Docket DOT-OST-2016-0037 Proposal under the Small Community Air Service Development Grant Program Santa Fe, New Mexico Under 49 U.S.C. 41743 et seg DUNS # 069420818 Congressional District # 03
Table of Contents I. APPLICATION SYNOPSIS 3 II. GRANT PROPOSAL 4 III. THE SANTA FE AIR SERVICE PICTURE 5 Severe Loss of Access And Passengers At SAF 7 The Traffic Base At Santa Fe 8 Santa Fe Fares Higher Than Similar Airports 11 Summary of The Air Service Deficiency 12 IV. THE GRANT SOLUTION 13 Air Service Development Program At Santa Fe 14 Marketing & Community Support 14 Continuing Support Post-Grant 15 V. SUMMARY 16 Docket DOT-OST-2016-0037 Page 2
I. Application Synopsis This page provides a summary of the content of this application. A. Official Sponsor Santa Fe Municipal Airport is the official sponsor of this application and the point of contact is: Mr. Cameron Humphres Airport Manager Santa Fe Municipal Airport 121 Aviation Way, Building 3002B Santa Fe, NM 87507 (505) 955 2901 B. Additional Community Members This application has wide local support. Northern New Mexico Air Service Alliance, representing a coalition of business will be the point organization representing the Community Members in this application. The County of Santa Fe, the City of Santa Fe and the New Mexico Department of Transportation will also be part of the community coalition supporting this application. C. Brief Project Description: The air service made possible by this grant will resolve a major air service deficiency created by the elimination of flight access to Los Angeles and the US West, which was precipitated by the national shortage of pilot time. American Airlines has indicated that it is interested in adding flights that will access its connecting hub at Phoenix Sky Harbor International Airport, contingent upon funding to offset the risk of this new market operation. As a corollary to the need to re-establish Santa Fe access to the West, this proposed service will concurrently address the single greatest O&D leakage at Santa Fe, which is to Phoenix, the largest market in the SAF ABQ corridor. The application requests a grant of $500,000, to be accompanied by match from a combination local and state sources of $500,000. This will be supported by additional inkind incentives. D. Eligibility Santa Fe is fully compliant with the eligibility requirements as outlined in the Docket. Docket DOT-OST-2016-0037 Page 3
II. Grant Proposal Santa Fe Municipal Airport (SAF), in partnership with the Northern New Mexico Air Service Alliance herein submits an application for a grant under the 2016 Small Community Air Service Development Grant Program. The Northern New Mexico Air Service Alliance is a regional partnership including, but not limited to the Santa Fe Chamber, Tourism Santa Fe, Taos Ski Valley, and Angel Fire Resort. Santa Fe Suffers An Economic-Threatening Air Service Deficiency Despite strong traffic, on September 1, 2015 American Airlines ceased its Santa Fe Los Angeles service. In place for over six years, the flights had achieved economic viability and were a key factor in the region s air service access. Unfortunately, the lack of pilot resources resulted in American deleting this important and only access to the West from SAF. To address this deficiency, the community is requesting a grant of $500,000, to be matched with $500,000 from a combination of local sources, to provide a risk-abatement mechanism and related marketing activities to support flights accessing the American Airlines hub at Phoenix. American has noted that the shorter SAF-PHX flight segment about half that of SAF- LAX and the strength of their Phoenix connecting hub combine to make the SAF-PHX route of interest to them. However, again due to lack of pilot and other operational resources, the carrier has made it clear that to reallocate flying to this new market would necessitate a risk-offset in the form of a minimum revenue guarantee to incubate the service. The Department is familiar with these risk-offset mechanisms, which have been successful across the nation with the use of SCASD funds. This Application Resolves A Double-Deficiency This option which American has evinced interest to review will not only address the Western access deficiency caused by the loss of LAX flights, but secondarily will provide Santa Fe access to the largest single O&D market in the SAF Albuquerque corridor, which is Phoenix. Today, all of the estimated 36,800 annual Phoenix passengers generated in the SAF service area use the Albuquerque International Sunport, more than an hour away. They have no alternative options. Therefore, in addition to regaining the traffic lost with the LAX service, the flights made possible by this grant will address the largest single leakage destination from SAF. Docket DOT-OST-2016-0037 Page 4
