APPLICATION UNDER SMALL COMMUNITY AIR SERVICE DEVELOPMENT PROGRAM DOCKET DOT-OST SUMMARY INFORMATION

APPLICATION UNDER SMALL COMMUNITY AIR SERVICE DEVELOPMENT PROGRAM DOCKET DOT-OST-2016-0037 SUMMARY INFORMATION A. PROVIDE THE LEGAL SPONSOR AND ITS DUN AND BRADSTREET (D&B) DATA UNIVERSAL NUMBERING SYSTEM (DUNS) NUMBER, INCLUDING +4, EMPLOYEE IDENTIFICATION NUMBER (EIN) OR TAX ID. Legal Sponsor Name: Tucson Airport Authority Name of Signatory Party for Legal Sponsor: Bonnie Allin, President/CEO DUNS Number: 00-690-2688 EIN/Tax ID: 86-0089060 B. LIST THE NAME OF THE COMMUNITY OR CONSORTIUM OF COMMUNITIES APPLYING: 1. Tucson Airport Authority C. PROVIDE THE FULL AIRPORT NAME AND 3-LETTER IATA AIRPORT CODE FOR THE APPLICANT(S) AIRPORT(S) (ONLY PROVIDE CODES FOR THE AIRPORT(S) THAT ARE ACTUALLY SEEKING SERVICE). 1. Tucson International Airport, TUS THE AIRPORT SEEKING SERVICE IS NOT LARGER THAN A SMALL HUB AIRPORT: UNDER FAA HUB CLASSIFICATIONS EFFECTIVE ON THE DATE OF SERVICE OF THE ATTACHED ORDER AS OF CALENDAR YEAR 1997 DOES THE AIRPORT SEEKING SERVICE HOLD AN AIRPORT OPERATING CERTIFICATE ISSUED BY THE FEDERAL AVIATION ADMINISTRATION UNDER 14 CFR PART 139? (IF NO, PLEASE EXPLAIN WHETHER THE AIRPORT INTENDS TO APPLY FOR A CERTIFICATE OR WHETHER AN APPLICATION UNDER PART 139 IS PENDING.) Yes No (explain) Proposal of Tucson International Airport Tucson, Arizona May 2016 1

D. SHOW THE DRIVING DISTANCE FROM THE APPLICANT COMMUNITY TO THE NEAREST: 1. Large hub airport: Phoenix Sky Harbor Int l (PHX), 119 miles 2. Medium hub airport: San Diego Lindbergh Int l (SAN), 416 miles 3. Small hub airport: El Paso Int l (ELP), 319 miles 4. Airport with jet service: Phoenix Sky Harbor (PHX), 119 miles E. LIST THE 2-DIGIT CONGRESSIONAL DISTRICT CODE APPLICABLE TO THE SPONSORING ORGANIZATION, AND IF A CONSORTIUM, TO EACH PARTICIPATING COMMUNITY. 1. AZ-03 F. APPLICANT INFORMATION: (CHECK ALL THAT APPLY) Not a Consortium Interstate Consortium Intrastate Consortium Community currently receives subsidized Essential Air Service, or receives assistance under the Alternate Essential Air Service Pilot Program Community (or Consortium member) previously received a Small Community Air Service Development Program Grant If previous recipient: Provide year of grant(s): ; and, the text of the grant agreement section(s) setting forth the scope of the grant project: Proposal of Tucson International Airport Tucson, Arizona May 2016 2

G. PUBLIC/PRIVATE PARTNERSHIPS: (LIST ORGANIZATION NAMES) PUBLIC PRIVATE 1. Tucson Airport Authority 1. William R. Assenmacher 2. Visit Tucson 2. HSL Asset Management 3. Tucson Metro Chamber of Commerce 3. Hilton El Conquistador Resort 4. Pascua Yaqui Tribe 4. James H. Click, Jr. 5. Tohono O odham Nation 5. Tucson New Car Dealer Association 6. Casino Del Sol 7. Holualoa Companies 8. Loews Ventana Canyon Resort 9. Desert Diamond Casinos and Entertainment 10. M3 Engineering 11. Diamond Ventures 12. Tucson Electric Power 13. Tucson Medical Center 14. JW Marriott Starr Pass Resort 15. Westin La Paloma Resort and Spa 16. Bon Voyage Travel 17. Southwest Appraisal Associates 18. Crest Insurance Group 19. Iridius Capital 20. Madden Media 21. Nova Home Loans 22. Simpleview 23. Westward Look Wyndham Grand Resort & Spa 24. Beach Fleischman PC 25. Bruce L. Dusenberry 26. Kathryn N. Dusenberry 27. Omni Tucson National Resort 28. Focus Hospitality 29. Prism Hospitality 30. Hacienda Del Sol Guest Ranch Resort 31. Troon Golf 32. BFL Construction Company 33. Sinfonia Healthcare 34. Mahoney Group 35. Southwest Gas Corp. 36. M.A.S. Real Estate Services 37. White Stallion Ranch 38. Northern Trust-Tucson 39. Tucson Jazz Festival 40. Enterprise Rent A Car 41. Rusing Lopez & Lizardi PLLC Proposal of Tucson International Airport Tucson, Arizona May 2016 3

