Evaluating the hype regarding British Airways’ return to PIT

Summary: British Airways’ return to Pittsburgh has been hyped as a “win” for PIT.  However, concerns about the poor track record of subsidies to carriers provided by the airport and the poor quality of the estimates of economic impact create very serious doubts on the advisability of subsidizing British Airways flights at PIT.

_____________________________________________________________________ 

The much-ballyhooed rollout of the British Airways flights between Pittsburgh International (PIT) and London’s Heathrow airport is in full flower. A recent newspaper report was awash with gushy comments from British Airways, the county executive and an airline consultant.

From British Airways spokesperson Simon Brooks, the airline’s senior vice president of sales in North America, “the Steel City was a really obvious choice for us.”  Mr. Brooks expects to see a profitable route — driven by corporate connections, tech and startup businesses, a robust leisure market and student travel to Pittsburgh’s universities from London and beyond. This begs the question. If British Airways believes the route will be profitable why does it need a subsidy? Or more directly, would it have come to PIT without the subsidy?

In that regard, the spokesman should have had someone check some startup data for the region. According to the Kauffman Index of Startup Activity that analyzed 40 large metro areas, the seven-county Pittsburgh metropolitan statistical area (MSA) ranked 39th, tied with Milwaukee for last place in 2017.

Whether the Pittsburgh route will be profitable when the $3 million in subsidies end in two years remains to be seen. Bear in mind the airline left the Pittsburgh market 20 years ago when the airport was still a hub with hundreds of incoming flights every day from all over the country that could provide Europe-bound passengers.

Remember too, that American Airlines offers one-stop travel to London through Philadelphia with flights leaving at 6:40 p.m. and arriving London at 10:20 a.m. while the four-times-per-week British Airways flight leaves at 9:50 p.m. and gets in at 10:25 a.m. And its four weekly return flights depart at 4:00 p.m., England time.  Several carriers offer one-stop travel from PIT to Heathrow at various times through the day and early evening with choices of days per week. All come with comparable fares for roundtrips. Whether the 9:50 p.m. British Airways departure time just four days per week will be a competitive issue will not be known for a while.

For certain, the airline is making heavy bets on U.S.-to-Britain and Britain-to-U.S. air travel. Just in the past few years it has added seven net new destinations in the U.S.  In 2013 there were 20 U.S. airports with British Airways overseas flights. Now there are 26. Newark has been dropped.

Oakland was added in March 2017 but dropped in October 2018 because of inadequate travel.  At the announcement of starting service, the media center for British Airways reported the comments of Colm Lacy, British Airways’ head of commercial service at Gatwick.  “We’re very excited to open up California to our customers in the Gatwick area and position British Airways as the number one European carrier to the Golden State. And concluded with, “We are confident this route will be a big hit with British tourists.”

Joining Pittsburgh in the recent additions list are Austin, New Orleans, Ft. Lauderdale, San Jose, Nashville and Charleston, S.C. Ft. Lauderdale’s addition brings the number of Florida destinations served by British Airways to four.

The questions are:  will all this new capacity be met with demand and will domestic airlines compete vigorously to keep their market shares?

Furthermore, there are serious concerns about the airline’s estimates of the local economic impact in the region. Those estimates were debunked in an earlier Policy Brief (Vol. 18, No. 31).

Meanwhile, Allegheny County Executive Fitzgerald was quoted in the article saying, “Pittsburgh is a vastly different city than we were in 1999.”  Furthermore, he said “there’s much more economic growth, much more economic impact. We didn’t have Google, all the autonomous vehicle companies, Facebook. … There are just so many things that are more positive today than there were in 1999.”

What the executive conveniently forgets is that the 1990-to-2000 decade was actually a far better period for private employment growth in the Pittsburgh MSA than the 18 years since 2000 have been.  From 1990 to 2000, the MSA added 105,500 private sector jobs—an annualized growth rate of 1.1 percent per year. Service sectors lead the way with 98,600 new jobs created. Goods employment rose by 6,800 as manufacturing held steady and construction jobs rose. But as good as the 1990s were for jobs in the Pittsburgh MSA, they grew only half as fast as the nation’s average of 2.0 percent per year.

