Okaloosa County BOCC — April 7, 2015 — BCC Requested to Approve Proposal to Amend and Enrich the Air — agenda request — reading text

BOARD OF COUNTY COMMISSIONERS AGENDA REQUEST DATE: April 7, 2015 TO: Honorable Chairman and Members of the Board FROM: Sunil Harman SUBJECT: BCC Requested to Approve Proposal to Amend and Enrich the Air Service Incentive Plan DEPARTMENT: Airport BCC DISTRICT: All STATEMENT OF ISSUE: The Board of County Commissioners is requested to approve a plan to amend and enrich the existing Air-Service Development New Airline Service Incentive Plan for Destin-Fort Walton Beach Airport (VPS), to enable the County’s Department of Airports to be more competitive in securing new air service and routes. BACKGROUND: Department of Airports staff and air-service consultant have held face-to-face meetings with 16 airlines in the past year in ongoing air-service development efforts to secure additional capacity from its incumbent legacy airlines as well as attract new service from prospective low cost carriers. The results have been very successful with the existing airlines that have increased capacity by 7%; as well as added service on larger, mainline aircraft. However, when attracting new airlines to the airport, VPS is at a competitive disadvantage with neighboring airports in the region. The business model of the airline industry has decidedly shifted in recent years from a focus on increasing profitably by increasing market share for which airlines needed airports to expand market penetration to a counterintuitive, yet extremely lucrative, Capacity Discipline model that involves creating a scarcity to bid up airfares by reducing and carefully managing the seats available below levels supported by demand, for maximum yield (profit) by driving higher fares. Capacity discipline is easier to implement as the number of airlines providing air service nationally have been reduced to four legacy carriers. This consolidation has occurred due to mergers resulting largely from bankruptcies and has impacted VPS with Delta's purchase of Northwest, United's merger with Continental and US Airway's acquisition of American Airlines resulting in reduction from six air-airlines to three. Southwest Airlines, which has never served VPS and has been long regarded as the original and most successful low cost airline is now considered a major legacy airline. VPS's legacy airlines have cut flights and seating capacity since 2008 and are only now beginning to add some capacity, however the newer niche low cost carriers including Jet Blue, Allegiant, Frontier and Alaska airlines tend to shy away from airports with legacy service such as VPS for fear of predatory pricing by entrenched legacy carriers. Even when the market demand analysis and metrics are favorable the low-cost carriers will only consider service for testing such markets when there are compelling incentives programs countering any financial risk exposure. Furthermore, unlike most airports and its direct competitors, VPS must pay a land rent of $386,000 each and every year. In addition, neighboring airports reap the benefits of privatized sector funding as well as bed tax and City tax funding as a revenue guarantee. The current incentives offered at VPS for airlines new to the market are sub industry standard and include: waived rent and landing fees for one year, free ground handling for one year and $85,000 for marketing the new destination. The Department of Airports proposes the following amendment and enrichment of the Airline Incentive Plan, as follows: 1. Apply for RESTORE Act funding with the intent to attract new carriers to four additional routes by offering a revenue guarantee to generate new inbound tourists. The funding plan would consist of $1.5 Million per route for a total request of $6 Million. 2. Request Tourist Development Council (TDC) explore opportunities for Bed Tax funding as an additional source of funding as a revenue guarantee to airlines for additional routes and generation of inbound tourists. This is common in tourist destinations including Walton and Bay Counties. New airline routes are costly and airlines are often reticent in initiating new service without a form of revenue guarantee to ensure profitability and the Federal Aviation Administration (FAA) prohibits airports from providing their own revenue guarantees or subsidies. The addition of these proposed funding sources would help level the playing field and better incentivize prospective airlines that commence service at VPS and increase tourism to the area. The resultant economic benefit of the additional air-service is estimated at 150,000 additional annual passenger enplanements yielding an estimated gross regional multiplier impact of 101.4 million annually. OPTIONS: Approve, Disapprove of Table RECOMMENDATIONS: Staff recommends that the Board of County Commissioners approve the proposed amendment to the existing VPS Air Service Development New Airline Service Incentive Plan for VPS to enable the County to be more competitive in securing new air service and routes from existing and new airlines. RECOMMENDED BY: APPROVED BY: John Hofstad, County Administrator