OST-98-3603 / Savannah/Hilton Head / High Density Rule, O'Hare Slots / March 11, 1998

Notice: Any party may file an answer to this application. Answers must be served upon the persons listed above and on the attached service list. Answers must be filed on or before March 26, 1998.

 

Application of The Community of

Savannah, Georgia/Hilton Head, South Carolina /

Docket No. OST-98-3603

for an exemption from 14 C.F.R. Part 93, Subpart K and S. 49 U.S.C. §41714 as to allow non-stop service to Chicago O'Hare Airport

 

APPLICATION OF THE COMMUNITY OF SAVANNAH, GEORGIAIHILTON HEAD,

SOUTH CAROLINA

 

INTRODUCTION

The community of Savannah, Georgia Hilton Head, South Carolina ("Savannah/Hilton Head') along with other municipalities and businesses from the states of Georgia and South Carolina /1 ("Parties") respectfully request that the Department grant an exemption from the requirements of Subparts K and S of Part 93 of the Federal Aviation Regulations so that they may obtain direct non-stop service to Chicago's O'Hare Airport. The Parties request eight slots at O'Hare to allow four Savannah/Hilton Head-O'Hare round-trip flights. /2

1/ The parties include the Governors of Georgia and South Carolina, Chambers of Commerce, the Savannah/Hilton Head Area Convention and Visitors Bureau, and civic officials, hotels, resorts, and businesses from throughout the South Carolina and Georgia areas (copies of letters of support are contained in Exhibit I ).

2/ The specific times when slots are requested are set forth in Exhibit 9.

 

Background

Since 1968, the FAA's high density traffic airport rule ("HDR") (14 CFR Section 93.12 et seq.) has restricted the number of aircraft operations at JFK, LaGuardia, Washington National and O'Hare airports. Under the HDR, in order to conduct any IFR operation (arrival or departure) at an HDR airport, the operator must have a slot for the particular time frame during which the operation will be conducted. Also, under the HDR, any party -- including municipalities or airport authorities may purchase or own" a slot.

In order to obtain service to O'Hare, the Parties are filing for an exemption for slots under 49 U.S.C. §41714. That section authorizes the Secretary to grant exemptions from the high density rule if the proposed service is in the public interest. The "public interest" is statutorily defined to include the following:

* avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one. . . . air carrier . . . unreasonably to increase prices.

* encouraging entry into air transportation markets by new and existing air carriers and the continued strengthening of small air carriers to ensure a more effective and competitive airline industry. /3

In responding to recommendations of the U.S. General Accounting Office that the legislative standard governing the granting of landing slots to accommodate new entrants should be reconsidered to include competition as a key criterion, /4 the Department of Transportation took the following position:

3/ 49 U.S.C. §40101()(4), (10), (13). The Secretary has broad authority to grant exemptions from the high density rule. That authority can be exercised even without the authority set forth in Section 49 U.S.C. 41714.

4/ U.S. General Accounting Office, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, RCED-97-4 (Oct. 1996).

 

In our past approvals and denials of slot exemptions, we have recognized as an exceptional circumstance the existence of markets that were demonstrably large enough to support nonstop service but had no nonstop service. Here we have determined to define "exceptional circumstances" more broadly by recognizing the need for competitive service in a market...In expanding the range of exceptional circumstances, we are concurring with the concerns that have been raised by members of Congress, numerous community groups, new entrant airlines, the General Accounting Office and within the Department about the state of competition in the airline industry. As an example, in an October 1996 study entitled Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, the General Accounting Office found that control of slots by a few airlines greatly deters entry at key airports in Chicago, New York, and Washington.

The Department added: "We find that substantial benefits can be achieved through increasing competition at slot controlled airports where consumers would be able to obtain significantly lower fares in noncompetitive or underserved markets." /5

Small-Medium Communities Need Access to High Density Airports To Be A Part of the Nation's Air Transportation System Since Deregulation

The grant of this request for slots is consistent with Congressional intent and statements by DOT officials that the Department intends to increase access to high density airports for small-medium sized communities. As noted in Order 97-1-7, January 13, 1997, p. 1, Congress has directed the Secretary "to make the fullest possible use of existing exemption powers under 49 U.S.C. §41714 . . . 'to improve service to nonhub airports where significant improvements can be achieved,"' citing the Conference Report to the DOT FY 1997 Appropriations Bill, Public Law 104-205.

5/ U.S. Department of Transportation, Order 97-10-16.

