AIRLINE INCENTIVE PROGRAMS
13 July 2005
Over the past several years, airports, governments, tourism groups and other stakeholders have
become increasingly aggressive in pursuing new air services, and have frequently turned to financial
incentives to induce airlines to serve their community. At the same time, the state of the aviation
industry has made airlines far more risk averse when examining new route opportunities. Airlines no
longer have the financial capability to endure heavy losses while a new route matures to profitability a process that can take several years. Before approving fleet expansion plans, airline boards are
requiring executives to demonstrate that new routes will meet higher thresholds of financial return
than in the past. As a result, many carriers now require significant incentive packages before
committing to a new service. While numerous variations exist, the most common incentives in use
today include airport fee discounts, joint marketing support, community ticket trusts (also called travel
banks), and revenue guarantees.
John Weatherill
Manager, Airline Planning
While incentives such as these can be beneficial, care must be taken to ensure that they are used
strategically and judiciously, and that limited community resources are used in the most effective way
possible. Airline incentives are not appropriate in every circumstance. They should be designed to
reduce the risk to an airline during the start-up phase of a new service, and to build awareness and
demand for a new air service as it becomes established. Incentives should not be used to “buy” air
services that would not be self-sustaining in the long term (such services are often discontinued the
moment the support is suspended).
In addition, different airlines have different incentive
requirements, the specifics of which are dictated by network
development strategy, fleet constraints, market growth
potential, airline philosophy and other factors. As a result, an
airport’s incentive program should be flexible to ensure that
both the needs of the particular airline and the interests of the
community are met.
Incentive Package Development and Implementation
As incentive requirements vary by route and airline, a community should develop an allencompassing, flexible incentive policy. Airport and community officials should be open to
considering incentives in certain (strategic) circumstances, and should be prepared to act quickly if
required, but should resist investing in new air services that do not hold sufficient expectation of future
viability.
Most airports are open to offering landing fee discounts for a limited period to airlines initiating service
on a new route, recognising that such a gesture does not require an out-of-pocket expense. In
addition, many communities provide co-operative support, often in the form of landing fee
reimbursements that are committed to a marketing program which promotes the new service. But
often communities are reluctant to agree to more significant incentives such as revenue guarantees
and ticket trusts.
Page 13
July 2005
InterVISTAS’ Canadian Aviation Intelligence Report
Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.
AIRLINE INCENTIVE PROGRAMS
– CON’T
When an airline requests such an incentive as a requirement for a new air service, communities
should proceed carefully and make an informed decision by taking the following steps:
!
Evaluate the expected financial results of the proposed air service, including sensitivity to
fluctuations in demand, traffic stimulation, airfares and airline costs (fuel, etc.);
!
Quantify the potential financial risks of the proposed incentive program;
!
Determine whether incentives are appropriate for the specific route/airline;
!
Determine which type of incentive is most likely to achieve the objectives of the airline and airport
!
Determine the appropriate amount of financial incentive.
Although such analysis is complex, it is required to ensure that a negotiated contract provides
maximum benefit (at minimum risk) for the community. Seeking outside assistance at this stage can
help an airport secure an important new air service, or avoid a potentially costly mistake.
Incentive Program Funding
Some airline incentive programs can be costly. For instance,
revenue guarantees for mainline service often exceed $1 million,
while those for regional/commuter services can require a
commitment of several hundred thousand. Arranging funding for
programs such as these can be a challenge.
Beyond contributing funds to an incentive program, airport
authorities can organise community support for an initiative by
conducting information sessions to educate community stakeholders as to the benefits of the new air
service, and can generate local commitments for contributions to ticket trusts or revenue guarantees.
Local sources of funding often include:
!
Municipal or state/provincial governments;
!
Chamber of Commerce;
!
Tourism industry stakeholders (revenue guarantees are often financed by large hotels or
attractions such as ski resort operators);
!
Large corporations;
!
Other community/regional partners.
The key to securing local funding is educating stakeholders on the benefits of the new services, and
clearly demonstrating that their commitment is a sound investment that will show future returns.
Carrier Backlash
A word of warning: incentive programs must be carefully constructed not only to meet the needs of
the recipient airline, but also to ensure that incumbent airlines are not unfairly discriminated against.
As incentive programs have grown in popularity, so has resistance grown among incumbent carriers
who argue that incentives, particularly travel banks and revenue guarantees, distort the marketplace
and create an unlevel playing field.
Page 14
July 2005
InterVISTAS’ Canadian Aviation Intelligence Report
Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.
AIRLINE INCENTIVE PROGRAMS
– CON’T
In Wichita, Kansas, the community provided a
multimillion-dollar revenue guarantee to AirTran Airways.
Delta Air Lines, which opposed the original funding to its
competitor, reduced service at Wichita in response to the
continuation the revenue guarantee for an extended
period. In Fresno, California, United Airlines has
launched a complaint with the U.S. Department of
Transportation over the use of a federal grant to fund a
revenue guarantee for Frontier Airlines on the FresnoDenver route – a market which United had already served.
Often such situations arise when a community seeks to achieve lower airfares by encouraging
competition on a route served by only one airline. To accomplish this goal without angering an
important existing airline, airports and communities can use various tactics:
!
Approach the incumbent carrier(s) first to see if they are willing or able to provide the desired air
service (either by enhancing existing services or starting new routes);
!
Limit incentives to airlines initiating services on previously unserved routes (note that securing
service to a competitive hub can achieve lower airfares for a number of connecting markets);
!
Structure incentive packages (such as marketing programs) to make all carriers eligible.
That said, airports and communities need not feel obligated to make incentives available to any
carrier that requests (or demands) them. For example, communities wishing to improve air access to
a certain region can limit their incentive offers to airlines with hub locations and route networks
complementary to this goal.
The key to developing a beneficial, affordable, and non-controversial airline incentive program is to
evaluate each opportunity on a case-by-case basis, and to perform detailed analysis of the potential
risk and reward to the community.
Page 15
July 2005
InterVISTAS’ Canadian Aviation Intelligence Report
Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.