City of Visalia
Agenda Item Transmittal
Meeting Date: 3/7/2016
Agenda Item Number (Assigned by City Clerk): 13.
Agenda Item Wording: Discussion of current trends in the regional air service industry, review and discussion of the air carrier proposals received as part of the Essential Air Service program and authorization to submit an application for $3.7 million in airport grant funding to the Federal Department of Transportation as part of the Community Flexibility Pilot Program.
Deadline for Action: 2/25/2016
Submitting Department: Transportation and General Services Department
Cont act Name and Phone Number:
Mario Cifuentez, 4480 - [email protected]
Department Recommendation: The Air Service Subcommittee recommends that Council:
1. Discuss the current state of Small Community Air Service
2. Review the proposals for providing air service at Visalia;
3. Approve the Sub-Committee’s recommendation to submit an application for approximately $3.7 million to the U.S. Department of Transportation (DOT) to be funded by the Community Flexibility Pilot Program. If the application is approved by DOT, and the grant awarded, then the Essential Air Service (EAS) program will be suspended in Visalia for a period of ten (10) years.
Summary: The purpose of this item is to present Council with an overview of the Essential Air Service (EAS) proposals received for the Visalia Airport and provide information that led to the Subcommittee’s recommendation that the City take advantage of the Community Flexibility Pilot Program. The Air Service Sub-Committee was created by Council in 2006 and consists of Council members Link and Gubler, the City Manager (Mike Olmos), Deputy City Manager (Eric Frost) and the Airport Manager (Mario Cifuentez).
Background Discussion:
In December 2014, SeaPort Airlines was awarded a contract by the DOT to provide subsidized service to Visalia. In February 2015, SeaPort commenced service with four (4) flights per day from Visalia to Burbank and Sacramento. The service was an immediate success by all measures of air carrier performance. The airline carried more passengers in their first full month -141-
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of operation than the previous carrier did in the previous 4 month time frame. SeaPort’s passenger totals remained high for the first six (6) months of operation and then gradually began to decline. The decline was directly related to the expiration of the introductory fares, which were being used by travelers that flew regularly between Burbank and Sacramento as part of their commute. Once those fares were increased, it became more cost effective for those travelers to use the major carriers that operated routes between those communities.
Even with declining passenger numbers, SeaPort was still carrying enough passengers to remain below the per passenger subsidy cap.
In January 2016, SeaPort airlines abruptly, and without notice to any of the airports they served, withdrew from all markets in California, Missouri and Kansas. This impacted not only Visalia, but also the El Centro, California EAS community. Within days, the DOT issued an Emergency Order RFP seeking proposals from carriers interested in providing services to those airports that were left without service. Under the guidelines established by the DOT, interested carriers were allowed to propose whatever service they felt would best serve the community’s needs.
The DOT served the Order on approximately thirty (30) different air carriers. On February 3, 2016, the Department received 3 proposals to provide subsidized service at Visalia. All things being equal, the DOT prefers to award the contract to the air carrier requesting the lowest subsidy amount. However, the DOT has stated that subsidy alone does not drive the decision, which is the reason that the DOT requests comments from the communities. The ultimate goal is to have unsubsidized air service and community involvement is the key to that.
The first step in the evaluation process for all EAS proposals is for the Air Service Subcommittee to review the proposals thoroughly and rank them according to the various elements that have come to be indicators of viable service for our community. Any City recommendation is given “weighted” consideration by the DOT, but the decision on which carrier to award a contract to is solely at the discretion of the DOT.
The fact that SeaPort airlines withdrew from our market after such a successful year caused the Subcommittee to first take a look at the overall state of regional air service.
Future of Air Service to Small Communities
The future of air service to small communities continues to look bleak. Over the past few years, as major air carriers have emerged from bankruptcy, they have all changed their business model to reduce costs and increase their per passenger yields. As a result, the carriers are pulling out of smaller communities. For example, over the past couple of years, other California airports of similar size like Modesto, Chico and Inyokern, all lost air service after decades of reliable service.
The move by airlines to pull out of smaller communities is buoyed by their belief that travelers will come to them wherever they are. Those facts are supported by travel patterns of our local travelers. Historically, we have seen 25-27% of our local travelers use Fresno for their air travel needs and well over 50% of our local travelers choose to drive to Los Angeles International -142-
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Airport (LAX) and use that airport as their departure airport. In other words, at least 75% of Visalia air travelers have chosen not to fly from Visalia. Given that travel pattern, which is typical for Californians, it is easy to understand why an air carrier would prefer to focus their personnel and equipment in just one market and let their consumers come to them instead of choosing to be in several small airports. The federal Essential Air Service program attempts to reduce air service voids in outlying communities through its subsidization of regional air carriers in eligible communities.