III. The Santa Fe Air Service Picture Current SAF Air Service As of September 2015, Santa Fe has air service access from just two connecting hub gateways. These are the American Airlines hub at Dallas/Ft. Worth, and the United Airlines hub at Denver. With the Albuquerque International Sunport within a 90 minute drive from the majority of the SAF population base, passenger leakage is a major issue, and any loss of current air access at SAF only drives more traffic to use ABQ. Traffic Composition Air Service Is The Lifeline For Santa Fe Santa Fe is a major center for tourism, and air service is the lifeline of the community. Traffic is comprised mostly based on visitors to the community. This means that scheduled air access from the rest of the nation is critical to economic viability of Santa Fe. The O&D data for the twelve months ending third quarter 2015 illustrates this traffic dynamic. Note the percentages of passengers that are inbound-generated. In fact, over two thirds of all SAF traffic is comprised of passengers visiting the region. 1 Therefore, the loss of access from the West Coast will be materially detrimental to the community s economy. 1 Source: Aviation DataMiner analysis of airline-reported DOT data. Docket DOT-OST-2016-0037 Page 5
Rank Market Psgr % Inbo und Visito rs Top SAF O&D Year End 3Q 2015 % o f T o tal SA F P ax 1 DFW 18,664 77.1% 12.6% 2 LAX 16,015 62.0% 10.9% 3 LGA 9,796 64.5% 6.6% 4 DEN 6,363 59.8% 4.3% 5 AUS 4,880 68.0% 3.3% 6 BOS 4,609 67.2% 3.1% 7 SFO 4,041 62.5% 2.7% 8 EWR 3,695 77.2% 2.5% 9 DCA 3,504 60.4% 2.4% 10 IAD 2,970 76.2% 2.0% 11 PHL 2,863 71.3% 1.9% 12 ORD 2,838 64.5% 1.9% 13 IAH 2,372 75.3% 1.6% 14 MSP 2,179 63.9% 1.5% 15 SAT 1,814 74.8% 1.2% Note also, that Los Angeles has been the second largest O&D destination, with over 10% of the SAF market, and the new service that this grant will make possible will not only reestablish viable connectivity from LAX, but also from the rest of the Pacific Coast. 2 2 Data is from Aviation DataMiner, sourced from DB1B sample and reconciled against T-100 and other sources. Docket DOT-OST-2016-0037 Page 6
Severe Loss of Access And Passengers At SAF To illustrate the effects of loss of LAX nonstops has had on the SAF market, comparing the fourth quarter of 2014 with the fourth quarter of 2015 (the first full quarter after the deletion of LAX nonstops), the SAF-LAX market dropped by almost 90%, with this demand shifting to using Albuquerque. Airport Top Markets Compare - SAF YEAR 2014 Q4 O&D RANK Year 2015 Q 4 O&D Rank 2016 Rank Mkt PAX 2015 Rank Origin PAX 1 DFW 4,860 1 DFW 4,942 2 LAX 4,265 2 DEN 2,401 3 LGA 2,500 3 LGA 2,155 4 DEN 2,180 4 BOS 1,407 5 BOS 1,113 5 PHL 1,245 6 AUS 1,100 6 EWR 1,137 7 EWR 990 7 IAD 1,080 8 SFO 956 8 AUS 1,022 9 ORD 830 9 SFO 957 10 IAH 735 10 DCA 756 11 DCA 650 11 IAH 657 12 MSP 582 12 MIA 604 13 IAD 550 13 SAT 575 14 PHL 540 14 ORD 570 15 STL 460 15 MSP 558 16 CLE 451 16 DTW 493 17 DTW 445 17 LAX 489 Note that there are almost 3,800 local SAF-LAX O&D passengers lost in just the first 90-day period after the loss of LAX flights - at SAF. All of these consumers are now using Albuquerque. In addition, there were an additional 1,420 passengers who were connecting at LAX in the 2014 quarter that were lost, most of which now have no option except to use Albuquerque. 3 3 Source: Airline-reported data to DOT, reconciled with T-100 and other sources. Docket DOT-OST-2016-0037 Page 7
The Traffic Base At Santa Fe Unlike many smaller markets, the air service at SAF enjoys very strong load factors. While there is some seasonality, the overall situation is that the market is very underserved. A glance at load factors for the nine months prior to the loss of LAX flights demonstrates this. Santa Fe Generates High Load Factors... Limited Excess Capacity To Replace LAX 100.0% 90.0% Nine months - March - October 2015. 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Mar Apr May Jun Aug Sept Oct DFW 90.2% 84.0% 87.3% 79.3% 73.8% 80.7% 85.2% LAX 72.0% 82.8% 82.7% 62.9% 64.8% 70.8% DEN 81.3% 83.8% 87.2% 81.7% 80.3% 91.0% 85.4% Service to DFW and to Denver are in most months at or above 80%, and in some months exceed 90%. The LAX load factors are somewhat misleading and are affected by the topography of the region, which has the potential of causing load restrictions. The combination of long sector length to LAX (710 miles) and the high altitude of SAF (6,348 ft.) reduced the actual seats that could be sold on the CRJ-700 aircraft operating the route. The SAF-PHX route, at half the sector length, will not face this situation. Santa Fe Is Now Cut Off From Western Air Access The remaining air service at SAF cannot fill the gap caused by the lost LAX access. Docket DOT-OST-2016-0037 Page 8
