When Airports Should Subsidize Airlines
One of the favorite airport tricks these days is to throw out subsidies to try to get airlines to start flying new routes. Historically, this is a plan that has failed miserably. The airline comes in until the subsidy runs out and then runs away screaming. Every so often, as we just saw with Portland (Oregon) and its efforts to keep long haul flights, one of these works. This has helped give some guidelines on what can and can't work in this world.
As a general rule, if you as an airport think there's some insanely large untapped market that nobody knows about, you're probably wrong. The airlines do this for a living, and if there's a missed opportunity, they're likely to find it. In nearly all cases, it's best to just work on lowering your operating costs as much as possible to try to attract service for the long run. Otherwise, you'll just end up paying for service for a couple years and then end up with nothing.
There are, of course, exceptions to this rule. Below, you'll find three examples. Two of these have worked and one has a decent chance. Let me explain.
Portland to Tokyo on Delta Years ago, Portland was Delta's Transpacific hub. Why? Well, it was the best market Delta (DAL) could find that wasn't already well-served, but it wasn't good enough. They eventually pulled out. However, Northwest Airlines had a flight from Portland to go into its Tokyo hub. Once Delta took over Northwest, it faced the chopping block.
Delta certainly was paying close attention to its new Tokyo hub, but in the face of the recession (which led to weaker demand) combined with the off peak winter months, the flight was struggling. Portland stepped in and offered subsidies to get through the rough patch, and now Delta has said it will keep the flights once the subsidies run out.
Why did this work? The flight wasn't a rock star, but it was solid enough when times were good. The downturn really hurt the demand for this route, but Portland correctly saw it was as s short term issue. Could Delta have simply left and come back once demand rebounded even without the subsidy? Possibly, but when air service disappears, it's hard to get it back. And if you do, it takes time to build it up again. Portland made a smart move here and it paid off.
Santa Rosa to Los Angeles on Horizon In 2004, Sonoma County in northern California applied for a Small Community Air Service Development grant from the feds to get airline service back at the airport. The last service via United Express left in 2001, but Sonoma thought there was enough demand. They just needed some funds to get someone to try it.
Ultimately, they found Horizon Air willing to take a shot with flights to Los Angeles, as long as they could cover startup costs. For Horizon, this was venturing outside their traditional territory. Though they do more of this flying now, they hadn't done much, if any, within California and obviously this would have been a new airport for them. Beyond marketing support and other incentives, they only wanted a revenue guarantee for four months to cover the inevitable startup losses. That's a very short time period.
This grant was chosen as a winner and now Horizon flies to four cities from Sonoma without subsidy. This was without question one of the more successful grants handed out. But why? A couple reasons. One, the United Express service was focused on connecting traffic through its hubs as opposed to the more profitable local market. That's just how United runs its intra-California regional business. Horizon would focus on the more profitable local traffic. Los Angeles was also the largest local market from Sonoma. Ultimately, this subsidy pushed Horizon to give it a shot and it worked.
Flights to Panama City on Southwest It was a surprising announcement when Southwest said it had signed a deal to fly into Panama City (Florida), and it showed them willing to do things differently than they had in the past. Though service has just begun and it's unclear if this will be a success or not, the prospects are good.
What makes this one so different? The area is being heavily developed by The St Joe Company, a huge development company, so there's an expectation for dramatic traffic growth over what's been there historically. Those sort of expectations make anyone wary, but if you're really convinced that you're about to blow the doors off the place with demand, then a subsidy is a good way to convince an airline to give it a shot.
Now, the oil spill in the Gulf has the potential to scare off people in the short term, so that could put a dent in their plans, but in the long run, my guess is this will work out assuming that all goes as planned by St Joe.
Of course, when it comes to this industry, nothing ever goes as planned, but these are a couple of the very rare examples of a good subsidy in this industry full of bad ones.