Wing and a Prayer

Can Humboldt afford to fly?



On an early February afternoon, 4th District Supervisor Virginia Bass found herself in a huge Denver convention hall filled with more than 100 tables. Sitting at each: potential matches. It was like speed dating, and she was prepared, despite the pressure of a giant clock ticking away the seconds of each timed interaction.

Would Bass find the perfect fit out of the dozens of attendees? The answer remains unclear. She wasn't looking for romance, but instead courting representatives from airlines, looking to impress them with Humboldt County's riches and charm.

Bass's whirlwind wooing tour was only the latest in a years-long effort to increase options for Humboldt's would-be flyers. It's been successful on many fronts. Fly Humboldt, the public-private partnership organized to add flight routes into and out of the Arcata-Eureka Airport, has raised more than $1 million to lure airlines to serve the county. But the results of that fundraising and cheerleading have been ... well, it's hard to say. Bass, and her cohorts in the airplane recruitment faction are playing close to the vest. The airline industry has changed a lot in recent years, and companies hold the cards in an extremely competitive market. Any press could wildly swing Humboldt's chances of attracting more air service, insiders say.

Meanwhile, the Aviation Division's enterprise fund, essentially the airports' operating budget, is projected to be nearly $1 million in the hole by the middle of this year. The division is borrowing from its trusts to cover costs, and considering asking for a loan from the county's general fund — a move that would take money away from other county services. The deficit is a result of fewer planes and fewer passengers, officials say. More destinations will turn that around, they insist. But when? And who will benefit? Can the county really afford a commercial airport, or, more importantly, should it?

Many people forget there are six airports operated by Humboldt County's Aviation Division. That includes small "general aviation" airports, which serve private flyers and shipping companies in Dinsmore, Garberville, Kneeland, Rohnerville and on Humboldt Bay, just north of Eureka. The only commercial airport is the Arcata-Eureka Airport on the north end of unincorporated McKinleyville. (County supervisors voted to change the airport's name to the "California Redwood Coast — Humboldt County Airport" two years ago, but they're still waiting on final Federal Aviation Administration approval before they'll officially start calling it that.)

County Public Works Director Tom Mattson is, by default, the interim Airport Manager, since former manager Jacquelyn Hulsey resigned in 2013. Hulsey's position has been frozen since then — a move that allowed the county to continue to employ Aviation Division Program Manager Emily Jacobs, who's been instrumental in the effort to expand service to ACV.

Each of Humboldt's tiny airports requires employees and regular maintenance to keep them up to safety standards, but Eureka-Arcata is by far the costliest line in the Aviation Department budget. That wasn't much of a problem in the early 2000s. The arrivals and departures of multiple airplanes brought in revenues from fuel sales, landing fees and terminal and hangar rentals that covered the county's operating costs. In the 2004-2005 fiscal year budget report to the board of supervisors, the director of public works wrote that "the operations of the county airport system are 100 percent funded by revenues collected at the airports."

At that point, local flyers could get on a plane to San Francisco, Seattle or Los Angeles through Horizon Air or United Airlines. From 2005 to 2009, more than 100,000 passengers (some of them repeat flyers, no doubt) got on planes each year in Humboldt County, bound for those West Coast hubs and beyond.

With air travel buzzing, the Aviation Division announced in 2008 it had worked out a deal with Delta Airlines to connect ACV to Salt Lake City, Utah. In exchange for service, the county offered Delta $1 million in incentives and a $500,000 minimum revenue guarantee. Financed by the Headwaters Fund, it was an insurance of sorts: If Delta's business plan didn't work out, the county would eat the loss.

Two years later, that's exactly what happened. In 2010, Delta pulled its Salt Lake City route. Horizon had ended its Seattle route in 2009, and in 2011 dropped its Los Angeles flights. That left Humboldt County flyers with one option: United Air to San Francisco.

It's arguably Humboldt County's most important hub, but the lack of options seems to have discouraged flyers. Enplanements have been falling since 2009, with just 53,000 people boarding planes out of Humboldt County in 2014.

Jacobs says that reduced service has led people to drive out of the area to catch flights, increasing enplanements at the Santa Rosa airport (which went up 6 percent between 2012 and 2013) and Medford, Oregon (which actually saw a 2 percent decrease in enplanements during the same time period).

