The argument about ticket prices is so misleading that it could seem to be intentionally so. Consider this: Airlines pay rent to airports that is measured in terms of cost per enplanement (CPE)—in other words, per person boarding the plane. In 2016, Lynn Horsley wrote in The Kansas City Star,

In 2015, based on an industry measurement, the cost of operating KCI was $6.70 per enplaned (departing) passenger. With a $970 million improvement project, which is the estimated cost of a new terminal, that cost per passenger boarding would bump up to about $9.00 in 2015 dollars.

Since that story, the cost of the new terminal has more than doubled that $970 figure. Will the new CPE really be $18 or over? This chart of the top 50 airports ranked by CPE suggests that an $18 CPE would make Kansas City International the 7th most expensive airport in the country. This is the higher cost that Allegiant and Spirit Airlines say they cannot bear. According to the Star:

Matt Klein, senior vice president and chief commercial officer for Spirit, said in his letter that Kansas City’s aging airport should be updated and is “not befitting of a major U.S. city.”

“However, we believe the current investment proposal is simply … too costly for smaller new entrant carriers to bear and still deliver the value that we deliver to the community in terms of low airfares,” Klein said.

Allegiant’s vice president of airports and government affairs, Keith Hansen, wrote to reiterate the airline’s support for the project, but said larger airlines were expecting smaller airlines to shoulder an unreasonably large portion of the costs of operating the airport.

“Given that the terms for the new airport rates and charges agreement remain unknown and considering the larger carriers continue to reject equitable cost allocation, Allegiant cannot support the terminal development program at this time,” Hansen said.

So . . . if KCI is too expensive for these low-cost airlines, they may just stop serving Kansas City altogether. Less competition at KCI will mean higher fares, higher parking fees, and so on to cover the monstrous amount of debt that a $2 billion airport terminal requires. And if it is too expensive for the remaining airlines, they may also stop serving KCI. Who makes the bond payments then?

Taking on such a large amount of debt to build a new single-terminal airport includes a significant amount of risk—not just for the airlines and bond holders, but for the airport and the city itself. Giving taxpayers the impression that all of this is free is irresponsible and suggests a lack of candor from policymakers.

The post KCI Airlines Links New Terminal Costs with . . . Service appeared first on Show-Me Institute.

Allegiant’s business model  is to provide the cheapest possible flights for travelers going from Northern climates to warmer destinations in the South and on the West Coast. To maintain cost-competitiveness, the airline charges a low base price and then adds extra charges for various amenities passengers can decide to buy. This makes Allegiant typical of Ultra Low Cost Carriers.

But the attention to costs does not stop there. Allegiant often eschews larger airports for smaller, secondary airports in metropolitan areas. For instance, instead of flying out of Saint Louis International Airport, Allegiant flies out of Belleville, a little-used airport some miles distant. These secondary airports have lower costs than large hubs, and Allegiant can use that advantage to stay cheaper than the competition. Aside from its primary holiday destinations, Allegiant avoids the nation’s largest airports. As the map above shows, it even avoids busy medium-hub airports where possible.

How then did MCI, a busy, medium-hub airport, entice Allegiant? Part of the answer is likely low price: whereas most medium-hub airports cost an airline more than $10 per passenger, at MCI the cost is only $7.75 per passenger. Not only is that much cheaper than most airports of its size, it’s cheaper than most small- and non-hub airports, as the chart below shows:

The low price makes it more affordable for Allegiant to take a chance serving MCI. In fact, holiday destinations aside, MCI is the busiest airport that Allegiant serves.

The addition of Allegiant to MCI underscores the reality that at airports, like everywhere else, costs matter. While expensive improvement projects may excite local leadership or spruce up the city’s front door, higher costs make an airport less competitive in its main mission: providing airline service. Residents and city leaders should remember that as they plan terminal improvements at MCI. 

The post Allegiant Shows How Kansas City’s Airport Benefits from Low Costs appeared first on Show-Me Institute.