H. PROJECT PROPOSAL: 1a. GRANT GOALS: (CHECK ALL THAT APPLY) Launch New Carrier Secure Additional Service Upgrade Aircraft First Service New Route Service Restoration Regional Service Surface Transportation Professional Services Other (explain) 1b. GRANT GOALS: (SYNOPSIS) Concisely describe the scope of the proposed grant project. Tucson International Airport, now eligible for Grant funding after being re-classified as a Small Hub Airport, seeks its first Grant for a revenue guarantee and marketing project to recruit service to New York/Newark, or another major East Coast hub. The Airport has developed $2.1 million in local community support for the project. This Grant is the final piece of funding needed for service launch. 2. FINANCIAL TOOLS TO BE USED: (CHECK ALL THAT APPLY) Marketing (including Advertising): promotion of the air service to the public Start-up Cost Offset: offsetting expenses to assist an air service provider in setting up a new station and starting new service (for example, ticket counter reconfiguration) Revenue Guarantee: an agreement with an air service provider setting forth a minimum guaranteed profit margin, a portion of which is eligible for reimbursement by the community Recruitment of U.S. Air Carrier: air service development activities to recruit new air service, including expenses for airport marketers to meet with air service providers to make the case for new air service Fee Waivers: waiver of airport fees, such as landing fees, to encourage new air service; counted as in-kind contributions only Proposal of Tucson International Airport Tucson, Arizona May 2016 4

Ground Handling Fee: reimbursement of expenses for passenger, cabin, and ramp (below wing) services provided by third party ground handlers Travel Bank: travel pledges, or deposited monetary funds, from participating parties for the purchase of air travel on a U.S. air carrier, with defined procedures for the subsequent use of the pledges or the deposited funds; counted as in-kind contributions only Other (explain below) I. EXISTING LANDING AIDS AT LOCAL AIRPORT: Full ILS Outer/Middle Marker Published Instrument Approach Localizer Other (specify) J. PROJECT COST: DO NOT ENTER TEXT IN SHADED AREA REMINDER: LOCAL CASH CONTRIBUTIONS MAY NOT BE PROVIDED BY AN AIR CARRIER (SEE TYPES OF CONTRIBUTIONS FOR REFERENCE). LINE DESCRIPTION SUB TOTAL TOTAL AMOUNT 1 Federal amount requested $900,000 2 State cash financial contribution $0 Local cash financial contribution 3a Airport cash funds $0 3b Non-airport cash funds $2,100,000 3 Total local cash funds (3a + 3b) $2,100,000 4 TOTAL CASH FUNDING (1+2+3) $3,000,000 In-Kind contribution 5a Airport In-Kind contribution** Landing Fee Waiver 5b Other In-Kind contribution** $0 5 TOTAL IN-KIND CONTRIBUTION (5a + 5b) $0 6 TOTAL PROJECT COST (4+5) $3,000,000 Proposal of Tucson International Airport Tucson, Arizona May 2016 5

K. IN-KIND CONTRIBUTIONS For funds in lines 5a (Airport In-Kind contribution) and 5b (Other In-Kind contribution), please describe the source(s) of fund(s) and the value ($) of each. The Tucson Airport Authority offers landing fee waivers on new routes for the first year of service. L. IS THIS APPLICATION SUBJECT TO REVIEW BY AN AFFECTED STATE UNDER EXECUTIVE ORDER 12372 PROCESS? a. This application was made available to the State under the Executive Order 12372 Process for review on (date). b. Program is subject to E.O. 12372, but has not been selected by the State for review. c. Program is not covered by E.O. 12372. M. IS THE LEAD APPLICANT OR ANY CO-APPLICANTS DELINQUENT ON ANY FEDERAL DEBT? (IF YES, PROVIDE EXPLANATION) No Yes (explain) Proposal of Tucson International Airport Tucson, Arizona May 2016 6

TABLE OF CONTENTS Section Page Number Legal Sponsor 7 Introduction 8 The Tucson Air Service Market 9 Catchment Area Demographics 9 Current Service 10 Air Service Deficiencies 12 Airline Capacity Reduction 12 Average Fares in the Region 14 Passenger Retention and Leakage 15 Air Service Development Plan: Tucson New York/Newark 16 Tucson s Rank among Unserved Airports 16 The Local Tucson New York/Newark Market 18 Connectivity over New York Kennedy on JetBlue 21 Funding Plan 22 Public/Private Partners 24 Conclusion 25 LEGAL SPONSOR The Tucson Airport Authority, which operates Tucson International Airport, is the legal sponsor responsible for administering the proposed air service development program. The Authority is a governmental agency. Tucson Airport Authority Tucson International Airport 7250 South Tucson Boulevard Tucson, Arizona 85756 Bonnie Allin, President/CEO (520) 573-4833 boallin@flytucson.com Proposal of Tucson International Airport Tucson, Arizona May 2016 7

