(Friday’s Populist Capitalist Blog Post)
The City of Portland’s port authority is scheduled to pay $3.5 million to Delta to persuade the airline not to cancel its daily, non-stop flight to Tokyo in September 2009. (The Wall Street Journal: Air Hubs Pay to Keep Their Spokes, July 10, 2009.)
Mind you, you could still get to Tokyo from Portland, Oregon, without Delta, you’d just have to suffer the “indignity” of going through (gasp!) Seattle or (horrors!) Vancouver. Of course, you’d spend an hour or two more on the trip (12 hours and 20 or 40 minutes, depending on the city) with the stopover versus 10 hours and 40 minutes for the direct. BUT you’d save big money too: Delta’s direct is $2,251 vs. $1,041 with the stopover. (See my non-scientific one try data run via Expedia below.)
Why is Portland willing to lavish $3.5 MILLION of the citizens’ money on Delta? And in the middle of the worst economic crisis since the Great Depression? Well, they claim it is because “direct Tokyo flights generate $61.2 million in annual economic impacts to the region.” Lay aside the fact that such studies are notoriously inexact. The rare follow-up study by an independent, objective third party generally has a hard time finding anywhere near the level of impact projected. And forget the inherent suspect nature of any study where those conducting the study are chosen with an ax to grind and the outcome (surprise!) supports the position of those paying for the study.
Instead, let’s look at the numbers. Remember, the $61,200,000 number is a) just someone’s best guess about a possible future while the $3,500,000 number is cold hard cash that is gone, gone, gone in the immediate now, now, now. Even more important, the $61,200,000 is an estimate of a REVENUE number NOT a PROFIT number. It amazes me how often people mix up the two or shift back and forth between them without adequate documentation or analysis.
Even if the $61.2 million of revenue were a real number (and I assure you it is not), local merchants would have to make at least a 5.7% profit from that revenue ($3.5M/$61.2M = 5.72%) in order for it to be an overall breakeven proposition. Right now, 5.7% net profit margin looks pretty good, but I’m not sure that too many businesses are able to hit that margin, day in and day out. Of course, that is overlooking the fact that profit to local merchants is not the same as tax revenues back into the pocket of the City of Portland or its port authority.
If the numbers don’t make sense (and they don’t), then why is the Port Authority of Portland willing to fork over $3,500,000 to Delta?
1. It ain’t their personal money, it’s the someone else’s, and
2. Prestige! Ego!
The $3.5 million payday to Delta will allow “Portland to continue being the country’s smallest city with both trans-Pacific and trans-Atlantic air links.” Portland’s self concept as a city of importance evidently had already taken too much of a hit to be able to endure any more slights since Portland had lost a direct link to South America last year and Lufthansa is planning to end its direct flights to Frankfurt.
This is the kind of misplaced municipal chest puffing that leads government to practice deplorable corporate welfare with hundreds of millions of dollars in subsidies for sports stadiums to bring or retain professional teams.
Two more points:
1. Portland’s pact extends Delta’s Tokyo service ONLY from September 2009 to May 2010 ($3.5 million for just 9 months???), AND
2. FAA regulations require that the Port Authority would have “to offer the same financial support to any other carrier that wants to offer the service.”
10:15 am Depart Portland (PDX) Sun 12-Jul Alaska Airlines 2450
Arrive Tokyo (NRT) 2:35 pm +1 day Japan Airlines 17 Connect in Vancouver
Duration: 12hr 20mn
2:15 pm Depart Portland (PDX)Sun 12-Jul Delta 3785 Nonstop
Arrive Tokyo (NRT) 4:55 pm +1 day
Duration: 10hr 40mn
Air Hubs Pay to Keep Their Spokes
By JOEL MILLMAN and MIKE ESTERL
The Wall Street Journal
July 10, 2009
PORTLAND, Ore. — Portland is one of a handful of cities willing to pay big bucks to keep it connected with the rest of the world.
The city’s port authority voted this week to make a one-time cash payment of $3.5 million to Delta Air Lines Inc. to maintain the city’s only direct link to Asia, a daily nonstop flight to Tokyo that the carrier had planned to terminate in September.
Deutsche Lufthansa AG confirmed this week that it would end its Portland-Frankfurt route in September because it wasn’t profitable, leaving Delta’s nonstop to Amsterdam as Portland’s sole direct link to Europe. Last year Portland lost its only scheduled nonstop service to Latin America, a Mexicana Airlines flight to Guadalajara.
Smaller cities are ramping up subsidies to keep airlines from cutting routes as a stiff recession sends air traffic tumbling. “Airports are desperate,” said Brian Busey, co-leader of the aviation practice at the law firm Morrison Foerster LLP in Washington.
Incentive programs have become increasingly common in recent years as airports and communities recruit carriers to fly routes that wouldn’t otherwise be profitable. A longstanding federal program also provides funding to connect small cities by air.
But the Portland pact with Delta points to a new trend in which airports are giving away money to simply retain airline routes rather than recruit new ones. The direct payment also departs from typical deals that waive landing fees, share in marketing expenses or provide revenue guarantees.
Peter Kirsch, a partner at Kaplan Kirsch & Rockwell LLP in Denver, said his law firm is advising “several” U.S. airports on possible retention deals with airlines on domestic and international routes. Portland’s pact extends Delta’s Tokyo service until May.
In lobbying for the deal, Port of Portland officials said direct Tokyo flights generate $61.2 million in annual economic impacts to the region, helping local companies more effectively compete in the global marketplace.
David Zielke, Port of Portland’s manager for air services, told port commissioners the pact would allow Portland to continue being the country’s smallest city with both trans-Pacific and trans-Atlantic air links. The city has about 575,000 residents, with a metro-area population of more than two million.
Recession-battered airlines are expected to post $9 billion in losses globally this year, including a $1 billion loss among North American airlines, according to the International Air Transport Association. Passenger revenue globally and in the U.S. fell about 30% in May from a year earlier.
Airlines are continuing to scale back flights to trim losses. Seat capacity has shrunk by more than 5% since last year. But midsize airports have suffered a particularly steep falloff in international passenger traffic. Scheduled cross-border flights at such U.S. airports — including Portland’s — are down 25% this month from a year earlier, according to the Airports Council International-North America, an umbrella group for airports.
Major airlines’ traffic through Portland declined nearly 6% last year to less than 10 million passengers, said Bill Wyatt, executive director of the Port of Portland. Through the first six months of 2009, traffic was down 13% from a year earlier, he said.
Tucson International Airport in Arizona is weighing an incentive program to try to restart cross-border flights. Despite its name, the airport hasn’t had any international routes since Aeromexico stopped flying to Hermosillo, Mexico, in September.
Myrtle Beach International Airport also doesn’t have any international flights, but it hopes to attract some new cross-border routes through an incentive program that was renewed last month and offers steep fee discounts. Allegiant Air launched domestic service to the South Carolina beach resort this spring after accepting such incentives.
Pittsburgh International Airport inked a pact with Delta in February to launch service to Paris — the city’s first direct European link in several years. To attract Delta, the airport authority agreed to waive landing fees for two years and kick in $300,000 in marketing funds. A local economic-development group provided revenue guarantees.
Such incentives are “especially important given the current economic recession,” said Deborah McElroy, a vice president of policy in Washington at Airports Council International, the industry group.
To pass muster with the Federal Aviation Authority, Portland wasn’t allowed to use airport revenue to pay Delta. The money will come from general funds of the Port of Portland. It also would have to offer the same financial support to any other carrier that wants to offer the service.