 

DOT's 1996 Low Cost Airline Service Study emphasized that there were a number of positive developments attributable to the growth of competitive service and that a number of markets were not enjoying the benefits of a deregulated environment. That study found:

· since deregulation, in the 112 cities served, the number of flight departures since deregulation has decreased in 12 of 49 small communities and 7 of 38 medium-sized communities.

· average fares, adjusted for inflation, have increased in 19 of 49 small communities and 14 of 38 medium-sized communities.

· the number of destinations served by nonstop flights declined in 28 of 49 small communities and 16 of 38 medium-sized communities.

· consumer benefits of increased competition are enormous -- $ó.3 billion annually.

· one of every seven domestic passengers is flying because of the increased competition.

The importance of airline service to small-medium communities has been the subject of a number of forums including the National Air Service Roundtable held earlier this year in Jackson, Mississippi and one year ago in Chattanooga, Tennessee. At these conferences, state, local, and federal officials including from DOT, discussed market-based solutions to local air service problems. The genesis for the conference was the need to provide focus and clarity to the national understanding about local-air service problems and to finish "the unfinished business of the Airline Deregulation Act of 1978 by bringing a competitive mix of service to all communities," particularly those that lack adequate airline competition or service quality. The Conference recognized the direct linkage between air transportation and job creation, economic growth and quality of life. The significance of airline service to the economic growth of small communities was best summarized by the following 1997 Conference statement:

The evolving aviation marketplace in mid-size communities was revealed to have tremendous implications for major employers at the roundtable. For example, testimony delivered by an official from Eastman Chemical, Tennessee's largest employer and exporter, identified substandard local service as an obstacle to: organizing sales meetings; recruiting a talented workforce; deploying sales personnel to field locations; and maintaining personal contact with valued clients.

At the end of the conference a number of issues including slot availability were highlighted in "The National Air Service Roundtable: A Consensus Report" written by Joseph P. Schwieterman, Ph.D. While the Conference identified a number of marketing steps that can be taken by communities and carriers, the participants agreed that 'if local efforts to enhance competition are to succeed," the federal government must address barriers to entry including the availability of slots. The report stated that:

The control of airline "slots" is also deleterious to competition. This problem is pervasive at the Wig four" airports, Chicago's O'Hare, New York's Kennedy and LaGuardia, and Washington's National airports. It can put the expansion of air service in mid-size cities into the hands of a few major carriers, which own the slots, precluding mid-size cities from working effectively with new entrants to establish service to major airports.

Service to small and medium markets has also been the focus of a number of Congressional hearings. An Eastman Company representative -- Fielding Rolston, Vice President, Customer Service and Materials Management, elaborated on how critical air service is to business growth when he testified on June 25, 1997 before the House Subcommittee on Aviation that:

I told you at the beginning that I'm here representing the business community. I say that again because I want to underscore the fact that, as a company in a very competitive and regulated field, we do understand marketplace realities. We do understand how supply and demand works and we do understand the limitations of legislation and regulations in solving societal problems.

But we also understand that this is a bigger question than whether the airlines need more competition. It's a question of whether this country wants an airline industry that ignores 20 percent of the communities and airports in this nation. In short, it's a question of whether we're willing to let the small and medium-sized communities -- and all of the companies that call those communities home -- fall by the wayside as they find it more and more difficult to attract and keep businesses.

Deregulation has worked for 80 percent of the country. And we're certainly not asking for re-regulation. But we are asking that deregulation be taken one step further. By providing greater access to gates and slots, you can let the market take over and give competition a true chance to flourish. And in doing so you can ensure that small and medium-sized communities again have a seat at the table and a gate at the terminal.

The purpose of deregulation was not to freeze certain communities out of the nation's air transportation system, nor was it to place air service determinations only in the hands of a few air carriers. The Airline Deregulation Act provides:

· placing maximum reliance on competitive market forces and on actual and potential competition.

· avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier to unreasonably increase prices, reduce services, or exclude competition in air transportation.

· encouraging, developing, and maintaining an air transportation system relying on actual and potential competition.

· encouraging entry into air transportation markets by new and existing air carriers.

Two-State Market

Savannah/Hilton Head has had very successful service to O'Hare in the past. From January, 1986 to February, 1995, United Airlines provided service in the market. (United utilized its standard jet fleet for that service. This petition is to establish regional jet service.) When United was providing direct nonstop service to O'Hare, the market was at its largest and was growing -- over 30,000 enplanements in 1994. (Exhibit 3 shows the Savannah/Hilton Head-O'Hare Yearly Historical Projected Enplanements.) As can be seen by that chart, the yearly enplanements rose dramatically when United was providing nonstop service. When that nonstop service was eliminated, passenger levels dropped dramatically.