When Congress passed the Airline Deregulation Act of 1978, lawmakers wanted to ensure that communities receiving scheduled air service before regulation would continue to receive scheduled air service after deregulation. In order to do so, Congress established the Essential Air Service (EAS) program, which guaranteed a certain level of scheduled air service to communities that otherwise would have lost access to the nation’s air transportation system under a deregulated airline industry. As a general matter, this is accomplished by subsidizing two to four round trips a day -- with three being the norm -- with 19-seat aircraft to a major hub airport. In those communities where service is provided by 9-seat aircraft, the DOT would expect a carrier to provide more frequency of service.
The EAS program was initially authorized for just a 10 year period. The program was modified and extended by the Airport and Airway Safety and Capacity Expansion Act of 1987 and was later made permanent as part of the FAA Reauthorization Act of 1996 with a standing annual appropriation of $50 million. Subsequent legislation has supplemented this funding with additional appropriations from other FAA revenue sources, including foreign overflight fees and the Airport and Airways Trust Fund. The Department currently subsidizes commuter airlines to serve approximately 163 rural communities across the country that otherwise would not receive any scheduled air service.
The EAS program has undergone numerous criteria adjustments since its inception, mainly limiting eligibility. At present, for communities to remain eligible for subsidized air service they must:
• Be located more than 70 driving miles of an FAA-de signated Large or Medium Hub airport;
• Maintain a minimum of 10 enplaned passengers per d ay if the community is within 175 miles of a Large or Medium Hub airport;
• Maintain a per passenger subsidy under $200 for co mmunities located 210 or more highway miles from the nearest Medium or Large Hub airport and under $1,000 per passenger for all other airports.
• For the purposes of these statutes, the DOT has de termined that Visalia is 178 miles from the nearest Medium hub airport, which is Burbank. An airport’s hub size is determined by the annual number of passengers originating out of that airport. Fresno -143-
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would have to double their annual passenger numbers before they would be considered a Medium hub. Bakersfield carries far less passengers than Fresno
The subcommittee discussed, at length, the fact that the City of Visalia and many small communities across the nation are at a crossroads for air service. On April 28, 2014, the DOT issued a Notice of Proposed Enforcement Policy, which put Visalia and many other EAS communities on notice. By doing so, the DOT has stated that they intend, going forward, to enforce compliance with the EAS statute that prohibits the Department from subsidizing service to communities receiving per passenger subsidy amounts exceeding $200. As it stands now, Visalia exceeded the $200 per passenger subsidy with an average per passenger subsidy amount of $204.34 for FY 2015, but the City was on record asking the DOT to allow Great Lakes airlines to withdraw from the market in October 2015 and the DOT recognizes that the low passenger totals that Great Lakes carried during that transition period is the reason for Visalia exceeding the subsidy cap for that year.
Proposals
The DOT submitted the Emergency Order Requesting Proposals to approximately thirty (30) different air carriers. Visalia received proposals from just three (3) carriers; all of which submitted competing proposals with SeaPort in 2014. The proposals all identify LAX as a common destination but the remaining elements vary from aircraft type to Terminal use and code share agreements. All of those elements summarized in the attached Summary of Proposals.
In addition to a summary of all of the proposals, attached is a copy of the full proposals from each carrier. Over the years, as the subsidy amounts have increased, the complexity of each proposal process has increased, along with the increase in interest from small airlines and scheduled charters in each round of proposals that the City has gone through. The major points of each proposal are laid out in the Table below titled Summary of Proposals:
Proposal Details
Airline Aircraft
Code Share
Partners
Secure
Screening
Destination
Airport
# departures /
week
Available
Seats/week
Total
Subsidy
Request
Projected
Passengers *
Effective
Pax at $200
Required
Load
Factor
Boutique
Air Pilatus
PC-12
None
Identified Yes LAX/OAK 48 432 3,517,077 $ 13,000 17,585 58% Mokulele Cessna
Caravan Alaska Yes LAX 48 432 $ 2,328,169 14,456 11,641 44% Great
Lakes
19-seat
Beech
1900D United Yes LAX 24 456 2,611,510 $ 11,750 13,058 88% * 2015 VIS total passengers of 9,297
Summary of Proposals
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• Boutique Air proposes daily service to LAX and Oak land Airport (OAK) at an annual federal subsidy cost of $3,517,077. Based on their requested subsidy, they will need to carry 17,585 passengers annually in order to remain below the statutory limit of $200 per passenger. By comparison, SeaPort carried 9,297 passengers in 2015 -- our highest passenger total since 2007. Additionally, at least 30% of the passengers that SeaPort carried were traveling between Burbank and Sacramento and not originating from Visalia.