It's a chicken-egg problem, she says. "When our community goes to other airports, all they're doing is boosting that airport. More flights and more destinations? We really don't get that until more people fly out [of ACV]."

There's less air service, certainly. But the dwindling number of flyers has to do with perception as well, Jacobs says, adding that misconceptions continue to swirl about the quality and reliability of ACV's air service.

Back-to-back runway improvement projects at ACV and San Francisco over the last several years led to cancellations and delays, which frustrated community members. Those projects are finished now, but the perception that ACV is unreliable — stemming from a 50 percent on-time arrival rate in 2008 — persists. But delays have gone down steadily in recent years; 76 percent arrived on time in 2014, and ACV beat the national average for on-time arrivals in January, 2015.

Another perception that plagues ACV is that fares are rising, and it's very real. The average cost of a one-way ticket out of ACV has more than doubled since 2005, from $129 to $275 in 2013, according to data provided by Jacobs. Part of that is due to rising fuel costs and the financial downturn of 2008, but it's hard to imagine that having an additional airline company serving the community wouldn't create some more competitive pricing.

Much of Jacobs' work consists of going out into the community — to schools, organizations, businesses — to tout the reliability of ACV, pitching for people to utilize the local airport and show airlines that the demand and need for additional destinations exist.

Another major part of her job is selling Humboldt County — hard.

Attracting airlines has become an ultra-competitive sport.

Bass didn't show up in Denver to pitch Humboldt County by herself. She described her role as that of a cheerleader — the smiling face of Humboldt County — but Jacobs was also there, bringing the down-to-business edge necessary to win over airlines.

"It's very important to show airlines love," Jacobs said. "Especially the ones we already have." She hinted that Delta's departure after two years of Salt Lake City service may have been the result of less-than-goodwill from the community.

Jacobs has been trying to rebuild that goodwill, but she also brings her networking and data to those conferences: facts and figures from previous routes out of ACV, the knowledge of airport improvements, and the feasibility of a host of incentives that can be bargained with, depending on the desirability of a route the airline might offer.

"It's a shark tank," Jacobs said. "You go very polished, you know your stuff."

As Jacobs describes it, airline companies have been losing money since the U.S. deregulated them in the late 1970s. The now-defunct regulatory agency had essentially been taken over by the industry, leading to very high fares. In 1978, "Federal controls over the entry and exit of airlines, flight schedules, airfares and quality of service were abolished," according to an article by The Public Good Initiative director David Morris. "Financial oversight was abandoned. Only airline safety remained under federal regulation."

Combined with dropping oil prices and newfound competition, fares plummeted, the standard thinking goes, democratizing air travel throughout the country. Deregulation was lauded across the political spectrum. According to Morris, the act's success goes virtually uncontested.

But, Morris writes (and he cites several studies), the drop in fare prices more or less coincided with falling prices before deregulation. Essentially, Morris says, deregulation led to concentration of ownership of airline companies, and one analyst concluded that the "grant of pricing freedom to the airline industry has generally resulted in average prices being higher than they would have been had regulation continued."

That thinking is becoming slightly broader, but economic debate aside, one thing is indisputable: Humboldt County has few options for air service. Four airline companies control 85 percent of U.S. air travel: Delta, United, American and Alaskan (which owns Horizon). And it's those same big four that Fly Humboldt and the county have pinned their hopes on.

But so has everyone else. Jacobs says there are hundreds of small communities around the country trying to expand air service, many of them with bigger populations (ergo more potential customers) than Humboldt County. Chico, Ventura, Redding and Oxnard — each of which has more than 80,000 residents, not including the surrounding areas — are all trying to expand service, just in California.

"We are so fortunate to have air service at all right now," Bass says.

So airlines, by design or by circumstance, have pitted America's small cities against each other. That means in addition to "showing the love," communities are offering hefty subsidies to airlines.

Jacobs paints a piteous portrait of the airline companies, saying they hadn't turned profits since deregulation, and that the price-wars model of the early 2000s didn't work. Low cost carriers like Southwest came in with older planes and tried to offer as many seats as possible. The legacy carriers couldn't compete, so the big four changed. No doubt, customers used to paying competition-lowered fares are bothered by the recent rise in prices, but they must pay the real cost of flying, Jacobs says.

It seems to be paying off. The airline industry posted record profits of $19.7 billion in 2014, up 50 percent from the year before, according to the Economist. The companies' biggest cost is jet fuel, and they operate on a fairly small margin, so much of their success depends on year-to-year fluctuations in oil prices.

