Airline Service In Smaller Markets Takes Nosedive

It's happening in practically every city: Flights are vanishing.

Fuel costs have doubled since just last year, and that's already forced eight carriers out of business and two more into bankruptcy. The rest are trying to stanch the flow of red ink by hiking fares, slashing payrolls and lopping off routes that lose money.

Big-city travelers will still have options. They can switch airlines or fly through different hubs. But in small- and medium-sized cities, it may not be that easy. The planes that serve them burn a lot of fuel just taking off and landing. And the craft might be small, but they still need pilots, co-pilots and flight attendants, so labor costs per passenger can be sky-high.

Airlines are doing the math, says Vaughn Cordle, CEO and chief analyst for AirlineForecasts LLC, which monitors industry trends.

"These airlines have no choice but to start pulling down their least efficient, biggest money-losing routes, which are the small aircraft in those short-haul routes into small- and medium-sized cities," Cordle says.

An Air Of Despondency

Airport directors gathered in Washington recently to talk about what's happening in their towns.

"At $130 a barrel for oil, the airlines tell me that there is no business model that works," says Tom Greer, general manager of the airport in Monterey, Calif. "We've already had our first casualty. ExpressJet announced that they were ceasing operations in September. They were pulling out of over 30 markets. It wasn't just Monterey."

"I'm just devastated," says Rick Griffith, manager of the airport in Butte, Mont. "Because companies aren't going to move to an area that doesn't have good air service."

Skip Miller, executive director of the Louisville (Ky.) Regional Airport Authority, compares the situation to that of the railroads 100 years ago: "If you didn't have a railroad and you weren't connected to the rest of the rail system in the country, your community died."

The smallest cities, in the most remote places, may be hit hardest of all.

"We depend on aviation to get to the majority of our communities — 280 of our communities. It's the only way in and out," says Christine Klein, who helps oversee Alaska's state-run airport system.

The federal government actually pays airlines to keep serving communities like these. It created a subsidy program called Essential Air Service in 1978, when it deregulated the airline industry. But most subsidies can't exceed $200 per passenger, and with today's fuel prices, many carriers say that's nowhere near enough. So they're giving up.

Klein says they've already backed out of contracts to fly into three communities in her state. "Basically, what that means is that those communities have no service at this time at all, and so it is truly a coming crisis for us," she says.

Government Intervention?

The question is what to do about it. Some lawmakers believe the government needs to step in.

"The airspace is the common heritage of all Americans," says Rep. Jim Oberstar (D-MN), chairman of the House Transportation Committee. "It doesn't belong to the CEOs of the airlines. It doesn't belong to the shareholders of the airlines. It belongs to all Americans."

Unless something's done, Oberstar says, more and more Americans are going to be left out. But he doesn't want to re-regulate the airlines, exactly. Instead, he's pushing to expand the Essential Air Service program. The House has already approved legislation that would boost the subsidies. Lawmakers are also considering changing the rules so that more airports qualify.

Some question whether it makes sense to keep planes flying where the market says they shouldn't. Thomas Firey of the Cato Institute says that in most places, Essential Air Service isn't essential and is a waste of money.

"On average, only three passengers are flying each of these flights, so we're paying a significant subsidy to fly mostly empty airplanes," Firey says. In most states, he says, air travelers simply drive to nearby cities to catch flights.

"Consumers have already backed out of this; they're already going to the major airports," he says. "The only people who can't seem to back out of it is Congress, because this is a nice little gift to give their districts."

Oberstar calls that attitude "elitist" and says it shows contempt for small-town America.

But there may be limits to what the government can do. To break even in some smaller markets, airlines may need to double — or even triple — airfares. That still may not help much. When tickets are too expensive, people think twice about flying. Empty seats could cost the airlines even more money and force them to cut service to even more communities come winter.

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