• Mokelele’s proposal anticipates 4 daily flights to LAX at an annual federal subsidy cost of $2,328,169. They have the advantage over Boutique of having an interline baggage agreement with Alaska Airlines and Air New Zealand, but that advantage is limited. Interline baggage agreements allow checked bags to be transferred between different air carriers without the traveler having to recheck that bag. If a passenger wanted to transfer to any other domestic carrier besides Alaska, he/she would have to fly with a carry on because Mokulele has no interline baggage agreements to allow baggage to transfers to other domestic carriers. Their requested subsidy amount would also require them to carry 11,641 passengers per year in order to stay below the subsidy cap. Again, that’s far more than SeaPort carried.
• Great Lakes Airlines proposed 2 daily flights to L AX at an annual cost of $2,611,510.
However, Great Lakes’ service declined significantly prior to leaving the Visalia market, and as a result, it is unlikely that the community will have faith that Great Lakes can establish and sustain a dependable air service.
Given the three (3) proposals that were submitted and the proposed passenger totals which are seemingly unachievable, the Subcommittee concluded that the most viable choice is to take advantage of the Community Flexibility Pilot Program.
Community Flexibility Pilot Program
The Community Flexibility Pilot Program was created in 2004 as an alternative program to achieve some cost savings for the EAS program. That program would allow up to ten (10) communities to waive their right to the annual EAS subsidy for a period of ten (10) years, in exchange for an airport grant equal to twice the subsidy paid to the most recent carrier for the previous 12 month period. For Visalia, that would equate to a grant of approximately $3.7 million that can be used for any Airport Improvement Program (AIP) eligible project, such as hangar development, aircraft apron construction or navigational aids.
During the Airport’s participation in this program, the airport would maintain its eligibility in the program, but would simply waive subsidy eligibility for the ten (10) year period. After the ten years was up, Visalia would once again be eligible for subsidy, if the EAS program is still in existence and program criteria at that time are met.
The Subcommittee has serious concerns that none of the submitted proposals would result in enough annual passengers to remain below the $200 per passenger subsidy requirement. If that were to happen, the DOT would terminate Visalia’s eligibility in the EAS program. Should Visalia lose its eligibility for violating the statute related to per passenger subsidy, it would no -145-
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longer be considered in “good standing” and there, no longer eligible to participate in the Community Flexibility Pilot Program
The federal law related to the Community is as follows:
Community Flexibility Pilot Program.—
(1) In general.— The Secretary shall establish a pilot program for not more than 10 eligible places or consortia of units of local government.
(2) Election.— Under the program, the sponsor of an airport serving an eligible place may elect to forego any essential air service for which compensation is being provided under this subchapter for a 10-year period in exchange for a grant from the Secretary equal in value to twice the compensation paid to provide such service in the most recent 12-month period. (3) Grant.— Notwithstanding any other provision of law, the Secretary shall make a grant to each airport sponsor participating in the program for use on any project that— (A) is eligible for assistance under chapter 471 and complies with the requirements of that chapter;
(B) is located on the airport property; or
(C) will improve airport facilities in a way that would make such facilities more usable for general aviation.
49 U.S. Code § 41745
Taking a 10-year break from subsidized air service would not preclude a carrier from operating unsubsidized at Visalia, but that carrier would have to succeed based on the merits of the service they provide and free from federal government assistance.
Recommendation
Based on a thorough review of all proposals and consideration of industry trends, and the recent history of declining air service performance in Visalia, it is the Subcommittee’s belief that none of the carriers have a strong enough proposal to guarantee that Visalia would maintain eligibility in the EAS program and therefore, the Subcommittee recommends that Council authorize staff to submit a grant application to the DOT requesting the approximately $3.7 million under the Community Flexibility Pilot program to fund airport improvements.
Fiscal Impact: $3.7 million in new grant funding to the airport for improvements.
Prior Council Action: April 4, 2006 - Council authorized the formal recognition of the Air Service Sub-Committee and authorized that committee to submit comments to the Department of Transportation conveying the community’s position on EAS matters.
September 15, 2014 - Council authorized the Mayor to sign a letter, to the Department of Transportation, supporting Seaport Airlines as the carrier under the EAS contract for Visalia.
Other:
Committee/Commission Review and Action:
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The Air Service Subcommittee recommends that Council approve the submission of a grant application to the DOT in the amount of $3.7 million dollars in exchange for a ten (10) year waiver of subsidized service for the Visalia Airport.
Alternatives: Submit a letter of support for one of the proposals received. Because the projected passenger loads by all three proposers appear exceedingly optimistic, selecting a carrier would likely result in an eventual termination of EAS eligibility if the statutory per passenger subsidy is not met.
Attachments: Proposals for Air Service from all prospective carriers as well as a comparison chart of the proposals.
Recommended Motion (and Alternative Motions if expecte d):
I move to approve the Sub-Committee’s recommendation to submit an application for approximately $3.7 million to the Department of Transportation to be funded as part of the Community Flexibility Pilot Program.
Copies of this report have been provided to:
Environmental Assessment Status
CEQA Review: None
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