But airlines are getting a lot more than just rising fares. It's now essential, everyone agrees, to offer a minimum revenue guarantee for an airline to even consider new service to an area.

Small planes aren't profitable like the big jets that fly out of San Francisco and New York, Jacobs says. Airline companies operate on small margins and an economy of scale. One industry association estimates that airlines profit about $6 per passenger, per flight. So when airlines offer regional service, like out of ACV, they're most often trying to get those people onto a connecting flight, where the profit margins are higher.

"They're not subsidized to have empty seats," Jacobs says. "They want a body in that seat that's connecting onto somewhere else."

A minimum revenue guarantee, or MRG, "ensures the airline that there's a huge commitment in making [a new route] successful," she says.

Gregg Foster, a banker who's worked on securing airline service since his time as the Redwood Region Economic Development Commission in the mid 2000s, said American Airlines came knocking in 2012. Foster (who's now married to Jacobs) had been flown to a meeting with the company in Tampa. "They were ready to sign a contract," Foster saiys, but it was too soon. The company wanted a $2 million revenue guarantee. "There just wasn't community commitment at the time. American felt burned. They tipped their hand to their competitors. We would have had twice-daily jet service to L.A. in fall 2012 or winter 2013."

That's when Fly Humboldt took off. The organization of public and private partners saw a need to have cash ready so ACV wouldn't get turned down again if an airline felt the timing was right.

The group began fundraising and putting money into a Humboldt Area Foundation-managed bank account. The group raised enough to earn a matching $125,000 Headwaters Fund grant, but donations had stalled again by 2014. Headwaters offered an additional $125,000 grant and Virginia Bass got involved late last year. "We started — I don't want to say pressuring — we started reaching out to people," Bass says.

In January, Fly Humboldt announced it had reached its $1 million goal. Many donations were under $1,000, but, in addition to the headwaters grants, notable donations included $320,000 from the Humboldt County Convention and Visitors Bureau, $80,000 from the city of Arcata, $80,000 from the Humboldt Lodging Alliance, $15,000 from Humboldt State University and $10,000 from Murphy's Markets.

People felt burned when Delta left, Bass says, "The agreement wasn't negotiated where it protected the county enough."

Jacobs says the county learned from a couple of problems with the Delta contract. With future contracts, the county will seek to reconcile its minimum revenue guarantee on a monthly or quarterly basis, rather than at the very end of a contract, "so you can tell how fast you're going through that money," Jacobs says.

More frequent reconciliations give the county a little more negotiating power over fare prices. Delta's flights to Salt Lake City were pretty full, she says, but the airline wasn't meeting its revenue goals because fares to East Coast destinations were low — around $300.

"The other thing is ancillary costs," Jacobs says — baggage fees, on board meals and other items the airline charges passengers. "Those were not included in the revenue for those flights. Had that been included we would've been less likely to pay that money."

Bass has confidence in Jacobs to negotiate a beneficial contract. "It's not just a blank check when we structure it right," she says.

Foster says American is "talking to us again," but says it's an example of how cautious airlines are about community perception, press and their competitors.

Jacobs says it's hard for her to return from meetings with airlines and stay tight-lipped. She won't talk about the specifics of any current contract negotiations — including which airlines she's talking with. Neither will Bass, except to say she was feeling "jazzed" after the last conference.

But even though the county has money to offer airlines, a minimum revenue guarantee is no service guarantee. Pretty much every community serious about adding service has a million dollars to offer now, Jacobs says. That's in addition to Humboldt's policy of waiving terminal rent and landing fees for two years to incoming airlines.

"Unfortunately, our history is that we haven't treated our airlines very well," Foster says. "Generally, small airports need airlines more than they need us. Treat them well with basic customer service and they appreciate it. In a time [of] lots of pressure on margins, don't start raising fees. We'll make money on parking, ancillary fees."

With a deficit in the Aviation Division projected to reach nearly $1 million by the end of the 2014-2015 fiscal year, can the county really afford to waive fees to entice airlines?

In 2004, the division's operating costs were fully covered by revenue. But by the 2012-2013 fiscal year, Public Works was bemoaning dwindling returns. "As a result of Delta Airlines ceasing air service from the Arcata-Eureka Airport in 2011, enplanements have decreased by 10 percent, thereby decreasing landing fees, parking and rental car revenues," a budget proposal read. Homeland Security funding to assist a sheriff's deputy position at the airport also declined.

