Federal Air Travel Subsidies: Is Essential Air Service ‘Essential?’

 By Hunter Raines, Albany Government Law Review 

Some may recall the shocking headline last year resulting from the failure of the United States Congress to reauthorize the Federal Aviation Administration, costing thousands of jobs and foregoing billions of dollars in government revenue.[1]  Perhaps a few were more concerned with whether or not airlines should have adjusted their fares by the amount of the federal aviation tax that no longer applied upon expiration of the FAA’s bill to question what possible debate could exist with whether or not the FAA should be funded.[2]  In truth, however, the debate was centered not on whether or not to federally regulate aviation, but, inter alia,  how and where to subsidize certain large commercial airlines for flying routes that “just [do not] make sense” absent a government subsidy.[3]  This article argues that the proper role for the majority of these funds is not corporate (and community) welfare, but to undertake capital projects to improve infrastructure at existing, commercially sustainable airports without increasing the cost to the tenant airlines or the traveling public.  This article’s analysis will focus primarily on New York State.

The Federal Aviation Administration oversees a program that started with the federal deregulation of airlines in 1978 called Essential Air Service (hereinafter “EAS”).[4]  EAS was formed as a ten year, $7 million initiative whose goal was to maintain commercial air service at small airports as the aviation system in the United States adjusted from a federally regulated model to a free-market model; at the end of the ten year period the subsidization was set to expire.[5]  The old adage that ‘nothing is more permanent than a temporary government solution’ holds true here, as the program was revitalized earlier this year with the passage of the FAA Reauthorization bill which not only continued the plan in its overly-bloated state costing taxpayers around $200 million a year, but also neglected to include any sort of sunset provision.[6]  Indeed, while the program was originally intended to prevent loss of commercial airline service in rural communities that would otherwise be very difficult to reach by ground, the program has now been extended to subsidize air travel services such as, e.g., flights to and from Muskegon, Michigan; a mere forty miles away from the much larger Gerald Ford International Airport in Grand Rapids.[7]

Additionally, the EAS program is malfunctioning and may soon be broken.[8]  The Government Accounting Office reported nearly a decade ago that the cost of the program was growing far more rapidly than passenger use.[9]  This observation has held true over time, and is now yielding consequences.  Delta Air Lines recently notified the FAA of its intent to stop serving twenty-four small cities (some of which Delta received multi-million dollar subsidies to serve) because of the failed EAS program.[10]  This is partially due to two key conditions.  First, the load factor, or the percentage of seats filled with paying passengers, on EAS routes, which is  “[on] average 35.7 . . . percent full,” compared to a national average of well over eighty percent.[11]  Additionally, the cost of jet fuel has increased nearly 400% since 2000, from eighty-seven cents per gallon to over 300 cents per gallon, resulting in extremely high operating costs for commercial airplanes.[12]

Still, New York’s federal elected officials have advocated for the continuation of this program.[13]  Following the passage of the FAA Reauthorization, Senator Chuck Schumer was quick to claim a victory for New Yorkers as the bill maintained large amounts of money flowing to the state from the program.[14]  But this is a mistaken stance on the issue.  New York should advocate through its federal elected officials, and pass supporting legislation in the state house, to redirect EAS funding to airport capital improvement projects designed to improve passenger comfort and reduce delays related to congestion and aging infrastructure.

The EAS program is a perfect example of a failed, overgrown government program.  Instead of guaranteeing service to smaller, isolated communities consistent with its original mandate, the program now supports service to many communities which are easily accessible by a short journey by highways or rail to an airport with unsubsidized air service.[15]  A recent report found that out of 153 communities which receive government-subsidized air service, many were within a relatively short drive of a major airport; and in many cases, providing funding for a passenger bus service would cost the tax payers sixty-eight percent less than traditional air travel service, while reducing the impact on the environment and providing more seats for the small community to the larger airport with greater frequency than the taxpayer-subsidized flight.[16]  Indeed, some cities receiving service under the EAS program are easily (and possibly more efficiently) accessible by travelers by interstate highway or rail travel.[17]  This is particularly true in New York State which has vast interstate highways and a level of service by Amtrak unseen in many other states, bringing into question the necessity of funding EAS service to six airports in the state, particularly in the face of a large number of airports with unsubsidized service.[18]

Subsidization of air service is not entirely improper, however.  For example, until an interstate highway or a robust rail system can be constructed, many communities in Alaska are otherwise completely isolated and cut-off from the rest of the world without air service.[19]  There, the need is critical; however it should also be required of a state receiving subsidized air service through EAS to pay a fee to the FAA in partial reimbursement.  But this is beyond our scope today.  It is clear that the conditions that hold true for much of Alaska are not true for New York, a state which is almost entirely accessible by automobile and/or rail travel.

