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Home My WebLink About1/17/2007 - STAFF REPORTS - 5.A. ti �pALMsA�2 i c+ u v *� CONo[ni[a 0e' k -0`'F°Ra\P CITY COUNCIL STAFF REPORT DATE: JANUARY 17, 2007 NEW BUSINESS SUBJECT: PALM SPRINGS INTERNATIONAL AIRPORT INCENTIVE PROGRAM FROM: David H. Ready, City Manager BY: Aviation Department SUMMARY Airport staff is requesting approval for the Air Service Incentive Program to be used in air service development efforts. RECOMMENDATION: 1. Approve Resolution No. , A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS APPROVING THE ESTABLISHMENT OF AN AIR SERVICE INCENTIVE PROGRAM. 2. Authorize the City Manager to execute all necessary documentation. STAFF ANALYSIS Incentives increasingly are becoming standard procedure for small hub airports such as Palm Springs International to attract new air service by mitigating some portion of an airline's startup costs on a new route. In a 2003 GAO study, 11 of 17 small hub airports studied had financial incentive programs in place, with some ranging well above $100,000 in annual value. In many cases, having no incentive program at all is a clear disadvantage when competing for proposed service with other similar airports. In recent years, many of our airport advertising campaigns have been directed at local customers through print, television, radio, and other media. These expenditures were often not connected with supporting new service, but were used to raise general awareness of the airport. Also, there was little consistency in how the funds were spent. Sometimes advertising was directed towards certain new services, but not others, and also in varying amounts. The proposed program will specifically call out the advertising and marketing funds which are available to any airline fulfilling the criteria for air service ITEM NO. k— incentives. The incentives will be granted according to a consistent set of criteria. We will reduce the amount of advertising that was previously directed towards increasing local awareness, as we establish an incentive program focused on promoting new air service. Though our efforts are centered on our top origin-destination (O&D) markets with no nonstop service at all, we are also interested in converting seasonal service to year- round, in order to further reduce the seasonality of our air service. The key components of any effective air service incentive program are that it is available on an equitable basis to any airline fulfilling the criteria for the incentive and therefore meets legal scrutiny, provides a return on the airport's investment, and most importantly, increases the likelihood of a carrier entering the market and beginning the new route. This program is not designed to completely offset an airline's risk of operating the new service, but to help an airline market its new service and to reduce its operational costs while building demand for the new route. It also shows the airport's commitment toward helping ensure that the new route or airline is successful in our market. Our program features two components: 1) Operational credits equal to up to twelve months of landing fees Landing fees will be charged but then credited, on a monthly basis, to the carrier for a maximum period of twelve months, or until the carrier reduces service levels on the route below its original level, whichever comes first. Depending on the equipment and service level, this portion of the incentive program can represent a savings in excess of $50,000 annually for the carrier. To put this amount in context, Palm Springs International Airport expects to collect approximately $1.2 million in landing fees in total in FY2007. 2) Funds for marketing and advertising the new service Our program provides a modest amount of marketing and advertising for the express purposes of stimulating demand at the launch of the new service. The Airport will review the proposed expenditures and reimburse the carrier up to the amount of the incentive. In order to receive better pricing, the carrier may ask the Airport to place local advertisements. These expenditures must follow the announcement of a launch date for new service. Palm Springs International Airport Air Service Incentive Pro ram Award New Strate i I New Daily Year-Round Marketing Type Carrier I Market Destination Frequencv Service Incentive 1 ✓ $50,000 2 ✓ ✓ ✓ ✓ $30,000 3 ✓ ✓ ✓ $15,000 4 ✓ ✓ ✓ $15,000 5 ✓ ✓ ✓ $15,000 6 ✓ ✓ ✓ $15,000 Award 1: Any Nonstop Service to a Strategic Market "Strategic Market" is defined as service to New York (JFK or Newark) or Washington/Baltimore (Dulles or Baltimore). New York-LaGuardia and Reagan National cannot currently be served nonstop from Palm Springs due to federal capacity restrictions at these airports. For service to one of these destinations, total award