was willing to risk the loss of EAS subsidies for 10 years in  exchange for only 2 years of funding. Likewise, the Alternate Essential Air  Service Pilot Program, which allows the Secretary of Transportation to  provide assistance directly to a community, rather than paying  compensation to the air carrier, elicited no interest from communities.  Under the pilot program, communities could provide assistance to air  carriers using smaller aircraft, on-demand air taxi service, provide  transportation services to and from several EAS communities to a single  regional airport or other transportation center, or purchase aircraft.  The  administration’s draft FAA reauthorization bill would repeal these pilot  programs.
Another program, the EAS Local Participation Program, allows the  Secretary of Transportation to select no more than 10 designated EAS  communities within 100 miles, by road, of a small hub (and within the  contiguous states) to assume 10 percent of their EAS subsidy costs for a 4- year period. However, Congress has prohibited DOT from obligating or  expending any funds to implement this program since Vision-100 was  enacted. The administration’s draft FAA reauthorization bill would repeal  this pilot program.
Three additional initiatives authorized by Vision-100 have not been  implemented, in part due to a lack of dedicated funding. Section 402 of  Vision-100 allows DOT to adjust carrier compensation to account for  significantly increased costs to carriers. For example, an air carrier that  has a contract to provide air service can apply for an adjustment due to an  increase in its costs. If this increase is granted, the air carrier has  increased its revenue without having to competitively bid for the contract.  The initiative also provided for a reversal of this adjustment if the costs  subsequently declined. DOT officials indicated that a concern they have  with this initiative is that an air carrier could win a 2-year contract with a  low estimate, and open it again to obtain more funds without facing  competition.
Also, the Section 410 marketing incentive program, which could provide  grants up to $50,000 to EAS communities to develop and execute a  marketing plan to increase passenger boardings and usage of airport  facilities, was not implemented. DOT officials explained that with the  uncertainty of the number of communities that would need EAS subsidies  and the cost of those subsidies, using EAS subsidy funding for this  marketing incentive program could put the subsidies at risk. One industry  group suggested dedicated funding might improve the use of this program.  The administration’s draft FAA reauthorization bill would repeal this  marketing incentive program.
Finally, Section 411 of Vision-100 authorized the creation of a National  Commission on Small Community Air Service to recommend how to  improve commercial air service to small communities and the ability of  small communities to retain and enhance existing air service. This  provision was likewise not implemented because funds were not  specifically appropriated, according to DOT officials. Such a commission  may have been helpful in developing approaches to deal with difficult  policy decisions, such as regionalizing air service. DOT plans to host a  symposium to bring industry experts together to identify regulatory  barriers and develop ideas for improving air service to small communities  which may be a step in the right direction. DOT officials acknowledge that  this symposium should be held soon to inform reauthorization  deliberations.
section_title: Recently Started DOT Evaluation of the Effectiveness of SCASDP Should Add Information on the Effectiveness of SCASDP
paragraphs: In 2005, we recommended that DOT examine the effectiveness of SCASDP  when more projects are complete; and the DOT IG recently began this  evaluation. Since our report, an additional 48 grants have been completed  and DOT will be able to examine the results from these completed grants.  Such an evaluation should provide DOT and Congress with additional  information about not only whether additional or improved air service was  obtained, but whether it continued after the grant support ended. In  addition, our prior work on air service to small communities found that  once financial incentives are removed, additional air service may be  difficult to maintain. This evaluation should provide a clearer and more  complete picture of the value of this program. Any improved service  achieved from this program could then be weighed against the cost to  achieve those gains.
In conducting this evaluation, DOT could find that certain strategies the  communities used were more effective than others. For example, during  our work, we found some opposing views on the usefulness of certain  strategies for attracting improved service. DOT officials could use the  results of the DOT IG’s evaluation to identify strategies that have been  effective in starting self-sustaining improvements in air service and they  could share this information with other small community airports and,  perhaps, consider such factors in its grant award process. In addition, DOT  might find some best practices and could develop some lessons learned  from which all small community airports could benefit. For example, one  airport used a unique approach of assuming airline ground operations  such as baggage handling and staffing ticket counters. This approach  served to maintain airline service of one airline and in attracting additional  service. In addition, the SCASDP program has shown that there is a strong  demand on the part of small community airports to improve enplanements  through various marketing strategies. Successful marketing efforts could  increase enplanements, thus driving down the per passenger subsidy.  Sharing information on approaches like these that worked (and  approaches that did not) may help other small communities improve their  air service, perhaps even without federal assistance.
In conclusion, Mr. Chairman, Congress is faced with many difficult choices  as it tries to help improve air service to small communities, especially  given the fiscal challenges the nation faces. Regarding EAS, I think it is  important to recognize that for many of the communities, air service is  not—and might never be—commercially viable and there are limited  alternative transportation means for nearby residents to connect to the  national air transportation system. In these cases, continued subsidies will  be needed to maintain that capability. In some other cases, current EAS  communities are within reasonable driving distances to alternative  airports that can provide that connection to the air system. It will be  Congress’ weighing of priorities that will ultimately decide whether this  service will continue or whether other, less costly options will be pursued.  In looking at SCASDP, I would emphasize that we have seen some  instances in which the grant funds provided additional service, and some  in which the funds did not work. Enough experience has now been gained  with this program for a full assessment, and with that information the  Congress will be in a position to determine if the air service gains that are  made are worth the overall cost of the program.
I would be pleased to answer any questions that you or other Members of  the Subcommittee may have at this time.
section_title: Contact Information
paragraphs: For further information on this testimony, please contact Dr. Gerald L.  Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making  key contributions to this testimony and related work include Robert  Ciszewski, Catherine Colwell, Jessica Evans, Colin Fallon, Dave Hooper,  Alex Lawrence, Bonnie Pignatiello Leer, and Maureen Luna-Long.
section_title: Appendix I: Essential Air Service Communities and Subsidies as of April 1, 2007
paragraphs: Airport Finance: Preliminary Analysis Indicates Proposed Changes in  the Airport Improvement Program May Not Resolve Funding Needs for  Smaller Airports. GAO-07-617T Washington, D.C.: March 28, 2007.
Commercial Aviation: Programs and Options for the Federal Approach  to Providing and Improving Air Service to Small Communities. GAO-06- 398T Washington, D.C.: September 14, 2006.
Airline Deregulation: Reregulating the Airline Industry Would Reverse  Consumer Benefits and Not Save Airline Pensions. GAO-06-630  Washington, D.C.: June 9, 2006.
Commercial Aviation: Initial Small Community Air Service  Development Projects Have Achieved Mixed Results. GAO-06-21  Washington, D.C: November 30, 2005  Commercial Aviation: Survey of Small Community Air Service Grantees  and Applicants. GAO-06-101SP. Washington, D.C.: November 30, 2005  Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms  of Underlying Structural Issues. GAO-05-945 Washington, D.C.:  September 30, 2005  Commercial Aviation: Legacy Airlines Must Further Reduce Costs to  Restore Profitability. GAO-04-836 Washington, D.C.: August 11, 2004  Commercial Aviation: Issues Regarding Federal Assistance for  Enhancing Air Service to Small Communities. GAO-03-540T.  Washington, D.C.: March 11, 2003  Federal Aviation Administration: Reauthorization Provides  Opportunities to Address Key Agency Challenges. GAO-03-653T.  Washington, D.C.: April l0, 2003  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.
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