As the two-state area is increasing in business and leisure traffic, even without non-stop service, O'Hare enplanements are once again on the rise. Much of this increase is attributable to the growth of the Savannah/Hilton Head area as a first class-leisure destination and to businesses having expanded throughout the region (see Exhibit 4 for service area and population growth projections).

United stopped its Savannah/Hilton Head-O'Hare service because they had other competitive uses for their aircraft and slots not because of passenger boardings. This is a primary problem with O'Hare service for small and medium communities. As a result of the slot limits at O'Hare (as compared to operations at other competing hubs) the two O'Hare hub carriers often increase frequencies to larger markets while dropping service to smaller markets. While such decisions reflect the competitive nature of the airline business, it often results in reduced levels of service from communities that have taken numerous steps to create traffic. Therefore, a community could spend funds to support new O'Hare service, however, it may lose that service through no fault of its own and with no ability to keep or immediately replace that service.

On May 22, 1996, the Department issued an order (Docket OST 96-1241) granting Air South the authority and the slots to operate three round-trip flights a day between Savannah, Georgia; Hilton Head and Charleston, South Carolina to John F. Kennedy International Airport.

In granting the authority for service, the Department stated:

In summary, there is sufficient traffic in the JFK-South Carolina/Savannah markets to justify the proposed service and clearly the markets are undeserved.

* * *

Air South should also be able to generate a substantial volume of new discretionary traffic based on South Carolina's growing status as a domestic and international tourist destination.

* * *

We find Air South's arguments regarding the growing importance of international access to South Carolina to be reasonable.

Unfortunately, Air South was unable to continue its operations. As demonstrated by the following, the Savannah/Hilton Head air service market area has grown since DOT granted the exemption to Air South:

· The WEFA Group, a respected economic forecaster, recently predicted that the Savannah Metropolitan Statistical Area's (MSA) employment growth from 1994 to 1997 will make it the 11th fastest growing metropolitan area in the nation.

· With over 17,000 visitor-supported jobs, tourism is Savannah's second largest industry. Visitor spending was 5623.7 million in 1994. Estimates show that in the past 10 years the number of visitors to Savannah has doubled and the amount of tourist dollars spent has tripled. Conde Cast recently voted Savannah one of the top 10 cities to visit in the United States.

· The Port of Savannah is the 4th largest port on the east coast and generates an estimated $6.7 billion of revenue, creating 63,000 jobs statewide. Glynn County (Golden Isles) also boasts a world class port with an active sailing schedule and links to major ports around the world.

· Fort Stewart and Hunter Army Air Field are located in the Savannah MSA. With over 94,000 soldiers and civilian employees, Fort Stewart/Hunter is coastal Georgia's largest employer and the largest army base east of the Mississippi River.

· The Mighty 8th Air Force Heritage Museum opened one exit south of the Savannah International Airport on Interstate 95 in May 1996. The Museum houses 90,000 sq. ft. of exhibit space on 12 acres and is expected to attract 300,000 annual visitors.

· The Federal Law Enforcement Training Center is located in Brunswick and employs approximately 14,000 people who train annually 23,000 federal employees from over 70 agencies.

· The Georgia Maritime and International Trade Center is scheduled for opening in Savannah in 1999. This is a 345,000 sq. ft. conference facility projected to generate $5.1 million in annual tax revenue and to create 1,950 jobs.

· The Savannah Area Harbor Resort will be a four star resort located adjacent to the Maritime Trade Center and will include 384 guest rooms and suites on 16 floors. The resort will include a 27 hole golf course, 12,000 sq. ft. spa, four lighted tennis courts, a complete fitness center, three restaurants, and a full service marina.

· In addition to the Maritime Trade Center and Resort, an Indy Car Race Track has been developed on the same site. Chatham County has a three year contract with Indy Lite to host annual races - the first of which was held in the Spring of 1997.

· Home Depot is constructing a national import goods center (1.4 million sq. ft.) on 390 acres in the newly developed Crossroads Business Center, which is located just north of the Savannah International Airport on Interstate 95. The $68 million facility will initially create 5,230 jobs, as well as estimated 1,200 jobs at the port facility and among private distributors.

· Del Webb's Sun City Hilton Head is located just across the Talmadge Bridge in South Carolina, equal distance from Savannah and Hilton Head Island. This retirement community consists of 5,600 acres and welcomed its first residents in August 1995. It is projected that Del Webb will pump approximately $3 billion into the local economy in the form of capital improvements and payroll during the 17 years it will take to build the 8,000 houses that will be homes to approximately 15,500 new residents.

