February 19, 2018

Aer Lingus taps $4.5M state subsidy after direct flights miss revenue target

Photo | Contributed
Photo | Contributed
An Aer Lingus jet taxiing at Bradley Airport in late Sept. 2016, when it began flights out of the Windsor Locks airfield. Aer Lingus missed its first-year revenue target. (Below) Connecticut Airport Authority Executive Director Kevin Dillon said it's not uncommon for airlines to tap revenue-guarantee subsidies.
Photo | HBJ File
Connecticut Airport Authority Executive Director Kevin Dillon.
Photo | Contributed
Connecticut officials, including DECD Commissioner Catherine Smith (left), have been encouraged by Aer Lingus passenger traffic as the airline turned the page on its first full year of operations out of Bradley International Airport.
Photo | Contributed

Aer Lingus' spending requirements

In exchange for its revenue subsidy, the state Department of Economic and Community Development requires Aer Lingus to contract with a variety of Connecticut companies.

The airline is required to spend at least $3.3 million a year for the following services:

• At least 135 man hours per week with a Connecticut-based ground handler for check-in, boarding and passenger service requirements;

• At least 13 man hours per week with a Connecticut-based cleaning company;

• At least 221 man hours per week with a Connecticut-based catering company;

• At least six man hours per week with a Connecticut-based transport company to transfer crew from Bradley to hotels and back;

• At least 42 hotel rooms per week on average for Aer Lingus' crew at downtown Hartford hotels;

• All fuel and food consumed on outbound Dublin flights must be purchased from a Connecticut-based company.

During its first year flying to Dublin, Ireland out of Bradley International Airport, Aer Lingus missed its revenue goal, triggering a $4.5 million subsidy from the state, the Hartford Business Journal has learned.

The payment, which is pending from the state Department of Economic and Community Development (DECD), is part of a $13 million incentive deal inked between state officials and the Irish airline to woo it to Bradley, where flights began in Sept. 2016. Revenue subsidies make up the bulk of the two-year deal, at $9 million, with the rest comprised of marketing incentives and airport fee waivers.

Revenue-guarantee subsidies have become more common in the industry, particularly for smaller and mid-sized airports, though this is the first deal of its kind in Connecticut.

Kevin Dillon, executive director of the Connecticut Airport Authority, said it's not uncommon for airlines to miss revenue targets built into the deals, which are designed to reduce the financial risks of a new service.

"I think from a revenue guarantee standpoint, this is typical," Dillon said. "You typically find that airlines have to draw on it."

State officials said they hoped to see the Dublin service draw higher revenue in the first year. Nonetheless, they have decided to move ahead with the second year of Aer Lingus' revenue-subsidy deal, pointing to a recent uptick in passenger traffic as a sign for optimism.

The deal "absolutely" provides value to the state's economy, DECD Commissioner Catherine Smith said.

"I think there is a gigantic payback for the state — it creates jobs in the local market and I hear from business travelers who use it that they love to go out of Bradley," Smith said. "I would certainly have liked to not have to provide the full $4.5 million, but hopefully the full number won't be needed in year two."

Indeed, Aer Lingus passenger traffic is up 8 percent in the first quarter of its second year (Oct.-Dec. 2017), according to data published by Bradley Airport. January and February passenger data were not yet available.

Smith said launching the service just ahead of the tourism off-season may not have been ideal timing.

Aer Lingus decided to reduce flight frequency for the first two months of this year, from four round trips per week to three, which the airline says is a response to off-peak seasonal demand. The airline's contract with the state, obtained by HBJ, appears to allow Aer Lingus to run three flights a week all year, if it chooses, but airline spokesman Declan P. Kearney said flight frequencies will return to year-one levels next month (four round trips per week in March and daily round trips from April to October).

Kearney said the Hartford-Dublin route "has performed in accordance with expectations since its launch."

He said the airline, DECD and Airport Authority have met their commitments and that Aer Lingus is "encouraged by both the performance of the route to date and its positive relationships with the state and the CAA."

