Before the United States Department of Transportation Proposal to Provide Essential Air Service at Owensboro, Kentucky DOT-OST-2000-7855 Under 49 U.S.C. 41731 et seq. SeaPort Airlines, Inc. Proposal to Provide Essential Air Service at Owensboro, Kentucky By Order 2011-8-6, the Department requested proposals for Essential Air Service at Owensboro, Kentucky due on. Pursuant to that Order, SeaPort respectfully submits this timely proposal to provide subsidized essential air service to the community of Owensboro, Kentucky for a two year term beginning on or about November 1, 2011, or other date as may be agreed upon with the Department, community, and current provider of air service at Owensboro-Davies County Regional Airport. Correspondence regarding this proposal should be directed to: Timothy Sieber Vice President Strategy & Corporate Development SeaPort Airlines, Inc. 7505 NE Airport Way Portland, OR 97218 (971) 340-1716 tsieber@seaportair.com
SeaPort Airlines: Focused On Serving Small Communities Company Overview SeaPort Airlines, Inc. is a FAA certified scheduled airline with nearly 29 years of experience in commercial aviation. Our company s foundation is built on efficient and reliable service to rural communities. Both SeaPort Airlines, and our sister brand Wings of Alaska, currently operate service under the Essential Air Service program as well as on an unsubsidized basis. 1 SeaPort s approximately 200 professionals operate an average of 100 daily departures to 20 cities in nine states with a business that is focused on providing service to smaller communities. This is in sharp contrast to the strategies of the mega-airline brands, which no longer have the operational or economic capability, or strategic desire, to serve rural America. SeaPort delivers Essential Air Service to seven communities: Excursion Inlet, Alaska; Pendleton, Oregon; Jonesboro, El Dorado, Hot Springs, and Harrison, Arkansas; and Salina, Kansas. In each of these cases, after award of the EAS contract by US DOT, we have started by the date promised and with fares either at or below those outlined in our proposal. We would note that this stands in contrast to some other airlines that place bids with unreasonable fares that are never realized by the traveling public, delay the start of service, or do not launch service that has been awarded by the Department. A Track Record of Rebuilding Local Air Service SeaPort Airlines is keenly aware of the air service issues that the Owensboro market has faced in recent years: Big Sky Airlines ceased service on January 6, 2008; Great Lakes Aviation was selected as the replacement carrier but did not begin service which resulted in Owensboro being without service from January 6, 2008 through August 30, 2009 a period of 20 months; and Pacific Wings inaugurated service on August 31, 2009, but traffic failed to rebuild anywhere near historical levels. 2 The Arkansas communities of El Dorado, Jonesboro, Harrison, and Hot Springs experienced a period of sixteen (16) months without any air service, and suffered inferior service prior to the hiatus. SeaPort Airlines, as the new provider of essential air service in these communities, has worked diligently to reestablish affordable and reliable air service that has resulted in residents and businesses returning to their local airport. 1 Wings of Alaska is the premier airline serving Southeast Alaska. Providing scheduled passenger service, fast freight and charter service between Juneau and Skagway, Haines, Hoonah, Gustavus, and weekly flights to Excursion Inlet. Wings of Alaska grew in reputation and size, becoming one of the most successful regional air carriers in Alaska, now comprised of a fleet of seven Cessna 207 s and Grand Caravans. Wings of Alaska presently operates an average of 38 daily scheduled flights to six Southeast cities in Alaska. 2 US DOT Order 2011-8-6 Page 2
Revenue Passenger Enplanements To illustrate this point, the graph below compares SeaPort s monthly enplanements since we reestablished scheduled service at the four Arkansas communities during the fall of 2009 to enplanements at Owensboro during the approximate same period. 