"Small cities in US should prepare for fewer flights"

Tuesday, June 10, 2008

Small cities in US should prepare for fewer flights 
The Associated Press 


PRESCOTT, Arizona - It's a frustration felt across rural America.

The federal government guaranteed numerous small towns and cities air
service 30 years ago when it deregulated the industry. But skyrocketing fuel
prices have outpaced subsidies from the Essential Air Service program, and
many U.S. carriers are either trying to re-negotiate their contracts or
dropping out altogether.

The rejection from Air Midwest came swiftly on a one-page fax. The carrier
couldn't afford to fly to the mountain community of Prescott anymore,
officials said. The city would simply have to find a new tenant for its tiny
airport.

"Everything was going fine — then, bam — the airline is gone," Mayor Jack
Wilson said with a sigh. "That's just not how you do business."

According to the Department of Transportation, which administers the
program, airlines have asked to opt out of subsidy contracts to 20 cities so
far this year. That almost matches 2007's total of 24 cities in the U.S. In
2006, airlines asked to drop contracts for 15 cities.

Meanwhile, the federal government plans to slash its Essential Air Service
budget for 2009 to $50 million, less than half of its program budget in each
of the last seven years.

Jim Corridore, an analyst at Standard & Poor's, said rural communities
should get ready for even fewer flights in the future.

"This is not a charity," Corridore said. "Airlines are in a business to make
money, and they're not. In fact, they're losing billions of dollars. So
something needs to be cut."

The Regional Airline Association disagrees. Rural communities could keep
their air service if the federal program was tweaked and given the funding
it needs, said Faye Malarkey, a lobbyist for the association.

According to airline officials, the primary flaw with Essential Air Service
is that it doesn't increase subsidies to meet rising operating costs like
fuel.

So as jet fuel costs jumped, more than doubling from $1.86 per gallon (3.8
liters) at the beginning of 2007 to $3.96 per gallon in May, airlines were
locked into the same subsidy. Some carriers raised fares, but that couldn't
keep up with the cost of fuel.

"It's been years since we turned a net profit," Air Midwest President Greg
Stephens said.

Stephens said Air Midwest tried to get out of its subsidized routes on the
East Coast last year to save money, but the Department of Transportation
forced it to honor some of those contracts for nearly 14 months because it
couldn't find a substitute carrier to take over.

The company continued to lose money. Meanwhile, parent Mesa Air Group Inc.
was forced to pay $52.5 million to settle a lawsuit with Hawaiian Airlines
Inc. Mesa also learned that Delta Air Lines Inc. wanted to cancel a contract
worth $20 million a month.

The company couldn't wait anymore, Stephens said.

Mesa Air Group decided to shut down Air Midwest, canceling service to 20
cities in 10 states by the end of June. Stephens said Mesa probably won't
return to subsidized flights again.

"We were trying to grow Air Midwest through EAS," he said. But "the customer
is more than willing to hit the road" and drive to a major airport, despite
high gas prices. "That's what we were competing with."

Regional carrier Colgan Air Inc. also is struggling with its
government-subsidized contracts. It posted an operating loss of $4.5 million
in 2007, in part because of escalating fuel costs.

"In a lot of places we have EAS service, we're looking at fuel costs of $5
and $6 a gallon," said Joe Williams, a spokesman for Colgan parent Pinnacle
Airlines Corp. of Memphis, Tennessee. "Nobody saw this coming two years
ago."

The airline also is trying to turn a profit by moving some of its flights
from Pittsburgh to Washington's Dulles International Airport and by offering
travelers more connections through a code-sharing agreement with United
Airlines.

Colgan recently asked to get out of contracts serving six cities in West
Virginia, Maine and Pennsylvania, but it hopes to rebid for those contracts
and ask for a greater subsidy to reflect the surge in fuel prices.

That's currently the only way an airline can adjust a subsidy contract for
higher fuel costs — ask to get out of its obligation, wait 180 days as the
department mulls the request and then rebid for the contract, Malarkey said.

"It really is just about the worst thing you can do to the service," she
said. "You've got the community up in arms. They don't quite understand. The
airline seems to be abandoning them."

The Regional Airline Association has called for changes to the subsidy
program for several years, so that airlines wouldn't have to struggle to
make rural flights profitable. Malarkey said the Department of
Transportation should boost subsidies to allow for higher profit margins and
give airlines a one-time grant to pay for the rise in fuel costs.

A Transportation Department spokesman said the agency agrees there's need
for reform but is not in favor of creating flexible subsidies to reflect the
rising cost of fuel. Its solution is to limit subsidies to only the most
isolated communities.

"EAS reform is needed to ensure the program serves the people it was
designed to serve — those who have no other viable travel options,"
spokesman Bill Mosely said in a statement.

The Essential Air Service program was created 30 years ago after the airline
industry was deregulated. Carriers weren't going to fly unprofitable routes
to tiny communities, so the federal government agreed to pay some of their
costs.

Communities now consider them a lifeline. Subsidized flights encourage
businesses to expand outside urban centers, and they give residents quick
access to medical centers and international airline hubs in bigger cities.

"It's a necessity, not a luxury," said W. Gary Edwards, a town supervisor in
Massena, New York, a community of about 11,500 near the U.S.-Canada border.
Edwards said Big Sky Airlines pulled out of town in November, and Massena is
now waiting for new service from Capital Air Services Inc. to begin in
September.

"We're all the way at the top of New York state," Edwards said. "We don't
have a four-lane highway. All our roads up here are country roads."

Prescott, Arizona's former territorial capital, is wedged between national
forests about 100 miles (160 kilometers) north of Phoenix Sky Harbor
International Airport.

It's grown into a haven for wealthy retirees, luring them out of cities with
its promise of mountain views, ample hiking trails and clean air. About
129,000 people now live within 20 miles (32 kilometers) of the Prescott
Airport — enough to expect decent air service, said Gary Buck, president and
CEO of a vision technology company in the town.

"Right now, you have a choice to take an airport shuttle to Phoenix, or you
could drive directly," Buck said. "It takes about two hours each way. It's
just a pain."

On the Net:

Prescott Airport, http://www.cityofprescott.net/services/airport/

Mesa Air Group, http://www.mesa-air.com

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