INTRODUCTION Tucson International Airport is one of ten airports now eligible for Small Community Air Service Development Grant (SCASDG) consideration that did not qualify when the program was first created. Tucson was a medium hub airport as recently as 2008, but steep declines in airline capacity and quickly rising fares led passenger numbers to fall. Since 2009, Tucson has been classified as a small hub airport, but it was not eligible for SCASDG until this year s rules changed to track current airport classification to eligibility. As a new airport to the SCASDG program, Tucson fits the criteria exceptionally well. Tucson has the third highest average fare in the Southwest region. The Airport has lost 37% of its airline capacity since 2008, or an average of 31 departures a day and more than 3,000 departing seats a day a bigger decline than all but a handful of airports. Following capacity cuts and fares up by 38% in the last decade, more people in Tucson drive to Phoenix for air service than ever before an average of 2,000 per day in each direction. The timing of this application is nearly perfect, as the Airport and its partners are working through an effort to develop Tucson has the third highest average fare in the Southwest region. The Airport has lost 37% of its airline capacity since 2008... local funding for new air service. To date, the effort, led by the Tucson Metro Chamber and its corporate partners, has raised $2.1 million in local cash for new non-stop service to New York City. This matching funding would be joined by Tucson s requested $900,000 in SCASDG funding for the project. Tucson lost its last East Coast non-stops in 2008, during the recession. The Airport has been actively recruiting carriers to launch New York service, but in the current environment, with slow growth, longer haul routes are out of favor. A Tucson New York/Newark flight requires the time of an entire airplane, or about 11 block hours per day. To allocate that resource an airline wants to be certain it can generate a high margin, as the carrier s alternate option would be to use the aircraft for five or six flights in the same day, carrying many more passengers. That s why this Grant is so critical for Tucson. Without an exceptionally large revenue guarantee, the likelihood of Tucson landing New York service is slim. While the community s commitment is outstanding, the Grant would make it difficult for an airline to say no to launching new service. Proposal of Tucson International Airport Tucson, Arizona May 2016 8

THE TUCSON AIR SERVICE MARKET Air Service Profile Tucson is a community that relies more heavily on its air service than almost any other in the country. Not only is Tucson isolated in the Sonoran Desert of southern Arizona, but it is a huge tourist destination, drawing visitors to the desert from around the world. Tucson s economy relies heavily on these tourists and MAP 1: Tucson Catchment Area Source: Sixel Consulting Group, May 2016 the money they bring to the community. As air service has declined, so has the tourist impact, and the number of jobs in Tucson. The Tucson metro area is home to 1,004,516 residents as of the 2014 US Census estimate. The Airport draws from a much larger area, due to its relative isolation, more than two hours south of Phoenix, with only open desert in between. The greater Tucson catchment area, the 90-minute drive time radius seen inside the blue line in map 1, is home to 1,278,100 people. The Tucson area has added 7% more residents since 2011, as the non-tourist economy has begun to recover following the recession. Still, Tucson is tied to tourism. Each year, seven million people visit Tucson (see figure 1), with a large number in excess of one million coming from the East Coast. Tucson hosts an average of FIGURE 1: Tucson Tourism by the Number Source: State of Arizona Travel Survey, Fall 2015 more than 19,000 daily visitors, which is four times its current airline capacity. These visitors spend $3.6 billion in Tucson each year, employing almost 31,000 people. Tucson attracts visitors who have the income to afford to fly, with the median income of its visitors at $71,350 per year. Tucson s challenge is its insufficient airline capacity. Tucson s tourism agency, Visit Tucson, has been able to quantify the economic loss to the community due to the limited air service available locally. Its report shows that in a two-year Proposal of Tucson International Airport Tucson, Arizona May 2016 9

period, Tucson lost 49 meetings and conventions because the organizers said it MAP 2: Current Routes, Tucson International Airport Source: OAG Airline Schedules, June 2016 was too difficult to fly into Tucson. This cost the community a total of 14,779 meeting delegates and more than 39,000 hotel room nights. The overall economic value of these visitors was $12.5 million. And those statistics only include specific instances where meeting organizers cited air service as the reason they chose another location. Tucson International Airport has current service on five airlines, with non-stop flights to 11 year round destinations and two destinations with winter seasonal service (see map 2). Tucson s service within the West is satisfactory, with non-stops to three cities in California and two cities in the Pacific Northwest. But Tucson has limited connectivity to the east, and lacks non-stop flights FIGURE 2: Tucson Capacity, June 2016 vs. June 2015 Source: OAG Airline Schedules, June 2016 Non-Stop Departures Seats Departures Seats Capacity Carrier Destination Per Day Per Day Per Day Per Day Change Alaska PDX 0.2 14 0.1 9-35.7% SEA 1 143 1 162 13.3% Alaska Total 1.2 157 1.1 171 8.9% American DFW 6.1 854 5.9 826-3.3% LAX 4 200 3 228 14.0% PHX 10.6 706 10.5 749 6.1% ORD 2 280 2 280 0.0% American Total 22.7 2040 21.4 2083 2.1% Delta ATL 1.9 299 1.9 299 0.0% LAX 0 0 2 152 100.0% MSP 0.1 16 SEA Jun-15 Seasonal Jun-16 Seasonal SLC 2.8 140 2.9 169 20.7% Delta Total 4.8 455 6.8 620 36.3% Southwest DEN 2 292 2 286-2.1% LAS 3 423 3 424 0.2% LAX 2.9 411 2.9 415 1.0% MDW 2 291 2 290-0.3% SAN 2.9 406 2.9 410 1.0% Southwest Total 12.8 1823 12.8 1825 0.1% United DEN 2 137 2.3 184 34.3% IAH 3 191 2.9 205 7.3% LAX 1 50 1 50 0.0% SFO 1 50 1.3 63 26.0% to the East Coast. Due to desert heat, summer is Tucson s low season, so a number of its non-stop services are curtailed. In June of 2016, Tucson s overall capacity will be up slightly, at 6.1%, over 2015, with the main additions coming on competing routes (see figure 2). For example, Tucson now has four carriers providing non-stop service to Los Angeles, with Los Angeles capacity more than double its level of a year ago. While Tucson gains seats on competing routes, it is losing seats on its major connecting routes to the east, such as Dallas/Ft. Worth. United Total 7 428 7.5 502 17.3% Tucson Total 48.5 4903 49.6 5201 6.1% Proposal of Tucson International Airport Tucson, Arizona May 2016 10