From 2000 through 2018, Pittsburgh MSA private employment rose by 52,100 jobs, an average annualized gain of 0.3 percent while the national rate was 0.7 percent. The service sector added 87,900 jobs over the 18 years while goods-producing employment plunged by 35,800, led by a 44,200 loss of manufacturing jobs.  Modest gains in construction and mining partially offset the huge manufacturing loss. Manufacturing was hard hit nationally as well over the period losing 5.6 million jobs, despite a recent rebound that added 450,000 jobs between December 2016 and December 2018. Unfortunately, the rebound did not include the Pittsburgh MSA where there has been little sign of renewed growth, although the long slide appears to have ended with employment holding around 85,000.

Moreover, the region’s population continues to decline falling by over 36,000 from 2,394,880 in 1990 to 2,358,695 in 2000, then slightly further to 2,357,043 in 2010 and was estimated to have dropped to 2,333,367 in 2017.  Meanwhile, the City of Pittsburgh has seen population drop from 369,879 in 1990 to 334,563 in 2000 and for 2017 was estimated to have 302,500 residents.

Household employment—the number of persons reporting they are working whether for a company or themselves—rose 53,755 from 1990 to 2000 (a 5 percent gain). But from 2000 to 2018 the number of people in the region reporting as working climbed a very meager 5,754, about of a tenth of the 1990-to-2000-decade number. Of course, there was a recession in 2009 and 2010 that caused a drop in employment but through 2018 the recovery barely returned the worker count to the pre-recession level.

By way of comparison, U.S. household employment climbed 15 percent between 1990 and 2000, three times faster than the Pittsburgh MSA. And between 2000 and 2018 U.S. workers rose 13.7 percent and have been growing steadily since 2014 when after seven years the employment level returned to its pre-recession peak.

In short, the Pittsburgh area economy is quite anemic in comparison to the national economy and, what’s worse, population is not growing.  The labor force is nearly stagnant and job gains have slowed from the 1990s performance. Startups are very weak compared to other metro areas.

Then came the quote to top all the others. To wit: “You’ve had a lot of air service wins in Pittsburgh. They all pale in comparison to this one,” said William Swelbar, chief industry strategist for Richmond, Va.-based Delta Airport Consultants. “… It opens up the world to the Pittsburgh community.”

It seems almost comical to say Pittsburgh has had a lot of air service wins. British Airways left in 1999. USAirways went bankrupt twice in the early 2000s and PIT ceased to be a hub, despite its relatively new terminal. More recently, OneJet and WOW airlines have ceased operations, while Delta’s flight to Paris was eliminated.  Quite a lot of money was spent subsidizing all three. Qatar Air’s freight service, also being subsidized, has been a frightful disappointment.  And Delta’s announcement came soon after the British Airways deal was struck. Coincidence? Hardly seems likely since Delta had not mentioned it was planning to abandon the Paris flight before the British Airways announcement.

For some reason, the so-called gurus apparently do not understand that air travel demand depends on the size of the population and its income in the collection area that are disposed to fly—especially overseas. In a region with little or no population growth and slow employment gains with those heavily concentrated in lower income jobs, overseas air travel demand is not likely to be growing rapidly, if at all. Artificially stimulating demand by subsidizing travel is a dreadful misuse of tax dollars since much of the benefit will go to people who would have traveled without the subsidized fares, as well as to the carrier.  And once the subsidy starts for one carrier, others will want subsidies as well.

Unless the British Airways flights to PIT are carrying a much higher percentage of passengers from outside the country than local passengers, the taxpayers are actually ponying up to send more tourist dollars out of the region than are coming in from abroad. And that is definitely the expectation of British Airways.  It forecasts approximately 70 percent of travelers on its Pittsburgh flight will be U.S. citizens, primarily from the Pittsburgh area. Thus, British Airways gets the fare revenue of the passengers that leave the country immediately and then they go to England or Europe to spend lots of money.

Compare that to the planes flying from London to Miami, Orlando, Tampa, Las Vegas, New York and Phoenix for example. They are no doubt carrying a large percentage of foreign tourists to the U.S. rather than the other way around.

Indeed, it seems very unlikely that British Airways would ever think of asking for a subsidy for its New York or Los Angeles flights.

As Policy Brief Vol. 18, No. 31 concluded, “the most probable effects of the subsidy will be to damage competitors while increasing the net outflow of resources from the region, it is hard to see any upside to handing over tax dollars to the airline.”

