REPORT TO THE CITY COUNCIL
June 30, 2016
FROM: KEVIN R. MEIKLE, Director of Aviation
Airports Department
SUBJECT
Title
Approve an updated Incentive Program for Scheduled Domestic and International Air Service for Fresno Yosemite International Airport (Council District 4)
Body
RECOMMENDATION
Staff recommends Council approve Fresno Yosemite International Airport’s (FAT) updated Incentive Program for Scheduled Domestic and International Air Service (Incentive Program), which replaces the current incentive programs for Domestic Air Service and Scheduled International Air Service.
EXECUTIVE SUMMARY
FAT competes for air service in a dynamic environment in which airports pursue additional service by highlighting the strengths of their service areas, the potential profitability of new routes, and by extending incentives to reduce airlines’ start-up costs. This proposed updated Incentive Program enhances FAT’s ability to compete for limited airline resources and supports our key goals of attracting additional service and fostering competition on existing routes - a key factor in reducing airfares. Refer to Attachment A.
Under the existing domestic incentive program, air service is segregated into short-haul, medium-haul, and long-haul categories and offers incentives up to $95,000 (combined marketing support and landing fee waivers). The updated Incentive Program is market-based (not distance-based) and provides incentive levels commensurate with the market.
The updated Incentive Program is also more consistent with other programs in the industry, and therefore more competitive. Refer to Attachment B.
BACKGROUND
Airline incentive programs aim to attract additional sustained air service to an airport. FAT has an impressive record in this area. Airline initiative program success stories include AeroMexico and Volaris initiating service to Guadalajara in 2011, service that now accounts for 11 percent of FAT’s passengers, and Alaska introducing service to San Diego in 2011, the carrier recently added flights to both San Diego and Portland. By targeting high demand priority destinations, the updated Incentive Program better positions FAT to add to these achievements.
Over the past decade the airline industry has consolidated from nine to four major airlines, which are American, Delta, United and Southwest (“the Four”). The Four control 80 percent of the domestic market, and favor concentrating air service at large-hub international airports. The Four have significantly improved their ability to manage capacity. They have fewer available aircraft, which are selectively placed in high-profit markets. To compete effectively in this environment, smaller airports must offer meaningful incentives. This also sends a message that the City of Fresno is a serious business partner willing to share market-entry risks.
The updated Incentive Program complies with the Federal Aviation Administration’s (FAA) Revenue Use Policy (Policy) by extending incentives rather than subsidies. The Policy prohibits subsidies - usually direct payments of airport revenue to a carrier in exchange for additional service. The Policy permits incentives - typically a fee waiver and/or use of airport revenue to fund marketing support. It also complies with the FAA’s Air Carrier Incentive Program Guidebook by limiting the duration of incentives to a defined promotional period not to exceed two years. Incentives are discontinued at the expiration of that period.
The updated Incentive Program is available to all air carriers and markets. It also provides higher incentive levels to desirable markets not directly served out of FAT, such as Atlanta, Chicago, Minneapolis, Houston, Long Beach, and Orange County markets. Attachment C provides a summary of the updated Incentive Program.
The Fresno Chamber of Commerce participated in a 2015 air service study, which identified desirable nonstop destinations not currently served out of FAT. Airports then presented an overview of the updated Incentive Program in early June 2016 to the Chamber. The Chamber appreciates the importance of attracting additional and meaningful air service and supports the updated Incentive Program.
To ensure compliance with FAA policy, the updated Incentive Program and its concepts have been reviewed by Spiegel & McDiarmid LLP (outside Counsel specializing in aviation and FAA compliance requirements) and by the City Attorney’s office.
ENVIRONMENTAL FINDINGS
This is not a “project” for the purpose of CEQA pursuant to CEQA Guidelines Section 15378.
LOCAL PREFERENCE
Local preference does not apply to approval of the Airline Incentive Program because it is not a bid or award of a contract.
FISCAL IMPACT
The updated Incentive Program is self-funding. New air service created by the Incentive Program will stimulate passenger growth and generate additional revenue that will more than offset program costs. Although FAT is prohibited from funding incentives for general economic development, the incentive program may have incidental benefits for the regional economy to the extent it increases the volume of business travelers with a high propensity to spend on hotels, meals, and other local services. Additional air service may also create jobs. There is no impact to the General Fund from this action.
Attachments:
Attachment A: Incentive Program for Scheduled Domestic and International Air
Service at Fresno Yosemite International
Attachment B: Incentive Programs - Other Airports
Attachment C: Summary of Incentive Program