Aer Lingus is now about halfway into the second and final year of that revenue-subsidy deal, which state officials said in 2015 would be built around the amount of revenue Aer Lingus would need to break even on its new service. DECD and the airline negotiated revenue targets in advance of the service launching.

The airline could receive up to $4.5 million in its second year, if it misses its revenue target by that much.

Year-one targets

According to the Aer Lingus-DECD contract, the airline has a revenue target of $134,550 per round-trip flight (assuming an exchange rate of 1 Euro = $1.15).

Aer Lingus' contract required it to run about 300 round-trip flights in its first year, producing an annual revenue target of approximately $40 million.

While a $4.5 million payment means Aer Lingus missed that target by at least 10 percent, the exact extent of the gap is unknown. Neither DECD nor Aer Lingus would say how much revenue the flights brought in during the first year.

Aer Lingus Chief Commercial Officer Keith Butler (who has since left the company) told HBJ in 2016 that the the airline hoped to fill 105,000 seats in its first 12 months. Bradley data shows that it filled about 77,000.

Dillon: Get used to incentives

The Connecticut Airport Authority has sought to leverage Aer Lingus' Dublin service as a way to attract other flights for which it says there is demand.

International flights have a positive impact on Connecticut's economy, and Aer Lingus' service has caused other airlines to kick the tires, said Dillon, the CAA chief.

CAA is pursuing nonstop service to the European hubs of London, Paris and Frankfurt. On the domestic side, it wants to attract more frequent service to Los Angeles and San Francisco and new nonstop service to Seattle.

But even strong demand indicators and a great pitch are often not enough to convince airlines to launch or expand service out of Bradley, Dillon said. Desirable routes are highly sought after, and airports and economic development agencies in other states are increasingly willing to make counter offers. In that environment, airlines can afford to shop around, Dillon said.

Dillon said in written testimony this month to the state Commission on Fiscal Stability and Economic Growth that for international and domestic flights alike, many airlines are looking for minimum revenue guarantees, akin to the Aer Lingus deal, in addition to marketing incentives and fee waivers.

"Unfortunately, the competitive nature of the industry has created expectations for airports to offer incentive assistance when pursuing new services," Dillon wrote to the CEO-led commission, which is expected to make recommendations to the legislature soon on how to make the state more economically competitive. "It has become readily apparent that all of these services may require new revenue-guarantee arrangements."

Dillon wants the legislature to do what a handful of states have done, including Rhode Island in 2016: establish a "route development fund" to help draw new routes to Bradley.

The legislature could seed the fund or provide initial appropriations, while businesses could also donate money.

Bradley has intensified its outreach efforts to businesses in recent years, but Dillon says a fund is needed to combat Bradley's tough competition from Logan International Airport in Boston and John F. Kennedy International Airport in New York.

Though Bradley is closer for many, and offers cheaper parking, corporate travelers often choose to fly out of New York or Boston airports because of differences in fares, flight times or other reasons, he said.

"We understand that our fares may not always be the absolute cheapest in the region. We understand that sometimes we offer a red-eye rather than a more desirable flight time," Dillon wrote. "But, if you choose another airport instead, we will never be able to demonstrate to the airlines that our market is strong and that our airport is ready for the services that you seek."

Asked about Dillon's recommendation, DECD's Smith was hesitant.

"I see Kevin's point, but I don't know if we want to get into a bidding war in airline service as we have in other ways in economic development," Smith said.

She said Bradley has managed to attract new service without revenue subsidies, including United's seasonal service to San Francisco and Spirit's seasonal service to the Gulf Coast. It also landed Norwegian Air service to Scotland, but that route will end in March, blamed on high air taxes charged by the Scottish government.

"I don't think it's necessary all the time and I don't think they expect it all the time," Smith said.

She said she would prefer assessing such deals on a limited, strategic basis.

Dillon said not every flight will need a subsidy and that market forces and demand will drive the decisions.

"The reality is, no flight is going to survive solely on a revenue guarantee," he said.

Read more

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