Our View: Airline program woes raise questions about tax

Advertisement

Editorial Board, August through January 2012

  • Scott Stanford, general manager
  • Brent Boyer, editor
  • Tom Ross, reporter
  • Shannon Lukens, community representative
  • Scott Ford, community representative

Contact the editorial board at 970-871-4221 or editor@SteamboatToday.com. Would you like to be a member of the board? Fill out a letter of interest now.

Editor's note: This editorial has been updated from its original published version. The vast majority of the 11 percent reduction in airplane seats for the 2012-13 season is attributable to the discontinuation of Frontier Airlines flights that never were part of the winter air program to begin with. Also, the goal of the air program has been to get back to 150,000 seats by 2016, not 160,000 seats.

Last fall, the Steamboat Pilot & Today endorsed a 0.25 percent sales tax to help fund direct ski season jet flights into Yampa Valley Regional Airport.

We backed the proposal because we were alarmed that the airport had experienced a 27 percent decline in available airline seats in three winters. We urged voters to approve the tax — which they did — on the presumption that the tax would give Steamboat the funds it needed to get back to 150,000 seats by 2016.

So imagine our dismay to learn this week that, with more than $400,000 in new tax dollars already in hand and another $500,000 anticipated by the end of the year, air program officials project an 11 percent decrease in available seats this winter. Instead of putting us on a path to 150,000 seats, the tax is barely going to keep us above 100,000 seats, the mythical Mendoza Line for airline flight revenue guarantees.

Airline revenue guarantees are used to ensure direct ski season jet flights into YVRA from key markets such as Dallas, Houston, New York, Atlanta and Chicago. Airlines prefer to fly more profitable business routes but will fly into Steamboat Springs if they can get specific revenue guarantees for the flights. If the load factors don’t pan out during ski season, Steamboat’s winter air program makes up the difference.

In 2004, Steamboat voters approved a 2 percent tax on lodging to help fund the winter air program. At the time, those tax dollars, combined with funding from Steamboat Ski and Resort Corp. and contributions from local businesses, were thought to be enough to take care of the program long term. But the recession, rising fuel costs and consolidation in the airline industry led air program officials to go back to voters last fall for the 0.25 percent sales tax. The tax is expected to provide about $1 million per year in funding for five years, after which it sunsets.

Last week, Janet Fischer — of Ski Corp., which negotiates flight guarantees on behalf of the winter air program — outlined this season’s projections for the Local Marketing District, which oversees the taxes that pay for the flight program. Fischer said the 11 percent reduction in inbound seats seeks to improve efficiency. For example, the new program reduces several Tuesday flights, which are the lowest performing for Steamboat. And the changes include adding Saturday and Sunday service on United from Los Angeles International Airport. Further, it must be noted that of the 11 percent reduction in seats, the vast majority of it is attributable to the discontinuation of Frontier Airlines flights that never were part of the winter air program to begin with.

It makes sense to reduce inefficient flights, but what has us truly concerned is that increasingly, the winter air program appears to be built on a flawed model, that no amount of tax dollars will be enough for the airlines that essentially hold all the cards in negotiations.

Some may think it’s premature to judge the new tax. After all, it’s still five months before the first ski season jet flights with the new tax dollars. But a reduction in seats and an increase in costs isn’t just unanticipated, it’s alarming.

Voters now twice have approved taxes to fund airline revenue guarantees. Each time, the tax was pitched as the solution, but neither has come close to solving the problem. Instead, the best case officials can make is that things would be worse without the taxes. We’d advise working on a backup plan because that’s not an argument that’s going to fly with voters in the future.

Comments

John St Pierre 1 year, 8 months ago

We have one of the largest targets in Denver.... but at $161 rd trip it puts us at a disadvantage from say the Summit County resorts.... perhaps more attention should be paid to them and getting that fare down to where coming to the Boat becomes much more attractive for weekend trips......
Does the hotel reservations and packages reflect the same??? If so this and no snow could make for a very rough winter for all.......

0

John Weibel 1 year, 8 months ago

Why can't it be fixed Scott? If it is not then it should be repealed along with redirecting the pillow tax to ways in which have a higher return than the air program

0

Scott Wedel 1 year, 8 months ago

It cannot be fixed because airlines now operates on 70+% seats occupied business model and Ski Corps says midweek flights have low demand.

It would seem that only sustainable way to operate a flight guarantee program is to largely meet the guarantees since that reduces the costs. Ski Corps needs to find a way to fill midweek flights with paying passengers.

0

John Weibel 1 year, 8 months ago

There you have an answer on how to fix it. Manage it trying to break even. Then figure out how to use the excess funds well and/or cut taxes

0

Scott Wedel 1 year, 8 months ago

John, But the challenge is whether filling midweek via discount packages or such will take from weekend passengers.

We probably need to hire Vail's #2 person of their airline program.

0

Steve Lewis 1 year, 8 months ago

IMO, this editorial begins the conversation the City should have had last year, and is essential to making this program stable. The sales tax for the airline program was a late August arrival to the ballot. There was too little time to fairly question or investigate its true value.

