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

Letter

Background

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.

The Airline Industry Is Adapting to Economic Pressures that Creates Challenges to Maintaining Air Service to Small Communities

Service to Small Communities Has Declined since 2007

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.

Economic Factors Have Contributed to the Decline in Service to Small Communities

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.

Federal Programs and Policies Support Service to Small Communities but Face Challenges

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.

EAS Subsidies Are Increasing and Recent Program Changes Are Intended to Limit Eligibility

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.)

Small Community Grants Have Had Limited Effectiveness in Retaining Air Service

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.

Legislation, Regulations, and Airport Policies Affect Service to Small Communities

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.

Multimodal and Nongovernmental Transportation Options Could Help Small Communities

A Multimodal Approach Could Be Used to Connect Communities

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.

Local Community Approaches to Attracting Air Service Have Had Some Success

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.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact and Staff Acknowledgments

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.

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