The American hub at DFW provides access from only the Eastern US. The service to the Denver hub of United Airlines results in circuitous connectivity to the Western US, and as a result, captures very little of this traffic that is generated in the SAF service area. One of the challenges facing Santa Fe as the result of the discontinuance of the LAX flights is that there is also very little capacity slack to accommodate these passengers over Denver, even if the circuitous connectivity were consumer-acceptable, which based on geography and actual passenger flows, it is not. In fact, the high load factors on the United/Denver segment (83%) equates to less than 11,000 empty annual seats. The annual lost AA/LAX traffic (including connect/flow over LAX) is approximately 16,200 passengers. United Denver Is Not An Alternative The United Airlines system entered the DEN-SAF market in 2013, and has enjoyed strong success. This success, however, has been in mostly flowing Eastern US traffic to and from SAF over their Denver connecting hub. Furthermore the travel time involved in flying to Denver to connect to points in the West is far higher than the option of driving to board flights at Albuquerque. In the year ending 3Q 2015, there were only two western markets in the top ten United/Denver connect destinations from SAF. These were SFO and LAX, which combined represented less than five passengers per day each way. Connect Market PDEW LGA 5.5 EWR 2.9 IAD 2.9 SFO 2.7 BOS 2.2 MSP 2.0 ORD 2.0 LAX 1.6 CLE 1.8 IAH 1.4 What these data clearly indicate is that without the new service to Phoenix, which will be made possible by this grant, Santa Fe will be cut off from air access to the Western United States. Docket DOT-OST-2016-0037 Page 9
Addressing Loss of LAX, Will Also Address PHX Leakage As will be illuminated below, this service will also address another major air service deficiency at SAF. The American Airlines option will deliver nonstop flights to the #1 O&D market in the SAF-ABQ corridor Phoenix. Total SAF/ABQ Corridor Markets Corridor SAF ABQ Rank Market TOTAL PSGR Psgr Psgr 1 PHX 289,093 88 289,005 2 LAX 268,045 16,015 252,029 3 LAS 199,697 852 198,845 4 DEN 181,654 6,363 175,291 5 DAL 156,788 0 156,788 6 OAK 156,157 90 156,068 7 SEA 142,980 1,403 141,577 8 SAN 135,500 1,105 134,395 9 BWI 111,005 1,048 109,956 10 DFW 101,307 18,664 82,643 Today virtually, all traffic between PHX and SAF which is conservatively estimated at approximately 36,800 annual O&D is being lost to Albuquerque. The service levels proposed in this application are estimated to be capable of recapturing approximately 15% of that leakage, 4 By way of historical background, Great Lakes Airlines operated the SAF-PHX market briefly for six months in 2013 with one flight per day. The lack of connectivity, the low consumer acceptance of the 19-seat aircraft operated, high fares, and low market awareness resulted in the service failing to meet even minimal consumer expectations, especially with the presence of over ten nonstop jet flights to Phoenix from nearby Albuquerque. The AA-branded jet service herein proposed will see much different customer acceptance. 4 On a population/demographics/buying power analysis, the SAF region is estimated to generate approximately 36,800 annual O&D to PHX. However, the high levels of ABQ-PHX frequencies and the much lower fares that can offered compared to the proposed AA RJ service, the actual recapturable O&D is estimated to be approximately 15% of the SAF- PHX generation, or 5,500 annual O&D. Docket DOT-OST-2016-0037 Page 10
Santa Fe Fares Higher Than Similar Airports Santa Fe has major fare variances with much larger Albuquerque. While this is somewhat natural when comparing the economics of small airport airline service with that of larger ones, it underscores the importance of maintaining service levels at SAF that can retain an economically-viable traffic base. Top 15 SAF O&D Markets YE 3Q 2015 SAF ABQ SAF Avg OW Avg OW SAF Market Psgr Psgr Rank Fare Fare Premium 1 DFW 18,664 $276.42 82,643 $232.65 18.8% 2 LAX 16,015 $222.07 252,029 $185.59 19.7% 3 LGA 9,796 $355.60 65,295 $249.64 42.4% 4 DEN 6,363 $192.87 175,291 $172.10 12.1% 5 AUS 4,880 $278.86 57,435 $261.60 6.6% 6 BOS 4,609 $352.51 66,713 $279.22 26.2% 7 SFO 4,041 $291.22 69,626 $226.13 28.8% 8 EWR 3,695 $383.49 39,206 $278.56 37.7% 9 DCA 3,504 $404.26 80,431 $289.11 39.8% 10 IAD 2,970 $379.83 33,150 $312.70 21.5% 11 PHL 2,863 $358.74 38,318 $314.90 13.9% 12 ORD 2,838 $339.35 55,628 $286.94 18.3% 13 IAH 2,372 $325.71 46,275 $253.71 28.4% 14 MSP 2,179 $285.48 54,887 $255.61 11.7% 15 SAT 1,814 $339.01 47,906 $254.83 33.0% All Markets $309.06 $236.83 30.5% The data are for the full year ending third quarter 2015, and are ranked by O&D demonstrated and generated by the character and levels of air service at SAF. 5 In