3 400 Monthly Enplanements SeaPort Arkansas Markets v OWB September 2009 August 2011 350 300 250 200 150 PacWings - OWB SeaPort - HOT SeaPort - HRO SeaPort - ELD Seaport - JBR 100 50 0 It is clear that SeaPort has experienced success in reestablishing air service in the Arkansas communities and we reasonably believe similar success can be achieved in Owensboro with the right combination of schedule, fares, destination, reliable service, and community partnership. A Track Record of Building Community Partnerships With respect to community partnerships, SeaPort Airlines prides itself on those which it has been able to develop in each market served. This includes participation in local events, donation of tickets, regular community meetings, and advance notification of and opportunity for input related to schedule changes and fares. 3 Note that Pacific Wings started service in Owensboro on August 31, 2009, with the first complete month of service being September 2009. SeaPort Airlines started service in Arkansas during October 2009, with the first complete month being November 2009. The data illustrated begins with the first complete month of service for each carrier. Data for SeaPort Airlines ends in August 2011, the last complete month prior to the filing deadline of this Docket. Pacific Wings enplanements were sourced from T-100 market reports, May 2011 being the most recent publicly available data. Page 3
We believe this approach serves our own interests equally with those of the communities served by fostering long-term, stable relationships that result in increased ridership and, eventually, reduced subsidy requirements. SeaPort s partnership approach is beginning to get recognized by those who watch the Essential Air Service program as evidenced by the following weblog entry from Skyland Centre for Essential Air Service: 4 We invite the Owensboro community to contact any of our EAS partner communities for additional information. Additional evidence of our ability to develop a strong community partnership and provide Owensboro with reliable, customer-focused air service is demonstrated through community and customer comments that are provided later in this proposal. 4 SkyLand Centre for Essential Air Services offers news, information, expert opinion and industry insights through www.skylandnews.com home page, where breaking news is posted as it comes in and a weekly news digest, currently circulated to 5,000 essential air service professionals around the world. Page 4
The SeaPort Airlines Experience Below, we have summarized for the benefit of the Department and the community key elements of SeaPort s operating model and service strategy that we intend to employ at Owensboro KY if selected to provide essential air service. Aircraft SeaPort Airlines is proposing service at Owensboro with 9-passenger Cessna Caravan aircraft. Currently manufactured in the USA, the Caravan was originally designed in the 1980 s to replace an aging fleet of fleet of piston-powered aircraft, such as the De Havilland Otter and Cessna 402. SeaPort Airlines Cessna Caravan The Caravan has a spacious cabin that is highlighted by a large aisle and huge windows for all around excellent visibility. The large cargo pod on the belly of the aircraft facilitates carriage of baggage volumes and weights much greater than that which can be accommodated on older piston-powered twins. We believe the Cessna Caravan offers the right size increment of capacity to rebuild passenger traffic at OWB, enabling us to offer optimal frequency levels and reasonable fares to Page 5
the community, while at the same time minimizing the required level of subsidy by the Department. Airport Terminals SeaPort Airlines is offering three proposal options for consideration by the community and Department that include service to St. Louis, Nashville, and Memphis. For service at each airport, SeaPort proposes the following terminal arrangements: St. Louis (STL): SeaPort Airlines will operate from the main terminal complex with all passengers being screened by the Transportation Security Administration (TSA). Nashville (BNA): SeaPort Airlines would operate from the main terminal with TSA-screened operations. We have obtained the airport s schedule of rates and charges and, unlike the current EAS provider at Owensboro, have no indication that we would be unable to procure counter or gate space at [Nashville International Airport] on reasonable terms. 