Passengers using Tucson International Airport peaked in 2007 and have been in decline ever since. While Tucson has been active in air service development, traveling to airline headquarters to discuss new and expanded service almost a dozen times each year, it has not been able to recruit capacity to replace that lost during the recession. Tucson also has an active airport marketing program promoting the Airport throughout the region. But without new available seats to sell, the Airport hits a passenger plateau. As of the year ended third quarter 2015, the latest data available, Tucson International Airport captured a little over three million annual passengers, or an average of 4,192 passengers per day each way (PDEW) (see figure 3). Since 2007, Tucson has lost an average of 1,504 PDEW, or 26% of all of its passengers. FIGURE 3: O&D Passengers and Average One Way Fare at Tucson Source: US DOT Table DB1A; YE3Q07 YE3Q15 One of the main reasons for the loss of passengers is exceptionally high fares for a market of Tucson s size. Since 2007, the average one way fare at Tucson has climbed from $167 to $229 (see figure 3). Fares are up by an average of $63 each way in the period, or 38%. High fares continually suppress passengers, or force them to use other airports. In the case of a tourist destination, high fares have the impact of pushing potential visitors to other destinations outside Arizona and the Southwest. While Tucson has significant air service relative to many of the applicants for Small Community Air Service Development Grants (SCASDG), it faces the same challenges as other small and nonhubs. Tucson is saddled with high fares that push passengers away. Tucson has seen large airline capacity cuts and seats have not been replaced. To recruit new service, Tucson must offer aggressive incentives, such as revenue guarantees, despite its large market size. All of these factors make Tucson a good match for the SCASDG program. Proposal of Tucson International Airport Tucson, Arizona May 2016 11

AIR SERVICE DEFICIENCIES Over the last decade Tucson has seen unprecedented cuts in its airline capacity which has led to quickly increasing fares and a precipitous drop in passengers using the Airport. While Tucson has worked with its carriers in an attempt to add frequencies, seats, and new destinations, it has been challenged by the fact that it has not been eligible to participate in the Small Community Air Service Development Grant (SCASG) program. With the 2016 rule change, and its first application, the Airport is aiming to use SCASDG funding to address its air service deficiencies. Since March of 2008, Tucson International Airport has seen its airlines reduce capacity by 37%, removing an average of 3,223 daily departing seats from the market. In March of 2008, Tucson had an average of 8,695 daily departing seats (see figure 4). In November of 2015, Tucson capacity had been reduce to just 5,472 daily departing seats. FIGURE 4: Daily Departing Seats and Flights, Tucson Source: US DOT T100, March 2008 November 2015 Similarly, daily departures stood at 85 in March of 2008 (see figure 4). By November of 2015, airlines were operating just 54 daily departures at Tucson. In that period, Tucson lost an average of 31 departures per day, or 37% of all flights. The main alternate airport for Tucson catchment area passengers is Phoenix Sky Harbor. As a hub for American Airlines, and as the gateway to a much larger city, it has significantly more Proposal of Tucson International Airport Tucson, Arizona May 2016 12

capacity than Tucson. But Phoenix has been faced with similar capacity cuts. Its former hub carrier, US Airways, merged with American, leading American to rationalize Phoenix capacity. Since February of 2008, Phoenix has lost an average of 10,487 daily departing seats 2.2 times more daily seats than Tucson lost (see figure 5). Phoenix now has 14% less capacity than it did in 2008. At the same time, Sky Harbor has lost an average of 102 daily departures, or 17% of all of its flights. FIGURE 5: Daily Departing Seats and Flights, Phoenix Source: US DOT T100, March 2008 November 2015 Together, the Tucson Phoenix area has lost an average of almost 14,000 daily departing seats, or the equivalent of 88 daily flights on 737-800 aircraft. With regional capacity at such a low level, there are often times in the peak winter and spring season where Tucson travelers cannot find available seats at either airport. The lack of regional capacity has a huge impact on the economy, pushing inbound tourists to other destinations. Tucson seeks to replace only a small portion of this lost capacity through the project detailed in this application. The predictable impact of the lost airline capacity in Tucson is rising fares. As mentioned in the previous section of this application, Tucson fares are up 38% since 2007. Tucson now has some of the highest fares in the Southwest region. As of the year ended third quarter 2015, the average Tucson one way fare had climbed to $229 (see figure 6 on next page). Tucson now ranks as the third most expensive airport in the Southwest region, with an average fare 30% higher than the Proposal of Tucson International Airport Tucson, Arizona May 2016 13