Although the slot exemption authority granted to Air South was for JFK service, the O'Hare market is stronger for a number of important reasons, including:

1. O'Hare service provides connections to the upper midwest and northwest to new and convenient one-stop service that was not available at JFK, where few domestic connecting opportunities are available.

2. As a result of the Open Skies agreement with Canada, a significant number of connecting opportunities are available to Canada from O'Hare. Those connecting opportunities are not all available at JFK.

3. A significant number of international connections are available at O'Hare, particularly with the alliances created by United and American.

The Savannah/Hilton Head area generates over :0,000 enplanements annually to Chicago (Exhibit 3). This data does not reflect the additional enplanements that would be generated by the greater convenience of non-stop jet service. There are few medium sized communities that generate more leisure traffic than the Savannah/Hilton Head area (Exhibit 5).

Benefits of New Entry and Competition

In "The Low Cost Airline Service Revolution," April 1996, the Department states:

"We encourage communities to promote their own interests by undertaking efforts to encourage low cost new entry. Awareness of the benefits of low cost service where it has succeeded should be adequate incentive for communities to pursue low cost service."

Economic development for the two state area cannot exist when its service is limited and those wishing to travel to or do business in the area do not have reasonable access to major parts of this country and to the world. True deregulation can only exist when all markets can take part in the international transportation system.

Aviation in this part of the country is concentrated. Most small and medium communities only receive service through a few large hubs. While those hub operators provide important service, it leaves most small and medium communities with little or no flight options or price competition. At the current time, Savannah/Hilton Head has service to several east-coast hubs with the primary service to Atlanta by Delta and AirTran. Savannah/Hilton Head's service includes:

AirTran - Atlanta

Continental Express - Newark

Delta Air Lines - Atlanta

Midway Connection - Raleigh-Durham

US Airways - Charlotte

On April 1, 1998 United Express will initiate service between Savannah/Hilton Head and Washington Dulles Airport utilizing regional jets.

As DOT has suggested, Savannah/Hilton Head has taken a number of important steps to attract service. The service that has started in Savannah/Hilton Head has exceeded all expectations. In some cases carriers started with a few flights and added service to accommodate growing demand. The residents of these communities want competition and will support it. As service grows, business people and leisure travelers from other areas will drive to Savannah/Hilton Head to use the multiple flight options. They have met with some success in those efforts, and it is appropriate that DOT facilitate additional growth by opening government imposed slot restrictions..

An important service area for the two state area is to one of the nation's primary business airports -- O'Hare -- which is blocked by federally imposed regulations and is subject to the marketing decision of two carriers. For those communities without O'Hare service -- including Savannah/Hilton Head -- the options are for travelers to drive several hours to those markets with nonstop service or to board connecting flights to one of the hubs with service. This would add costs and time to any trip (see Exhibit 5 for Savannah/Hilton Head area passengers driving to Jacksonville to obtain direct service to the Midwest), which is particularly tolling on families and business people who need to take frequent trips. Moreover, these cost and time burdens have a significant impact on those who might consider these cities for conventions or for the location of businesses.

The Parties applaud the Department's actions to open O'Hare up to new community service. The applications submitted by Simmons Airline (Docket No. OST-1997-2985-1) (Atlantic Coast Airlines (Docket No. OST-1997-3259-1 and Trans States Airlines (Docket No. OST-1997-9368-1) should hopefully bring important service to a number of new communities. Unfortunately, because of limitations imposed by the FAA on the number of additional operations that can be added, not enough slots will be awarded to allow each community named in the applications to receive service. If sufficient slots were available, other communities would have been included in the applications. As a result, deserving communities -- such as Savannah/Hilton Head -- will be blocked from adding service critical to their economic development.

The economic growth of small and medium communities is directly related to convenient and competitive airline service. This is particularly essential for a community such as the two state area that has increasing amounts of leisure and business travel and a growing need for international service, particularly to Canada. By adding convenient one-stop service to most major Canadian markets, the resorts in the area would be able to attract a significant number of new customers. Without that service, the area is disadvantaged as to other areas with service.

As can be seen by Exhibit 6, Chicago is the third most popular destination market from Savannah/Hilton Head. Exhibit 7 shows that the Parties estimate that 420 passengers would use O Hare service. United Express will initiate nonstop service to Washington Dulles with three roundtrips per day with an estimate of 357 passengers per day. While United Express added regional jet service to Washington Dulles -- a smaller market -- it and American Eagle are bloclie:1 from adding O'Hare service in the same regional jets because of slot limitations -although the O'Hare market is significantly larger.

