WOW, what a turn of events at PIT

Summary: Bad news continues to come for Pittsburgh International Airport in 2018—from airlines not meeting expectations or others canceling flights or ceasing operations.  The common thread for these events is the presence of subsidies which were offered that distort the marketplace.

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Pittsburgh International Airport (PIT) is having a very tough run.  At the end of November the Allegheny County Airport Authority announced that Qatar Airways’ cargo flights from PIT failed to generate their projected levels of cargo carried and thus obligated PIT to pay a “support fee” to the airline.  Then it was announced that WOW Airlines, another airline collecting PIT subsidies, is not offering flights to Iceland and from there to Europe after mid-January 2019.  This comes on top of the news just a few months ago that PIT is suing OneJet to recoup a loan. Shortly after that suit was filed, OneJet suspended all flights.  Then Delta announced it was cancelling its seasonal flights to Paris.  It’s fair to say that PIT has been hit with a run of very bad news during the second half of 2018.

We weighed in on the OneJet saga (Policy Brief Vol. 18, No. 32) and the decision of Delta to stop its seasonal flight to Paris (Policy Briefs Vol. 18, Nos.31 and 41) which occurred shortly after the Airport Authority announced it was giving a $3 million subsidy to British Airways to provide service to London beginning in the spring of 2019.

The Qatar Airways case is a bit different in that instead of receiving a subsidy to transport passengers to destinations previously unserved by other airlines—the Airport Authority’s justification for subsidizing OneJet, WOW, British Airways, Condor, etc.—Qatar was subsidized to carry cargo.  Before Qatar began operating at PIT in October 2017, the announcement of the added cargo service was accompanied by the usual enthusiasm and the promise of turning PIT into a logistics center.  News coverage of Qatar’s cargo service even mentioned that it might aid in attracting Amazon to the region.  Evidently, it was not a factor since Amazon is not coming to Pittsburgh.

Consider this:  in terms of cargo tonnage, PIT is ranked as the 53rd largest airport in the country by the Federal Aviation Administration, based on landed weight in 2017 (470.1 million pounds—roughly 235,000 tons).  Ten years earlier, in 2007, the airport ranked as the 48th busiest with 492.2 million pounds (246,100 tons) of landed cargo.  While things may be looking up2017’s landed cargo weight was 4 percent better than in 2016it still has not caught up to where it was before the last recession.

The Airport Authority took a gamble on Qatar Airways being able to boost PIT as a cargo center and lost.  From the news report in September 2017 it was claimed that Qatar planned to transport 200 tons of cargo to and from Pittsburgh each week from Doha to Luxembourg to Atlanta and then Pittsburgh.  Bear in mind that at the 2017 tonnage level, PIT averaged over 4,500 tons of landed cargo per week. So at the planned 200 tons per week Qatar would account for about 4 percent of PIT cargo handled.

Under the arrangement the authority was obligated to pay Qatar a “support fee” of $744,000 every six months if the carrier failed to average 480 tons of cargo per month—about half the planned 200 tons per week. It never came close to 480 tons. The authority paid the airline two installments for a total of $1.48 million for the year.  According to recent news, the best month for the airline netted only 180 tons (October 2018) and before that 163 tons (October 2017).  In June 2018 only 99 tons were carried with a further drop to only 61 tons in September.  The route was even changed to go through Chicago instead of Atlanta and two sales agents were hired to boost cargo totals and it still was not enough.

While Qatar is still operating at PIT, presumably without the subsidy, there have been news reports stating “that could potentially change if another deal is reached between Qatar and the authority.”

The authority still has dreams of being a logistics center—but at what cost?  The other, non-subsidized cargo haulers such as FedEx and UPS are at PIT and offering service because the market is strong enough they can do so profitably and without subsidies.  How will they react if Qatar is given additional subsidies to compete with them?  Will they ask for subsidies as well? The Airport Authority may have painted itself into a corner in their attempt to manipulate the market.

WOW Airlines’ decision to stop offering flights past mid-January was not a surprise but speaks to the lack of real demand for flights to Europe.

WOW has already stopped flying out of Cleveland and Cincinnati, with service lasting only from May to October from the latter, and will cease operating out of St. Louis in January, again after a brief stay of just eight months.