FIGURE 6: Average One Way Fare, Southwest Region Source: US DOT Table DB1A; YE3Q15 (Airports 500,000 1M Pax) overall regional average of $176 one way, including similarly sized airports serving between 500,000 and 10 million passengers per year. Only Santa Barbara and Fresno had higher fares in the region, and both serve considerably fewer passengers than Tucson. The result of high average fares is that passengers seek service from airports that offer cheaper options. Tucson International Airport loses almost 30% of its catchment area s passengers to Phoenix Sky Harbor and another 1.5% to Phoenix-Mesa (see map 3). Sky Harbor offers a wider array of low cost carrier service, including flights on Frontier, JetBlue, and Spirit. Mesa Airport functions as a focus city for ultra-low cost carrier Allegiant. Tucson s True Market Study analyzed data from calendar year 2014. During that period Tucson retained an average of 4,267 passengers per day each way (PDEW) to and from its catchment area, or almost 69% of passengers (see figure 7 on next page). Tucson lost almost 1.4 million passengers in 2014 to airline service at Sky Harbor, or an average of 1,861 PDEW. An average of 95 PDEW drove from the Tucson catchment area to Mesa Airport for flights on Allegiant. MAP 3: Passenger Retention in Tucson Catchment Area Source: Sixel Consulting Group, CY2014 The market, as a whole, generated more than 4.5 million passengers. That number Proposal of Tucson International Airport Tucson, Arizona May 2016 14

FIGURE 7: Passenger Retention in Tucson Catchment Source: Sixel Consulting Group, CY2014 underscores the local demand for air service in Tucson, and how the lack of capacity is hindering the economic growth of the region. The number of passengers driving to alternate airports for service makes a compelling case for additional flights at Tucson, itself. However, with airlines only increasing capacity conservatively, markets such as Tucson are often left out of expansion plans. While multiple airlines are currently fighting for position in western markets such as Los Angeles and Seattle/Tacoma, Tucson continues to see capacity decline. In multiple headquarters meetings with incumbent and target carriers, Tucson has learned that small hub markets have to be more aggressive than ever in developing attractive incentives to land new routes. A decade ago, Tucson was able to point out market opportunities to prospective carriers, and often service was added without any incentive. Today, the dynamic has changed, and the Airport realizes the only sure way to secure new service, especially on longer-haul routes, is to offer a revenue guarantee. Tucson is honored that the Department of Transportation was able to alter the eligibility requirements of the SCASG program to include airports with airlines only increasing capacity conservatively, markets such as Tucson are often left out of expansion plans. that have fallen from medium hub status to small hub status since 1997. Small hub airports, such as Tucson, with high average fares and declining capacity, can make for great success stories in airline recruitment with the help of the SCASDG program. Proposal of Tucson International Airport Tucson, Arizona May 2016 15

AIR SERVICE DEVELOPMENT PLAN: TUCSON NEW YORK/NEWARK When reviewing Tucson s current and past air service, it is clear which part of the country is severely underserved the East Coast. While Tucson has had service to New York Kennedy, Newark, Washington Dulles, and Charlotte in the past, it has no current service to the East Coast. Tucson s closest current service is Delta s nonstops to Atlanta, which is more than 750 miles from New York City. In order to reduce fares, increase local airline capacity, bring high value tourists to Tucson, and to connect the local business community to its largest market, the Airport is working to recruit non-stop service to a New York/Newark area airport. Tucson ranks as the largest market in the country without a non-stop flight to one of New York s three main airports: Newark, Kennedy, and LaGuardia (see figure 8). The Tucson True Market, including Tucson catchment area passengers that fly in and out of Phoenix, generates more than 165,000 annual New York/Newark passengers, or an average of 227 passengers per day each way (PDEW) (see figure 8). The actual Tucson market, which includes only passengers using Tucson International Airport, is the largest actual market without New York/Newark service, generating more than 88,000 annual passengers, or 121 PDEW, as of the year ended third quarter 2015. FIGURE 8: Top 30 New York/Newark Markets without Non-Stops Source: Sixel Consulting Group and US DOT Table DB1A, YE3Q15 Market Passengers PDEW One Way Fare Coupons Tucson True Market 165,420 226.6 $227 2.0 Tucson 88,200 120.8 $251 2.0 Tulsa 78,830 108.0 $218 2.0 Kahului/Maui 76,400 104.7 $456 2.1 El Paso 67,810 92.9 $233 2.0 Ontario 66,460 91.0 $237 2.1 Key West 56,590 77.5 $236 2.0 Pensacola 55,430 75.9 $217 2.0 Anchorage 50,770 69.5 $330 2.1 Aspen 46,350 63.5 $396 2.0 Boise 43,190 59.2 $276 2.1 Spokane 40,910 56.0 $275 2.1 Jackson, MS 40,550 55.5 $231 2.0 Wichita 40,110 54.9 $225 2.0 Lihue/Kauai 37,920 51.9 $489 2.2 Chattanooga 37,370 51.2 $197 2.0 Tallahassee 36,870 50.5 $235 2.0 Kona 35,520 48.7 $511 2.1 Cedar Rapids 34,000 46.6 $232 2.0 Gainesville 33,410 45.8 $163 2.0 Daytona Beach 32,780 44.9 $174 2.0 St. Croix 32,140 44.0 $244 2.0 Fresno 31,890 43.7 $282 2.1 Huntsville 31,020 42.5 $243 2.0 Augusta, GA 30,240 41.4 $201 2.0 McAllen, TX 28,850 39.5 $299 2.1 Santa Barbara 28,100 38.5 $319 2.1 Panama City, FL 25,610 35.1 $235 2.0 Colorado Springs 24,390 33.4 $250 2.1 Quad Cities 23,860 32.7 $195 2.0 Due to difficult connections and the lack of non-stop service, Tucson International Airport retains just 57% of the New York/Newark passengers that travel to and from its catchment area. Proposal of Tucson International Airport Tucson, Arizona May 2016 16