5 Memphis (MEM): SeaPort would utilize its existing business terminal at Memphis International Airport, which offers convenience for quick trips to and from the Memphis metropolitan area. We provide a complimentary and quick shuttle service to and from the main airline terminal for passengers connecting to, or from, distant destinations. Passengers departing Owensboro would go through TSA screening. Passengers departing Memphis would not go through TSA screening and would be deplaned into a non-sterile area at Owensboro. Distribution Strategy SeaPort has invested heavily in improving our inventory distribution abilities. We are now in all five major global distribution systems and are available on all major online travel agencies and meta-searchers including Orbitz, Travelocity, Expedia, Kayak.com, Hipmunk.com, and CheapoAir.com. SeaPort currently has an interline ticketing agreement with US Airways and is working toward securing agreements with other carriers that will facilitate single ticket itineraries from Owensboro to destinations all around the world. Pricing Model Generally, SeaPort Airlines employs a simplified pricing strategy of all fares being one-way with varying levels of advance purchase and capacity controls. 6 The objective of this strategy is to offer a community attractive fares that encourage use of the local airport, while at the same time minimizing required levels of subsidy provided by the Department. Equally as important, we oppose the notion of baiting a community with ridiculously low fares and inflated traffic projections that are neither attainable nor sustainable and, in reality, shift the true and fair cost of air transportation from consumers to the Department and EAS program. 5 US DOT Order 2011-8-6, p. 2 6 From time to time SeaPort offers promotional fare sales that offer additional savings to passengers. We anticipate, for example, offering introductory fares in the Owensboro market to generate market awareness of SeaPort Airlines as the new provider of regular air service at OWB and, depending on the service option selection by the community and Department, the new service option. Page 6
Consistent with our pricing model, SeaPort charges reasonable fees for ticket changes ($35 v $100+ on most major airlines), pet travel, and unaccompanied minors. These fee levels reflect SeaPort s philosophy of building customer loyalty through quality service at reasonable prices rather than opportunistically nickel and diming passengers at every possible turn. Marketing & Public Relations Strategy SeaPort will implement a comprehensive marketing and public relations strategy aimed at introducing the brand and service model to the community and promoting increased ridership levels. Among the marketing activities that SeaPort has implemented in other markets and which will be applied at Owensboro are the following: Local Event Marketing. Recognizing that visible participation in local events has been successful for both legacy and low-cost airlines, SeaPort has implemented a similar strategy in all of its communities. These have ranged from SeaPort Airlines community egg hunts, to presenting at business expos, to hosting after hours events at local Chamber of Commerce meetings. In addition, SeaPort often makes in kind donations of tickets for use by local charities, either for their own business needs or as a fundraising tool (i.e., raffles, silent auctions, etc.). Website: The majority of SeaPort s passengers book through the Company s website (www.seaportair.com) which is currently undergoing a redesign to improve user navigation and facilitate an easier booking process. Social Media: Since 2010, SeaPort Airlines has managed a successful social media campaign that has allowed the Company to dynamically engage its customer base in a twoway conversation through sites such as Facebook, Twitter, FourSquare & LinkedIn. We have found social media to be an excellent tool for generating passenger referrals and information sharing in our communities, and expect similar results in Owensboro. FlyerFlex Customer Rewards: During 2011, SeaPort launched a new and improved customer loyalty program called FlyerFlex. This program provides customers with a variety of benefits including free flights, service charge waivers, bonus points, gift memberships, and personalized baggage tags. SeaPort anticipates unveiling further enhancements of the FlyerFlex program during 2012 that will include a wider choice of travel rewards. Value Accounts: SeaPort will offer its Corporate Value Account at Owensboro, a program that encourages businesses to make a long-term investment in local air service by offering a variety of benefits and savings, including 5%-to-15% savings. It is important to note that unlike corporate travel programs of major airlines that are not designed to serve small businesses in rural communities, SeaPort s Corporate Value Accounts can provide savings to a company of virtually any size and can be used by any employee of a company, not just specific employees named on a sales contract. Page 7
Sample SeaPort Airlines Advertising Page 8
