6b
PORT OF SEATTLE MEMORANDUM COMMISSION AGENDA Item No. 6b ACTION ITEM Date of Meeting June 14, 2016 DATE: June 6, 2016 TO: Ted Fick, Chief Executive Officer FROM: Michael Ehl, Director Aviation Operations Kazue Ishiwata, Senior Manager Air Service Development Tom Green, Senior Manager Air Cargo Operations and Development SUBJECT: Revised New Air Service Incentive Program for Seattle-Tacoma International Airport ACTION REQUESTED Request Commission authorization for the Chief Executive Officer to implement a revised incentive program for new commercial air service for Seattle-Tacoma International Airport as described below for new international service, new domestic and short-haul international service, and new international freighter service. SYNOPSIS The purpose of this action is to revise and enhance the Airport's incentive program for new air services in order to be more competitive in attracting new air services to Seattle. The program provides participating airlines with temporary waivers of landing fees and certain facility charges as well as joint promotional support for the new service for a period of one to two years. The Port's existing incentive program has proven to be an effective final inducement for carriers considering new service to Seattle. However, the market has become significantly more competitive since the program was last reviewed in 2011 (with the exception of the addition of Small Community Air Service Incentives in 2015). As the Airport seeks to attract new services further afield where carriers prefer to operate lower frequency service, the eligibility requirements of the current program appear unnecessarily onerous and not comparable to other airports' programs The proposed changes to the incentive program simplify and enhance the existing incentives for medium- and long-haul international services, while adding modest incentives for new services to unserved domestic/short-haul international markets and for new freighter services. These proposed changes will bring the Airport's program in line with programs at other airports, and will help the Airport achieve its Century Agenda goals of advancing the region as a leading tourism destination and business gateway and to triple the volume of air cargo to a target of 750,000 annual metric tons. Template revised May 30, 2013. COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 2 of 8 BACKGROUND Efficient air service is vital to Washington State's economy, benefiting the regional community as a whole in facilitating business transactions for corporate travelers and stimulating the state's tourism industry. Air cargo services, whether by freighter or with cargo carried by passenger aircraft, link Washington State producers and consumers to global markets emphasizing speed of delivery. New air services generate additional economic and employment benefits to the region, and provide the Port of Seattle with direct, incremental revenues. An international long-haul flight, for example, provides the Port with over $1.5 million in annual terminal rents and charges, and generates over $75 million annually to the regional economy. The launch of a new air service requires significant investment risk on the part of an airline. For example, the cost to operate a daily long-haul international flight with a Boeing 777 aircraft is over $100 million annually, depending on many variables such as fuel price, flight distance, operating carrier's base cost, etc. With airlines having grown increasingly risk-averse since 9/11, it has become a commonly-held practice for airports, including Sea-Tac, to offer incentive programs as a way to partially mitigate these risks. The Port of Seattle Commission authorized implementation of the Airport's new air service incentive program initially in December 2005, and subsequently granted revisions to modify it through several additional action items in 2007, 2009, 2011, and 2015. The incentives are comprised of a combination of fee waivers and/or joint promotional funds, depending on the category of service. The current program is primarily focused on new medium- and long-haul international services, which may qualify for one of four categories (A-D) based on the length of the new route and whether the market is already served by another carrier at the Airport. The program also has an additional category (E) for new service to unserved small communities in Washington, Oregon, or Idaho. However, the current program does not provide any incentives for new domestic markets or for new freighter services. PROJECT JUSTIFICATION AND DETAILS Project Objectives The proposed changes to the incentive program will allow the Airport to compete more effectively in negotiating with prospective carriers in attracting new air services. The increased activities and resultant revenues brought by new air services produce a long-term reduction of overall airport costs, which benefits existing carriers. Scope of Work The tables below detail the proposed additions and changes to the Airport's New Air Service Incentive