FIGURE 9: Tucson New York/Newark O&D Passengers Source: Sixel Consulting Group, CY2014 Newark is the preferred airport for Tucson area travelers, generating an average of 109 PDEW (see figure 9). Still, just 35% of passengers between Newark and Tucson use Tucson s airport. Tucson retention is better to both LaGuardia and Kennedy airports in New York. Tucson generates 84 PDEW to and from LaGuardia with 82% using Tucson (see figure 9). There is no non-stop service between Phoenix and LaGuardia, due to LaGuardia s perimeter rule, so fewer passengers drive to Phoenix to fly to LaGuardia since they have to connect using either Phoenix or Tucson. Tucson s passenger retention to New York Kennedy is just 70%, with a market size of 29 PDEW. The overall average one way fare between Tucson and the five New York/Newark airports is $227, including those passengers that drive to Phoenix for flights (see figure 10). Newark and New York Kennedy have higher than average fares at $230 and $240 one way, respectively. The Tucson New York/Newark fare is up 10% in just the last year. FIGURE 10: Tucson New York/Newark One Way Fare Source: Sixel Consulting Group, CY2014 The New York/Newark average fare for those passengers using Tucson International Airport is significantly higher than the average for the True Market, which includes passengers driving to FIGURE 11: Statistical Summary of the Tucson New York/Newark Market Source: US DOT Table DB1A, YE3Q15 Market Passengers Revenue One Way Fare Yield PDEW Coupons Share LGA 45,540 $11,024,130 $242 10.8 62.4 2.0 51.6% EWR 28,610 $7,300,280 $255 11.2 39.2 2.0 32.4% JFK 14,050 $3,781,000 $269 11.4 19.2 2.0 15.9% Totals 88,200 22,105,410 $251 120.8 100.0% Phoenix. The Tucson average fare to and from New York/Newark is $251 each way, 11% higher than the True Market average of $227 (see figure 11). Tucson captures an average of 121 PDEW to and from New York/Newark, with 52% of those flying in and out of Tucson using LaGuardia Airport in New York (see figure 11). Connections are required to fly from Tucson to any airport in New York/Newark so passengers will generally opt to Proposal of Tucson International Airport Tucson, Arizona May 2016 17

fly to the airport closest to their final destination in the New York area. If non-stop service was offered in the market it is likely the airport with non-stop flights would capture the majority of passengers. MAP 4: Primary Residence of Second Home Owners in Pima County Source: Sixel Consulting Group Analysis, 2014 Pima County Tax Records The majority of passengers traveling between Tucson and New York/Newark originate their trips in New York. 53% of demand on the route is inbound to Tucson. A large number of inbound trips are generated by those who either own second homes in Tucson, or have a family member who owns a second home in Tucson. Pima County, of which Tucson is the seat, property tax records show 102,000 homes owned by families with a primary residence out of state (see map 4). The largest group of second home owners is in the Los Angeles Basin, but the Northeast is also a focus of second home owners. Data shows that more than 5,000 homes in Pima County are owned by people who list their primary address as somewhere within 150 miles of New York City. New York/Newark is the second largest area of the US, in terms of second home ownership, without a non-stop flight to Tucson. FIGURE 12: O&D Passengers, Tucson New York/Newark Source: US DOT Table DB1A, YE3Q15 Tucson had non-stop service to both New York Kennedy and Newark from 2006 through 2008. That service stimulated the local Tucson New York/Newark market by 60% from previous passenger levels. Since service ended, predictably, passengers have fallen. As of the year ended third quarter 2007, Proposal of Tucson International Airport Tucson, Arizona May 2016 18

Tucson New York/Newark generated an average of 261 passengers per day each way (PDEW) (see figure 12 on previous page). As of the year ended third quarter 2015, the most recent data available, the Tucson New York/Newark market had lost an average of 140 PDEW, or 54% of passengers. Some of those passengers drive to Phoenix for service, while others simply stopped flying between the two cities. FIGURE 13: Average One Way Fare, Tucson New York/Newark Source: US DOT Table DB1A, YE3Q15 With the end of non-stop service, fares to all three main New York City area airports have increased rapidly. The overall average fare is up 53% since the year ended third quarter 2007 (see figure 13). The average fare between Tucson and New York Kennedy is up $127 each way, or 89%. The average fare between Tucson and Newark is up $77 each way, or 44%. And the average fare between Tucson and New York LaGuardia is up $82 each way, or 51%. FIGURE 14: Analysis of JetBlue s TUS-JFK Service Source: US DOT Table DB1A, Third Quarter 2006 Third Quarter 2008 While Tucson is a large enough market to support non-stop service to New York/Newark, it is likely not large enough to support service from two carriers at the same time. This is evidenced by Tucson s previous non-stop service in the market. JetBlue launched service between Tucson and New York/Newark in third quarter of 2006 (see figure 14). One week after JetBlue announced service, an aggressive Continental Airlines, defending its hub, announced Tucson Newark non- Proposal of Tucson International Airport Tucson, Arizona May 2016 19

