| |
Posted Aug 22, 2019, 8:14 PM
|
|
Registered User
|
|
Join Date: Nov 2017
Posts: 2,274
|
|
Followup article in the ABJ about incentives
Quote:
When airlines set up new routes at Austin-Bergstrom International Airport, they cite familiar reasons — a healthy regional economy, sizable job and population growth, a robust technology sector and famous tourist draws such as South by Southwest and Austin City Limits.
But, behind the scenes, a little-known incentives program has been pumping millions of dollars toward airlines' facility and marketing costs for air service in Austin.
Airport officials and their allies in the business community say the program has been crucial to expanding leisure and business travel options out of Austin-Bergstrom, both to more domestic locations and to international destinations in the United Kingdom, Europe, Canada and Mexico. They argue the economic benefits of new air service to the Texas capital pale in comparison to the program's costs.
But the program operates on a far looser basis than other incentive regimes, such as the city's headline-grabbing Chapter 380 process that has subsidized the likes of Apple Inc. and Samsung Austin Semiconductor LLC. Contrary to what's spelled out in the airport's own rules, airlines have landed millions of dollars in incentives without a formal process of filling out applications — a modus operandi that concerns skeptics of economic incentive deals.
And with the amount of incentives provided through late July of this year already topping the 12-month totals from previous years, it’s a program on the rise as airlines compete to tap into Austin’s economic and tourism strong points. It could also be updated in the coming weeks to add more target destinations abroad that could qualify for incentives — and to carve out specific benefits for flights to Hawaii.
Airlines "can put a plane anywhere that they want to and they're looking at a myriad of factors on how they think the route will perform," the Greater Austin Chamber of Commerce's Walter Zaykowski said. "But that only gets you so far."
How airline incentives work
The Domestic and International Air Service Incentive Program was adopted by the city of Austin's aviation department, which runs Austin-Bergstrom, in August 2015. It had a predecessor program from 2013. Both programs were adopted through the city's rule-making process without any public comments received.
The current program offers marketing assistance and temporary reductions in specific airport fees for flights to new destinations "in order to increase competition and to enhance domestic and international air service."
Airlines qualify for these incentives by flying to a target destination on a frequent-enough basis. For example, new routes to priority international destinations such as Amsterdam, Frankfurt, Paris and Tokyo could qualify for incentives under the program if they run at least eight times per month for a year.
Carriers typically pay what are known as facility fees to use and occupy space at Austin-Bergstrom. Facility fees include charges to use space for ticket counters and baggage storage, as well as fees to land aircraft at the airport and parking space where aircraft can remain overnight. Waivers for these facility fees make up the bulk of Austin-Bergstrom's incentives program.
"In a way, we're like a landlord," Assistant Aviation Department Director Jamy Kazanoff said. "These are mitigated fees... These aren't checks that are written out."
'What Austin does is very typical'
The marketing side of the incentive program works a bit differently. Here, the department boosts public relations efforts, media strategies and advertising work that promote new routes. It's tailored to each route and carrier and is "primarily directed at maximizing exposure to the local media and travel and tourism trades."
Marketing incentives can be reimbursements to airlines for PR work they've done to promote their Austin service or expenses by the aviation department on advertising, Kazanoff said.
"Whenever an airport would land new service, it would want to market and tell customers about it," she said. "The new routes need to work successfully pretty quickly... So we do everything we can to ensure that the route is known."
Kevin Schorr, senior vice president of Campbell-Hill Aviation Group LLC, advises Austin-Bergstrom on air service development. He said incentives are fairly common across the industry — and pointed out they are limited to two years for each route under federal guidelines.
"Nearly every airport has some kind of incentives program that is one of their tools in the tool box," Schorr said. "What Austin does is very typical ... in terms of offering fee waivers and marketing money for new service."
Schorr said airlines look at a variety of factors when they weigh new routes, such as market size, demographics and potential revenue. But he said incentives packages are somewhat "expected at this point" by airlines eyeing new markets.
"One of the things they're going to look at is what type of support they're going to get in the initial ramp up of service," he said. "That's really when they're bearing the brunt of the risk."
Kazanoff said funds for the incentives program come out of the airport's operating budget.
Most incentivized routes, airlines
Roughly $7.5 million in facility fee incentives have been doled out through the program since 2015, according to data obtained by the Austin Business Journal through a public records request. About $9.9 million in facility fee incentives were awarded from 2013 to July 2019 to more than 20 carriers.
Another $1.8 million in marketing incentives were also awarded to eleven carriers since 2013, records show.
The biggest recent recipient of incentives from Austin-Bergstrom is British Airways, which launched nonstop service to London-Heathrow about five and a half years ago.
From 2014 to 2016, British Airways received almost $2.1 million in facility fee incentives. It also received $400,000 in marketing incentives in 2014.
In only a few months in the first half of 2019, Spirit Airlines has received the second-highest amount of incentives of any carrier in the last six years. The budget carrier has gotten nearly $1.8 million in facility fee incentives since launching new nonstop service to Baltimore/Washington, Chicago, Denver, Detroit, Fort Lauderdale, Las Vegas, New Orleans, Orlando and Los Angeles earlier this year.
Spirit's incentives are the big reason why 2019 is already the largest year yet for the program — with almost $2.4 million doled out through July 25. Much of the the rest of the facility incentives so far this year went to bolstering new international service — $362,821.63 to Norwegian Airlines for London-Gatwick service to the U.K.; $191,010.91 for Lufthansa service to Frankfurt, Germany; and $35,907.24 for WestJet service to Calgary, Canada.
