Low-cost airline won't be easy get
8:43 AM, Oct. 21, 2012
In its efforts to attract a low-cost carrier, Cincinnati/Northern Kentucky International Airport has identified JetBlue Airways as the top target.
Now comes the next question: Will the community step in with financial incentives to help land a deal?
Aviation experts say the only way JetBlue – or any other airline – is coming here is if the business community, local government or the airport itself helps pay the price of startup.
"It really is the price of admission these days," said Greg Principato, president of the Airports Council International-North America. "If you're not putting an incentive on the table, it's very, very difficult to get anyone to come to your airport."
In Greater Cincinnati and Northern Kentucky, the business community is taking the lead.
So far, no airline deals have been made, no incentive programs promised.
But a task force of top company executives has recommended to CVG that incentives be created to try to attract a new carrier.
"We've kicked that around with some of the business folks in the community," said Steve Stevens, president and chief executive officer of the Northern Kentucky Chamber of Commerce. "The reaction (from Northern Kentucky businesses) has been mixed because it's a fair amount of money that would have to come from the corporate community. I think it would be great, but in this economy I just don't know how easy it is to do at this moment."
For years, airlines drove expansion. The economy was booming, people were flying in record numbers and airports were growing.
As a thriving Delta Air Lines hub in the 1980s and 1990s, CVG didn't have to make much effort to attract carriers or new service.
But then 9/11 pummeled the airline industry and a recession stymied growth. CVG has lost more than 500 daily flights since 2005 while charging some of the highest fares in the nation.
Suddenly, incentives became a national trend as the airlines struggle with changing customer demands and their own financial needs.
Federal Aviation Administration guidelines limit airports in what they can offer in incentives, but there are no such rules on business, which drives 60 percent of CVG passenger traffic.
"There's nothing stopping the business community from subsidizing an airline," said airline analyst and consultant Michael Boyd, chairman of Boyd Group International.
Group suggests 'travel bank'
Development of an incentive package was among the many recommendations made to CVG by a task force formed by the Cincinnati USA Regional Chamber and Cincinnati Business Committee in February 2011 to improve airline service. The task force, of which Stevens was a member, completed its work and sent its recommendations to CVG last spring.
Officials won't disclose details, saying confidentiality is needed to attract a new carrier.
However, Kenton County Airport Board member Kevin Canafax, who chaired the task force, confirmed that discussions about an incentive package are under review.
"These things take time," said Canafax, vice president of public affairs at Fidelity Investments in Covington.
"There's no silver bullet."
Canafax added that the task force has recommended that a "travel bank" be considered. Popular in Europe and some U.S. airports, a travel bank allows companies and individuals to pledge or deposit money that will be used to purchase tickets on a new route. The idea is to show a prospective new airline that there is a commitment from the community.
In Portland, Ore., for example, companies committed funds into a travel bank to lure Germany-based Lufthansa in 2003. Portland-headquartered companies such as Nike and adidas helped drive demand for non-stop service to Germany. Daily service to Frankfurt lasted six years before the airline ended Portland operations because of the economy.
Long-term success in question
Incentives typically help to cover start-up costs in the first year or two. But they don't always work in the long run.
Several airlines have ceased operations in cities when the incentive package ran out.
JetBlue, for example, arrived in Columbus in 2006, launching daily service to New York and Boston.
Columbus' incentive package included a one-year waiver of landing fees and free gate rent. But JetBlue left Columbus after just one year. The airline reportedly discounted tickets too much and wasn't profitable.
Chicago O'Hare is JetBlue's only Midwestern presence.
"You basically hope a carrier can come in, use these incentives for the start-up phase and then stimulate additional demand because the success rate long-term is not very high," said Daniel Friedenzohn, associate professor at Embry-Riddle Aeronautical University and former network planner for United Airlines.
The Cincinnati business task force's recommendations were based on research provided by Seabury APG, a firm that has a track record of helping communities develop incentive packages. Recent Seabury clients Tampa, Fla.; Sacramento, Calif.; Las Vegas and Charleston, S.C., have announced incentive packages within the past three years.
Several other airports, including former Northwest hub Memphis, have approved incentive packages recently. And that creates a potential downside for CVG because "everybody's offering incentives," Boyd said.