amount will be $50,000 plus the calculated value of landing fees, which would likely be modest initially as these destinations would likely be served less than daily and only seasonally. Award 2: Unserved destination, new carrier, daily frequency, year-round Funds are available for new scheduled service to PSP that meets all of the following criteria: • Unserved airport • New carrier • Daily frequency • Year-round service For daily service, total award amount will be $30,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical annual value for landing fees would be $55,000. Award 3: For less than daily service by a new carrier to an unserved destination, scheduled year- round, total marketing support is limited to $15,000 plus the calculated value of landing fees. Award 4: Existing destination, new carrier, daily service, year round Funds are available for new scheduled service to PSP that meets all of the following criteria: • New carrier • Daily service • Year-round service Total award amount will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical annual value for landing fees would be $65,000. Award 5: Unserved destination, new carrier, daily service Funds are available for new scheduled service to PSP that meets all of the following criteria: • New carrier • Daily service • New destination Total award amount will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type and length of season. Award 6: Unserved destination, existing carrier, daily service, year round Total award will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical annual value for landing fees would be $55,000, The program criteria, amount of funding, and list of strategic destinations are subject to annual adjustment. This program will be budgeted each fiscal year in the Airport's operating expenses under "Advertising." For FY2007, existing funds in the Airport advertising budget will be applied toward any successful recruitment of service which qualifies for the incentive. Note that this program does not prohibit the creation of other offers or incentives specifically geared to attract or support new service that may be funded by other community organizations such as the Palm Springs Desert Resorts Convention and Visitors Authority (CVA) or the Palm Springs Bureau of Tourism. The Airport is actively advising the CVA in their creation of a marketing plan for key air markets. This Air Service Incentive Program gives the Airport an additional tool to attract the type of service that we believe is important for the city and the entire Coachella Valley. By stimulating more airline activity, not only will we be able to maintain a low-cost structure for airlines but we also will attract more customer demand, leading to higher service levels and a possible decline in ticket prices. The Airport Commission unanimously recommended City Council approval of this Air Service Incentive Program at their December 6, 2006 meeting. FISCAL IMPACT: Incentive awards under this program will be paid initially from the "Airport Advertising Account" which has a budgeted amount of $50,000 for all farms of advertising. If it is determined that additional funds are needed to provide qualified incentive awards, staff will recommend to City Council a budget adjustment. However, in next year's budget, Airport staff will propose that funds be allocated specifically to a marketing support account for this incentive program. Relative to the potential loss of landing fees, in FY2006, the Airport collected $1.13 million and projects that fees in this area will reach $1-20 million in FY2007- However, without new service, additional landing fees would not be collected- Yet, given the relatively short term of the proposed landing fee waiver, the negative fiscal impact is expected to be nominal depending upon on the type of new airline equipment and service levels proposed. Moreover, the incentive program ultimately represents a positive impact to the Airport's budget in excess of the waived landing fees as is illustrated in the attached Exhibit "B." Richard S. Walsh, A.A.E, Director of Aviation David H. Ready, City ager Attachments: Exhibit A- Palm Springs International- Top O&D Markets Exhibit B- Service Example Resolution EXHIBIT A Palm Springs International-Top_O & D Markets- Domestic Carriers Only _ Current -- "' Nonstop Service Rank, „ „ Destination. ,,, „ „ Level, 1 San Francisco year-round 2 Seattle/Tacoma seasonal 3 y Chicago-O'Hare ear-round 4 Portland, OR seasonal 5 New York-Newark none 6 Minneapolis/St. Paul seasonal 7 Denver, CO year-round 8 Sacramento, CA year-round 9 Vancouver, BC seasonal 10 Washington, DC/Baltimore, MD none 11 Dallas/Fort Worth year-round 12 Las Vegas year-round 13 Boston none 14 Phoenix year-round 15 Salt Lake City year-round 16 Philadelphia _ none 17 Los Angeles