The Airport’s Misguided $3 Million Subsidy to British Airways

Summary: On July 25, Pittsburgh International Airport (PIT) officials announced that British Airways would begin nonstop flights from Pittsburgh to London’s Heathrow airport. $3 million in subsidy is being provided to the airline to offer service at PIT.  This Policy Brief describes the deep flaws in the subsidy of British Airways.

______________________________________________________________________

British Airways is set to begin flights in April 2019 with one flight per day on Tuesdays, Wednesdays, Fridays and Saturdays. Flights will arrive at 8:15 p.m. and depart at 9:50 p.m. PIT will become the 27th U.S. destination for the carrier and is by far the smallest airport in terms of enplaned passengers (ranked 47th in the U.S. in 2017).

To get the airline to resume operations at PIT after a long hiatus the Airport Authority will pay British Airways $1.5 million each year for two years. This after handing WOW Air $800,000 to fly to Iceland and on to Europe and $500,000 to Condor for seasonal flights to Germany. Note, too, that American Airlines offers one-stop service to London through Philadelphia and Charlotte with several flights to choose from each day. Those airports are American Airlines hubs and can gather travelers from many cities to fill planes flying to Heathrow. Then, too, American is already posting fares at PIT to match the British Airways fares for next April.

The obvious question—will the British Airways service create new passengers at the airport or take them away from existing flights, some of which are receiving airport subsidies? According to the British Airways spokesperson, there is pent-up demand for travel to Europe. If that’s the case, why are subsidies necessary and why haven’t U.S. airlines jumped at the chance to offer nonstop flights to serve the pent-up demand?  Something does not add up here.

Indeed, the only possible justifiable reason to subsidize any carrier is to create demand by foreigners to fly to PIT. Subsidizing passengers to fly out of the country on a foreign carrier to spend money as tourists abroad is folly.

And that leads to the worst part of the airport’s presentation announcing the subsidy arrangement with British Airways. Airport executives said the authority estimates there will be a $57 million economic impact resulting from the British Airways presence.  To be clear, the economic impact estimates were provided in a study prepared by the EDR Group of Boston.

Apparently, most of the estimated impacts in the EDR study are based on assumptions about non-U.S. passengers using the flights. The study does not provide figures for spending on baggage handling, gate services, or purchases of fuel, food and beverages. EDR assumes 40,562 arriving and departing passengers annually on 234 roundtrips (81 percent occupancy).  Presumably those figures are from British Airways. Of those, 29 percent (11,763) are assumed to be from the United Kingdom or other Europeans whose destination is PIT and are not connecting to another city. How the 29 percent figure was determined is not explained.

Spending by the UK/European visitors in the Pittsburgh region seems to account for the bulk of the economic impact of the carrier’s flights. All told, the study predicts the 234 yearly roundtrips will lead to 564 added jobs in the 10-county Southwestern Pennsylvania region with average worker income of $37,776 and a total labor income boost of $21,306,000. This will be accompanied by a value-added increase of $33,879,000 according to the study. The $57 million economic impact figure quoted by airport executives is for gross sales and not net value produced.

Before evaluating the study estimates in more detail, it is important to note three large potential differences in economic impact depending on passenger count assumptions. Obviously, the total of 40,562 passengers matters because it will determine the amount of services needed at the airport. The assumption of 29 percent (11,763) non-U.S. passengers is critical because that drives the bulk of the local economic impact. And third, the British Airways passenger count assumptions do not factor in the percentage of travelers that would have flown other airlines to and from England or Europe.

Note that most of the projected new jobs in the study will be at restaurants and hotels as a result of the increase in foreign visitors to the region. Bear in mind, however, that 11,763 visitors to the region over 365 days is an average of only 33 per day.  Even if they stay seven days on average that represents only 82,000 hotel or other accommodation room nights. The city alone has around 2.6 million room nights available per year and the rest of the region likely has at least half that many. Thus, UK/European visitor stays would make up only two percent or so of the region’s available room nights.

And in that regard, it is highly improbable that a two percent uptick in room nights would create a commensurate number of new hospitality jobs. Indeed, stats from “The Economic Impact of Travel and Tourism in Pennsylvania 2016”, prepared by Tourism Economics a division of the Oxford Economics Company, show that for Allegheny County in 2016, on average, $143,297 was spent by tourists/travelers for each job in the tourism related industries. If that figure is still anywhere close to the present ratio, the 11,763 visitors would have to spend over $80 million, or $7,000, each to produce 564 new jobs.

