Airport Incentive Programs: Legal and Regulatory Considerations in Structuring Programs and Recent Survey Observations 2010 ACI-NA AIRPORT ECONOMICS & FINANCE CONFERENCE Monica R. Hargrove ACI-NA General Counsel May 4, 2010
Due to recent airline service reductions, some airports have attempted to attract new service providers According to a GAO study released in April of 2009, from the fourth quarter of 2007 to the fourth quarter of 2008, 38 airports lost all scheduled air service. Additionally, 14 airports that had direct service to two or more markets in 2007 had direct service to only one market during the fourth quarter of 2008. Finally, some airport and community officials affected by the service reductions fear the impact of service losses and reductions on local businesses and residents. The referenced GAO study is entitled Commercial Aviation: Airline Industry Contraction Due to Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, and Federal Government Revenues.
Airline/Airport Incentive Agreements may help an airport attract new service providers or encourage existing providers to add new destinations from an airport. However, there are regulatory constraints on the structure of airport/airline incentive agreements.
Principal Constraints Include: Revenue Diversion Prohibition Self-Sustaining Requirement Unjust Discrimination Prohibition Contractual/State and Local Law Issues Restrictions on airport sponsors use of non-airport revenues
Revenue Diversion Prohibition 49 U.S.C. 47107(b) restricts the use of airport revenue to: The capital or operating costs of--- The airport; The local airport system; or Other local facilities owned or operated by the owner/operator of the airport and directly and substantially related to the actual air transportation of passengers or property See FAA's Final Policy and Procedures Concerning the Use of Airport Revenues, 64 Fed.Reg.7696, (February 16, 1999).
What is Permitted and What is Not Permitted Under the Revenue Diversion Prohibition Permitted 1. Use of airport revenues [D]irected toward promoting competition at an airport [including] new air service and competition at the airport 2. Cooperative advertising, where the airport advertises new services and advertising of general or specific airline services to the airport Not Permitted (or qualified) 1. Direct Subsidies of air carrier operations (but airports may offer credits) Direct subsidies are payments of airport funds to carriers for air service BUT discounts/waivers do not involve an expenditure of airport funds and thus do not violate the revenue diversion prohibition (subsidies do not include waivers of fees or discounted landing or other fees during a promotional period The cost of offering discounted fees or waivers cannot be shifted to other air carriers not participating in the promotional incentive program (thus the airport may need a discretionary source of airport revenue or revenue from an external source) to fund the promotion. Airport must offer promotional fee waiver or discount to all similarly situated users of the airport willing to provide the same type and level of new service consistent with the promotional offering.
Self-Sustaining Requirement Airport must be as self-sustaining as possible under the circumstances at the airport, 49 U.S.C. 47107(a)(13), Grant Assurance 24, Fee and Rental Structure Permits airports to forego revenue, through fee waivers for promotional period FAA prefers credit to carriers for following period May invite scrutiny if results in check written to carrier Should be clearly documented as a waiver and not a subsidy
Unjust Discrimination AIP grant assurances prohibit unjust discrimination among airport users in terms of conditions and fees [40 U.S.C. 47107(a)(1)] BUT airports can make reasonable distinctions between classes of users, such as signatory vs. non-signatory carrier fees FAA is less likely to disapprove incentive program where most carriers at airport support the program Gaming the system (e.g., discount offered for service between new city pairs and carrier drops existing service but replaces it with new service and obtains benefit) Cross-subsidization (i.e., incentive program fails to generate additional revenue that is shared among carriers so that existing carries pay more in fees to cover the deficit)
Acceptable/Unacceptable Distinctions: New entrant vs. incumbent One year limitation---afterwards, FAA views new entrant as similarly situated with incumbent carrier International vs. Domestic Service FAA has allowed airports to provide incentives only for International Service Consistent with airport right to select target markets Low-Fare vs. Legacy (Unacceptable) Must develop objective criteria that does not distinguish between categories of carriers Unjust Discrimination Standard does not apply if the Airport Sponsor has no role in determining what carriers receive incentives
Contractual /Local and State Law Issues Most Favored Nations Clauses Other Restrictive Clauses Local/State law issues
Restrictions on Airport Sponsors Use of Non-Airport Revenues for airport incentives Letter from D. Bennett to Wichita Airport Authority, Nov. 18, 2003 (financial incentives offered by City to Air Tran for daily jet service to specific city pairs) Letter from D. Bennett to City of Tallahassee, December 22, 2003 (financial incentives offered by City to Air Tran for daily jet service to specific city pairs)
ACI-NA Airport Incentives Survey The survey was launched on April 21, 2009 to determine what airport incentive programs and agreements have been in existence since 2006. The survey was designed to gather information helpful in evaluating: Whether airport size is important in an airport's implementation of such agreements; What impediments affect an airport s decision to enter such agreements; Key terms of the agreements; Primary reasons for entering into such agreements; and Whether the implementation of incentive programs and/or execution of incentive agreements fulfilled the airport's purposes. The survey also attempted to determine the extent to which consultation with the Federal Aviation Administration (FAA) on the terms of such incentive agreements was sought and whether modifications to the airport's initial programs were made as a result of FAA guidance.
