CITY OF *% CcT SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL SUBJECT: SEE BELOW COUNCIL AGENDA: 04/19/16 ITEM: ^ Memorandum FROM: Kimberly J. Becker DATE: April 6, 2016 Approved ^ SUBJECT: PROPOSED NEW AIR SERVICE SUPPORT PROGRAM APPROVAL RECOMMENDATION (a) Conduct a Public Hearing pursuant to California Government Code Section 53083 regarding economic development subsidies to be provided to Air China pursuant to the City's Air Service Support Program. (b) Adopt a resolution authorizing the City Manager or his designee to provide the following economic development subsidies pursuant to the City's Air Service Support Program: Air China: (1) Waive landing fees at 100% for 18 months after the initial operation and 50% for the next 12 months at an approximate value of $263,830. (2) Waive ticket counter fees at 100% for 18 months after the initial operation and 50% for the next 12 months at an approximate value of $329,472. (3) Waive gate fees at 100% for 18 months after the initial operation and 50% for the next 12 months at an approximate value of $172,224. (4) City will provide marketing funds of up to $600,000. OUTCOME Making the support program available to Air China will help them during the most difficult time of the new San Jose to Shanghai, China route ramp-up process. The Airport support program is envisioned to help airlines offset initial large costs to start new service by waiving landing fees, ticket counter fees, and gate fees along with providing marketing support where applicable. The result will be a higher tolerance for initial route startup costs by airlines, while increasing chances to gain long term maturity and associated profitability. The long term success of this new route will benefit the Airport as well as the City by increasing revenues for both entities.
April 6, 2016 Page 2 The table below shows the positive financial impact of the new route on Airport finances. Airport support amounts, consisting of initial period fee waivers and marketing funds, are exceeded by net airport revenues from concessions, parking, PFCs, and other activities. The result is positive incremental revenue for the Airport for the duration of the incentive period of 30 months. Long term revenues associated with this route will continue to benefit the financial situation of the Airport for years to come. Total Airport Revenue/Fees* Total Airport Support Air China Shanghai $2,680,148 $1,365,526 Incremental Revenue on Airport $1,314,622 * All amounts shown are net revenue to the airport. Higher gross revenues benefit airport tenants. Each additional year that the route continues to operate after the expiration of the support program will generate revenues for the airport. EXECUTIVE SUMMARY The airline support program facilitates the development of new air service at the Norman Y. Mineta San Jose International Airport (SJC). Recently announced, the new service from Air China to Shanghai, China qualifies for the support program which will help the airline during the most difficult time of the new route ramp-up process. The Airport support program is envisioned to help airlines offset initial large costs to start new service by waiving landing fees, ticket counter fees, and gate fees and provide marketing support where applicable. It is recommended to apply the support program to Air China. The wider economic impact for the City resulting from these flights is estimated to be approximately $65,000,000. BACKGROUND Mineta San Jose International Airport (SJC) is a strategic asset for achieving the City's economic development goals. Air service provides an essential link to support and sustain Silicon Valley's quality of life by moving people and products between San Jose and destinations both domestically and globally. Gaining better access to national and international markets and technology centers has long been a priority of the region's businesses. Community and business leaders and travelers have clearly expressed their strong desire to the Airport for improved access between San Jose and key domestic and international cities. Following the dramatic increases in oil prices in 2008 and the impact of the global recession, airline consolidation accelerated and the industry as a whole reduced flight and seat capacity to
April 6,2016 Page 3 improve profitability. This essentially eliminated short-term growth within the industry. Since 2008, the newly consolidated mega-carriers also systematically shifted flights in multi-airport regions to the large, international hubs including San Francisco, Los Angeles, and Boston. Medium-size hub airports, including SJC, witnessed substantial reductions in service and significant challenges remain. From the program's beginning in 2006, the SJC airline support program has continued to evolve to take into account changes in the industry as well as competitive dynamics. The launch of the Air China San Jose to Shanghai, China route will represent the first non-stop service to that destination in the history of the airport. Airports similar in size and route network breadth to SJC also have marketing funds available for airlines serving international destinations. The list below shows several examples along with their respective marketing support funds: - Austin [AUS]: $400,000 - Portland [PDX]: $625,000 - Tampa [TPA]: $750,000 - San Diego [SAN]: $750,000 The above examples focus on airport-generated marketing programs. However, SJC is also competing in a larger arena with much larger marketing initiatives and/or outright subsidies. - Dallas/Fort Worth International Airport has summarized a program of $ 1,000,000 plus for new qualifying international service. - Portland put together a program for Lufthansa valued at over $ 10,000,000. - Baltimore/Washington International Airport's service on British Airways has been characterized as an ongoing subsidy by the state of Maryland. The request to apply the air service support program to Air China's San Jose to Shanghai route is similar to recent Council approved requests for British Airways to London, Lufthansa Airlines to Frankfurt, Southwest Airlines to Dallas, Alaska Airlines to Eugene, and Air Canada to Vancouver. ANALYSIS Air Service Support Program The terms of the Air Service Support Program are outlined in the summary table below. Additional details regarding each section follow the summary table.