stops. Those started just a few weeks after JetBlue s Kennedy service, in fourth quarter of 2006 (see figure 15). JetBlue s New York Kennedy load factor peaked in second quarter of 2007, with 75% of seats filled (see figure 14 on previous page). But competition from Continental clearly had an impact. JetBlue did carry the majority of local passengers between Tucson and New York/Newark, with an overall average of 85% of seats filled by local passengers. FIGURE 15: Analysis of Continental s TUS-EWR Service Source: US DOT Table DB1A, Third Quarter 2006 Third Quarter 2008 Continental s Newark service operated at higher average load factors, but with far fewer local passengers on board. It was clear that Continental s strategy was to connect as many passengers as possible to destinations beyond the Newark hub. Continental carried an average of 62% local passengers between Tucson and Newark (see figure 15). With the onset of the recession, Tucson couldn t support two carriers to and from New York/Newark. JetBlue was the first to announce the discontinuation of service. Just a few months after JetBlue announced its withdrawal Continental did the same, leaving Tucson without service to the East Coast. In the mid-2000s the US airline industry was much different than the capacity-controlled industry we see today. Airlines still fought over market share and protected what they perceived as their turf. This doesn t happen nearly as much today. It is highly unlikely a second carrier would announce service on top of another in a market such as Tucson New York/Newark. This gives Proposal of Tucson International Airport Tucson, Arizona May 2016 20

the Airport increased confidence that, with only one carrier on the route, new service in the market will be successful. Over the last nine months, Tucson International Airport and its community partners have met with five carriers at their headquarters to discuss New York/Newark service. While the local revenue guarantee, and any SCASD Grant funding, will be open equally to all carriers, JetBlue is among the best options for new service. MAP 5: Connectivity on JetBlue, TUS-JFK Source: Sixel Consulting Group Hub Builder Software JetBlue operates a large hub at New York Kennedy Airport. JetBlue does not currently serve Tucson. JetBlue is a low cost carrier that could help bring down fares not only to New York, but also to all the cities to which it offers connections. JetBlue would connect Tucson to 36 new one-stop cities through New York Kennedy, accessing an average of almost 750 passengers per day each way (see map 5). FIGURE 16: Top O&D Markets over JFK on JetBlue Source: Sixel Consulting Group TUS True Market Study Tucson retains just 62% of its catchment area passengers that could flow to, and over, JetBlue s New York Kennedy hub, with 38% of its passengers driving to Phoenix for lower fares. In the Washington- Baltimore market, which is the largest to which JetBlue would connect over Kennedy, Tucson loses 20% of its 228 PDEW to Phoenix (see figure 16). As mentioned, in the New Proposal of Tucson International Airport Tucson, Arizona May 2016 21

York/Newark market Tucson retains just 57% of passengers. In the Boston market, 53% of Tucson passengers drive to Phoenix for flights. New low cost service on JetBlue will help Tucson recapture the passengers through lower fares and better connections. The average Tucson fare to all destinations over New York Kennedy on JetBlue is $235 one way, including passengers who drive to Phoenix for service (see figure 17). All of the markets to which JetBlue would connect are considered high fare markets, with no fares below $215 in any connecting market. This air service development project is strategically designed to bring fare relief in some of Tucson s highest fare markets. New service to and through New York should achieve this goal. FIGURE 17: One Way Fare in Markets over JFK on JetBlue Source: Sixel Consulting Group TUS True Market Study The Tucson business community, led by the Tucson Metro Chamber, is working together to develop air service incentives for new routes. The Chamber identified New York/Newark as its number one target for new service, and has been collecting revenue guarantee commitments for the service. The Chamber has developed the cash match for this Grant application and it is likely one of the largest cash matches ever developed for a SCASDG-supported project. FIGURE 18: Funding Source Overview Source: Tucson International Airport Funding Source Funding Amount Private Cash $1,950,000 Public Cash $150,000 Federal DOT Cash $900,000 Total Project Cost $3,000,000 Private Share 65.0% Public Share 5.0% Federal DOT Share 30.0% Altogether, local partners in Tucson have raised $2,100,000 in local revenue guarantee commitments for service to a New York/Newark area airport. Of that amount, $1.95 million in cash comes from local Tucson businesses, while $150,000 comes from public partners (see figure 18). Tucson International Airport is requesting $900,000 in SCASDG-supported funding for the project. The total project cost is estimated at $3 million. There will be additional airport funding spent on marketing and advertising for the new service, but it is not a part of the revenue guarantee portion of this project. Proposal of Tucson International Airport Tucson, Arizona May 2016 22