On Tuesday, Allegiant Air announced it will start nonstop service from Kansas City to Orlando, Southwest Florida and Tampa in mid-November. The Las Vegas–based low-cost airline is operated by Allegiant Travel Co.

In an interview on KMBZ radio, Bill Grady asked airport administrator Mark VanLoh if this new service announcement raised questions about the real need for a new terminal. Mr. VanLoh replied, “I don’t see how the two are connected.”  

In fact, the two are very much connected.

The news of Allegiant Air is not only good news in and of itself, but it demonstrates exactly why Kansas Citians ought to be skeptical of taking on an unnecessarily large expense at the airport. Allegiant Air is a “low-cost” airline. According the The Memphis Business Journal: 

Allegiant often serves smaller markets like Orlando-Sanford International Airport instead of Orlando International Airport to avoid pricey landing fees.

Advocates of spending a great deal of money at the airport tell us that only travelers and airlines will pay the price. That is largely true. They also tell us that the prices airlines pay to serve an airport have little to do with ticket price; that may also be true. But pricey landing fees of the type that would follow an expensive rebuild or remodel may chase away airlines like Allegiant. And they would be a disincentive for bigger airlines like Southwest, too. A Southwest vice president said as much to the airport advisory group, “Higher costs can lead to less service, not more.” They have left other airports over similar price increases.

If Southwest wants to pour hundreds of millions of dollars into a new KCI, that might be welcome. But if improvements require issuing bonds resulting in higher fees to airlines, city leaders should think twice. A shiny new airport is of no use if airlines choose not to service it.

The post How a Cheap Airport Helps Kansas City appeared first on Show-Me Institute.

Now that a year has passed we can return to the plain facts. The CEO of Southwest Airlines, the carrier with the largest MCI service, was recently in town to showcase a Missouri-themed airplane. While here, as the Star reported, he said of the MCI terminal:

“I agree and Southwest agrees we definitely could stand to make some improvements. The question still remains exactly what is the best way to do that in the most cost-efficient manner,” Kelly said.

Air travelers are sensitive to price, something Kelly said is evident each time oil prices climb and the cost of flying jumps.

“It absolutely kills traffic,” he said.

People use airports to get on and off planes. They do not go to airports to eat at fancy restaurants or to buy socks or baseball caps. MCI is a highly regarded airport by passengers exactly as it is, and any changes need to be sensitive to the costs and convenience to airlines and travelers.

MCI is a relatively cheap airport for airlines to serve. One benefit is the many morning flights out of MCI because Southwest parks their planes here overnight. If airport fees rose to cover the costs of a new terminal, these planes might find cheaper accommodation elsewhere. Same for those midday direct flights to LaGuardia that originate from the West Coast. They stop here because MCI is a cheap place for them to fuel up and collect passengers. If fees rise, they may choose to connect in other cities and cost us the direct service.

Going forward, it is still tough to know who to believe on even the simplest details of the negotiations. Aviation Department Director Mark VanLoh recently told a Northland chamber group that he expects to have a recommendation before the city council by the end of summer. That seems unlikely. According to Austin Alonzo, Southwest’s CEO said, “We’ll get there, and I think patience is probably the right thing because it is a pretty complicated question.” The Star reported that the deadline for a final recommendation is May 2016.

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First, the consultant criticized the airlines’ statement that the airline industry has experienced considerable stress since 2001 and would attempt to use their limited resources where they make the most profit. The consultant claimed that, “In fact, the airlines are now experiencing record profits.” This point is shortsighted. Airlines have managed profitability in the last couple of years. However, in the last two decades, the airlines lost so much money that Warren Buffett joked, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright.” The airlines only reached this profitability after massive consolidation, keeping just the most profitable flights, and closing airport hubs. Airlines, especially MCI’s largest carrier, Southwest, have learned their lesson and will likely remain cost-conscious in the future.

