Allegiant Airlines (ALGT) issued a splashy news release to announce a dozen new flights nationwide. There was no mention of the role U.S. taxpayers played in supporting the airline’s newest routes from two small cities in Montana and New York.
Last year the U.S. Department of Transportation awarded 25 grants totaling $11.4 million to airports in 22 states as part of its Small Community Air Service Development Program. The program is designed to help smaller burgs from Worcester to Wenatchee deal with inadequate or overly expensive air service by attracting a new entrant to a market, with the expectation that new flights and lower fares will follow. The grant sometimes helps guarantee an airline receives a certain amount of revenue for a new route, and often the federal money pays for advertising or covers the cost of airport rent.
A government handout to private business? Yes. But equally important, airport executives say, is the way grants provide an incentive for airlines to try new flights in places that can’t readily demonstrate with sheer population numbers that a particular route will prove successful. “The airlines are very risk-averse, so the grants can tip that scale and take away the risk of actually starting that flight,” says Clint Torp, manager of the La Crosse Regional Airport in western Wisconsin. His airport won its first $750,000 grant last fall and is using the money to try to land a new daily flight to Dallas-Fort Worth on American Airlines (AAL) or a Frontier flight to Denver.
In an era of U.S. airline consolidation, carriers are focusing on markets with the highest financial returns as they attempt to turn the industry from its cyclical boom-and-bust periods to one that maintains strong profitability. High fuel prices have also rendered the 50-seat jet—the aircraft that has served most of these midsize and smaller cities—a financial albatross in the process of being culled from fleets. “We’re all competing, airports-wise, for these smaller number of jets,” Torp says.
For new routes where it uses grant money, Allegiant typically eschews revenue guarantees and focuses on cost concessions from airports and marketing support for new routes, says Eric Fletcher, the airline’s manager of airports. He says such a guarantee “doesn’t necessarily incentivize the right carrier or the right schedule” and won’t keep an airport from losing a particular route if traffic doesn’t support the flights. The airline is receiving marketing support and concessions for its costs on two of the new routes it’s beginning this spring, from Syracuse, N.Y., to Myrtle Beach, S.C., and Kalispell, Mont., to Los Angeles.
Funding for the grant program, which dates to 2000, has been choppy, ranging from $20 million in its earlier years to $6 million in 2010. The DOT often supplements direct appropriations from Congress with funds from its own budget. Airports have three years to use their grants and enjoy considerable latitude in how the money is spent, be it on local TV or radio ads, direct payments to airlines when revenues fall short of negotiated minimums, or to defray rent, landing fees, or other typical costs an airport assesses airlines.
“It is enough … to potentially encourage us to pull the trigger,” Fletcher says. Still, an airport grant alone will not persuade Allegiant to fly a route airline executives do not believe will work financially. Allegiant focuses its service on smaller communities that generally have limited access to major airlines’ hubs and generally flies many of its routes to Las Vegas, Florida, and suburban Phoenix a few times each week at most. Fletcher says the company “found a lot of good routes” as a result of the grants.
Not all these grants target new lost-cost carriers such as Allegiant. St. Cloud Regional Airport, which is less than 80 miles from Delta’s (DAL) Minneapolis hub, used its $750,000 grant to land two new daily flights to Chicago on United Express (UAL). That service, starting in May, will be St. Cloud’s first to an airline hub since Delta ended a former Northwest Airlines subsidiary’s flights to Minneapolis in late 2009.
Not every route will work, regardless of federal support, and some of the funds are returned to the government. Allegiant says that was the case in 2012 when it dropped a flight from Saginaw, Mich., to Orlando because of weak traffic. Airports such as La Crosse—which competes with Minneapolis-St. Paul International Airport, less than a three-hour drive northwest—use the grant program as a “tool” to mitigate airlines’ risk and to provide local businesses with air service they need and would support, Torp says. “I hope it stays in some form.”