the shadow of ABQ, the only real competitive advantage that SAF can offer is a level of local access that can retain a sufficient level of consumers to use the local airport. The loss of LAX the #2 SAF destination is a major challenge to this requirement. SAF Fare Levels Compared To Similar Airports To get a full comparison, and to address any episodic events at individual airports, the total traffic and average-paid fares for the latest-reported seven quarters of data, from 1Q 2014 through 3Q 2015 were analyzed at airports of similar traffic levels to SAF. 5 This is very different from demand, as the traffic levels will be affected by the actual service offered at SAF. The destinational demands not satisfied by this service are being met by service at ABQ. Source: Airline reported DOT data, analyzed by Aviation DataMiner. Docket DOT-OST-2016-0037 Page 11
Because air service levels, traffic patterns, connecting patterns and other factors vary from airport to airport, the most important metric is what consumers are paying per-mile of air travel, based on average nonstop miles. A secondary metric is average one-way fare, including federal fees and taxes. Santa Fe Yuma Champaign Springfield Flagstaff Total Psgr 251,350 282,321 303,098 303,749 251,084 Gross Fare $307.39 $306.73 $283.64 $216.97 $274.91 Nonstop Yield 25.70 20.60 25.46 19.67 21.85 Length of Avg Flt 1,194 1,438 1,143 1,088 1,272 In both of these metrics, SAF suffers higher average cost of travel. The addition of American Airlines service to its Phoenix hub will be a positive factor in addressing this situation. One factor to note is that at Phoenix, low-fare Southwest is the largest O&D airline. This results in American aggressively matching both local and flow-traffic fares, which will benefit SAF connecting passengers. Summary of The Air Service Deficiency With the loss of the SAF-LAX service, the damage to the Santa Fe economy is three-fold: Because of lack of capacity, overall fares are high The penalty is particularly damaging to a leisure destination such as SAF, where over two thirds of air traffic is composed of visitors The remaining air service access not only cannot access the regions lost with the end of LAX service, but also has high load factors that cannot accommodate significant additional passenger volumes. For these reasons, the proposed AA service to Phoenix that this grant will make possible is vital to the economy of Santa Fe. Docket DOT-OST-2016-0037 Page 12
IV. The Grant Solution The addition of American service to Phoenix, as noted above, will address not only the westbound deficiency resulting from the loss of LAX service, but will recapture much of the enormous leakage now being experienced in the SAF-PHX market. The solution proposed in this application is to provide a risk-offset to allow American Airlines to enter the SAF-PHX market. This is an approach that has worked successfully across the nation in several programs funded by the Small Community Air Service Development program. The service objective of this program will be the implementation of two weekday round trip flights between SAF and the American Airlines hub at Phoenix, with a reduced frequency on week-ends. Because of issues such as limited pilot time and aircraft availability, it would be acceptable for the carrier to begin with a single round trip frequency, with the agreement that it would increase to two round trips within six months of service initiation. Funding Mechanism The community is requesting a grant in the amount of $500,000, which will be matched by local cash funding in the total amount of $500,000, for a total program of $1 million. The local match will come from a combination of funding from the Northern New Mexico Air Service Alliance, in the amount of $300,000, and from in-place funding from the State of New Mexico in the amount of $200,000. A total of $600,000, combining both grant funding and local dollars will be used for the purpose of providing a minimum revenue guarantee to American Airlines. This program represents significant local funding. Aside from the state funding, the local community is providing a sixty-percent match to the requested program grant. C ategory SC ASD Grant Community Funds TOTAL Revenue Guarantee $300,000 $300,000 $ 6 0 0,0 0 0 M ark eting/advertising Support $200,000 $200,000 $ 4 0 0,0 0 0 TOTAL $500,000 $500,000 $1,000,000 To assure the new service is successful, the community plans an aggressive marketing and promotional program is planned, focused on building inbound ridership, as well as local support. 6 6 As an important leisure destination in New Mexico, air access from the rest of the nation and globe is the lifeblood of Santa Fe, with approximately 68% of all passengers being in-bound generated. Source: Airline reported data 2014 2015 as analyzed by Aviation DataMiner. Docket DOT-OST-2016-0037 Page 13
