Cabinet for Economic Development officials and residents in the swath of the state that radiates out from the commonwealth’s largest city believe Kentucky’s business climate would improve to 72 and sunny year-round if airlines provided more non-stop passenger service to and from Louisville International Airport.
State and local officials who focus on business creation and growth as well as a long list of executives who run Kentucky airports all made it clear they believe economic growth has been hampered – and will continue to be – unless it becomes far easier for business travelers to get in and out of the state quickly and efficiently.
“The data is indisputable in terms of the correlation between air access to major markets and economic growth,” said Terry Gill, secretary of the state’s Cabinet for Economic Development. “What we’ve seen is the business community telling us, quite honestly, that this is a major issue in Louisville. What we’re hearing from business leaders is, ‘I can’t get to the markets I want to serve from Louisville.’ ”
In an effort to attract more flights, the state as well as government and business leaders in Louisville announced a Minimum Revenue Guarantee (MRG) program in July designed to entice airlines to provide more service to the state’s largest city. Gill and Luke Schmidt, the consultant leading the newly created Louisville Regional Airlift Development (LRAD), said the organization’s top priority initially would be to use the MRG inducement with airlines that can offer non-stop service to Boston and Los Angeles.
MRGs allieve budget uncertainty for air providers. If traffic does meet the agreed upon revenue minimum, local entities such as LRAD commit the difference to an escrow-type account. The commitment decreases when traffic generates more than the minimum.
The Kentucky air service problem, both Gill and Schmidt point out, extends to the much larger issue of overall population growth and is more than whether business travelers must devote three extra travel hours to, for example, flying from Louisville to Seattle.
Economic growth, job growth and population growth all are linked, according to Gill and Schmidt, who were interviewed separately but provided similar data that had been collected to support the creation of the LRAD, which will oversee the MRG air service recruitment program.
Others grew via air service
Other mid-sized U.S. cities have shot ahead of Louisville in population and economic growth over the past 35 years after they adopted strategies including “air travel as a growth tool,” Schmidt and Gill said. They mention Nashville especially, along with Raleigh and Charlotte in North Carolina, and Austin, Texas, as metropolitan areas now substantially larger than Louisville’s.
“I think that it’s not a stretch to look at population growth as an indication of economic advancement,” Gill said. He provided data that showed dramatic increases in the populations of the cities mentioned as well as the explosive growth of “enplanements” – the number of people who boarded aircraft in those cities.
In numbers of regularly scheduled nonstop flights, Louisville has fallen behind nearby cities that now attract Louisville travelers because of their flight availability, according to Schmidt and Mary Ellen Wiederwohl, chief of Louisville Forward, the economic and community development agency inside metro government, and a member of the 19-person LRAD board.
After Frontier Airlines announced in mid-July it would offer nonstop service to Denver, the Louisville airport said it had 28 nonstop flights, half the number of nonstops available at the Cincinnati/Northern Kentucky International Airport, which is 90 minutes from Louisville International. Indianapolis has 47 nonstop flights, while Nashville emphasizes it provides more than 50.
Besides making travel to and from Louisville far easier for people doing business in the U.S., nonstops to Boston and Los Angeles would facilitate international travel because those cities are key connecting points for air service to Europe and Asia, Gill said.
“Foreign direct investment is a big component of our growth this year,” said Gill, pointing to the $6.8 billion worth of economic development projects that already have been announced for 2017, when the total will “obliterate the previous high-water mark” for business investment. “About a third of that is coming from Europe and Asia,” he said.
“Not all businesses obviously have a national or international aspect … but if companies do have business on a national basis or they do business internationally, it’s (air service) a top-three issue,” the cabinet secretary said.
A tool for competitiveness
Gill and Schmidt both also said the effort to bring more flights to Louisville is one more example of how Gov. Matt Bevin is trying to make Kentucky more business friendly.
“Obviously Kentucky is a changing state. We have a stronger pro-business climate than the state did two years ago (and) … Kentucky now has right-to-work, which is a big, big issue – a big, big deal,” said Schmidt, referring to the January passage of legislation in early that makes it more difficult for unions to collect dues at businesses where the unions have contracts. “That’s put the state in a much more competitive position to go out and attract industry.”
Louisville Forward’s Wiederwohl made it clear that she’s in agreement with Gill and Schmidt about the critical importance of nonstop air service for business growth.
“To be competitive we need this kind of a tool to attract the carriers,” said Wiederwohl, referring to the new MRG program. “It’s not just Louisville knocking on their (the airlines’) doors. It’s Oklahoma City and Columbus (Ohio) and St. Louis and smaller cities knocking on their doors.”
Schmidt said as many as 500,000 travelers who are within an easy drive of the Louisville airport routinely bypass it and fly out of other airports because of the availability of nonstop flights.
Wiederwohl agreed.
“There are a lot of business and leisure travelers driving to other airports to take advantage of nonstop flights,” said Wiederwohl, adding that travelers can drive to the Nashville, Indianapolis and Cincinnati/Northern Kentucky Airport in two hours or less to avoid the complications and time delays that can surface when changing planes.
Louisville has budgeted $200,000 for the program. The city’s LRAD partners might have to contribute, too, to the pool available for MRG agreements with airlines, but it’s too early to know if that will be needed.