Second, the consultant objected to the airlines’ view that terminals do not create demand. They stated:

…a new or expanded terminal can address certain deficiencies and open up new air service opportunities…For example, the lack of international gate capacity…

This point is strange, as the consultant admits that growth in international travel at MCI is essentially flat (0.7 percent growth) and will remain so. But, according to the consultant, Kansas City can be like Pittsburgh, which has a flight to Paris. Unfortunately, Pittsburgh had to pay $9 million in subsidies for that honor, so maybe Kansas City does not want be like Pittsburgh. As Southwest officials stated, MCI has adequate capacity and its price competitiveness means more service. Compared to non-hub peer airports, MCI has more non-stop destinations.

Third, consultants disagreed with the airlines about the importance of landing costs for airlines. They stated:

In general, airport costs (i.e., terminal rents and landing fees) comprise roughly 3 to 6 percent of an airline’s total costs.

The consultants claim that fuel is most important to airlines and operation costs can decrease at a more efficient, new site. However, this is irrelevant. If a new terminal is built that makes MCI more expensive to operate out of, the airport could certainly lose flights. Perhaps the consultants at Frasca & Associates should call Southwest officials and tell them that 3-6 percent of their costs don’t matter and they should not have refused to sign a lease agreement with Sacramento International Airport after that airport’s costs increased.

The consultants make several other points that are equally not insightful. Perhaps it need only be pointed out that airlines understand the aviation industry. The airlines also decide where their airplanes actually go, making their viewpoint on why they choose specific airports especially important.

The post On The Airline Industry, Don’t Trust The Airlines, Just Listen To A Consultant appeared first on Show-Me Institute.

The Kansas City Aviation Department originally used 2006 baseline estimates to justify new terminal specifications. Back then, they predicted 2.8 percent growth in enplanements (the number of people boarding the airplane) from 2006 onward. But they were wrong, and eventually had to revise the projected growth down to 1.9 percent. The growth of passengers in the last decade has fallen even further, to 0.01 percent. This slide in growth started before the financial crisis. Even including the booming 1990s, total growth averaged a meager 1.9 percent from 1991 to 2012.

MCI’s passenger traffic peaked at 6 million in 2000, when the airport still handled 1 million transfers per year. This subsequent decline in passengers is the result of airline consolidation and transfer centralization in large hubs. It is affecting all airports, not just Kansas City’s. The airlines’ strategy has meant that fewer airlines operate out of MCI than any time in the last two decades. This trend is unlikely to reverse, making a repeat of the growth rate in the 1990s an unlikely scenario.

According to the planning documents for the new terminal, the Aviation Department claims that takeoffs and landings will increase at 1 percent per year. In reality, the number of aircraft operating out of MCI fell and then stayed flat in the last decade, with little evidence of any future increase, much less at a rate greater than 1 percent. As airlines focus on filling every flight to capacity, they require fewer flights per passenger. If we assume that passenger growth remains low or flat, total flights will grow even slower.

The post KCI’s Overly Optimistic Estimates – Part 1 appeared first on Show-Me Institute.

The headline? The near future of all air service is looking grim. Airlines continue to consolidate service at their largest hubs, consolidate with each other, and will continue further reductions at small community airports.

Columbia has felt this decline over the past several months, and the final Frontier Airlines flight from Columbia took off for Orlando, Fla., on Monday. Columbia is not alone. Data in the MIT study shows that Missouri airports, along with almost every other airport in the country, have lost service over the past five years.

This data shows us that the fate of air travel is not dependent on how shiny your airport is. Airlines have shifted away from capacity expansion because it was not a profitable strategy. They will continue to seek ways to maximize profits; unfortunately, small- and medium-sized airports are disproportionally affected in the process.

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But today we are talking about a different Branson. You may have heard that Saturday marked the beginning of Southwest Airlines service to Branson, Mo. There will now be daily flights to Chicago, Dallas, and Houston, and one flight a week to Orlando. This news comes on the heels of a decrease in flights to Columbia, Mo.