Community & Customer Feedback While SeaPort Airlines has outlined above why we believe our airline is well positioned to ensure that reliable and reasonably priced air transportation continues to play a vital role in the local economy and quality of life in both of these communities, the strongest proof resides in the accolades we receive. Below is just a small sample of the comments SeaPort has received from our customers and community partners: Eastern Oregon Regional Airport at Pendleton had been struggling since schedule changes following 9/11 served by a carrier flying 37 seat aircraft. Low passenger count attributed to poor schedule, which then contributed to poorer passenger count. The carrier's solution was to bring in larger aircraft and fly to a different hub. The Airport and community balked at this suggestion and went in search of alternatives. The solution found through the EAS process was SeaPort Air flying a 9 passenger Pilatus. The passengers have welcomed the new service, much better schedule, and are elated with "no security check" and stand by time. Passengers today will say, "I love the service", "great customer service", and "I'm sure glad I finally tried it, cause I'll be back". In our particular market, the 9 passenger aircraft is perfect, and SeaPort Air provides the schedule, the professionalism, and customer service we need and desire. Larry Dalrymple Airport Manager Pendleton Regional Airport I have never had such a positive experience connected with any airline. I read about Seaport Air last October when they opened the Mid-South Route, but didn t have the chance to fly until March. Usually the dread of the process comes then you just grin and bear it; however, with SeaPort Air I could arrive 15 minutes early. The hassle free no TSA is wonderful and made me feel special. I have flown twice in the last 2 months and the customer service from start to finish is outstanding. I will be a regular customer and have already recommended the airline to several associates. Thank you, SeaPort Air, for making me feel like a queen! Catherine Martin Customer (few from Memphis to Harrison) For two decades I have been picking my mother up at the airport and for two decades I have been met with the defeated, hang-dog look that the ordeal of air travel has given her. I guess it pretty much does it to all of us, but (as she is well into her 80's) I worry about the toll it takes on her more and more lately. Page 9
When I picked her up today from her SeaPort flight K52325 from Dallas and saw she was smiling, you could have knocked me over with a feather! She couldn't stop raving about how pleasant the flight was. Let me be clear. My mother is a tough-as-nails Mid-western Yankee from the old school who has been around the world a couple of times since the late 1940's. She doesn't bestow idle praise and she seldom raves. Since it was a 9-seater plane that had to stop for a bathroom break, I can only conclude that it was the above average service she received from your staff. She, in fact, said as much. From the ticket counter in Dallas to the ride she got to the main terminal in Memphis she was impressed. She even liked the way she was asked to turn off her mobile phone and the help she was given doing so (she's not a big techie). I'm in the service industry myself and I know how often complaints come through. I just want to be sure to let you know how well everyone did on this flight. In the future, I will look to SeaPort first for my travel needs and will spread the good word to my friends. A smile and a kind word go a long way y'all. Thank you for getting this one so right. Mark Davis Peterson Customer (flew from Dallas to Memphis) I want to let you know that Alan, the owner, and I were stuck in the horrendous traffic getting to the airport. Your people called to see where we were at. Called a few times to try and get us out of the jam which was impossible, we were too far from the Gateway and we already had been on the road 1½ hours. Did manage to break free taking 102 (I think) and called close to the Embassy to let them know we were just a minute away and they held the plane for us!! Amazing and kudos to your team!! I have been telling everyone of the stellar customer service and you will be our flight of choice going forward. Joanne Bosworth Customer (flew from Portland to Seattle) Two hours before the flight I booked my ticket to Memphis from Hot Springs. Wow! What a surprise; it was simple, convenient, great price, and impeccable service. It far exceeded my expectations and I will be flying to Memphis on SeaPort Airlines instead of driving from now on. The customer service was fabulous! Ruth Ann Smith Customer (flew from Hot Springs to Memphis) Page 10
