Air Service Show and Tell

March 8, 2005
Industry officials offered up their take on where the airlines are headed while airport executives shared lessons learned at the 10th Annual National Air Service Conference
SALT LAKE CITY -- The 10th Annual National Air Service Conference, sponsored by the American Association of Airport Executives and Great Lakes Chapter AAAE, was held here in late January. Industry officials offered up their take on where the airlines are headed in the coming months, while airport executives shared lessons learned on the never ending battle of retaining existing air service and attracting new carriers. Here are some highlights. Airline analyst with CALYON SECURITIES, INC., Ray Neidl says of United Airlines, "If someone would have managed properly, they would have buried everyone else." He expects that UAL is on the right track to exit bankruptcy protection with the right cost structure, but with unhappy employees and pension plans that will be terminated. "If employees are working against you, it will destroy you," he says. Neidl says he fully expected that US Airways would have been liquidated by January 2005. The industry has been "aggressively cutting costs," he adds, "in areas that I never thought would be possible," referring to employee costs, which can be as much as 40 percent of an airline's expenses. While Neidl says the legacy carriers need to continue to reduce operating expenses, they don't need to be as low as those of the low-cost carriers. He suggests an 8.5 cent cost per available seat mile for the majors to be successful. And in terms of being successful in the eyes of passengers, Neidl says, "Legacy carriers' model still works for some travelers." "There is too much domestic capacity preventing carriers from raising fares," says Neidl. "We're never going to see fares raised significantly again." Neidl offers three solutions for the abundance of carriers in the market: liquidation; mergers; or a hybrid partnership. "I'm not a big fan of mergers; they are usually disastrous for stockholders," Neidl adds. "Delta and Western Airlines was the only successful one." If Northwest Airlines, Continen-tal, and Delta Air Lines were to form a partnership on noncompetitive routes, suggests Neidl, "they could be successful against the two giants, United Airlines and American Airlines." In regard to the low-cost carriers, Neidl says there are quite a few that have merit, including jetBlue, Southwest, AirTran, Frontier, America West, and Spirit Airlines. JetBlue has good management, good capital ("You want to be heavily capitalized because if something goes wrong, the big guys will come after you."), and its own niche. "JetBlue started making its mark with the JFK to Florida market. That's what made them work." The Embraer 190, which jetBlue will begin flying this summer, will be "hugely successful," says Neidl. "You can't even tell it's an RJ. JetBlue will be further bleeding the major airline hubs by flying these." Real growth, says Neidl, will come with 70-seat and maybe even 90-seat aircraft. In terms of scope clauses limiting the use of these aircraft, Neidl says Delta has led the pack by liberalizing its scope clause, "but hasn't abolished it. JetBlue is going to break the dyke ... making 90-seaters more popular." Of Delta's new "simplified" fare structure, Neidl says, "Anybody who observes this industry knew it was coming. It's what the customer wants." He adds that carriers can cut costs with not having people managing dynamic fare systems. Neidl says because Delta has more point to point, lower yielding markets, it had more of an incentive to go to the simplified structure. However, he expects other carriers will follow. Neidl says he's "not a fan" of the airline within an airline concept, such as Delta's Song or United's Ted. "I don't think Ted is going to work. Song may work because it's more point to point leisure markets." He adds that one positive may come out of Delta's experience with Song: Delta is learning through Song how to operate mainline.Other comments from Neidl on Southwest: "As soon as Southwest said they wanted it (ATA's leasehold at Midway), I knew ATA was a dead duck. What they're investing in Midway is pocket change to Southwest." "Southwest is drooling at Charlotte ..." "Whether US Airways goes in the next 12 months, Southwest is going to push them out."

Lansing's Success
Bob Selig, A.A.E., executive director of Lansing (MI) Capital City Airport, says that in July 2003 the airport adopted a five-year program to attract and retain air service.

According to Selig, Lansing's biggest competition is Detroit. With a 49 percent leakage rate, and a decrease in parking revenues of $300,000 each year since 1999, and a loss of 100,000 passengers since 1999, retaining current carriers and being competitive with local airports is critical to the future of the airport.

The airport authority committed to invest $2 million annually; $1 million in airline and business development incentive programs; $500,000 in a public awareness campaign; $500,000 for passenger/customer incentives, such as discounted parking and redevelopment of the airport's website ( "We invested good money in developing the website and we and the community are pleased with it." Currently the website has 30,000 registered members.

According to Selig, the airport employed a "broad range" of advertising media, including billboards, radio, and TV. "Sponsorships have gotten us notoriety," he adds, which includes sponsoring local school's athletic programs.
The airport also hired two regional marketing directors.