Marketing incentives have also peaked with this year's total already topping all other years since 2013 thanks to $400,000 in incentives to Lufthansa and $50,000 to WestJet for their respective service to Frankfurt and Calgary.
Southwest Airlines, Austin-Bergstrom's top carrier, has received $717,506.95 in facility fee incentives through a patchwork of waivers going back to 2013. That's the fourth-highest total incentive haul in the data provided, behind Norwegian's $1.1 million in incentives so far for its new London-Gatwick service.
But other legacy carriers such as American, Delta and United airlines haven't benefited as much from the program as some low-fare and international air service providers. Those airlines — which are second, third and fourth respectively in the most recent monthly passenger totals — all have received less than $100,000 in incentives since 2013.
No application process 'a huge red flag'
The rules for the airport incentive program state carriers must submit written requests to participate.
But when Austin Business Journal asked for applications to participate in the program and city responses to those requests, the aviation department had no responsive records.
Kazanoff said they begin working on a news release with airlines once they've decided to announce a new route connecting with Austin.
"That signifies the first part of the incentive program that they intend to serve the market," Kazanoff said, referring to the marketing side of the program.
"We don't have an application process, rather we have this long-term development process with airlines explaining the incentive program," she added.
Kazanoff said an internal process follows where a legal document called an incentives rider — which formalizes the agreement — is attached to an airline’s contract with the airport.
"So we have formal documentation," she said.
The lack of an application process concerns Nate Jensen, a University of Texas professor who studies economic development incentives and is often skeptical of their use.
He said it reminds him of when the Texas Enterprise Fund, the state's deal-closing incentives program for job creation, drew scrutiny several years ago for awarding millions of dollars to companies that never formally applied for incentives.
Jensen said requiring applications for incentives is viewed as a best practice in economic development — meaning no applications can be a sign of malpractice or "not taking the process very seriously."
"It's a huge red flag because often that can mean it's not going through any formal ... evaluation," he said.
"No protocol is just a recipe for disaster," he added.
Zaykowski said he feels the program's process is working well, adding that airlines should not be "bogged down in a ton of red tape."
"It gives them flexibility," he said. "It allows them to be nimble on their feet."
'What is most in demand'
ABJ also asked for updates to the list of target nonstop destinations, which determines what routes can qualify for certain incentives. But that list hasn't been updated since 2015.
Some routes have seen expanded service like Kansas City, Sacramento and Pittsburgh through incentives, while others, such as Honolulu and Panama City, remain more elusive.
Airport spokeswoman Mandy McClendon said the list is still relevant since it takes years to pursue markets for new air service. Kazanoff added that the airport is constantly pitching airlines on why they should put more planes in Austin, citing the years of work to add the first nonstop London service that began in March 2014.
"The lead up to landing British Airways was six or seven years of pounding on the corporate door," she said.
Kazanoff said the department and particularly the airport director have leeway to update the priority list at any point. But she said it's driven by analytics that show where passengers' ultimate destinations are out of Austin.
"This data ... drives what is most in demand and next on the list for Austin," she said.
Subsidized routes falling through
Some routes that have received incentives have since been discontinued by their airlines.
For example, Volaris received $377,175.53 in facility and marketing incentives for its Guadalajara service from 2016 to 2017, according to records. Frontier Airlines received $100,000 in marketing incentives to advertise service to Buffalo, Jacksonville, Milwaukee, Omaha, Reno, Providence and Charleston — in addition to separate fee waivers for all but one of those routes.
In 2018, ViaAir received more than $50,000 in facility fee incentives for Tucson, Oklahoma City, Little Rock and Tulsa nonstop routes that no longer exist. But Via was denied another $230,000 in potential marketing incentives for those routes, plus Amarillo and Birmingham, due to non-compliance, according to records.
With some incentivized routes being discontinued and other flights not receiving incentives at all, Jensen said it's not clear how officials can tell which incentives are pivotal to the success of new routes.
"There doesn't seem to be any acknowledgement of whether the marketing worked or not," he said.
Jensen also dislikes the argument these incentives aren't taxpayer funds, since revenues waived through the program could go toward airport improvements or other efforts.
"Money is fungible, so this money that is being given to the airlines could be used in a host of ways," he said.
Zaykowski thinks the program is still beneficial even if incentivized routes are discontinued, citing the need to compete with other cities for nonstop routes.
"You're not going to have a 100% success rate so I think it's absolutely worth it," Zaykowski said. "Because if you turn down a certain airline and say, 'we're not going to offer incentives here,' then maybe they're hesitant to come back to the table at another time when the route would've worked."
What's next
The aviation department is expected to adopt new rules for the program in September or October through the city's rule-making process. The updated program could spell out specific incentives for airlines that launch new nonstop service to Hawaii, Ireland, China and South Korea.
Kazanoff said an update to the program makes sense with a new executive director on board and the airport's ongoing work to meet expected air traffic demand, such as the 2040 Airport Master Plan.
"It's time to update the program to make clear to the airlines in the community that we offer a competitive program," she said. "We are constantly in pursuit of landing more options for our customers."
Zaykowski believes the current program was crucial to securing the British Airways flight to London and the new Lufthansa flight to Frankfurt, which launched earlier this year.
"Without this incentive program, I think it's fair to say we wouldn't have some of the international routes that we have," Zaykowski said. "It's a vital part of growing the airport's route tree."
"Without these routes, the region [and] the economy risk falling behind," he added.
Zaykowski said he hopes the program remains flexible to airlines' needs as it aims for more ambitious air service targets around the globe.
"Whether it's Europe or South America or Asia or wherever it might be, we've got to be prepared to make offers that are competitive."
|
|
|
|
Prev
Linear Mode