Instead of further seeking federal wealth redistribution to support unneeded and underutilized (perhaps even unwanted) air service in New York,[20] efforts should be shifted to improving the existing aviation infrastructure of aging and congested airports.  New York City’s primary passenger airports, LaGuardia and John F. Kennedy, are infamous throughout the traveling world, not only by and for their consistent status as being among the worst airports in the country, but also for being among the two worst airports on the planet.[21]  These two facilities are undoubtedly a civic embarrassment to present an arriving world.

New York should advocate a reform of EAS to follow a more cost-effective model while using the bulk of the money made available from downsizing EAS to improve the nation’s aging airports.  This program reform would be more effective with a similar state initiative to provide funding to improve the passenger experience at New York’s less-revered airports while reducing congestion-related flight delays, which cause over seventy-five percent of nationwide air traffic delays.[22]  Utilizing funds in this way ensures that passenger facility costs remain low and that the metropolitan New York City airports remain competitive in terms of cost with neighboring airports in Newark, NJ and less-congested alternatives on Long Island and points north of New York City.

A partial alternative to funding these improvements exists in enhancing the Passenger Facility Charge (hereinafter “PFC”) at the airport.[23]  This is essentially a per-passenger fee charged to the airlines, and the FAA allows airports to impose these fees (up to a certain limit) in order to improve airport infrastructure.[24]  While economically sound airport improvement projects (and likely associated costs) have been welcomed by airlines, some on-going airport improvement efforts have been criticized by carriers as unnecessary and too expensive, e.g. “a multi-billion dollar runway and terminal expansion project” at Philadelphia International Airport, which U.S. Airways warned would “result in huge cost increases [at] PHL[,]” requiring the airline to “significantly reduce [their] business at Philadelphia” and focus growth efforts at “another of [their] hubs.”[25]

Chilling examples of so-called “de-hubbing” have taken place over the past few years and can be instructive as to what can happen when an airport’s costs are no longer competitive.  In only the past few years, we have seen US Airways consolidate its Pittsburgh hub into Charlotte and Philadelphia[26] and Delta consolidate a hub in Cincinnati into other airports.[27]  These drastic moves, among others by other airlines, demonstrate that the economics of the particular airport are the catalyst for the actions taken.[28]  While the fate of New York City’s metropolitan airports will not likely join Philadelphia in following the catastrophic path of Pittsburgh and Cincinnati (at least not in the near-term), as fuel costs continue to climb and costly-congestion related delays are left to fester, air carriers may respond by shifting traffic to less-congested airports which border the city.

While shifting EAS funding may be the wisest long-term choice, the air service currently present in New York State only because of federal subsidization need not necessarily be lost; another form of subsidies exists that is remarkably absent of federal influence, termed “revenue guarantees.”[29]  Revenue guarantees are the product of a regional collective that provides funding upfront to airlines in return for a commitment to serve a particular route from the airport, which helps share the risk between the community and the airline.[30]  Funding is typically provided by business leaders “[who] understand[ ] the economic benefits an airline can provide.”[31]  Usually these guarantees phase out in the following years as the service establishes and becomes increasingly self-sufficient.[32]  Using revenue guarantees instead of EAS is better for states like New York because it shares risk with the private sector and gives the free market time to support a particular route in a sustainable fashion (rather than endless subsidization); all while potentially making funds available for needed airport improvements.  This is a better model to encourage new airline services to enter the market, as the revenue guarantees will be sufficient to make the venture meritorious of the risk absorbed by the airline.  This is superior to the EAS model which, in the past, has resulted in carriers abandoning a route, even with the benefit of subsidies, as the government handout has not been sufficient to justify the capital expense in the face of very few passengers traveling the route, in addition to the high (and increasing!) cost of jet fuel.[33]

In sum, the EAS program has a role in contemporary commercial aviation; however that role is limited to situations where communities would otherwise be nearly isolated without an air link, not merely in a situation where an unsubsidized flight can be reached by automobile travel of less than several hours.  Instead of continuing its federal advocacy of EAS as it stands, New York should shift its focus to reforming EAS to more closely resemble its original mandate, while using the residual funds to proliferate projects designed to improve airport facilities in ways that address passenger comfort and volume-related congestion.  These efforts should in turn be supported by a long-term commitment of state general funds.  This funding model should be used instead of simply increasing PFC levels further, which lead to an increase cost to consumers and could easily mean fewer options for the traveling public.

New York’s airports need not be in the dismal state they are today and the costs of improving these facilities need not be shouldered entirely by federal taxpayers, the residents of New York City or New York State, and instead can be spread among many parties who stand to benefit by these improvements.  By spreading out the costs, and keeping an eye trained toward the cost effectiveness of infrastructure improvements, New York can see a return to world-class airports that are the envy of the world, being models of both passenger efficiency and accessibility.  And it can do so without also leading the world in costs of using these facilities.

[1] Joan Lowy, Senate Plan to End FAA Shutdown Falls Apart, Bloomberg Businessweek, Aug. 1, 2011, available at http://www.businessweek.com/ap/financialnews/D9ORL10O0.htm.