Wiederwohl said a nonstop flight to Los Angeles is the top priority for Louisville and that she is confident that there are enough LA-bound passengers to support the flights.
Connectivity is time, time is money
“Connectivity with customers (and) business partners … is extremely important,” said Candace McGraw, CEO of the Cincinnati/Northern Kentucky International Airport, which is located in Hebron. “Even when you can Skype and FaceTime and do webinars, there’s no substitution for sitting across the table from the person you do business with – to shake their hand and close the deal. A nonstop will save you time and when you’re a large business you’re very time sensitive.”
Of course, time is also money.
“When you’re a mid- to smaller business, to have to add on an overnight (stay) because the timing doesn’t work right, now you’ve added on the cost of a hotel or a rental car or whatever else you need,” McGraw said. “So that’s why we’re trying to drive as much nonstop traffic as we can.”
During the last four quarters, 70 percent of the air travelers at CVG have boarded nonstop flights, said Bobby Spann, vice president of external affairs at the airport, which says it has non-stop flights to 38 of the top 40 business destinations.
Not that long ago, when Delta Air Lines had a major hub at CVG and dominated its gates, many travelers in the region flew out of Louisville because the fares in Cincinnati were among the highest in the country. Now that Delta flight numbers and influence have diminished and low-cost carriers are providing service, the airport says its fares rank just south of 40th in the U.S.
McGraw said her airport is growing at 13 percent this year – about three times the national average – and offers far more nonstop flights than Louisville, Lexington, Indianapolis, Columbus and Dayton.
Eric Frankl, executive director of Blue Grass Airport in Lexington, said the availability of nonstop flights is vitally important to many travelers.
“Obviously, if they don’t have to make a stop in some hub on the way to the West Coast it’s quicker and more efficient for them, and certainly that’s their priority … you know, less hassle,” Frankl said.
But he was doubtful that Lexington would be seeing nonstop flights to Los Angeles, for example, anytime soon.
“So much of this is really population based. In Lexington we don’t have the population base that would support a direct flight to LA, for example, based on the aircraft they have to use and the number of seats on that aircraft. We would have to have a pretty large population to make that work,” Frankl said.
Response to business community
Secretary Gill acknowledged that the minimum guarantee program supported by the state would seem to provide assistance to Louisville that isn’t available to competing airports in Lexington and Northern Kentucky.
“We’re certainly responding to what we’re hearing from the business leadership in Louisville – and that’s really what’s driving this. Could there be some concern from other markets about not having support? I suppose that’s a possibility, but we have not heard from those who are concerned about direct air service out of Lexington or Cincinnati,” said Gill, adding that he wouldn’t rule talking with the other airports in the future.
Business people have discussed the flight-service issue for years, Schmidt said.
“This whole issue has bubbled up, I would say, over the last two or two and a half years (and) really started with a number of significant business leaders expressing concern about the quality of existing air service at the airport,” he said. “We’re really talking about access of nonstop destinations out of Louisville. There’s been a lot of frustration about that.”
Most Louisville flights go to large connecting hubs like Atlanta and Chicago where travelers change planes to get to their final destination.
“If you’re going to be a successful company, and if you’re going to base the company in the Louisville region, you want access to the major markets,” Schmidt said. “You want to be able to reach your customers who are located in the major markets, and you also want the people who work for you and live in the major markets to be able to get to you easily.
Almost all of the companies receive complaints about how hard it is to get to Louisville, he said.
“We haven’t found one company that says the service is terrific and meets all their needs.”
Schmidt emphasized he and other members of LRAD, whose governing board includes Lesa Seibert, a member of the Louisville Regional Airport Authority board, are not suggesting the Louisville airport has failed in its effort to attract flights.
Instead, the MRG program announced in July gives the Louisville region an incentive to offer airlines skeptical about whether they can make money with nonstop flights from Louisville.
How it works
Under the MRG program in Louisville, LRAD and a carrier would enter into an agreement that would allow the airline to cover its costs and make a reasonable profit for a year or two. If ticket sales were sufficient to cover those costs, LRAD would not have to provide any funding.
If a flight’s monthly revenue target is $1 million and the flight comes in one month at $950,000, then LRAD would cover the $50,000 needed to meet the target, according to Joe Lilly, a spokesman for the Cabinet for Economic Development. And if a flight produces a profit of $100,000 above that $1 million goal in a month, that $100,000 would be carried forward into the next month as a community credit, Schmidt said.
Schmidt and others point out that airports are prohibited by the Federal Aviation Administration to offer incentives like those available through LRAD for specific nonstop flights at the Louisville airport. McGraw explained that airports may offer incentives to carriers that include reduced landing fees or terminal rental fees “as long as the program is open to everyone – carrier agnostic. (They are) fairly common around the country.”
“In a general sense, I can say that airlift is important to business growth, but it is somewhat of a chicken/egg situation. Airlines are different from other sectors in the travel industry because they can adjust capacity to demand rather quickly,” said Michael Baker, senior editor for transportation for the Business Travel News, which tracks the airline industry carefully. “Whereas a hotel or convention center will take years to build and continue to sit there empty if a region hits rough times, airlines can adjust their networks rather quickly to move flights in and out of airports as demand dictates.
“But, of course, business and especially major conferences/events are going to look at how easy it is to get people in and out of a region when they decide where to open a new HQ, have a major event, etc.,” Baker said in an email.
Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected].
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