The nation’s small community airports, while large in number, serve only a small portion of the nation’s air travelers and face issues very different from those of larger airports. Airports that are served by commercial airlines in the United States are categorized into four main groups based on the annual number of passenger enplanements—large hubs, medium hubs, small hubs and nonhubs. In 2001, the 31 large hub airports and 36 medium hub airports (representing about 13 percent of commercial service airports) enplaned the vast majority—89 percent—of the more than 660 million U.S. passengers. In contrast, those normally defined as small community airports —the 69 small hub airports and 400 nonhub airports—enplaned about 8 percent and 3 percent of U.S. passengers, respectively. There are significant differences in both the relative size and type of service among these communities, as shown in Figure 1. Officials from small communities served by small hub and nonhub airports reported that limited air service is a long-standing problem. This problem has been exacerbated by the economic downturn and events of September 11. Fundamental economic principles help explain the situation small communities face. Essentially, these communities have a smaller population base from which to draw passengers, which in turn means they have limited potential to generate a profit for the airlines. Relatively limited passenger demand, coupled with the fact that air service is an inherently expensive service to provide, make it difficult for many such communities to attract and keep air service. The recent economic downturn and events of September 11 dealt a severe financial blow to many major airlines, and the results of these losses can be felt in even the smallest communities. United Airlines and US Airways are in bankruptcy proceedings, and one Wall Street analyst is projecting industry losses of $6.5 billion for 2003, the third straight year of multi- billion dollar losses. While major airlines often do not serve small communities directly, many have agreements with smaller regional airlines to provide air service to small communities. This provides feeder traffic into the larger network. Consequently, financial problems for major airlines and their resulting cost-cutting efforts may ultimately affect the air service a small community receives. Complicating the financial situation for both major and regional airlines is the growing presence of low-fare airlines, such as Southwest Airlines. Low-fare airlines’ business model of serving major markets, not small communities, has helped these airlines better weather the economic downturn. Airport officials have reported that these airlines’ low fares attract passengers from a large geographic area, and many small airports face significant “leakage” of potential local passengers to airports served by low-fare airlines. In a March 2002 report, we found that almost half of the nonhub airports studied were within 100 miles of a major airline hub or an airport served by a low-fare airline, as illustrated in Figure 2. Further, over half of the 207 small community airport officials we surveyed said they believed local residents drove to another airport for airline service to a great or very great extent. Eighty-one percent of them attributed the leakage to the availability of lower fares from a major airline at the alternative airport. Local, state, and federal governments all play roles in developing and maintaining air service for small communities. Air service is a local issue because commercial airports in the United States are publicly-owned facilities, serving both local and regional economies. Many state and local governments provide funding and other assistance to help communities develop or maintain local air service. The federal government has assisted in developing air service both through the EAS program, which subsidizes air service to eligible communities and the Pilot Program, which provided grants to foster effective approaches to improving air service to small communities. The assumption underlying these efforts is that connecting small communities to the national air transportation system is both fundamental for local economic vitality and is in the national interest. The Administration’s budget proposal for fiscal year 2004 substantially reduces funding for small community air service. The budget would reduce EAS funding from $113 million in 2003 to $50 million in 2004 and would change the program’s structure by altering eligibility criteria and requiring nonfederal matching funds. The 2004 budget proposal does not include funds for the Pilot Program. Our recent review of nearly 100 small community air service improvement efforts undertaken by states, local governments, or airports showed that communities attempted three main categories of efforts (see Table 1): studies, like those used by communities in Texas and New Mexico, to determine the potential demand for new or enhanced air service; marketing, like Paducah, Kentucky’s, “Buy Local, Fly Local” advertising campaign, used to educate the public about the air service available or Olympia, Washington’s, presentations to airlines to inform them about the potential for new or expanded service opportunities; and financial incentives, such as the “travel bank” program implemented by Eugene, Oregon, in which local businesses pledged future travel funds to encourage an airline to provide new or additional service. Studies by themselves have no direct effect on the demand for or supply of air service, but they can help communities determine if there is adequate potential passenger demand to support new or improved air service. Marketing can have a more direct effect on demand for air service if it convinces passengers to use the local air service rather than driving or flying from another airport. While the specific effect is difficult to ascertain, an airport official from Shenandoah Valley, Virginia, pointed out that his airport’s annual enplanements more than doubled—from 8,000 to 20,000—after a marketing and public relations campaign. Marketing the airport to airlines may also have a direct effect on the supply of air service if the efforts succeed in attracting new airlines or more service from existing airlines. Financial incentives most directly affected the level of air service provided in the communities we studied. Financial incentives mitigate some of the airline’s risk by providing some assurance about the financial viability of the service. The incentives take a number of different forms, as shown in Table 2. Some programs provided subsidies to airlines willing to supply service. Some provided revenue guarantees, under which the community and airline established revenue targets and the airline received payments only if actual revenues did not meet targets. Financial incentives can attract new or enhanced air service to a community, but incentives do not guarantee that the service will be sustained when the incentives end. We studied the efforts of 12 communities in detail, all but one of which used a financial incentive program. Of these, five had completed their program but only Eugene, Oregon, was able to sustain the new service after the incentive program ended. At the other four—all nonhub airports smaller than Eugene—the airline ceased service when the incentives ended. However, while a community’s size is important, it is largely beyond a community’s control. We identified two other factors, more directly within a community’s control, that were also important for success. The first, the presence of a catalyst for change, was particularly important in getting the program started. The catalyst was normally state, community, or airport officials who recognized the air service deficiencies and began a program for change. More important to the long-term sustainability, however, was a community consensus that air service is a priority. This second factor involves recognizing that enhanced air service is likely to come at a price and developing a way in which the community agrees to participate. At many of the communities we studied, there was not a clear demonstration of community commitment to air service. The two major federal efforts to help small communities attract or retain air service are the EAS program and the Pilot Program. The Congress established EAS as part of the Airline Deregulation Act of 1978, due to concern that air service to some small communities would suffer in a deregulated environment. The act guaranteed that communities served by airlines before deregulation would continue to receive a certain level of scheduled air service. If an airline cannot provide service to an eligible community without incurring a loss, then the Department of Transportation (DOT) can use EAS funds to award that airline, or another airline willing to provide service, a subsidy. Funding for EAS was $113 million for fiscal years 2002 and 2003. The other major program, the Pilot Program, was authorized as part of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21). The Pilot Program’s mission is to assist communities in developing projects to enhance their access to the national air transportation system. The Pilot Program differs from EAS because communities, not airlines, receive the funds and the communities develop the program that they believe will best address their air service needs. The Congress appropriated $20 million in both fiscal years 2002 and 2003 for this effort. The EAS program costs have increased dramatically since 1995, but the actual number of passengers using EAS-subsidized air service has dropped. Total program funding increased from $37 million in 1995 to $113 million in 2002 (2002 constant dollars). Further, during this period of time, the subsidy per community nearly doubled, from almost $424,000 to over $828,000. However, the total passenger enplanements at EAS-subsidized communities decreased about 20 percent (between 1995 and 2000) falling from 592,000 to 477,000. As a result, the per passenger subsidy (for continental U.S. communities) increased from $79 to an estimated $229 in 2002, a nearly 200-percent increase. Table 3 provides more information. Two key factors will likely continue to increase EAS program costs in the future. First, more communities may require subsidized service. As of February 2003, the EAS program served 125 communities, up from the 114 served only 7 months earlier. Of these, 88 are in the continental United States and 37 are in Alaska, Hawaii, and Puerto Rico. According to DOT officials, more small communities will likely lose unsubsidized commercial service in the future—especially those served by one airline.