The local community cash represents 70% of the total project cost (see figure 18). Department of Transportation share is just 30% of the project cost. The community will take the majority of the risk in the project as a demonstration of its commitment to recruit New York/Newark service and to ensure that service is successful. The Airport and its community partners have already been meeting with prospective carriers, so at the time of the writing of this application, the project is well underway. This will help the airport to fast-track the launch of service. Assuming the Department of FIGURE 19: Project Timeline Source: Tucson International Airport Activity/Project Milestone Transportation awards this Grant in July of 2016, and a contract is executed in August of 2016, the Airport will work toward a new service announcement in fall of 2016 (see figure 19). This would allow for a service launch in Tucson s high tourist season during the winter and spring of 2016-2017. It is anticipated that the revenue guarantee would remain open for a period of two years. With service starting in the high season, the goal is to start strong and build a credit with the carrier so that revenue guarantee funds are not used. The Estimated Date SCASD Grant Award Announcement July 2016 Execute Grant Agreement with DOT August 2016 Meet to Determine Additional Service Fall 2016 Targeted Announcement Date for Service Fall 2016 Develop Creative/Launch Marketing Fall 2016 Targeted Start Date for Service Winter/Spring 2016-2017 Submit Grant Status Reports to DOT Quarterly Q3 2016 - Q2 2019 Close Grant August 2019 While the main target for service in this application is JetBlue, the Airport would also, in the interest of fairness, offer the guarantee to all qualified carriers. Alternate carriers would include American, with its New York Kennedy hub, Delta, with its New York Kennedy hub, United with its Newark hub, along with low cost carriers such as Alaska, Southwest, Frontier, Spirit, and Virgin America. Should service to New York/Newark not be feasible, or should a carrier launch service without the need for a guarantee, the Airport would request an alternate use for Grant funding. This alternate use would be for service to an East Coast hub, which could include flights to airports such as Washington, DC, Boston, or Philadelphia. Proposal of Tucson International Airport Tucson, Arizona May 2016 23

PUBLIC-PRIVATE PARTNERSHIP A total of more than 40 local organizations, businesses, and private citizens have pledged funding for Tucson s first-ever Small Community Air Service Development Grant (SCASDG) project (see figure 20). This diverse group of partners comes from all sectors of the local economy, and represents the Airport and community s broad outreach in preparation for this application. This group of partners also represents the main potential users of service to and from New York/Newark, instilling confidence that service will meet with success. immediate It is also important to note that the main work in building this coalition of partners has been undertaken by the Tucson Metro Chamber and not Tucson International Airport. The Chamber, its members, and other community recognize partners the importance of expanded local air service, and are working to develop airline incentives independent of the Airport. FIGURE 20: Public-Private Partners Source: Tucson International Airport Beach Fleischman PC BFL Construction Company Bon Voyage Travel Bruce L. Dusenberry Casino Del Sol Crest Insurance Group Desert Diamond Casinos and Entertainment Diamond Ventures Enterprise Rent A Car Focus Hospitality Hacienda Del Sol Guest Ranch Resort Hilton El Conquistador Resort Holualoa Companies HSL Asset Management Iridius Capital James H. Click, Jr. JW Marriott Starr Pass Resort Kathryn N. Dusenberry Loews Ventana Canyon Resort M3 Engineering Madden Media Mahoney Group M.A.S. Real Estate Services Funding Partners Northern Trust-Tucson Nova Home Loans Omni Tucson National Resort Pascua Yaqui Tribe Prism Hospitality Rusing Lopez & Lizardi PLLC Simpleview Sinfonia Healthcare Southwest Appraisal Associates Southwest Gas Corp. Tohono O odham Nation Troon Golf Tucson Airport Authority Tucson Electric Power Tucson Jazz Festival Tucson Medical Center Tucson Metro Chamber of Commerce Tucson New Car Dealer Association Visit Tucson Westin La Paloma Resort and Spa Westward Look Wyndham Grand Resort & Spa White Stallion Ranch William R. Assenmacher Together, the members of the public-private partnership (see figure 20) have raised more than $2 million in local revenue guarantees for East Coast service in particular, service to New York/Newark. The opportunity to grow this guarantee with a SCASDG award would help to ensure service begins quickly. Proposal of Tucson International Airport Tucson, Arizona May 2016 24

CONCLUSION Securing non-stop air service to the East Coast is a top priority for the entire Tucson community not just Tucson International Airport. In the past nine months, the Airport s community partners, led by the Tucson Metro Chamber, have worked tirelessly to develop a local revenue guarantee fund for non-stop flights to New York/Newark. This fund has $2.1 million in cash commitments from Tucson businesses, universities, and government organizations. It is an excellent start in the recruitment of service. But a Small Community Air Service Development Grant (SCASDG) award would help put Tucson s East Coast service incentive over the top. Tucson has never before been eligible to participate in the SCASDG program. Tucson fell from the ranks of the medium hub airports to a small hub in 2009, but the SCASDG program was only open to airports that were Tucson now has the third highest fare of similarly-sized airports in the southwest region. Tucson s average fare is 30% higher than the regional average. classified as small and non-hubs in 1997. This put Tucson at a distinct disadvantage in air service recruitment as other small hubs won Grants, such as Spokane, and secured new service with Grant-supported revenue guarantees. Now that Tucson is eligible, it is proposing a strong project that will change the landscape of air service in southern Arizona. Airline capacity at Tucson International Airport has fallen 37% since 2008. At the same time, fares have increased by 38%. Together, capacity cuts and fare increases have suppressed passengers using Tucson s airport by 26%. Tucson now has the third highest fare of similarly-sized airports in the Southwest region. Tucson s average fare is 30% higher than the regional average. Because fares are so high, more passengers to and from Tucson are driving to Phoenix to access air service. Tucson loses more than 30% of its catchment area s passengers to Sky Harbor and Mesa airports, representing an average loss of 2,000 passengers per day each way. New service to New York/Newark will help to lower fares in key Tucson markets. The service will re-stimulate East Coast passengers and help to bring more New York-area visitors to Tucson. The Tucson tourist economy relies upon air service. This project will help better connect Tucson and all of the Sonoran Desert to the eastern US, improving connectivity and generating new jobs. Proposal of Tucson International Airport Tucson, Arizona May 2016 25