"The leverage has now shifted into the hands of the airlines with cities like us," said Tom Williams, president of North American Properties and a member of the task force.
A model from down South
Charleston, S.C., has established the most recent model for how to lure a low-cost carrier with an incentive package, Principato told members of the Kenton County Airport Board during a meeting last week.
The Charleston business community spearheaded putting together a $1 million incentive package that helped lure Southwest Airlines in 2010 and JetBlue, which last month announced it will launch daily nonstop service to New York and Boston.
Like Cincinnati, Charleston has been plagued by high fares for years because of the lack of a low-cost carrier. In 2003, Charleston had the sixth-highest fares in the nation – Cincinnati was No. 5 – among the top 100 airports, prompting community action.
"We had a number of business leaders contact the chamber and say, 'We've got to do something about this,' " said Mary Graham, senior vice president of the Charleston Metro Chamber of Commerce.
Charleston officials began courting low-cost carrier AirTran. Officials were able to secure a $1 million federal grant to cover start-up costs, and area businesses promised the airline they would purchase tickets. In May 2007, AirTran launched daily service to Atlanta. Fares dropped $126 from the first quarter to the third quarter that year. Experts said the airline saved travelers an estimated $80 million a year, according to the Charleston Post and Courier.
But citing the recession, AirTran announced in October 2009 that it would cease Charleston operations. Government officials refused a proposal to further subsidize AirTran.
The business community and airport board moved swiftly to put an incentive package in place to try to land more low-cost carriers.
Charleston's chamber of commerce, the convention and visitors bureau, the airport and an economic development organization contributed a total of about $1 million. The convention and visitors bureau alone contributed nearly $700,000.
"When we first started meeting with Southwest and (then) JetBlue, they were impressed that the community had four organizations working together," Graham said.
"The business community is pleased with the results because they've seen fares lower."
Fares in Charleston have dropped since peaking at $509 in the second quarter of 2006 but remain above the national average. Furthermore, Southwest has been successful in Charleston so far – the airline had 2.5 million passengers on flights in 2011, a 25 percent increase from the previous year.
Conversely, Charleston's airport had more flexibility in what it could offer in the incentive package than CVG would. The Charleston County Aviation Authority approved that $200,000 would come from the airport. The incentive included marketing assistance for JetBlue, infrastructure upgrades and a brief waiver of landing fees.
Agreement limits CVG's power
Along with the local business task force, CVG has been working to lure a low-cost carrier since Candace McGraw took over as chief executive officer in July 2011.
Today, CVG's infrastructure is mostly in place, with open gates for a new airline in Concourse A, which re-opened in May after a $36.5 million renovation. The airport also could offer marketing assistance as part of an incentive package, said Meghan Glynn, CVG's vice president of external affairs.
But waiving landing fees isn't an option at CVG because of an agreement with tenant airlines established in the 1970s. That agreement expires at the end of 2015, and it's likely a new agreement will give the airport more power to negotiate incentive packages.
"Existing tenants want the same sweet package, and that's kind of been the problem all along," said local aviation expert Jay Ratliff, a former general manager for Northwest Airlines.
Delta's dominance at CVG is another big consideration here. No one wants a repeat of what happened in Pittsburgh a decade ago.
The airport in that city brought in so many low-cost carriers that it expedited dominant airline US Airways' downsizing of its hub. Fares dropped dramatically, but critical nonstop service for business travelers, once provided by US Airways, was lost.
CVG officials say they want incremental service, which is an indication that Delta remains critical here.
"We're looking to attract air service that would complement Delta's current level of service," Canafax said.
Besides, added Boyd, "There's no airline that's going to come to Cincinnati and lower fares across the board."
Delta's presence ultimately may keep JetBlue away, experts say. JetBlue has planes on order and is looking to expand. The airline prefers to have its flights go through its hub at New York's JFK.
At CVG, flights to New York/New Jersey already are well-serviced by Delta and others. In May, United announced it would increase its weekday flights to Newark, N.J., from four to six per day.
JetBlue's experience in Columbus alone might dissuade the airline from coming to CVG. The company did not return messages last week.
"JetBlue flying to New York isn't going to change your fares," Boyd said. "You've got more nonstop service than you can support now."
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