Service Proposal Service Pattern SeaPort Airlines is offering three service options for consideration by the Owensboro community as summarized on the map below. SeaPort Airlines Service Pattern Options at Owensboro, KY St. Louis, MO (STL) Owensboro, KY (OWB) Nashville, TN (BNA) Memphis, TN (MEM) Option #1 18 weekly round trips to Nashville, TN Option #2 12 weekly round trips to St. Louis, MO + 6 weekly round trips to Memphis, TN Option #3 12 weekly round trips to St. Louis, MO + 6 weekly round trips to Nashville, TN Note that options #2 and #3 would provide the community with access to two different connecting hubs. We believe that this enhanced option of two connecting points will help facilitate faster restoration of passenger traffic at OWB. We have found this to be true in our Arkansas communities, where the addition of Dallas and/or Kansas City to existing Memphis service has resulted in significant recent traffic growth (see graph on page 3), and believe similar results can be achieved in Owensboro. In the case of Memphis, access would be afforded to virtually every major airline in the United States and is a major hub for Delta Air Lines. St. Louis and Nashville offer similar access to legacy carriers, with the added benefit of access to low-fare airlines such as Southwest and Frontier. 7 7 While SeaPort Airlines (along with every other U.S. based airline) does not have an interline ticketing and baggage agreement with Southwest Airlines, Internet savvy consumers figured out long ago how to build end to end connecting itineraries with this carrier, as well as others. This has been validated in a number of our other EAS markets that are linked with airports served by Southwest (as well as other low-fare airlines). Page 11
Projected Passenger Traffic The Department provided historical traffic in Appendix B of Order 2011-8-6 to assist carriers in developing traffic and revenue projections for their performance. That data indicates traffic at Owensboro has been in a free fall since service was initiated by the current air carrier. 8 To develop passenger and revenue projections, SeaPort Airlines reviewed historical traffic data back to 2003. This data is provided below and compared to SeaPort s own traffic forecast during the first year of service at Owensboro for each option. 12,000 Passenger Traffic at OWB Historical Levels v SeaPort Forecast 10,000 8,000 SeaPort s passenger forecast is reasonable when compared against those years during which Owensboro had reliable, affordable, and most importantly stable air service 6,000 4,000 2,000 0 STL BNA MEM CVG SOURCE: Historical traffic data from T-100 filings While SeaPort s projected passenger levels are higher than recent historical data, they should not be viewed as unreasonable when the community s ability to generate passenger traffic is considered over a longer period of time. We raise this point because during communication with the EAS Division related to another docket Seaport Airlines was advised the Department s calculation of whether a proposal meets statutory requirements is based on actual passenger counts and not a specific carrier s forecast. If we were to submit a bid using the actual numbers for the period that Owensboro has been served by Pacific Wings, the level of subsidy requested would have to be substantially higher and would have exceeded the statutory cap of $200 per passenger. 8 See graph on page 3. Page 12
Service Proposal Detail & Subsidy Request Projected revenue and operating expenses that form the economic basis of this proposal are summarized on the tables on the next page for a two year period. Note that the requested level of subsidy for each option declines during the second year as SeaPort is confident that, similar to our experience in Arkansas, we will be able to restore consumer confidence in scheduled air service at Owensboro-Davies County Regional Airport. Projections are based on the assumption of one-way fares from Owensboro as low as: $99 to Memphis; $79 to St. Louis; and $59 to Nashville. 9 Notwithstanding the risk of cost inflation in coming years (particularly related to fuel) that could possibly outstrip traffic growth and reasonable fare increases, SeaPort is offering the Department the option to contract the proposed annual subsidy for a four year period at no increase in annual subsidy beyond that level specified for the second year of each option in this proposal. We believe this offer provides the community with the assurance of stable air service for an extended period and reduces the administrative burden on both the Department and ourselves. SeaPort Airlines appreciates the opportunity to submit this proposal and welcomes any questions from the community or the Department. Respectfully submitted, Timothy Sieber Vice President Strategy & Corporate Development SeaPort Airlines, Inc. 9 Inclusive of all taxes and fees. Page 13