Through its efforts, Lansing has been able to add service and retain some flights that were in danger of being eliminated. According to Selig, Delta, Continental, Independence Air and Northwest have all added flights. The airport was also successful in negotiating air fare reductions with Northwest and in keeping a flight that the carrier had planned to eliminate.

Selig attributes the success of the air service program to the "combined efforts of the staff and community commitment to the program. We're only one and a half years into it; we have a ways to go ... the gig isn't up. So far we're calling it a success." Future goals for the airport include expanding/starting service to Atlanta, Chicago, and Minneapolis.

Rockford's Revival Northwest Chicagoland Regional Airport at Rockford (RFD) lost scheduled air service in 2001 when Northwest Airlines discontinued its flights here. Since then, the airport has fought tirelessly to see carriers return to the airport and in August 2003 achieved success. Now served by Hooters Air, TransMeridian Airlines, and Vacation Express, Rockford recently announced service to Detroit via Northwest Airlines which will begin in May. The airport has seen passenger numbers jump from 1,500 to 50,000 in one year, according to deputy director of air service, Derek Martin, C.M. Previously, "we had total leakage," he adds. "We had one million people getting on a bus to O'Hare or Midway each year." While Chicago officials have focused more on a third airport to relieve congestion in the region, Rockford officials say their airport is the perfect alternative. Because of this, the majority of the airport's marketing is focused on the Chicagoland area. Martin also expects that if the O'Hare Modernization Project goes through, congestion and delays at O'Hare will increase, driving more passengers to Rockford. According to Martin, one of the biggest challenges the airport faces in attracting carriers is the start-up cost for an airline serving a new city. When TransMeridian committed to serving Rockford, the airline asked for $500,000 in marketing support. The airport held a 20-day campaign during which it raised $270,000 from the community. "We wouldn't have been successful without the community," says Martin. In total, Martin says the airport invested some $750,000 for marketing and promoting the new service via TMA and agreed to waive landing fees for one year. TMA has some 17 people on staff at Rockford and even moved some of its staff from O'Hare to RFD. Rockford offers passengers free parking. "We didn't have parking revenue before [without passengers] so we're not missing it now. And it's a huge marketing benefit," explains Martin. And, he adds, it is something the airport can do to create an environment that's not O'Hare. "Whatever you can't do at O'Hare, I want you to be able to do at my airport." Rockford has plans to build a business center with free access to passengers. Airlines' Perspectives Mike Gallagher, director of schedule development for Delta Air Lines, offers advice for airports looking to court DAL to their communites. He advises: Do not bring the mayor; do not fly solo; do not use the shotgun approach (be specific); and make incentives contractual. "There is no appetite for risks in the airline industry," says Gallagher. "You're going to be asked for incentives." Gallagher does concede that meetings with airports today are a "night and day difference" from four years ago. "You've gotten so much better," he says. United Airlines' director of North America planning David Jehn, says the carrier is now targeting a fall 2005 exit from Chapter 11 bankruptcy protection. In its restructuring, United has reduced its fleet size from more than 600 to just 455 aircraft, many of which were replaced by RJs, says Jehn. Additionally, some domestic capacity will be shifted to international flying. "By the end of 2005 we will have 41 percent of our capacity flying overseas, and that does not include Mexico and Canada." Since 2000, says Jehn, United has reduced its domestic capacity by 30 percent by using smaller planes, not by reducing the number of cities served. Jehn suggests airports looking to be served by United Airlines "do [their] research; be prepared; get a consultant if you have to; make the time useful. There's a lot of risk in serving these cities. Government incentives and revenue guarantees can make an impact."

Regional Airlines
Deb McElroy, Regional Airline Association, encourages airports to offer carriers revenue guarantees, saying, "They allow you to raise your voice above the noise in many cases." She suggests it is the government- imposed taxes and fees that "make it more difficult to provide service to smaller communities."

According to McElroy, an estimated one in four domestic passengers traveled on a regional airline in 2004, totalling some 129 million passengers. "These aren't your father's regional airlines," she adds. "These are sophisticated operations."

McElroy says the industry is restrained by scope clauses, limiting an airline's ability to be profitable. "Because of scope clauses, many airlines have announced they are going to get another certificate, which is crazy -- to go through the process because of restrictions on the free market by scope clauses."

She adds that the Essential Air Service (EAS) program is a concern, along with demand management programs currently employed by some airports. "Small airports will be priced out of those markets" that implement peak period pricing. "Slot auctions go to the highest bidder and it's hard for network carriers to bid given their financial difficulties."

The new Embraer 190, which jetBlue will be operating, is an aircraft McElroy says "a lot of regional airlines would love to operate, but we're constrained by scope clauses."