program. In summary, the proposed program: COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 3 of 8 Enhances the existing program for new medium- and long-haul international flights by modestly increasing incentives and relaxing the eligibility requirements to include lower frequency services. Creates new incentives for new domestic or short-haul international flights to unserved markets. Creates new incentives for new international freighter service to help the Airport achieve the Century Agenda goal to triple the volume of air cargo. Proposed Changes to New International Service Incentive Program Landing Fee IAF Fee Promotional Waiver Waiver Funds Year Year Year Year Year Year Category Eligibility 1 2 1 2 1 2 Unserved city >6,000 Category A: >4,000 miles 100% 100% 100% 100% Unserved Long-Haul 5x 2x week min, year-round $500,000 Int'l Markets Unserved city 4,000-5,999 $455,000 75% 75% 100% 75% (previously Cat. A & B) miles 2x week min, year-round Category B: Unserved Medium- Unserved city 2,000-4,000 100% 100% $300,000 Haul miles n/a n/a 75% 75% $200,000 Int'l Markets 3x 2x week min, year-round (previously Cat. C) Category C: Competitive Medium- Served city >4,000 >2,000 & Long-Haul Int'l miles n/a n/a n/a n/a $200,000 n/a Markets 3x 2x week min, year-round (previously Cat. D) COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 4 of 8 Proposed Incentives for New Domestic and Short-Haul International Services Ticket Counter Landing Fee Promotional & Gate Fee Waiver Funds Waivers Year Year Year Year Year Year Category Eligibility 1 2 1 2 1 2 Category D: Unserved city in Washington, $12,000 $12,000 Small Community Air Oregon, or Idaho 100% 100% 100% 100% Service 5x week min, year-round $25,000 (previously Cat. E) Category E: Unserved city in the U.S. Unserved Domestic & (excluding WA, OR, and ID) Short-Haul Int'l -or- n/a n/a n/a n/a $25,000 Markets Unserved city <2,000 miles (new category) 5x week min, year-round Proposed Incentives for New International Freighter Services Landing Fee Promotional Waiver Funds Category Eligibility Year 1 Year 2 Year 1 Year 2 Category F: New service to markets with no Unserved International up to existing freighter service 100% 100% Freighter Markets $100,000 2x week min, year-round (new category) Category G: New service to markets with existing Competitive International up to freighter service n/a n/a n/a Freighter Markets $25,000 2x week min, year-round (new category) Schedule To be eligible for this incentive program, the new air service must be announced and become publicly available prior to the termination of the current Signatory Lease and Operating Agreement (SLOA). However, the carrier does not have to be a signatory carrier to be eligible for the incentive program. FINANCIAL IMPLICATIONS Financial Analysis and Summary Even during the incentive period, new air services generate direct revenues to the Port, in addition to contributions to the regional economy. Below are two examples of the fee waiver COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 5 of 8 structure based on the proposed incentives for passenger and cargo services. These examples do not include joint promotional funds of up to $500,000. Example A: Estimated Charges and Incentives for Boeing 787-8 service 3x/week to Category A market (Note: this service would not be eligible for ultra long-haul incentives under the current program) Annual Cost paid by Estimated Waived Rate/Charge Carrier (Port Annual Charges Amount revenue) Landing Fee $ 211,600 $ 211,600 - Ramp Tower Fee $ 1,200 - $ 1,200 Apron Fee $ 26,100 - $ 26,100 Passenger loading bridge fee $ 5,500 - $ 5,500 Common use gate fee $ 165,700 - $ 165,700 FIS Facility Fee $ 169,800 $ 169,800 - Common use ticket counters $ 55,800 - $ 55,800 Baggage Makeup Device $ 131,100 - $ 131,100 Annual Cost paid by Estimated Waived Rate/Charge Carrier (Port Annual Charges Amount revenue) Baggage Makeup System $ 53,600 - $ 53,600 BMU Equipment Charge $ 69,800 - $ 69,800 Office Space Lease $ 44,800 - $ 44,800 Annual Total $935,000 ($381,400) $553,600 2-year Total $1,870,000 ($762,800) $1,107,200 Assumptions: 2016 rates and charges for SLOAIII signatory carrier. 236-seat Boeing 787-8 aircraft at 80% load factor; 1.5 bags per passenger 300 ft2 office space Example B: Estimated Charges and Incentives for Boeing 747-8F 2x/week freighter service to Category F market Annual Cost paid by Estimated Waived Rate/Charge Carrier (Port Annual Charges Amount revenue) Landing Fee $ 283,300 $ 283,300 - Ramp Tower Fee $ 800 - $ 800 Cargo Operations Area fee $ 18,200 - $ 18,200 Annual Total $302,300 ($283,300) $19,000 2-year Total $604,600 ($566,600) $38,000 Assumptions: 2016 rates and charges for SLOAIII signatory carrier. COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 6 of 8 STRATEGIES AND OBJECTIVES This project supports the Century Agenda objectives to advance the region as a leading tourism destination and business gateway by making Seattle-Tacoma International Airport the West Coast "Gateway of Choice" for international travel. It also