High and Hot

High and Hot
The Challenge of Air Service Development

Thursday, June 17, 2010

Flights are packed and Making Money...Is The Communities Air Service Safe? NO!

I can't tell you how many times I hear from communities the statement: "Why did we lose air service with XX Airlines...the Flights were always packed?!"
THE TRUTH: The flights may have been full or close to it when the
person making the statement flew but overall the flights are often
not very full....

The flights were pretty full with high load factors in general but the
airlines can't go to the bank to pay their bills and hopefully make a
profit with people in seats...if not enough revenue is on the plane.
...these people in the seats also need to spend enough dollars to cover costs and have some left over for profit...butts in seats doesn't always equate to enough dollars in the bank! If you need a dollar and you get 90 cents your losing money no matter how many passengers you carry.

Very recently, Flagstaff Arizona announced that they were losing service on Horizon Airlines to Los Angeles. Unfortunately a small community losing some air service is not usually a big news item in these times of airlines reducing capacity and service. What makes this incident of note is that Horizon not a month or so before this discontinuance of service announcement had advised Flagstaff that the flights were profitable!

You may ask how can a community lose airline service when the service is profitable?! The answer is actually simple and goes to THE BIG TRUTH of Airline Service Development...


"Profit alone doesn't make community air service secure. Making a
bigger profit than if the airline used the aircraft to fly to another
community is what makes the air service secure!"
THE BIG TRUTH is exactly what Horizon shared with the Flagstaff community. Yes they were successful and the service was profitable...unfortunately for Flagstaff they were on the bottom of the profitability list of airports Horizon had service to and when Horizon was going to see a reduction in aircraft they had to cut service. Like a good business will...they will keep their most profitable ventures and cut their least profitable ventures when they have to make cuts.

You may ask why doesn't the airline just get more equipment? If the service is profitable why not get or keep enough aircraft to operate all profitable routes? Good Question but with logical answers. In an industry that has reduced capacity and thus flights to get to an overall pricing power needed to get their systems profitable...you don't just casually add or retain aircraft and flights. Those extra flights could put too many seats in the system driving down airfares and jeopardizing more of an airlines flight schedules ability to make a profit.

Additionally an additional aircraft isn't an inexpensive thing to buy...Aircraft cost tens of millions of dollars. It is a costly asset and not something purchased like a box of pens. Aircraft of the right size and type are not always available to just buy and put into your fleet. Also...if your lease is up on an aircraft it has to go unless you extend the lease and then you have to look at the costs of doing this. The extra costs of maintaining an additional aircraft type with maintenance, training etc...can move profitable route to one that is non-profitable.

What is a community to do if even when their commercial air service is profitable they can lose the service?

Airline Revenue Guarantees can help especially if the community has a sustained ability to offer risk abatements.
It turns out that Flagstaff originally offered subsidies and other start-up support to get the Horizon Los Angeles Flight in the first place. High six figure level support. Unfortunately, often, start-up cost abatements are only helpful as long as the communities funds are available. It's an old story that often the airlines will leave when these funds are depleted. Flagstaff's funds were for start-up support. If they had an ongoing program where they had a consistent funding source available...Horizon could have gone back to Flagstaff and allowed them the chance to move them up the profitability ladder via a revenue guarantee and Horizon could have cancelled another communities service instead. Knowing Flagstaff's investment for air service was short term and not a longer term support that was sustainable... Horizon cancelled the service and didn't make the call about the discontinuance of service until after the decision was made and executed.

If a community is generating a profitable service why would they even consider offering a revenue guarantee?

Because in the present environment...there are fewer aircraft available for a growing number of communities who want the air service...who want the economic development and activity that the air service can generate. Let me put it this way...IF A FLIGHT DRIVES $10 MILLION DOLLARS+ IN ECONOMIC ACTIVITY TO A COMMUNITY AND WOULD COST $200,000 IN A REVENUE GUARANTEE TO RETAIN THE AIR SERVICE I THINK A COMMUNITY WOULD BE CRAZY NOT TO FIGURE OUT HOW TO COME UP WITH THE $200,000!

Through my role as Executive Director of the Telluride Montrose Regional Air Organization I've pursued, obtained and supported commercial air service via revenue guarantees that have delivered a strong return on investment. I've facilitated the creation of benchmarks so that my community can determine what the ROI of an air service needs to be and what other benchmarks a community should develop to best manage an air service development program that is worthwile and drives strong community economic impacts.

Community Flights, my air service development consulting company can help communities evaluate air service development issues like revenue guarantees...how much is appropriate for how much air service etc...Small Communities in particular need to compete for the air service they can support and service they deserve...Community Flights can help facilitate a communities air service focus and develop and execute a strategy to meet the communities air service goals.  VFNV9FAQDT2U

Example Code:        scott@communityflights.com

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