[2] Id.

[3] Id.

[4] Al Karmen, New Aviation Bill: The Pork Barrel Lives, Washington Post, Feb. 9, 2012, available at http://www.washingtonpost.com/blogs/in-the-loop/post/new-aviation-bill-the-pork-barrel-lives/2012/02/09/gIQAHlap1Q_blog.html.

[5] Id.

[6] Id.

[7] Joe Sharkey, 24 Small Towns May Lose Airline Service, N.Y. Times, July 18, 2011, available at http://www.nytimes.com/2011/07/19/business/economy/24-small-towns-may-lose-airline-service.html?pagewanted=all.

[8] United States Government Accounting Office, Options to Enhance the Long-Term Viability of the Essential Air Service Program 2002, 1, available at http://www.gao.gov/assets/100/91493.pdf.

[9] Id. at 4.

[10] See Sharkey, supra note 7.

[11] Id.

[12] International Airline Transport Association, Jet Fuel Price Monitor, Feb. 24, 2012, available at http://www.iata.org/whatwedo/economics/fuel_monitor/Pages/index.aspx.

[13] Press Release, Senator Charles E. Schumer, FAA Bill Preserves Essential Air Service at Jamestown Airport (Feb. 2, 2012), available at http://schumer.senate.gov/Newsroom/record.cfm?id=335836.

[14] Id.

[15] Larry M. Elkin, Essential Air Service is Completely Nonessential, and It’s Time For it to Go, Business Insider, Feb. 15, 2011, available at http://articles.businessinsider.com/2011-02-15/politics/29992662_1_eas-essential-air-service-tiny-airports.

[16] M.J. Bradley and Associates, Comparison of Essential Air Service Program to Alternative Bus Service: Keeping Rural Communities Connected 1–5 (Sept. 2011), available at http://www.buses.org/files/Foundation/EAS%20Study%20Final%20Report%20FINALv2%20%2012sep11.pdf.

[17] Id.

[18] Press Release, Senator Kirsten Gillibrand, Gillibrand Fights Attempt to Eliminate Essential Air Service, (Feb. 4, 2011) available at http://www.gillibrand.senate.gov/newsroom/press/release/gillibrand-fights-attempt-to-eliminate-essential-air-service-urges-senate-to-pass-faa-bill-with-73-million-increase-in-program [hereinafter Senator Gillibrand].

[19] See Elkin, supra note 15.

[20] See Senator Gillibrand, supra note 18.

[21] See Katrina Brown Hunt, America’s Best and Worst Airports, Travel & Leisure, July 2010, available at http://www.travelandleisure.com/articles/americas-best-and-worst-airports-2010/2; see also Oren Yaniv & Lukas I. Alpert, LaGuardia Ranks Worst Airport in Country According to Zagat Survey, JFK Also Falls Near End of List, N.Y. Daily News, Nov. 29, 2010, available at http://articles.nydailynews.com/2010-11-29/local/27082652_1_zagat-survey-jfk-laguardia-airport; Gary Stoller, Travel Guide Ranks Best, Worst Airport Terminals, USA Today, Jan. 17, 2012, available at http://travel.usatoday.com/flights/story/2012-01-16/Travel-guide-ranks-best-worst-airport-terminals/52602176/1.

[22] Press Release, Regional Plan Association, Better Airports Alliance (July 13, 2010) available at http://www.rpa.org/2010/07/better-airports-alliance.html.

[23] Federal Aviation Administration, Advisory Circular 150/5000-12 (July 15, 1994), available at http://www.faa.gov/documentLibrary/media/advisory_circular/150-5000-12/150_5000_12.pdf.

[24] FAA Passenger Facility Charge Regulations, 14 C.F.R. § 158.5 (2007).

[25] U.S. Securities and Exchange Commission, U.S. Airways Group, Inc., Annual Report (Form 10-K), at 25 (Feb. 22, 2012), available at http://www.sec.gov/Archives/edgar/data/701345/000095012312002888/c24579e10vk.htm.

[26] David Grossman, Dismantling Pittsburgh: Death of an Airline Hub, USA Today, Oct. 15, 2007, available at http://www.usatoday.com/travel/columnist/grossman/2007-10-15-dismantling-pittsburgh-hub_N.htm.

[27] James Pilcher, Why CVG Lost Half of All Flights, The Sunday Enquirer (Cincinnati), May 23, 2010, available at http://news.cincinnati.com/article/20100524/EDIT03/5230393/Why-CVG-lost-half-all-flights.

[28] See id. (discussing reduced profits).

[29] See, e.g., David Grossman, Cities Provide Revenue Guarantees to Land an Airline, USA Today, May 26, 2011, available at http://travel.usatoday.com/flights/post/2011/05/airline-revenue-guarantee/171986/1.

[30] Id.

[31] Id.

[32] Id.

[33] See Sharkey, supra note 7.

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