PORT OF SEATTLE MEMORANDUM COMMISSION AGENDA 6b Item No. Date of Meeting September 27, 2011 DATE: September 26, 2011 TO: Tay Yoshitani, Chief Executive Officer FROM: Michael Ehl, Director Aviation Operations Kazue Ishiwata, Air Services Development Manager SUBJECT: Revised Incentive Program for New Commercial Air Service for Seattle-Tacoma International Airport ACTION REQUESTED: Request Commission authorization for the Chief Executive Officer to implement a revised incentive program for new commercial air service for Seattle-Tacoma International Airport (Airport) to include a proposed new category of services (Category A) for extra-long-haul international operations. SYNOPSIS: The purpose of this action is to enhance the Airport's incentive program for international air services specifically for longer distance with higher operating costs on the part of the airlines, with the goal of increasing our chance of attracting the type of services that are also projected to bring a higher amount of revenue to the Aviation Division, as well as the economic benefit to both the local community and region. The previously authorized incentive program has proven to be an effective tool in final inducement in the carriers' decision-making process. However, we have encountered a higher hurdle to pass when it comes to certain markets with longer distance, as carriers cite a significantly increased risk involved due to the high cost such of extended-range aircraft, as well as additional crew and fuel. The proposed modification would increase our opportunity to attain some of the more challenging but valuable routes by presenting better risk mitigation to the carrier. COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer September 26, 2011 Page 2 of 3 PROGRAM COMPARISON OF CURRENT PROGRAM VS. PROPOSED PROGRAM: Proposed Servie Category: Service Category NEW Category A Category B (was A) Category C (was B) Category D (was C) Category E (was D) Description International nonstop air service of 6,000 miles and longer to an unserved new city International nonstop air service of 4,000 miles to less than 6,000 miles to an unserved new city International nonstop air service of 2,000 miles to less than 4,000 miles to an unserved new city New competitive international nonstop air service of 4,000 miles and longer on an existing route Small community air service for unserved destinations in Washington, Oregon and/or Idaho Part II Incentive: Temporary waivers of landing fee and terminal facility charge New Category A Category B Category C Category D Category E International Arrivals Facility Fee Waiver Year 1 Year 2 100% 100% 75% 75% 75% N/A N/A N/A N/A N/A Landing Fee Waived Year 1 Year 2 100% 100% 100% 75% 75% N/A N/A N/A 100% 100% Common Use Aircraft Gate and Lobby Fees Year 1 Year 2 N/A N/A N/A N/A N/A N/A N/A N/A 100% 100% Part III Incentive: Joint Marketing Program Service Category New Category A Category B Category C Category D Category E Total of Multi-Year Marketing Fund $455,000 $455,000 $200,000 $200,000 N/A Usage Timeline 2 years, not to exceed 3 budget years 2 years, not to exceed 3 budget years 2 years, not to exceed 3 budget years 1 year, not to exceed 2 budget years N/A Notes: The eligibility of the categories remain the same except for one element. Only for the proposed new Category A, we would require a minimum of five scheduled round trips each week (as opposed to the three weekly in the previously authorized program) in order to maximize our return on investment and assure a higher level of revenue. If the carrier does not meet the eligibility fully, the benefit to the carrier would be limited to the lower-tier program's level. The COMMISSION AGENDA Tay Yoshitani, Chief Executive Officer September 26, 2011 Page 3 of 3 Federal Aviation Administration (FAA) does not allow an incentive program to be categorized by aircraft size or seats, while it is permitted by the regional or distance differentiation. FINANCIAL IMPLICATIONS: Below is an example of a fee waiver structure based on a B777-300ER example, at 75% load factor for 350 seats, under the newly proposed category, compared to the previously authorized maximum benefit for the same service: Airport Charges Landing Fee Gate/Lobby International Arrival Facility Charge (per passenger) International Arrival Facility Charge (fixed charge) Ramp Tower Fee Baggage Make-Up PFC Revenue Total for Year One (excluding ticket counters and office space rental) Standard Annual Waived % Waived Amount Estimate Cost Cost to Airlines Paid by Airlines $ 579,613 100% $ 579,613 $ 0 $ 483,260 $ 483,260 $ 395,499 $ $ $ $ 40,030 2,387 123,918 431,978 100% $395,499 - - $ 0 $ 40,030 $ 2,387 $ 123,918 $ 431,978 $ 2,056,685 $ 975,112 Total for Two Years $ 4,113,370 $ 1,950,224 $ 2,163,146 Total for Two Years under the previously authorized program $ 4,113,370 $ 1,607,572 $ 2,505798 100%/ 75% waiver $ 1,081,573 Notes: In addition to the above, a new entrant carrier normally requires ticket counter space (at approximately $53,000 annually for six counter positions for three hours at 2011 rate of $8.05 per position), as well as office rental revenue (at approximately $100,000 annually for 450 sq feet office). Additional revenues from the indirect revenue in parking and concession are also expected but are not included here. PREVIOUS COMMISSION ACTIONS OR BRIEFINGS:  June 28, 2011 - The Commission approved a revised incentive program consistent with recently-published Federal Aviation Administration guidelines.