According to a Cleveland news report, WOW’s statement noted that the routes did not perform as well as hoped and that load factors were not achieving target levels.  Similar reasoning was used when pulling out of St. Louis while high cost and low profits were reasons for leaving Cincinnati.

WOW committed to Cleveland in August 2017, shortly after committing to PIT (June 2017).  Both airports subsidized the airline.  Cleveland offered $1 million over two years while PIT offered $800,000 over two years. St. Louis also offered $800,000 over two years but due its short time in that city, WOW failed to qualify for the agreed-upon subsidy.  News concerning the cessation of Cincinnati flights did not mention whether subsidies had been given to the carrier.

In Cleveland, WOW competed head-to-head with Icelandair with bad results.  According to another Cleveland news article, Icelandair was in talks to purchase WOW but those talks failed and the merger was called off in late November, just before WOW announced it was cancelling service at PIT. The article notes that with the failed merger, WOW’s “future is up in the air.”

So after an aggressive expansion campaign in 2017, and collecting taxpayer subsidies, WOW’s future is very much in doubt at the end of 2018.  It seems unlikely the airline with resume flights at PIT anytime soon—if ever.

Propping up business enterprises with public funds is not only a high-risk practice but it represents interference in the marketplace and begets ever more subsidies undermining the role of markets. This is especially egregious in the effort by PIT to artificially create travel to certain destinations by underwriting the cost of the fares.

It is folly on its face. Because to be truly successful in terms of sustaining adequate passengers loads for the flights, the subsidies would have to go on forever given that the real underlying demand is not there.   Perhaps the Airport Authority will learn a valuable lesson from 2018’s embarrassing failures and all the money that it has wasted.

A Woeful Tale of an Airport Subsidy

Summary: The Allegheny County Airport Authority transferred a lot of money to OneJet Inc. to have them move their “focus” airport to Pittsburgh from Indianapolis. Promises of services to 10 destinations were made in exchange for the $3 million of loans and investments. It has not worked out well.

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OneJet Inc. began its existence by incorporating in Larkspur, California. Its headquarters is in Massachusetts. Its hub (focus) of operations—if two destinations can be called a hub—is in Pittsburgh. After beginning serious operations in Indianapolis in 2015 with great fanfare about service to cities throughout the Midwest and Pittsburgh, the airline dumped Indianapolis as its base in 2016 and entered into a heavily subsidized agreement to move its operations base to Pittsburgh. OneJet promised flights to 10 destination cities from Pittsburgh International Airport (PIT) in exchange for a $3 million “investment”.

In October 2017, the airline received an unknown “investment” in Milwaukee to set up a secondary operations base. As of August 17, 2018, the airline operates to only five destinations—Hartford, Indianapolis, Pittsburgh, Albany and Buffalo. The Albany and Buffalo flights are only between those two New York cities. Two destinations remain for Pittsburgh—Hartford and Indianapolis. And flights from Hartford and Indianapolis are still in effect to each other and Pittsburgh.

Note that, according to USA Today, Milwaukee business leaders made a significant investment in the airline last October. However, currently, Milwaukee is not a second focus airport and is not even a OneJet destination. Nor are Memphis, Nashville, Omaha, Kansas City, Cincinnati, Columbus, Richmond, Palm Beach, Louisville, Providence or Raleigh. All were cities where OneJet started service or promised to start.

Now the Allegheny County Airport Authority, which provided a $1 million loan as part of the $3 million used to get the airline to move its focus of operations to PIT with its promise of 10 destinations, has filed suit against the carrier to recoup $763,000 for failure to make good on its promises.

What is the real problem here? Can failure to do due diligence be at fault? And the glaring conflict of interest of having a non-voting OneJet board member also sit on the board of the authority is extremely problematic if not a gross violation of ethics or the law.

As a non-voting board member of the airline, the authority board member—and by extension the entire authority board—should have had access to the financial situation of the airline, including importantly, current and projected revenue and costs per seat mile flown as well as expenditures for ground operations, flight control, scheduling, booking systems, planning, marketing and general management. Were the authority board and county officials made aware of the key figures? If so, were they deemed credible?  Was there a business plan showing prospective revenues and profitability associated with the promise to greatly expand service?  If all was in order, why has the airline failed so miserably? How many other creditors and investors other than in Pittsburgh are suffering losses as well?  None of this is known because the privately held corporation does not make the information public.

