By Faye Malarkey Black, RAA Vice President-Legislative Affairs
Latest News: Read -RAA Position on EAS funding (2/16/2011)
When Congress passed the Airline Deregulation Act of 1978, lawmakers promised that communities receiving scheduled air service before regulation would continue to receive scheduled air service after deregulation. In order to uphold that promise, Congress established the Essential Air Service (EAS) program, which guaranteed a certain level of scheduled air service to communities that otherwise would have lost access to the nation’s air transportation system under a deregulated airline industry.
History of the Program
The EAS program was initially authorized for 10 years with funding provided by the general fund of the US Treasury. It was modified and extended by the Airport and Airway Safety and Capacity Expansion Act of 1987 and was later made permanent as part of the FAA Reauthorization Act of 1996 with a standing annual appropriation of $50 million. Subsequent legislation has supplemented this funding with additional appropriations from other FAA revenue sources, including foreign overflight fees and the Airport and Airways Trust Fund. The EAS program has undergone numerous criteria adjustments since its inception, mainly limiting eligibility. At present, communities are no longer eligible for subsidized air service if they are located within 70 driving miles of an FAA-designated Large or Medium Hub airport, or if their per passenger subsidies exceed $200. Communities located 210 or more highway miles from the nearest Medium or Large Hub airport are exempt from the subsidy cap.
Managed by the DOT
The program is administered by the Department of Transportation (DOT), with DOT determining
1.the level of service required at each eligible community
2.certain characteristics of the aircraft used and
3.the maximum number of permissible intermediate stops before the hub. If a carrier is the only airline serving an EAS-eligible community and wishes to exit the market, DOT regulations require that carrier to file a 90-day service termination notice. During this time, DOT may require the carrier to continue flying in the market indefinitely.
In cases where no carrier is willing to provide replacement service without a subsidy, DOT solicits “best and final” competitive proposals from carriers to provide subsidized service for a period of two years. As part of this process, carriers must submit financial data as well as project revenues and costs expected over the duration of the two-year contract. DOT then reviews these proposals, selects a carrier, and sets a subsidy amount to cover the difference between the carrier’s projected costs of operations and its expected passenger revenues, providing the carrier with a profit margin equal to five percent of total operating expenses. Under the current program, airlines may not seek rate adjustments during the duration of the contract and must instead file 90 day service termination notices in order to trigger a rate renegotiation should the airline’s costs increase significantly during the lifetime of the rate agreement. Filing such service termination notices causes DOT to open a new competitive bidding process with other carriers and often damages communities’ perception of the air service.
In recent years, airlines, communities and other stakeholders have cited these service termination notices, among other issues, as evidence of the program’s failure to keep pace with changes in the airline industry and other modes of transportation that impact passenger traffic at EAS points. New highways and increased speed limits, for instance, have resulted in greater numbers of passengers driving to nearby airports in search of lower fares. The increased operational costs of 19-seat turboprop aircraft, coupled with skyrocketing fuel prices and passenger migration to nearby airports with scheduled air service, have also caused program costs associated with EAS to climb sharply.
Most stakeholders agree continued modification is necessary to improve the program, but several recent proposals to “reform” the program would, in fact, dismantle it. RAA has instead sought to improve the program while maintaining air service that is, in fact, essential for smaller communities.
RAA Supports the Essential Air Service Program
President Bush in December 2003 signed into law HR 2115, the Century of Aviation Reauthorization Act (Vision 100), which provided DOT with a tool to index airline cost increases and adjust EAS compensation rates accordingly without requiring airlines to file termination notices in order to renegotiate contracts. Unfortunately DOT failed to implement the cost-adjustment mechanism. Consequently, carriers have suffered under increased fuel costs without real time subsidy adjustments. Because EAS providers have already suffered severe financial losses for many years under DOT’s failed policy of requiring service termination notices to trigger necessary rate adjustments, the fuel cost indexing tool will no longer provide significant help. In fact, in the years since RAA first suggested this relatively simple solution, several airlines providing EAS flights have gone out of business.
In order to make vital changes that will restore health to the EAS system, RAA proposes the following program improvements, which should be enacted immediately:
1. Increase overall program funding by retaining current standing appropriation of $50 million and authorizing and appropriating an additional $150 million in FY2009, bringing total program funding to $200 million. This increased funding is necessary in order to continue serving current EAS markets.
2. Amend the carrier profit allowance from a margin of five percent to a margin of 15 percent. This would allow carriers to weather cost fluctuations, which are often significant, over the lifetime of a contract. As such, an increase in the profit allowance would reduce instances of service termination as the sole means of carrier survival, and more importantly, help preserve community trust in the program.
3. Increase the per-passenger subsidy cap to $300 per-passenger in order to accommodate unavoidable program cost increases associated with fuel and other rising costs. The subsidy cap should also be indexed for inflation.
4. Lengthen DOT’s commitment to carriers from the current two-year model to a period of five years for EAS contracts. Longer contracts will provide carriers greater access to capital when financing aircraft, and ensure stability to the communities.
Current EAS Funding Status
EAS has been inadequately funded in recent years, with DOT subsidizing service at 140 communities. Lawmakers in the 110th Congress do not expect to pass EAS funding legislation before they adjourn, but expect to address EAS funding early in the 111th Congress. In its most recent budget requests, the Administration has sought to cut or eliminate the program, most recently proposing to limit funding for the program to $50 million per year, allocating those reduced funds to the most isolated communities according to distance to the extent allowed by available funds. Under this proposal, more than one half of the communities currently receiving subsidized air service would lose service. Congress has rejected these cuts, with some congressional leaders suggesting that the Department of Transportation has lost sight of the history of the EAS program, and of why it exists.
As a new Congress and Administration take office next year, RAA will be working to educate lawmakers – not only on the role EAS has played in upholding Congress’ commitment to communities during airline deregulation; but also on the reforms and improvements we know to be vital for the future of this important program.