Posted: February 25, 2002

For the sake of argument, assume that you're taking a business trip from Richmond to Atlanta and back again in one day. And say, for the point of discussion, that you have to take that trip tomorrow, which for the purposes of this article is Feb. 20.Leave from Richmond and your round-trip fare will be $1,122 on Delta.But scoot on down Interstate 64 to Newport News/Williamsburg International Airport and that same round-trip fare will cost $387.50 on the same Delta airline. It's also the same price on discount carrier AirTran Airlines.So how does the Newport News airport, long considered an also-ran since its days as Patrick Henry Field, offer a vastly superior deal? How does Richmond, with its much larger business and legal community and millions in air-travel expenditures, get stuck with a $734 higher price?Simple: Old-fashioned government intervention.The secret is Newport News' long relationship with AirTran, which dates back to when the airline was the struggling ValuJet. The airline shut down operations at the Newport News airport before it changed its name to AirTran in 1997. In its efforts to lure it back, Newport News offered AirTran revenue guarantees in exchange for service. Simply put, Newport News guaranteed that AirTran could fill a certain number of seats every year. If the seats didn't get filled — which rarely ever happens — then Newport News promised to make up the difference. This practice, which started at airports near tourist destinations to lure casino travelers, has spread to cities such as Rochester, N.Y., and Tallahassee, Fla.It seems to work. The airport gets its discount service, and the airline has the risk of entering a new market drastically reduced. Could a subsidy system also work at Richmond's airport, which has long suffered from pricey airfares due to the lack of discount service?From AirTran's perspective, the answer appears to be "yes." Not surprisingly, AirTran has strongly embraced revenue guarantees and now seeks similar incentives from cities attempting to lure it, said Tad Hutcheson, director of marketing for the Orlando, Fla.-based airline."We're looking for what we call public-private partnerships," Hutcheson said. Why? Since AirTran can only afford to add a few new cities a year, the guarantees reduce risk considerably."I think we're blazing the trail," Hutcheson said. Jim Evans, manager of business development for the Peninsula Airport Commission, concurred. Since the city started guaranteeing AirTran's revenues, it has become a model for other airports around the country. "They did some creative things to get AirTran," said Evans, who wasn't around when the incentives first started. "Back then, it was not the norm to throw incentives to airlines for new service."Why not Richmond? Four years ago, Richmond had discount fares without subsidies.In April of 1998, AirTran began flying from Richmond to Atlanta, connecting to most cities in the Southeast with fares of less than $100. It was a hit, so much so that the fares were quickly matched by the larger Delta. But after the service began, George Hoffer, a Virginia Commonwealth University economics professor who follows transportation, noticed that AirTran competitor Delta changed the planes that were serving Richmond. Instead of smaller MD-80s, the airline brought in larger Boeing 727s with more seats."Delta would match price, but more importantly than matching price, they would increase capacity," Hoffer said.The effect was devastating. The smaller AirTran, in the throes of a merger with struggling ValuJet, announced it would leave Richmond and Norfolk to concentrate service in Newport News, with its revenue guarantees. AirTran left Richmond in January of 1999."Effectively, they were driven out," Hoffer said.Hoffer said that AirTran's Richmond passenger loads were comparable to Newport News, making the revenue guarantee critical to Newport News keeping the airline.When an airline enters a new market, it typically loses several million dollars on a new route, AirTran's Hutcheson said. However, revenue guarantees eliminate that risk.The plan is simple — after the cost of a particular route is established, an airline and a city make a deal to guarantee that costs are met. If the route meets the goal, no money changes hands.Indeed, the idea of subsidizing carriers crossed the minds of Richmond airport officials, who have fought for years to bring a discount carrier to Richmond."We decided not to go the subsidy route because it would set a bad precedent," said Beverley "Booty" Armstrong, owner of the Jefferson Hotel and a member of the Capital Region Airport Commission, which operates Richmond International Airport.It was not so much a philosophical decision against guarantees as it was a question of how they would be perceived by the other airlines that served Richmond, Armstrong said. He, too, might have supported revenue gaurantees in Newport News' position, as AirTran was its only jet service."Newport News didn't have that much to lose," Armstrong said.And there was another big consideration — federal aviation regulations.Under federal law, airports are not allowed play favorites with airlines, said Troy Bell, director of marketing for the Richmond airport. The airport cannot enter into contracts that favor one carrier over another.For example, Allentown, Penn., had to discontinue offering subsidies at its airport because it was deemed illegal, said Brian Busey, an aviation attorney and partner in the Washington, D.C., law firm of Morrison & Foerster."That was found to be unlawful revenue diversion," Busey said. "What an airport cannot do is pay direct payments to airlines."Airports do have some options to lure carriers, but these incentives must be offered to all carriers. "They have to be operated in a non-discriminatory fashion — you have to target it at new services," Busey said. Newport News gets around the federal rule because AirTran is guaranteed revenue through the city's Industrial Development Authority, and not the airport. It used that method just this year when it announced that AirTran would add one flight a day to Orlando and two to New York's LaGuardia Airport. All told, it was a $1.5 million revenue guarantee, which amounts to about $4,800 per flight, an expense Newport News doesn't expect to have to pay. Could Richmond devise a similar arrangement? Art Warren, a member of the Chesterfield County Board of Supervisors and chairman of the Capital Region Airport Commission, says it wouldn't be fair to the other airlines. "It's a fairness issue," Warren said. "We prefer the approach of the free-market system guiding and providing leadership for what airlines serve Richmond."Airline poaching Some observers, however, see that mindset changing in the near future. After Sept. 11, airports outside the top markets have been starved for service, Busey explained, which could add a new twist to the debate. Studies show empirically what everyone already knows — that a vibrant airport is critical for business development."Having good air service is very important to a community," Busey said. "This is a key to economic development." Newport News' Evans agreed. AirTran has become a real asset for the Peninsula. "AirTran has turned into quite a valuable commodity," Evans said. As the airline industry consolidates in the wake of new security measures and other expenses related to the terrorist attacks, Busey expects more intense competition between cities for service. With this new pressure, Busey predicts so-called "origin and destination" routes (the term for travel between two cities without a hub) being poached and moved to nearby airports in smaller towns.Indeed, this happened with AirTran.Bell cited the case of Fort Walton Beach and Pensacola, Fla. The towns got into a bidding war for service from AirTran, with each town's business community ponying up money to lure the discount airline. In Pensacola, business leaders even held telephone pledge drives to build a multimillion dollar "pledge bank" that would guarantee service for two years.Pensacola won. Fort Walton Beach, which could only offer $500,000, lost its shot at AirTran.Community pledges aren't subject to federal law. And there's nothing stopping the Richmond business community from doing the same thing to lure a discount airline such as AirTran, said Richmond airport's Bell. "There's nothing that prohibits an airline from seeking out large corporate users," Bell said.Because Southwest Airlines promises it will soon come to Richmond, the city isn't as desperate for a discount carrier as it once was. But Hoffer said that a corporate commitment to an airline would likely lower fares all around. "I was surprised that our Richmond business community did not do more for AirTran," Hoffer said. "For low prices, you need a viable discount carrier."