There is obviously a lot that contributes to the decision for an airline to begin or increase service. But it is worth noting two things. One, Branson is the only privately owned and operated commercial airport in the country. Many were skeptical that it would succeed. Industry expert Mike Boyd predicted when the airport opened that “the local population is too small, and the region’s attractions aren’t sufficient to consistently generate sufficient traffic for profitable air service.” Branson may be small, but the area has generated enough demand to keep air service over the past few years.

And, they have done it without major subsidization. This airport does not rely on taxpayers to operate (but it does receive $8 from the city for each arriving visitor). Nor does it rely on taxpayer money to attract business. Columbia ran into trouble when it offered subsidies to one airline but not the others; the others are now gone. Subsidies may help attract an airline in the short term. But Delta official Trebor Banstetter reinforced that subsidies such as revenue guarantees will not keep an airline around if the flight does not prove to be successful without that guarantee.

The post You Are Now Free To Move About The Country Without Subsidies appeared first on Show-Me Institute.

Frontier just began flights from Columbia to Orlando, Fla., last November. American Airlines now will be the only provider at the airport — and the company receives a revenue guarantee for two years to provide service. So if American does not make a profit from this market, they can still dip into funds that Columbia will provide to make up for any lost revenue.

Delta Senior Manager Trebor Banstetter commented that revenue guarantees “can be a tool to perhaps get things started, [but] . . . airlines really like to see a service that can sustain itself and be successful, without having a guarantee in place.” He added that the most important thing when considering what a community can offer an airline is “having the community and the travelers embrace  the service and use it on a regular basis because without that it’s hard to justify operating the route.”

Banstetter makes the point that revenue guarantees and other subsidies are not sustainable. The only way to keep service at the airport is if the flight itself is profitable. Prior to 2008, Delta served the Columbia airport with revenue assistance from the federal government, as part of the Essential Air Service program to provide air service to rural airports. Delta continued serving the airport for the next few years, until it was no longer profitable (Delta reported a $900,000 loss in 2011). During this time, Columbia had two airlines and no city subsidies — and now it has just one, plus subsidies.

Columbia officials would be better served if they give up on the “40 in 2020” goal to have 40 percent of mid-Missouri airline passengers using the Columbia airport by 2020. The loss of Frontier and Delta are real indications that flying to Columbia is not profitable for airlines. Yes, it would be convenient for Mizzou students and others in the area to have affordable flights closer than Saint Louis or Kansas City. It might be difficult to conceptualize because we live in a world where the federal government subsidizes almost everything, but there are costs to doing business. We all face constraints in resources. Airlines cannot provide services to a market that is not profitable. How long will it take for Columbia officials to understand this?

The post Now It’s Time To Say Goodbye appeared first on Show-Me Institute.

Well guess what happened. Delta declined the offer, and announced it will exit the Columbia market in February 2013.

I said it before and I will say it again: what were Columbia decision-makers thinking?

They interfered with the market by offering American a revenue guarantee, which is essentially a subsidy. Delta officials had to step up and say “hey wait a minute — this isn’t fair if we are competing with an airline whose flights are subsidized by the government. We cannot compete with that.”

Columbia then found itself in a lose-lose situation. The city would have been out another couple million dollars if Delta accepted a deal that matched American’s, forcing taxpayers to spend even more. Or, Delta would decide to leave an unfair market and the city would lose the options they worked hard to grow at the airport, which is what happened.

What happens in two years, when the revenue guarantee for American ends? Will the city extend the deal, or just hope that the market suddenly becomes profitable? It is not prudent to subsidize a market that would not survive on its own just because someone likes the idea of it. I hope this will serve as a memorable example of the damaging consequences of government intervention in the free market.

The post No Free Rides for Delta appeared first on Show-Me Institute.

I know Columbia Mayor Bob McDavid has a catchy-sounding goal of “40 in 2020” — meaning, to have 40 percent of mid-Missouri airline passengers using Columbia’s airport by 2020. But doling out subsidies is not the best way to strive for this goal.