Preliminary vs. Final Survey Participation Preliminary Survey results, based on 35 airport responses received by May 1, 2009, were presented during the Spring Legal Conference on May 15, 2009. See http://www.aci-na.org/static/entransit/legal_sessioniii_kemp- AirportIncentivesSurveyResults.pdf 52 airports responded to the survey by the final deadline of May 20, 2009. The final survey results were sent to participating airport representatives.
Airport Responses by Hub Size Number of Responding Airports (by size) Number of Airports 20 15 10 5 0 13 19 14 6 Large Hub Medium Hub Small Hub Non-Hub
Number of Airports with Domestic Incentive Agreements/Programs Airports with Agreements Airports w/out Agreements Large Hub: 6 7 Medium Hub: 10 8 Small Hub: 13 1 Non-Hub: 4 2 TOTAL 33 18 [ No Response: 1 ]
Number of Airports with International Incentive Agreements/Programs Airports with Agreements Airports w/out Agreements Large Hub: 10 3 Medium Hub: 8 8 Small Hub: 3 10 Non-Hub: 2 4 TOTAL 23 25 [ No Response: 4 ]
Impediments to entry into domestic incentive agreements Airport not approached about incentive agreement Current airline lease does not allow incentives. Focus is on international passenger and cargo service. Incentive offered in past not attractive to new entrant because space lease or sublease costs were too high. Lack of funds, legal issues under signatory agreements, and anticipated objections from hub carrier.
Impediments to entry into international incentive agreements Current lease does not permit incentives. Airport has not been approached about entering such an agreement. Service for which contemplated agreement would be entered deferred until 2010. No incentive has ever been associated with airport s international services.
Main reasons for interest in developing an incentive program/agreement To provide the ability for a carrier to start new service with upfront assistance from airport, minimize airport-related costs, and allow new service to be as successful as possible. To better compete with services offered from nearby airports. To attract new service providers. To increase enplanements and reduce leakage by providing more nonstop service and lower fares. Securing low-fare carrier service is of particular importance.
Main reasons for interest in developing an incentive program/agreement (Cont d) To motivate carriers to increase the number of destinations served from airport. Open new markets and increase seats in current markets. Enhance revenues. Increase non-stop services, competition, and hopefully close the gap in fares to similar destinations from nearby airports. To offset first year of operating costs of start-up service.
Main reasons for interest in developing an incentive program/agreement (Cont d) Revenue diversification and reducing dependence on largest carrier; creating connections to new destinations; increasing overall passenger traffic; improving customer satisfaction by offering a variety of destinations and flight frequencies. To induce carriers to provide service to markets not available in that community. To stimulate the introduction of international service. Airlines expect that an incentive of some type will be offered; necessary to compete with other airports seeking new international service.
Has implementation of incentive program/incentive agreements fulfilled airport s purpose? Yes No Large Hub: 9 2 Medium Hub: 7 3 Small Hub: 10 2 Non-Hub: 4 1 TOTAL 30 8 [ No Response: 14 ]
Did airport consult with FAA about incentive program? Did airport modify program after consulting with FAA? Consulted with FAA Modified Program Yes No Yes No Large Hub: 8 3 1 7 Medium Hub: 7 6 4 3 Small Hub: 5 6 1 4 Non-Hub: 1 4 1 0 TOTAL 21 19 7 14 [ No Response: 12 ] [ No Response: 31 ]
Summary of Key Terms Airport Incentives Offered Airline Eligibility for Incentives Additional Requirements
Airport Incentives Offered Include: Partial Landing fee credit for specified term Temporary/Exclusive-Use Rent Reduction Inaugural event financial support Billboard/local radio/ other media support Waiver of passenger terminal ramp fees, gate use charges, incremental space fees or other fees required for qualifying flights (sometimes qualified on peak vs. non-peak seasonal basis) Local/state authorization of tax exemptions/reductions for certain airport construction projects associated with new service Assistance in identification of local, state or national support programs in targeted markets Assistance with airport facility improvements and/or equipment purchases, on a case by case basis
Airline Eligibility Requirements for Incentives New Airline Entrant at airport Incumbent airline starts additional direct service to city not covered at airport New roundtrip non-stop international or domestic passenger service at least x times per week for a minimum term, on a continuous basis Addition of new all cargo international service at airport Upgrade of equipment by existing carrier, e.g., regional jet service upgraded to jet service, on specified route
In addition to meeting eligibility requirements, additional terms may include that the Qualifying Airline: Provide monthly reports to airport identifying enplaned and deplaned passenger totals for airline broken down by air service route(s) for the previous month Actually operate the aircraft and provide new service that would otherwise qualify for the financial incentives provided Become a signatory tenant at airport Provide evidence that all regulatory agencies have given necessary approvals for the new qualifying route/service
Recommendations Confer with FAA to identify potential issues/problems before implementing an incentive program Make sure there are no direct subsidies involved Try to resolve any potential gaming/cross-subsidization issues Consider potential issues under local law or lease and use agreements Review with signatory airlines to reduce likelihood of challenges by selective carriers [suggested in Amended Rates and Charges Policy]