More importantly, now that the authority is suing OneJet, it would seem likely that other creditors will be looking to jump in before any other adverse financial news hits the carrier.

Then too, the authority would have done well to read the large number of predominantly negative passenger reviews that excoriated the airline for cancellations and delays.

All that said, what we have here is another useful object lesson—a lesson that seems never to be learned.  Subsidy of airlines beyond providing the place to land and takeoff, the parking for passengers and other infrastructure is a gamble at best and poor economics at worst.

Have so called experts been of any help in the OneJet fiasco? Consider these quotes in a May 30, 2017, Trib article.

“Airline industry experts say that although giving public money to startup airlines can be a gamble, the OneJet deal is the type of creative investment [PIT] needs to make to rebuild after losing its hub status and more than 70 percent of its departing flights.”

One aviation consultant was quoted as saying, “It would appear to me this should work very well.  It’s not the same thing as getting British Airways into town, but it’s part of the mix. A strong, business-focused market like Pittsburgh is somewhere where this makes sense.” Another said, “In a matter of two or three years, I think the money will be going back to the coffers of the government.”

The first consultant mentioned above, when asked about the authority’s lawsuit, replied flippantly in an August 14 Post-Gazette news story saying that “God gave us the court system” to settle such disputes.  And a couple of days later, he told the paper “It was a risk, an option, and it hasn’t worked. That’s the name of the game.”  Easy to say when it is not your money at risk.

And the story does not end there. At PIT, there has been a rash of subsidization of airlines over the past three or four years to induce them to provide service to various U.S. and overseas destinations.  So far, there has been no data released regarding the number of passengers that are using those flights.  Some reporting on the passenger counts at WOW Air, Condor and China Eastern would be useful. Qatar Airways cargo and recently British Airways have received or will be receiving subsidies.

Where is all the money coming from? Apparently, a lot comes or will come from the state. Bear in mind that for the last 10 years or so the airport has received well over $100 million in gaming revenue to retire debt. And now, thanks to some Legislative maneuvering, it will continue to receive $12 million each year in gaming money. Some of the money for subsidies likely comes from the Department of Community and Economic Development’s other development funds.

Which raises the main issue: Are airports primarily economic generators or infrastructure that accommodates and helps facilitate economic activity and growth? If airports are hubs, they are clearly jobs producers and economic generators.  Without a hub, the airport is primarily a facilitator of economic activity that involves air travel and transport. Obviously, being able to accommodate the demand for travel by inbound and outbound passengers that is organically produced by the local economy and population travel needs is important. Indeed, that is why municipal governments or authorities underwrite or help underwrite the construction costs of airports and related structures.

However, that means demand for air transportation at a non-hub airport will depend on the area’s population, income, employment and businesses and/or amenities that attract out of towners to the area served by the non-hub airport.  Real demand for travel will bring in carriers to provide service. For some destinations, travel demand that is insufficient to make the routes profitable for airlines will go unmet, forcing passengers to use flights with one or more stops or find other modes of travel.

Subsidizing airlines so they can lower the fare prices to fill a plane to desired levels or so they can make a flight profitable with lower than desired loads cannot be justified.  It could well be taking business from existing carriers who could get the passengers to their destination with one stop. Then, too, it represents, in part, an indirect transfer of tax dollars to the passengers using the subsidized flight.

Why should local or state taxpayers underwrite the flights of people so they can avoid using existing options? Or in the case of overseas travel, why should taxpayers subsidize people who are traveling to other countries and spending lots of money overseas?

Money spent on ill-advised subsidies is money that could be used for other justifiable purposes on behalf of taxpayers. Or the tax dollars could have been left in taxpayer pockets in the first place in the form of lower tax rates.

Unfortunately, as has happened at PIT, subsidies beget subsidies. Give it to one carrier and others are bound to show up with their hands out. As the analyst quoted above said, it is a gamble with risks. Airport officials should not be in the business of making unnecessary gambles with taxpayer money. And at the very least, they need to show real and permanent positive outcomes resulting from the subsidies if and when some happen.

Considering the total amount of taxpayer dollars that have already gone into PIT over the years, further use of tax dollars to subsidize carriers and passengers is outrageous.