April 6,2016 Page 4 Service Landing Fee Waiver Ticket Counter/ Gate Fees Waiver Marketing Funds New Unserved Short-Haul Domestic 100% for 12 months n/a Up to $25,000 Any New or Added Long-Haul Domestic 100% for 18 months n/a Up to $50,000 Any New International within North America 100% for 18 months n/a Up to $50,000 Any New International outside North America New Entrant Carrier 100% for first 18 months; 50% for next 12 months As above n/a Up to $500,000 Same duration as 100% As above + Up Landing Fee Waiver to $100,000 Airlines need to apply for the support program to be eligible to receive fee waivers and marketing funds. Short-Haul Domestic Destinations Short-haul domestic destination defined as within 1,250 mile radius of SJC. 100% waiver of landing fees for up to 12 months for any new unserved destination. Long-Haul Domestic Destinations Long-haul domestic destination defined as more than 1,250 miles from SJC. 100% waiver of landing fees for up to 18 months for any new destination even if currently served by another carrier or for any added frequency if currently served by the carrier that is adding service. International Destinations within North America 100% waiver of landing fees for up to 18 months for any new destination even if currently served by another carrier or for any added frequency if currently served by the carrier that is adding service. International Destinations Outside North America 100% waiver of landing fees for the first 18 months of service, 50% waiver for the next 12 months for any new destination even if currently served by another carrier or for any added frequency if currently served by the carrier that is adding service. International Seasonal Service Seasonal schedule must be declared at the start of service. 100% waiver of landing fees for the duration of the first year of seasonal service.
April 6, 2016 Page 5 If seasonal service returns as year-round service, the start date of the full support program will coincide with the launch of the first seasonal service. New Entrant Carrier In addition to landing fee waivers, 100% waiver of Eligible Terminal Rents (ticket counter and gate fees (excluding Baggage Claim Charges, and Baggage Make-Up Charges and Exclusive Use Premises Charges) for 12 months for new unserved US shorthaul destinations; 18 months for US long-haul destination. In addition to landing fee waivers, 100% waiver of Eligible Terminal Rents for 18 months for international destinations within North America. In addition to landing fee waivers, 100% waiver of all Eligible Terminal Rents for 18 months and 50% waiver for the next 12 months for international destinations outside North America. Marketing Funds Marketing Introduction Program available to all new destinations - includes on-airport messaging, website announcement, external newsletter announcement, public relations assistance, community introductions, community investment program (if available). Up to an additional $25,000 in marketing funds for new unserved short-haul US destination without airline match requirement. Up to an additional $50,000 marketing funds for new and additional frequencies to longhaul US domestic destination without airline match requirement. Up to an additional $50,000 marketing funds for new international destination within North American without airline match requirement. Up to an additional $100,000 funds for new entrant carrier without airline match requirement. Up to $500,000 funds for new international destination outside of North America to be spent within the first two years of operation (pro-rated for seasonal service) without airline match requirement. All marketing funds must be used to promote the specific route to SJC. Snap-back Invoicing Policy The Director of Aviation will have the authority in extenuating circumstances to remove "snap-back" invoicing of landing and terminal fees if service is cancelled within the minimum qualifying period (12 consecutive months or 4 consecutive months for international seasonal service).
April 6, 2016 Page 6 Additional Frequency Policy The Director of Aviation will have the authority to determine application of support funds for additional frequencies on existing routes. Minimum Flight Requirements Minimum requirements to be eligible for support program: 3x weekly for 12 consecutive months or 4 consecutive months for international seasonal service. Recommended Support Air China Air China will launch new three times weekly service to Shanghai, China. This constitutes an international destination outside of North America. Waived landing fee at 100% for 18 months after initial operation and 50% for the next 12 months will amount to approximately $263,830. Waived ticket counter fee at 100% for 18 months after initial operation and 50% for the next 12 months will amount to approximately $329,472. Waived gate fee at 100% for 18 months after initial operation and 50% for the next 12 months will amount to approximately $172,224. Marketing funds will amount to up to $600,000. $500,000 constitutes marketing support for the new route and $100,000 for new entrant carriers. EVALUATION AND FOLLOW-UP The Air Service Support Program will monitor the number of departure and arrival of flights to specified destinations supported by the program to ensure adherence to the program specifications on a continuous basis throughout the application period of the program. POLICY ALTERNATIVES The City Council may choose to not approve the application of the Air Service Support Program in the case of the mentioned airline(s). If Council does not approve application of this program, chances of financial success of the route(s) will be put in jeopardy. The mentioned airline(s) might even choose not to operate the service in the first place as other airports become better aircraft allocation options. The support program is designed to enhance the ability to attract new routes to SJC and to benefit the Airport and the City.