supports the Century Agenda objective to triple the volume of air cargo. This project also addresses the Aviation Division's strategic objectives to become one of the top ten customer service airports in North America and to operate a world-class international airport by ensuring safe and secure operations and by anticipating the meeting needs of tenants, passengers and the region's economy. ALTERNATIVES AND IMPLICATIONS CONSIDERED Alternative 1 Eliminate New Air Service Incentive Program Cost Implications: Joint promotional funds have averaged $511,000 annually over the past five years, and would be retained by the Port were the program eliminated. The elimination of fee waivers would also potentially save money. Pros: (1) The Port could save money through the elimination of joint promotional funds. (2) The Port may gain additional services even without an incentive program. Cons: (1) The Port would be at a disadvantage with regards to peer airports with incentive programs. (2) The Port could lose revenue from services that decide against Seattle because of a lack of incentives (3) The Port could lose revenue from services that may have accelerated their decision to serve Seattle had incentives been in place. This is not the recommended alternative. Alternative 2 Status Quo (maintain existing Incentive Program with no changes) Cost Implications: The Port has spent an average of $511,000 in annual joint promotional funds over the past five years. However, this money has been more t han offset by the additional revenue generated by new services. Pros: (1) The Port would not increase incentive program expenditures. (2) The Port will receive the full amount of landing fees and other charges for any new air services that begin service but that are not eligible for incentives under the current program. COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 7 of 8 Cons: (1) Competing airports are aggressively pursuing similar services with even more generous programs, thereby strengthening their positions as well as their working relationships with carriers. (2) Carriers may decide against beginning new services that would not qualify for incentives, or would begin services later than they otherwise might have. This is not the recommended alternative. Alternative 3 Implement Proposed Revisions to Incentive Program Cost Implications: Under the proposed incentive program, more services will be eligible for fee waivers and joint promotional funds. The single largest increase in costs under the proposed program would be joint promotional funds available to qualifying new freighter services, which would be eligible for up to $100,000. Pros: (1) Increases opportunities to gain more challenging routes by presenting better risk mitigation to the carrier. (2) Increases competitiveness with peer airports while meeting FAA compliance requirements. (3) Inclusion of unserved domestic/short-haul international incentives closes "gaps" in the current program. Currently no incentives are available for unserved markets that fall between the existing small community criteria (current Category E) and medium-haul markets over 2,000 miles (current Category C), or for freighter services. Cons: (1) Port will receive reduced fees during the duration of the incentive program. This is the recommended alternative. ATTACHMENTS TO THIS REQUEST Proposed New Air Service Incentive Program PREVIOUS COMMISSION ACTIONS OR BRIEFINGS March 10, 2015 The Commission authorized revisions to the incentive program to enhance incentives for Small Community Air Service. September 27, 2011 The Commission authorized revisions to the incentive program to include a new category for ultra long-haul international operations. June 28, 2011 The Commission approved a revised incentive program consistent with recently-published Federal Aviation Administration guidelines on airport incentives. June 14, 2011 The Commission was briefed on the growth of international air service. COMMISSION AGENDA Ted Fick, Chief Executive Officer June 6, 2016 Page 8 of 8 May 5, 2009 The Commission authorized revisions to the incentive program to include a narrow-body international air service to Europe, previously not included in the category. November 2, 2007 The Commission authorized a modification to the previously approved program by eliminating the previously defined per-year usage limit for Joint Promotional funds, allowing greater flexibility within the existing cost and timeline restrictions. April 27, 2007 The Commission authorized the implementation of a Small Community Air Service Incentive Program. April 10, 2007 The Commission authorized revisions to the incentive program to create a new category for trans-border commercial air service routes. February 16, 2007 The Commission authorized modifications to the incentive program raising the maximum benefits to an air carrier. December 13, 2005 The Commission authorized the first request for implementing a New International Air Service Incentive Program.
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