Dangling incentives in front of airlines to entice them to start operating out of an airport or add a new nonstop flight isn’t a reinvention of the airplane wheel.
For a decade at least, some small- and medium-sized airports around the United States have used an incentive called a minimum revenue guarantee to attract new air service. The incentive guarantees airlines a basement-level amount of revenue, which reduces some of the risk that comes with starting new routes or locating in smaller markets.
The incentive has had mixed results.
The newly created Louisville Regional Airlift Development has already started collecting money for a minimum revenue guarantee fund that the coalition members hope will kick-start nonstop flights to Los Angeles and Boston from Louisville.
“Companies that are here want better access” to other cities via nonstop flights, said Luke Schmidt, president of Louisville-based consultancy firm L.B. Schmidt & Associates and head of LRAD.
The Kentucky Cabinet for Economic Development is expected to contribute $1.33 million. Louisville-Jefferson County Metro Government has committed $200,000 to the fund this fiscal year, and the remaining $2.46 million will come from private investors, companies and civic partners.
As part of its pitch for the minimum revenue guarantee, LRAD notes multiple cities that have used similar funds to bring new flights to their airports, including Columbus, Ohio; Indianapolis; Columbia, Mo., and Manhattan, Kan.
With at least 38 percent of the funding coming from taxpayers, Insider Louisville decided to look at several cities that have used minimum revenue guarantee funds to see how they worked there and what could be gleaned about the impact of new air service.
When it’s worked
In 2013, The Indianapolis Star reported that the local airport was getting a daily nonstop flight through United Airlines from Indianapolis to San Francisco, a nonstop route it didn’t have at the time.
Business and government leaders touted the benefits the new flight would have on the Indianapolis economy overall and its tech industry in particular as the San Francisco route provided easier access to the U.S. technology capital Silicon Valley.
“To maximize Indiana’s opportunity to attract more investment from the Asian Pacific Rim, to attract more investment from the high-tech sector in and around the San Francisco Bay Area, a direct daily flight was absolutely essential,” said then-Gov. Mike Pence.
Business and civic leaders had joined forces to lobby for a nonstop flight to San Francisco. The state’s economic development arm Indiana Economic Development Corp. pulled together $1.5 million in a fund and agreed to cover any shortfall in United’s minimum revenue guarantee for the period of a year.
After the year ended, the route was successful enough that United continues to offer it today and on some days offers multiple nonstops flights. “They actually upgraded the plane size and added more frequency to it,” Abby Gras, director of communications for Indiana Economic Development Corp., told Insider.
Indianapolis’s tech industry is continuing to grow. Local tech businesses have expanded, and some jobs have moved from San Francisco to Indianapolis, Gras said.
Most notably, San Francisco-based Salesforce added 800 new high-paying sales and marketing and software developer jobs this year in Indianapolis. According to the commission, Salesforce will bring $40 million of new investment to Indiana.
However, Gras said it is difficult to draw a line between the new route and the growth of an industry that was already doing well. Indianapolis also has a relatively low cost of living and the talent locally to fill the jobs.
“There are multiple reason why people grow where they grow, but we are certainly seeing a lot of tech growth in Indy,” Gras said. “We are hearing a lot of positive feedback from the community” about the flight.
Meanwhile, government leaders in Columbia, Mo., found the minimum revenue guarantee fund so successful that the city signed a second agreement this year.
The city is offering United a $600,000 one-year revenue guarantee in return for a nonstop flight to Denver. The funds came from city and private dollars, The Missourian reported, with most of the money coming from private companies and the University of Missouri.
In 2012, Columbia executed a two-year contract with American Airlines for flights to Chicago and Dallas/Fort Worth. That revenue guarantee was worth $3 million, but American Airlines only used $22,562 of that, the article states. The rest of the money was eventually returned to the civic and private investors.
The University of Missouri has seen a “big boom” in students coming from Chicago since the flight began, according to a source quoted by The Missourian.
Where the carrot approach hasn’t work
In 2009, state and local governments in Florida pooled $1.5 million for a revenue guarantee to offer nonstop Delta flights between Tallahassee and Tampa, Orlando and Fort Lauderdale, according to a 2011 report adopted by the Kentucky Legislative Research Commission.
Six months later, the only flight that remained was between Tallahassee and Fort Lauderdale. Today, Delta doesn’t offer the flight.
Another city that struggled to support a new route was Pikeville, Ky. For less than a year, the airport in Pikeville, had its own air service, Appalachian Air, which flew from the Pike County Regional Airport to Nashville. The air service received a revenue guarantee of $750,000.
From the first takeoff in 2015 to the cessation of operations, the flight failed to attract the needed passengers, according to a report from regional TV news station WSAZ. The airline cited the fact that the region lost nearly 12,000 coal mining jobs in 2014 and 2015.
“The failure of Appalachian Air to gain traction in the marketplace is yet another result of President Obama’s ‘War on Coal,’ ” said Luke B. Schmidt, of L.B. Schmidt & Associates.
Schmidt now is leading the Louisville Regional Airlift Development’s air service development project.