Risk-Offset Program The risk offset will be engineered similar to others that have been made possible by SCASD grant awards. 1. Upon final grant approval the Airport will begin negotiations as appropriate with American Airlines. As noted, the carrier has provided a letter of support for this application. 2. The negotiations will establish the specific revenue-generation requirements for the carrier, as well as pre-determined cost factors on a per-flight basis. Adjustment factors will be included for shifts in fuel price. 3. Specific schedule and reliability metrics will be established for the carrier. For example, it is envisioned that there will be a requirement for 97% flight reliability, ex-weather, and that fare levels will be commensurate with yields charged in markets with similar characteristics. 4. The revenues will include the local passengers to Phoenix, as well as an agreedupon revenue prorate for the passengers that SAF generates to the airline beyond the hub. It is envisioned that all passenger-related revenues will be included in the minimum revenue guarantee computation. 5. The grant period is envisioned for a two-year period, starting with the initiation of new service. Each on a quarterly basis, a settlement will be made regarding any shortfall in revenues. 6. The Airport will provide the Department with quarterly reports on the performance of the new, grant-assisted route. These are general guidelines. The exact agreement will depend on negotiations and the full agreement of the Airport and the Department. Air Service Development Program At Santa Fe Santa Fe has had success in the last five years in attracting United Airlines service from its hub at Denver, and in supporting and making successful the American flights to both DFW and Los Angeles. Marketing & Community Support The marketing support is felt to be critical to assuring community awareness of the new service. Docket DOT-OST-2016-0037 Page 14
In this regard, the Airport and the Northern New Mexico Air Service Alliance contemplate an aggressive media and civic awareness program to be initiated within 90 days prior to the start of American service to Phoenix. Unique to Santa Fe, it needs to be understood that more than two thirds of the air traffic are visitors from the rest of the nation and the globe. Therefore, while local marketing will be important, it will be critical to address the need to build awareness of the new service outside of the region. Normally for a small community, this would be daunting. However, because Santa Fe is already a national and global destination, the hospitality industry in Santa Fe already has extensive national and international outreach databases that will be utilized to broadcast the new service access to the region via Phoenix. In addition, joint programs with American are expected to be developed, particularly in the Phoenix area. Continuing Support Post-Grant The airport and community are confident that the service proposed herein will be successful and will be self-supporting. However, as demonstrated by the local match, and the state support, the community has the resources to assure that the new flights to Phoenix will remain viable beyond the end of the grant period. Docket DOT-OST-2016-0037 Page 15
V. Summary Proposal of Santa Fe New Mexico This application meets both the spirit and the intent of Congress in enabling the Small Community Air Service Development Grant Program: Santa Fe has a material air service deficiency. The loss of LAX service now demands that virtually all local consumers and visitors to/from the US West have no alternative but to use other airports, in this case, Albuquerque. Fares at SAF are on average 30% higher than at Albuquerque. While parity with that airport in regard to fares is not likely, the loss of access to the LAX AA hub will only make the situation worse. This grant will be important to both recapturing lost traffic, but also lowering ambient fares at SAF. The low-fare presence of Southwest at Phoenix provides pricing discipline at that airport, which will be of benefit to SAF. The proposed solution made possible by this grant is based on an approach that has proven successful in SCASD programs across the nation over the past decade. It is what airlines want when they take a risk on a new market, and it has worked. American Airlines is interested in assisting the community in addressing this deficiency. A letter of support in attached to this document. Based in this, the Santa Fe Municipal Airport and Northern New Mexico Air Service Alliance respectfully request favorable consideration of this grant application. Docket DOT-OST-2016-0037 Page 16
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