Small cities should prepare for fewer flights

PRESCOTT, Ariz. -- 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.”

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 carriers are either trying to re-negotiate their contracts or dropping out altogether.

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 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 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, Tenn. “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, N.Y., 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 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 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.”

Buck’s company, Visual Pathways Inc., requires him to travel out of the city about four times a month and bring in clients two or three times a month. He used to fly Air Midwest, though the service was unreliable. The last time Buck entrusted the carrier with his travel plans, he returned in a bus.

“They said it was a mechanical error,” he said. “They always say that.”

Buck said Prescott deserves a variety of carriers, each competing for business.

That may be a far-flung hope, given the price of fuel and state of the airline industry. But Prescott officials said they’ll keep their plans to expand the runway and ask other regional carriers to fly into the airport.

Great Lakes Aviation also has offered to replace Air Midwest, and in September, Horizon Airlines is expected to return commercial flights to Prescott with service to Los Angeles International Airport.

Without air service, “are people going to stay here?” Mayor Wilson said. “No. If we lose the airline, we start losing people. We lose businesses as well.”