year-round 18 Houston-Intercontinental seasonal 19 Atlanta seasonal 20 Detroit none 21 Kansas City none 22 St. Louis none 23 Spokane, WA none 24 Cleveland, OH none 25 Omaha, NE none Definitions! "New carrier" is defined as one which has not served PSP within the last three years. If two new carriers begin service to the same destination in the same season, both would be eligible for an incentive. A carrier is only eligible for one award per new service. EXHIBIT B Service Example: New carrier, existing destination, daily, Frontier year-round Airlines Palm Springs-Denver Annual Departures 365 Two-Way Annual O & D Passengers 58,000 Aircraft Type CRJ700 Net Annual Market Stimulation Rate 15% PSP Incremental Originating Passengers 8,700 Additional Revenue From: PFC $ 39,150 Parking $ 21,162 Car Rental $ 51,965 Concessions S 10,663 Landing Fees $ 30,569 Landing Fee Surcharge $ 3,741 Loading Bridge Fee $ 14,600 Terminal Fee $ 13,050 Terminal Space Lease S - Total Additional Revenue $ 184,900 Landing Fee Credit $ (30,569) Incremental Revenue $ 154,331 Incentive Amount $15,000 Payback(months) 2 Assumptions: $4.50 PFC $2.43 Average grass parking revenue per enplanement Average Airport rental car revenue per $5.97 enplanement $1.23 Airport's concession revenue per enplanement $1.25 Signatory Landing Fee per 1000 pounds $0,43 Landing Fee Surcharge $40.00 Loading Bridge Fee-Signatory- per use Terminal Operation Fee per enplanement $146 (average) 50% incremental passengers living outside PSP area RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA, ADOPTING AN AIR SERVICE INCENTIVE PROGRAM. WHEREAS the City Manager has recommended, and the City Council desires to approve, the adoption of an Air Service Incentive Program for the Palm Springs International Airport. WHEREAS, City staff has completed an analysis of the Palm Springs air service market and believes that this program will be beneficial to Palm Springs International Airport's air service development efforts; WHEREAS, the incentives, if offered, are expected to be revenue-positive for the Airport in less than six months; WHEREAS, funding for the incentive program is provided within the Airport's marketing budget; WHEREAS, six types of new service are eligible for incentives, as follows: Award 1: Any Nonstop Service to a Strategic Market: "Strategic Market" is defined as service to New York (JFK or Newark-EWR) or Washington/Baltimore (Dulles-IAD or Baltimore-BWI). Total award amount will be $50,000 plus the calculated value of landing fees. Award 2: Unserved destination, new carrier, daily frequency, year-round Total award amount will be $30,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical annual value for landing fees would be $55,000. Award 3: For less than daily service by a new carrier to an unserved destination, scheduled year-round, total marketing support is limited to $15,000 plus the calculated value of landing fees. Award 4: Existing destination, new carrier, daily service, year round Total award amount will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical annual value for landing fees would be $55,000. Award 5: Unserved destination, new carrier, daily service Total award amount will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type and length of season. Award 6: Unserved destination, existing carrier, daily service, year round Resolution No, Page 2 Total award will be $15,000 in marketing support plus the calculated value of landing fees, which will vary by aircraft type. A typical value for landing fees would be $55,000; and WHEREAS, the program criteria, amount of funding, and list of strategic destinations are subject to annual review. THE COUNCIL OF THE CITY OF PALM SPRINGS RESOLVES: SECTION 1: The City Manager is authorized to formulate and implement a final Air Services Incentive Program as generally described in this Resolution and the City Council Staff Report dated January 17, 2007, including the waiver of landing fees and the expenditure of no more than $50,000, on a cumulative basis, without the approval of the City Council. SECTION 2. This Resolution and the Air Services Incentive Program shall terminate on February 1, 2008, unless otherwise extended by the City Council prior to such termination date. ADOPTED THIS 17th day of January, 2007, David H. Ready, City Manager ATTEST: James Thompson, City Clerk Resolution No. Page 3 CERTIFICATION STATE OF CALIFORNIA ) COUNTY OF RIVERSIDE ) ss. CITY OF PALM SPRINGS ) I, JAMES THOMPSON, City Clerk of the City of Palm Springs, hereby certify that Resolution No. _ is a full, true and correct copy, and was duly adopted at a regular meeting of the City Council of the City of Palm Springs on January 3, 2007, by the following vote: AYES: NOES: ABSENT: ABSTAIN: James Thompson, City Clerk City of Palm Springs, California