The Parties ask that the Department award slots so that either United Express or American Eagle can work with the O'Hare incumbents to start service at Savannah/Hilton Head

The Parties have no doubt that they will initiate this service. If the slots are awarded to Savannah/Hilton Head, the civic and corporate parties know that they can spend money; to support service and not have to worry about having the slots transferred to other markets.

Those who created the dream of deregulation never intended that service would be controlled by marketing departments of airlines. By awarding slots to Savannah/Hilton Head. the Department would acknowledge the direct link between air service and the economic development of small and medium communities. Those communities should not be told by the government that they may never get service in airports regulated by DOT.

The Department should also consider survival of competition as a factor in granting slot exemptions. As Assistant Secretary Charles Hunnicutt stated before the Senate Commerce. Science and Transportation Subcommittee on Aviation, on May 13, 1997, New entry has almost completely stopped. We have received no new low-fare applications this calendar year and we have licensed only one new low-fare competitor" since May of 1996. Awarding slots to Savannah/Hilton Head would be consistent With these principles and would provide additional competitive options for the two-state area by bringing new carriers into this region of the country.

By denying new competitive service from the grooving business and tourism markets of Savannah/Hilton Head, DOT would tighten the dominant hub carriers' grip on this two state region and lessen the likelihood that competition will permanently come to this part of the country.

Based upon the data depicting available traffic, marketing and potential growth information for the two-state area, there is no doubt that the service proposed in this petition justifies an exemption to allow O'Hare service.

Slot Awards

Today, a community may only obtain service to O'Hare if one of the two carriers each controlling approximately 1,000 slots, decides to shift slots for use at that community. While these carriers are seeking additional slots through the exemption process for limited new service, the Parties believe that it would be in the greater public interest to award exemption slots for regional jet operations to the community.

The Parties are asking the Department of Transportation to award eight slots to the Savannah Airport Commission. If those slots are not utilized within 180 days from the date of the award, the slots would be returned to FAA. Awarding these slots to Savannah/Hilton Head would provide the residents of the two-state area with the assurance that if they support O'Hare service, it will not disappear from use so that the carrier using the slot may serve other markets. Awarding slots to the community is consistent with the high density regulations (allowing communities to own slots) and with actions taken by this Administration to work with local and state governments to promote tourism and economic growth. The Department has a responsibility to all of those who depend on air transportation -- not just the air carriers that dominate O'Hare.

 

Conclusion

 

If we are going to have airline competition into the next century, particularly in small and medium communities, barriers to entry must be opened. Communities such as Savannah/Hilton Head should not be told that they will forever be destined to be no more than a "spoke" to one or two highly concentrated hub airports. These communities must be given opportunities to receive service to high density airports. Approving the minimal slot request in this petition will promote competition, and will:

* provide business travelers from a several state area with options for travel to Chicago, the upper midwest and Canada;

* provide leisure travelers with affordable fares that will allow them to visit families and friends, to take family vacations and explore business opportunities;

* stimulate enormous business and economic opportunities in the Savannah/Hilton Head' (and all of Chatham County), Hilton Head Island and Brunswick areas; and

* stimulate other air carrier service in these markets bringing lower prices and more choices for the traveling public;

According to a variety of studies, the growth enjoyed by small and medium communities in various parts of the country has not occurred in the southeast. Now is the time for the Department to take the steps necessary to allow communities such as Savannah/Hilton Head to benefit from competitive airline service.

Combined with existing service by established and affordable fare carriers. Savannah/Hilton Head will become an alternative airport for millions for passengers traveling to and from the two state area. Competition will be alive and well for the first time since deregulation was enacted. Moreover, economic development in this part of the country will no longer be discouraged because of inconvenient and non-competitive air service.

 

The true winners from a Department action to grant this limited exemption would be the consumers and business people of the two state region and those that obtain jobs as a result of the economic development stimulated by air service. Secretary Slater has often spoken of the linkage between transportation and economic growth. By granting this petition, the Department Will generate true opportunities for economic growth in the two-state area. It is time for the Department to empower the Community of Savannah/Hilton Head and the two-state area with the ability to control its future economic growth.

For all these reasons, the Parties respectfully request the Department grant it an exemption from the high density slot regulations to allow four nonstop Savannah/Hilton Head-Chicago O'Hare roundtrips.

 

Respectfully submitted,

Edward P. Faberman

UNGARETTI & HARRIS

1747 Pennsylvania Avenue, N.W.

Suite 900

Washington, D.C. 20006-4604

Submitted March 11, 1998