Oklahoma Air Service Development Grant Pilot Program Interim Study Summary presented by Alexis Higgins, CEO - Tulsa International Airport October 21, 2020
Executive Summary New nonstop air service can be a risky proposition for the airlines . With each route, an airline is not only investing aircraft resources and ownership costs, but also all of the variable costs that come with the operation of each flight (fuel, crew, passenger related costs, navigation fees, etc). Adding service to larger cities with more demand is typically an easier proposition for the airlines, making it challenging for smaller communities to attract new air service. Minimum revenue guarantees (MRG) are designed to reduce an airline’s risk of financial loss over the ramp up period of new nonstop service. An airline will set a specific revenue target for each flight segment, and the MRG fund serves as the backstop for any revenue shortfall that may occur each flight. The Oklahoma Air Service Development Grant Pilot Program (OASDGP) is designed to increase the number of nonstop flights throughout the state of Oklahoma. These new nonstops provide millions in economic impact for individual cities and the state as a whole. New businesses are able to be recruited to the state by having nonstop flights to specific cities from which companies are looking to expand. The OASDGP will bring significant value to the citizens and companies across the state of Oklahoma by giving communities another tool to utilize when recruiting new nonstop flights. The program is not designed to have state’s commercial airports compete against each other; rather, increase and improve the quality and amount of nonstop flights to the state overall. The following slides demonstrate how an MRG programs have had little to no impact on current service levels and market dynamics to various cities in Oklahoma.
Since American launched SWO-DFW daily service in 2016 utilizing an MRG , the OKC and TUL market sizes to Dallas have increased , while SWO still has a higher fare Passengers per day each way (PDEW) Annual Seat Capacity Average Fare 700,000 350 $170 606,216 $158 $150 286 600,000 300 529,069 $150 $150 $130 250 500,000 216 212 $122 555,647 $130 $133 200 400,000 470,558 $128 $110 124 150 117 300,000 108 $90 100 200,000 $96 50 $70 End of Wright 100,000 39,448 7 3 12,848 Amendment 0 $50 0 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 OKC TUL SWO OKC TUL SWO OKC TUL SWO American’s SWO-DFW service Both the OKC and TUL markets to Despite the MRG, SWO-DFW average fares • • • launched in 2016 utilizing a SCASD Dallas have seen daily passengers are higher than OKC and TUL to Dallas grant and MRG increase since SWO-DFW started Average fares in OKC and TUL have • OKC and TUL capacity to Dallas remained constant to Dallas • increased 15% and 12%, respectively, the first year after SWO- OKC currently has a $25 higher average • DFW service initiation fare than TUL to Dallas The SWO-DFW service on American shows that new nonstops in the state have no impact on capacity in other cities Source: Diio Mi 2013-2019
The OKC-LAX market has continued to grow even since TUL-LAX launched on American in April 2019 Annual Seat Capacity Passengers per day each way (PDEW) Average Fare 288 282 100,000 300 $250 $230 76,982 231 250 80,000 221 68,296 $200 $183 $182 $214 195 200 60,000 $178 $150 39,044 141 $168 150 40,000 Allegiant starts $100 TUL-LAX 100 20,000 American starts 3,652 American starts Allegiant starts American starts TUL-LAX TUL-LAX 50 TUL-LAX TUL-LAX $50 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 OKC TUL OKC TUL OKC TUL OKC has maintained at least The OKC/TUL-LAX markets have Despite TUL-LAX average fares decreasing • • • 2x/daily service to LAX both grown around 10% annually $10 YoY with new AA service, OKC-LAX since 2016 market has grown and fares remained Even with TUL-LAX launch on AA in constant • 2019, American planned to upgauge OKC-LAX market grew 2% from • one of OKC-LAX frequencies to 2018-2019, even with TUL-LAX mainline in 2020, pre-COVID starting on American TUL-LAX service on American has had no negative impact on OKC, as OKC-LAX continues to grow Source: Diio Mi 2013-2019
Only 3% of passengers in TUL’s catchment area are “leaking” to OKC, signaling that new nonstop service in TUL will have extremely minimal impact to OKC, if any TUL Primary Catchment Area Airport Usage Top Leaked Airports Passengers per Day DFW 120 Other OKC 1% 3% DFW OKC 70 6% Other 20 90% of traffic originating in TUL’s catchment area • utilizes TUL Only 3% , or 70 passengers per day each way, are • driving from TUL’s catchment area to fly out of OKC TUL Vice-versa, only 35 passengers per day are • 90% driving from the OKC MSA to fly out of TUL (0.5% of daily OKC passengers) The largest individual markets from TUL that leak to • OKC are at most 5-10 passengers daily TUL DFW OKC Other Any new nonstop flight to TUL will not have an • impact on current service levels from OKC in any given market Source: TUL 2019 Leakage Study
Summary Minimum revenue guarantees (MRG) are designed to help offset an airline’s risk of launching new nonstop • service in a given market. An airline does not simply start nonstop service because an MRG is available. Airlines research and forecast • new markets that they feel have the potential to sustain nonstop service , and the MRG helps mitigate the risk of nonstop. If a current airport has nonstop service without the necessity of an MRG to the airline, it signals that the • market dynamics are already strong and the airline has confidence in the route. There would be no reason to reduce capacity in an already strong market. Should another city in the state receive a nonstop with the assistance of an MRG, it will not have an impact • on another cities nonstop service. For example: OKC current has nonstop service to SFO. If TUL were to recruit nonstop service to SFO • utilizing an MRG, it would not make sense for the passengers already flying out of OKC nonstop to drive from their home city to fly nonstop out of TUL. There are currently 3.5 passengers per day that drive from the TUL catchment area to fly nonstop to • SFO out of OKC. This is an extremely minimal impact to the OKC-SFO nonstop service, and would not cause United to reduce or remove service in OKC. The OASDGP will allow all communities in the state to actively recruit new nonstop service •
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