More recently, the city of Tucson, Ariz., has struggled to make a minimum revenue guarantee fund work.
Tucson Metro Chamber struck a two-year deal with American Airlines to offer a nonstop flight to New York City. Part of the deal was a $3 million revenue guarantee, with funds coming from the city of Tucson, Pima County and private investors.
Chamber CEO Michael Varney told Insider Louisville that at the time, Tucson was the largest market without a direct flight to New York.
Such a flight would help economic development, he said. “New York also is our No. 1 tourism feeder market, so there were a lot of reasons we wanted to open that route.”
During the first three months, however, the flight ran a $1.3 million deficit. The route was terminated in May, less than a year after it had started.
“The revenue guarantee fund was depleted,” Varney said. “We went into this very confident. In the end, we fell short.”
Still, Varney is positive about how the route performed overall and is optimistic that the route could work in the future.
“The route performed fairly well,” he said, adding that a postmortem of the deal showed that each flight was 15 people shy of meeting the agreed upon minimum revenue.
Research showed that 45 people a month took a one or more stop flight to New York or continue to drive to the larger airport in Phoenix, Varney said.
“Not enough people changed their habits,” he said. “We kind of got blindsided.”
If he had to do it over again, Varney said he’d do consumer surveys and work with businesses to change their business travel loyalty programs over to the airline offering the new route.
And he may get that chance. Varney said there is talk about giving the minimum revenue guarantee another go.
“That was the battle. That wasn’t the war,” Varney said. “It’s just too important not to. …Your economy will perform better if people have an easier time to get to it and get from it.”
Today, incentives like minimum revenue guarantees are a necessity for any city with a major airport, he said.
“It’s really the only way you are going to get a major new route to your city,” Varney said.
Not quite what the cities were going for
In other instances, the individual results have varied.
In 2008, the Metro Denver Economic Development Corp. set up a $2 million minimum revenue guarantee fund to subsidize a nonstop flight from Denver to Munich, Germany, for a year. Airline Lufthansa took the bait but ended up refunding some of the money after canceling the flight in fall 2008, according to The Denver Post.
However, Lufthansa started offering the nonstop route five days a week in May 2016. This time, the airline received $300,000 from the Colorado Economic Development Commission, $50,00 from the Metro Denver Economic Development Corp. and $25,00 from tourism group Visit Denver. The airport itself also ponied up $5 million in incentives.
By October 2016, Lufthansa increased the offering to daily flights. It continues today.
A nonstop flight from Pittsburgh to Paris also had ups and downs. The public-private Allegheny Conference on Community Development and the state of Pennsylvania ended up giving Delta Air Lines a total of $9 million over a two-year period to offer a daily flight, according to The Pittsburgh Post-Gazette.
The nonstop flight started in 2009 and continues today, but this year, Delta only is offering daily flights from late May until the end of September.
Moving forward in Louisville
Since the beginning of this century, airlines have merged, and others have declared bankruptcy, making airline companies reticent to add routes they aren’t 100 percent sure about or expand service at airport outside the major hubs.
“The lack of direct flights is one of the top issues that our local companies cite as an impediment to their growth,” said Mary Ellen Wiederwohl, chief of the city’s economic development arm Louisville Forward. “With all the consolidation that occurred and the hub and spoke network, you have a handful of cities that are winners.”
Travelers have to add a day on the back and front of their trips, which for companies, means that workers are out of the office longer.
Wiederwohl said that a minimum revenue guarantee is necessary nowadays to give airports a leg up. The additional incentive can move a city up in line to get a new route or airline.
“This tool will make us competitive for these flights,” she said. “Airlines are interested in Louisville. They are not closing their door, they are not turning their back.”
The city also needs public and private buy-in, Wiederwohl said.
“That is the only way you can get some of these big things done now,” she said. “We are very often an important partner in this, and we need the partnership of the business community to come forward.”
In LRAD’s case, nearly 40 percent of the funding will come from public dollars, with the rest coming from private investors and civic partners.
On behalf of the airport, governments and businesses, LRAD will specifically seek out nonstop flights to Los Angeles and Boston, which the coalition already knows there is demand for.
“The math behind those look really, really attractive,” Wiederwohl said. “It looks achievable.”
Schmidt told Insider should an airline approach with a different route seeking a minimum revenue guarantee agreement, the coalition would research demand for it.
“It depends on where the demand is,” he said. “You have got to go where the fish are.”
When asked how Louisville doesn’t end up in a situation similar to Tucson’s first minimum revenue guarantee, Wiederwohl said the coalition, of which she is a board member, will look at its overall convenience including how much the flight will cost compared to a similar flight out of Cincinnati or Nashville and what times the flight will be offered.
“The worst thing that could happen is for us to support this, and for it not to work or the flight not to sustain,” Wiederwohl said. “Theses incentive are the icing, not the cake. So, you have to make sure the cake is good and strong.”
Correction: A previous version incorrectly stated that the company Salesforce moved 800 jobs to Indianapolis. The company actually added 800 new jobs in Indiana’s capital.