April 6,2016 Page 7 PUBLIC OUTREACH This memorandum will be posted on both the Airport's website and on the City's Council Agenda website for the April 19, 2016, Council meeting. The April 19, 2016 Council meeting will also serve as the economic development subsidy public hearing as required pursuant to California Government Code Section 53083 and as further described in the Fiscal/Policy Alignment discussion below. COORDINATION This memorandum was coordinated with the City Attorney's Office and the City Manager's Budget Office. FISCAL/POLICY ALIGNMENT This project aligns with the City's Economic Development Strategy #9 "Keep Developing a Competitive, World Class Airport, and Attract New Air Service." Application of the Air Service Support Program to assist the air carriers in succeeding financially in serving the new destinations will benefit the City. The Office of Economic Development calculated the following City wide economic impact statistics: Air China's new flights to Shanghai will create approximately $65,000,000 in annual economic benefits. The tables below address the requirements set forth in the recently adopted State of California AB 562 (Government Code 53083) for publication of information related to an economic development subsidy and a public hearing. Air China i. Name/address of beneficiary of the subsidy Air China IF, Air China Building 96 Zhelimu Road, Xincheng District Beijing, PRC, 010010 ii. Start and end dates, and schedule, for the subsidy The air service support program (not an actual subsidy) will start with the launch of service, currently identified as June 16, 2016, and will end 30 months later. If Air China ceases to operate the three times weekly flights at any time prior to the end of the support period, Air China will be required to repay the amounts specified in the Air Service Support Program.
April 6,2016 Page 8 iii. Description of the subsidy, estimated total amount of expenditure of public funds or revenue lost iv. Statement of public purpose v. Projected tax revenue (includes Airport fee revenue) vi. Estimated number of jobs created by the subsidy, broken down by full time, part-time and temporary positions The Airport will waive Air China landing fees estimated at $263,830, ticket counter fees estimated at $329,472, and gate fees estimated at $172,224. The Airport will pay up to $600,000 in marketing funds. The support program is designed to enhance the ability to attract new routes to SJC and to benefit the Airport and the City. The increase of air service provided by Air China is estimated to result in an additional $1.3M in various fee revenue to the Airport during the first 30 months of operations. The wider economic impact for the city is estimated to be $65M annually. Employee needs are currently being assessed by the airline and will be determined in the following months. COST IMPLICATIONS Funding from the Airport's Non-Personal/Equipment appropriation will fund the amount of $600,000 to provide the necessary marketing funds. The airline air service support program credits will continue to result in waivers of airline fees and charges for qualifying new air service. However, the increased revenue from parking, concessions, car rentals, Passenger Facility Charges, and other Airport services that will directly result from increased air service is expected to offset the short-term loss of revenue from waived airline fees and charges for qualifying new service. Additionally, the wider economic impact for the City resulting from these flights is estimated to be approximately $65,000,000. For the Airport Department, the impact of the Air Service Support Program for the flights discussed in this memo is: (a) Air China to Shanghai estimated revenue of $2,680,000 is partially offset by fee waivers and marketing support of $1,370,000 over the course of 30 months. The availability of the support program, including marketing funds, encourages new entrant carriers and existing carriers to add new destinations. As a result of this anticipated additional passenger-driven revenue, no increases in airline rates and charges is required to offset waived airline fees and charges. Higher marketing expenditure amounts will make the San Jose Airport much more attractive to airlines when choosing new destinations in the future, increasing the probability of adding new service and ultimately increasing airport revenues.
April 6, 2016 Page 9 BUDGET REFERENCE The table below identifies the fund and appropriation to fund the actions recommended as part of this memorandum. Fund # 523 0802 Appn # Appn. Name Total Appn. Rec'd. Changes 2015-2016 Adopted Operating Budget Page Airport Non-Personal/ Equipment $34,333,547 $0 XI-3 Last Budget Action (Date, Ord. No.) 12/15/15, Ord. No. 29676 CEOA Resolutions Nos. 67380 and 71451, File No. PP09-192. /s/ KIMBERLY J. BECKER Director of Aviation For questions, please contact Kimberly Becker, Director of Aviation, at (408) 392-3611.