SeaPort Airlines, Inc. Option #1 18 Weekly Roundtrips: Owensboro, KY - Nashville, TN Operating Projections Year 1 Year 2 Average Sector Length (sm) 115 115 Scheduled Departures 1,872 1,872 Scheduled Block Hours 1,747.2 1,747.2 Projected Completion Factor 98.0% 98.0% Projected Completed Departures 1,835 1,835 Projected Completed Block Hours 1,712.3 1,712.3 Passenger Projections Projected Passengers 5,200 5,720 Projected Average Fare $72.50 $73.95 Revenue Passenger Miles (RPMs) 598,000 657,800 Available Seat Miles (ASMs) 1,898,770 1,898,770 Projected Load Factor 31.5% 34.6% Financial Projections Revenues Passenger Ticket Revenues $377,000 $422,994 Ancillary Revenues $11,395 $12,789 Total $388,395 $435,783 Expenses Flight Operations $196,909 $200,163 Aircraft Ownership/Lease $162,664 $162,664 Fuel & Oil $404,520 $412,611 Traffic Servicing $53,572 $60,108 Insurance $34,245 $34,930 Maintenance $282,522 $288,173 Sub-Total - Direct $1,134,433 $1,158,649 Indirect $215,542 $231,730 Total Expenses $1,349,976 $1,390,379 Projected Operating Profit/(Loss) ($961,581) ($954,595) Subsidy Calculations Operating Loss $961,581 $954,595 Economic Return @ 5% $67,499 $69,519 Required Subsidy $1,029,080 $1,024,114 Subsidy per Departure $560.94 $558.23 Subsidy per Block Hour $601.01 $598.11 Subsidy per Passenger $197.90 $179.04 Page 14
SeaPort Airlines, Inc. Option #2 6 Weekly Roundtrips: Owensboro, KY - Memphis, TN 12 Weekly Roundtrips: Owensboro, KY - St. Louis, MO Operating Projections Year 1 Year 2 Average Sector Length (sm) 206 206 Scheduled Departures 1,872 1,872 Scheduled Block Hours 2,780.4 2,780.4 Projected Completion Factor 98.0% 98.0% Projected Completed Departures 1,835 1,835 Projected Completed Block Hours 2,724.8 2,724.8 Passenger Projections Projected Passengers 6,500 7,475 Projected Average Fare $108.81 $110.98 Revenue Passenger Miles (RPMs) 1,341,167 1,542,342 Available Seat Miles (ASMs) 3,406,778 3,406,778 Projected Load Factor 39.4% 45.3% Financial Projections Revenues Passenger Ticket Revenues $707,250 $829,604 Ancillary Revenues $21,371 $25,086 Total $728,621 $854,690 Expenses Flight Operations $307,085 $312,159 Aircraft Ownership/Lease $253,679 $253,679 Fuel & Oil $630,859 $643,477 Traffic Servicing $100,499 $117,888 Insurance $53,406 $54,474 Maintenance $440,600 $449,412 Sub-Total - Direct $1,786,129 $1,831,089 Indirect $143,502 $272,004 Total Expenses $1,929,631 $2,103,093 Projected Operating Profit/(Loss) ($1,201,010) ($1,248,403) Subsidy Calculations Operating Loss $1,201,010 $1,248,403 Economic Return @ 5% $96,482 $105,155 Required Subsidy $1,297,492 $1,353,557 Subsidy per Departure $707.25 $737.81 Subsidy per Block Hour $476.18 $496.75 Subsidy per Passenger $199.61 $181.08 Page 15
SeaPort Airlines, Inc. Option #3 6 Weekly Roundtrips: Owensboro, KY - Nashville, TN 12 Weekly Roundtrips: Owensboro, KY - St. Louis, MO Operating Projections Year 1 Year 2 Average Sector Length (sm) 164 164 Scheduled Departures 1,872 1,872 Scheduled Block Hours 2,281.6 2,281.6 Projected Completion Factor 98.0% 98.0% Projected Completed Departures 1,835 1,835 Projected Completed Block Hours 2,236.0 2,236.0 Passenger Projections Projected Passengers 6,500 7,475 Projected Average Fare $89.42 $91.21 Revenue Passenger Miles (RPMs) 1,063,833 1,223,408 Available Seat Miles (ASMs) 2,702,307 2,702,307 Projected Load Factor 39.4% 45.3% Financial Projections Revenues Passenger Ticket Revenues $581,250 $681,806 Ancillary Revenues $17,562 $20,610 Total $598,812 $702,417 Expenses Flight Operations $251,997 $256,161 Aircraft Ownership/Lease $208,172 $208,172 Fuel & Oil $517,690 $528,044 Traffic Servicing $82,595 $96,885 Insurance $43,826 $44,702 Maintenance $361,561 $368,792 Sub-Total - Direct $1,465,840 $1,502,755 Indirect $322,485 $360,661 Total Expenses $1,788,325 $1,863,416 Projected Operating Profit/(Loss) ($1,189,513) ($1,161,000) Subsidy Calculations Operating Loss $1,189,513 $1,161,000 Economic Return @ 5% $89,416 $93,171 Required Subsidy $1,278,929 $1,254,171 Subsidy per Departure $697.13 $683.64 Subsidy per Block Hour $571.97 $560.90 Subsidy per Passenger $196.76 $167.78 Page 16