The revenue guarantee enables American Airlines to break even on each flight. But what about Delta, which already services Columbia without subsidies? Let’s look at an example. Airlines have a minimum amount they can charge for each ticket before they start losing money — say it is $200. But because Columbia is helping American, that airline now can provide fares at $150. Delta, on the other hand, does not have this extra help and cannot lower its prices below $200. Which flight will passengers choose? Unless they have an unwavering love of the Delta Biscoff cookies, they will choose the cheaper American flight; and this is how Delta now will be at a disadvantage in the marketplace.

Delta officials know this, and already warned the city that they will expect a similar subsidy if the American deal goes through. I expect that we will now see a domino effect.  Chances are, Columbia will have to spend taxpayer money to keep Delta from leaving the airport, even though they were already providing service there for four years. There is also a third player. Frontier Airlines is scheduled to begin service to Columbia in a few weeks. They will have good reason to ask the city for a revenue guarantee as well.

The city created an artificial need for other companies to now require subsidies that previously they did not expect or request. Thank you, Columbia, for giving us an example of how subsidies can cause harm to a city.

The post Dominoes In Columbia appeared first on Show-Me Institute.

Incentives often appear to be an easy solution to spur economic development. But this plan is now backfiring for Columbia. Delta has served the Columbia market since 2008 —  without any special government incentives. Now that American has been offered a two-year revenue guarantee of $3 million, Delta is reconsidering its service to Columbia.

In a letter from Delta Senior Vice President Robert Cortelyou to Columbia Mayor Bob McDavid, he states, “While we welcome competition in the marketplace, this revenue guarantee puts Delta at a severe disadvantage by subsidizing American Airlines at Delta’s expense. This is unacceptable.”

Cortelyou emphasizes an important point. If Columbia gives a subsidy to one airline, it creates unfair competition and puts the other companies in that market (Delta and Frontier) at a disadvantage.

Delta officials did state that the airline will exit the Columbia market if they are not offered a similar package. Their threat exemplifies why cities like Columbia should not provide benefits to some companies and exclude others in the first place. If Columbia meets their demands, the city will waste even more scarce public dollars. There is no reason to bribe airlines to serve Columbia.  If there is passenger demand to warrant increased service to the airport, companies will provide it without subsidies, just as Delta has been doing. Doling out subsidies to these companies takes money and resources away from other actions that could be better investments for the city.

However, at this point, Columbia has dug itself a hole and the only option may be to provide similar incentives to Delta, if the deal with American goes through. The good news is that it would only be a two-year commitment. If city officials act prudently, they will prevent it from extending beyond two years.

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“You should do everything, including underwriting flights, to get as many highways in the sky as you can,” said John D. Kasarda, director of the University of North Carolina’s Kenan Institute of Private Enterprise and author of “Aerotropolis: The Way We’ll Live Next.”

Sounds a lot like Saint Louis so far. But (emphasis added):

There doesn’t appear to be support for the idea if it involves public money.

“I don’t agree with subsidizing flights or subsidizing certain airlines. We should work to lower the costs of all of the airlines at the airport,” said Allegheny County Executive Dan Onorato. He said the county doesn’t have money to provide such backing.

Pennsylvania and the Allegheny Conference on Community Development agreed to provide up to $9 million if Delta Air Lines’ flight between Pittsburgh and Paris missed revenue targets. They paid the maximum $5 million after the first year of service, but it’s unknown whether they will owe money for the second, which ended June 1.

Onorato appears to be taking the principled stance of not letting the government pick winners and losers at the airport. As to the airport, at least, Allegheny County taxpayers can be proud of its executive’s fiscal prudence.

The post Kudos, Allegheny County Executive Dan Onorato appeared first on Show-Me Institute.

It is exciting that the private commercial airport in Branson is expanding its operations; it is also exciting that at least some airline service in mid-Missouri can be operated at a profit without government support. Here is to hoping for much more of both!

The post More Good News for Aviation in Missouri appeared first on Show-Me Institute.