Currently, six Aviation Division positions (including that of the airport manager) are frozen in an attempt to manage the budget. In an email, Public Works Director Tom Mattson wrote, "The operational budget has been hit hard by three main items starting with the loss of Delta flights to Salt Lake City then the loss of Horizon flights to Los Angeles and most recently the reduction in fuel sales to the Coast Guard as they have constructed their own fuel tank. ... We have trimmed the expenses to minimal levels."

Public works suggests that additional air service will balance the budget, but the Aviation Department is still operating at a large deficit. Mattson says the loss of a secondary airline has cost the county $250,000 per year — but that's only a quarter of the deficit projected for the end of this fiscal year.

"The simplest answer is to bring in other destinations," says Bass. But asked if additional destinations would make enough revenue to cover the deficit, she says, "I hesitate to make a guess."

United service brings in about $252,000 per year to the Aviation Division. The revenue from additional service would fluctuate depending on the size of planes and the frequency of flights, but Mattson says a quarter-million in additional revenue is a good benchmark.

That won't be an immediate injection of cash due to two-year fee waivers offered to attract airlines, but Mattson says more routes would increase parking and rental car income, as well.

Still, the division, which began this fiscal year with a $525,000 deficit, is projecting a further loss of $428,000. Some of that, according to a budget report, is due to a one-time, $145,000 tree trimming project to bring ACV into FAA compliance. That leaves the yearly deficit at around $283,000 — greater than the amount the Aviation Division anticipates gaining in additional airline revenue. The Aviation Division's enterprise fund is projected to have an ongoing annual structural deficit of more than $700,000 for the next five years.

The division is borrowing from trust funds it manages to cover costs, but anticipates seeking a loan from the county's general fund as the gap continues to widen.

"We are working to try to keep the deficit from growing, but it will grow this year," Mattson wrote in an email. "In addition to recruiting for additional air service, we are looking at trying to increase revenue from our land base by leasing additional properties and looking hard at our unreimbursed mandated security costs and how those can be reduced."

If the airport's revenues don't increase, Humboldt County taxpayers will be spending a lot of money to subsidize air service. Donations for an MRG are costs that the businesses who donated to Fly Humboldt may see returned in the form of more convenient air travel and competitive fares. But what about the average Humboldt County resident?

That's an area that's sorely lacking in hard data. While the Aviation Division gladly shows records of how many people board and disembark from planes at ACV, it's unclear how many of those people are repeat flyers, how many are county residents, and what their ages, incomes and reasons for flying are.

Did nearly 40 percent of Humboldt County's population fly out of ACV last year? Or were the more than 50,000 passengers frequent flyers? It's unclear.

"There were a lot of opportunities for research we didn't take advantage of," Bass says, when asked about the demographics of Humboldt County residents who use the airport regularly.

The Humboldt County Convention and Visitors Bureau — the largest donor to Fly Humboldt's MRG fund — did not return calls seeking comment before deadline.

It's unclear how long it will take to secure additional air service — if an airline company succumbs to Humboldt's lures at all. Most people agree L.A. is a preferred destination, but those involved in negotiations with airlines won't talk specifics.

As for the Aviation Division, Bass says there's talk about restructuring as a means of ending the deficit, though it's unclear exactly how that would help. She's trying to get more information on how other communities operate their airports.

One idea is handing operations over to a new special district, like the harbor district. That could fund airline subsidies and airport operations through voter-approved property assessments, for example — putting the brunt of public flying costs onto those more likely to utilize the service.

And while most of the energy is being spent on the airline industry's big four, Bass and Jacobs are not discounting other ways to add more destinations, like chartering planes or looking to small airline startups.

They'll continue to sell Humboldt's advantages to airline companies. They've learned from previous mistakes, they say, and have the basic funding they need to seduce airlines.

If a route's successful, Fly Humboldt won't have to touch its pledged $1 million revenue guarantee. That money can be put toward more destinations, marketing the airport to tourists, or encouraging travel by subsidizing low-cost flights in the off-season.

There's a conference in Seattle this June. Bass hopes she'll be invited along for another speed-dating session. Fly Humboldt's successful fundraising left her enthusiastic, but she's anxious to stop the Aviation Division's budgetary bleeding, to ink a deal with an airline and to announce a victory.

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