What’s more, most newly created jobs resulting from these foreign travelers would likely be low-paid hotel room attendants and restaurant wait staff for which pay levels are about $23,000, a far cry from the $37,776 pay level used in the EDR report. The figure EDR used for average worker pay would include salaries of managers, sales reps, engineers, security, repairmen, etc. It seems extremely unlikely that additional staff in these higher paid categories would be needed to handle an average of 224 people per night—assuming seven-day stays per visitor—at all the hotels in the 10-county region or even if they are concentrated in Allegheny County hotels.

And it gets worse. There is no estimate of how many of the 28,800 local passengers will be additional travelers to the UK/Europe or will be passengers that would have traveled on other airlines such as the already subsidized and very inexpensive WOW Air or from folks who would have flown one stop on American through Philadelphia or Charlotte—or United through Newark or Dulles. But it is almost certain that a large percentage will be passengers that would have taken other carriers. Likewise, it is not known how many Europeans will use British Airways instead of American or some other airline to come to Pittsburgh. If as few as half of Pennsylvania travelers to Heathrow are net new passengers and half of UK visitors are net new travelers that would mean the net effect of British Airways flights would be 15,000 more locals headed to London with 5,900 additional UK or other Europeans coming to the Pittsburgh area. Other assumptions about the ratio of new additional to total passengers could be made but this one will serve to illustrate the point.

If 5,900 is a better measure of the net additional UK/Europeans visiting Southwestern Pennsylvania, then the impact on the economy will be far lower than even a realistic estimate of the impact of 11,763 visitors, which the EDR estimate clearly was not.   Consider, too—assuming foreign visitors to Southwestern Pennsylvania spend about the same as local travelers spend abroad—that the outflow of dollars from the region to foreign-owned enterprises caused by 28,800 local travelers flying to London and perhaps visiting other European destinations will be far greater than the inflow of money associated with 11,763 foreign visitors to the region.  Using the EDR estimate of 29 percent of the passengers to be UK/Europe residents—which seems high—then U.S. residents make up 71 percent, a ratio of almost 2.5 to one. Thus, spending by Pennsylvania travelers would be 2.5 times greater than foreign British Airways travelers to the Pittsburgh region. That is not a win for the region. Indeed, it is just the opposite. Moreover, if the percentage of UK/European travelers turns out to be only 20 percent of total, the ratio of U.S. spending abroad to foreign spending in the region rises to four to one. And so forth if the percentage of foreign passengers is even lower.

Then too, the money spent by local residents to fly on British Airways will end up in that airline’s bank account.  And for that matter so will all the fares purchased by UK/European passengers. Using British Airways’ estimate of 28,800 Southwestern Pennsylvanians (and maybe some from out of the area) who will pay a low-side estimate of $1,000 or more for the trip means British Airways will collect $28,800,000 in fare revenue from area residents. And those dollars are leaving the region even before the travelers land in England. Note that British Airways’ basic economy fares at $716 will be available but these fares are accompanied by fees for luggage. And, the passengers cannot select their seats and must board last. Prices are significantly higher for other seat classes. The $1,000 figure is used for demonstration purposes as an estimate of average fares but the actual average is likely to be significantly higher and the regional outflow of dollars higher as well.

Even if half the passengers would have flown other airlines absent the arrival of British Airways, the British carrier would still collect $28,800,000 in fare revenue. And if average fares for the other carriers are close to British Airways, they would lose almost $15 million in revenue. Obviously, any reductions in U.S. airline revenue will lower the economic benefits of the arrival of British Airways.

The fact that PIT is not a major hub and that the area is not world famous as a tourist destination—certainly not a on a scale such as Orlando, Miami, Las Vegas, Tampa, Phoenix or even New Orleans—makes it harder to induce UK/Europeans to fly to PIT as tourists.

All these factors make the airport’s $3 million misguided taxpayer investment unlikely to ever pay for itself unless British companies with significant investment and potential employment that otherwise would not have located facilities in the region decide to place operations in Southwestern Pennsylvania.  And in the meantime, with the most probable effects of the subsidy being to damage competitors while increasing the net outflow of resources from the region, it is hard to see any upside to handing over tax dollars to the airline.