In effect that ballot was a roll of the PR dice, even though this was deemed critical to our economy. I hope we don't do that again. The City should not approve this for another ballot without establishing its payoff to the average citizen and larger economy. Let us know, are we getting fair return for our 1/3 stake or are our lodging and Ski Corp partners getting the sweet end of taxpayer help?

The editorial's central point seems accurate - the numbers are trending against the promises.

0

Stephen Evans 1 year, 8 months ago

Like I stated last year using our tax dollars to subsidize private industry is just wrong. Just like when our city council bought the Iron Horse hotel. What is the roll of our city government? Perhaps if ski corp lowered lift ticket price tourists would be tempted to fly to Stmbt. Sp. on their own accord. And why cant locals use empty airline seats that we pay for?

0

Scott Wedel 1 year, 8 months ago

I think the SB City government is trying to pretend this fiasco does not affect them despite the public seeing it as a city tax and yet another financial mistake by the City of SS.

That a city sales tax hike campaign was allowed to be run by the Chamber and Ski Corps that so blatantly lied to the public is a scandal that should affect the public willingness to approve anything in the future.

The campaign for the sales tax hike did not promise to keep the number of seats the same. They promised 140,000 seats. Head of the Chamber wrote a letter to the editor showing the economic benefit of having EVERY SEAT OCCUPIED!!!. None of those highly dubious claims, aka lies, were questioned by the City or this paper.

Considering the number of seats is worse than what Ski Corps and the Chamber claimed would happen if the tax was not passed then, according to Ski Corps and Chamber, then we would be better off now without the tax.

City Council now needs to hold the sort of informational hearings that they failed to hold prior to putting the tax on the ballot. If Ski Corps and Chamber cannot provide satisfactory answers on the management and direction of this program then City Council should put on the ballot a measure to repeal the sales tax.

0

Dan Hill 1 year, 8 months ago

What this demonstrates is that the economic development model for this community is broken. Skiing is a stagnant industry. Add to that the consolidation and rationalization of the airline industry and the model of promoting destination skiers with direct flights can no longer work to drive growth. We're struggling to even keep numbers flat despite throwing ever increasing amounts of money and the problem is only going to get worse.

Airlines will provide service without revenue guarantees if it is profitable meaning if there are enough passengers willing to pay high enough prices. It would be interesting to see an airline revenue breakdown between residents and visitors. I've been on plenty of flights where I would guess most of the revenue is coming from Yampa Valley residents travelling on business, each of whom is far more profitable to the airline than a visitor looking for a rock-bottom fare. How do we create more of that so we have sustainable airline services? Focus on making Steamboat attractive to location neutral workers. What do we want from an air service? Frequency, all year round. Two or even three services a day means it is usually quicker to drive to Denver than fly out of YVRA.

0

John Weibel 1 year, 8 months ago

Dan hit the nail on the head. As opposed to guaranteeing revenues maybe the focus needs to be, from a community standpoint, cutting costs for the airlines to maintain service into yvra. Maybe the focus should be on cutting the operational expenses for the airlines flying into yvra.

This way summer flights are more profitable and potentially more frequent and the winter operational costs are lower facilitating lower fares or allowing the airlines to manage what flights to bring into yvra. This then allows ski corp to use their funds to convince to airlines to fly direct for less. Ski corp could also set aside several condos and lift tickets for the crew on weekends to allow their employees a perk for flying weekend charters from Denver or wherever and park the planes here for the weekend on slow weekends. Figure out how to cut costs for the airline industry so that it is more profitable to fly here.

0

rhys jones 1 year, 8 months ago

I'm sure Ski Corp is getting a good chuckle listening to everybody tell them how to do business. They don't do ANYTHING that doesn't reek profit, the airline subsidy program included. They just thought of a clever way to squeeze even more money, now out of the community in general, by crying increased guarantees. A monetary shell game.

Does anybody honestly believe that, had this tax not passed, they would have folded their tent and gone away? Hardly. This just pads their bottom line.

0

Steve Lewis 1 year, 8 months ago

A good conversation.

I believe we need to keep one critical element in view because it is so fundamental - rising fuel costs will continue to challenge marginal routes, if not the whole industry. Expecting 2020 to look like 2010 is a mistake. I voted for the tax but hated the irresponsible short term focus and the oft visited air program cliff.

Where is the stability? The City's current goal is a tier of extra restaurants, residences, and other investment on Yampa St. Do we seriously expect such investments are attracted to this picture?

0

Steve Lewis 1 year, 8 months ago

Not sure when this editorial was updated, and what text was changed, but the update italicized above does not seem to agree with the LMD's own facts.

The correction that the air program goal was for 150,000 seats is definitely wrong. The LMD budget presentation Exhibit F, to the City, is from the November 8, 2011 City packet (below). It matches the 2B campaign's YestoAir.com image of the same. Both show 160,000 seats was the goal.

The 11%. How can a non-air program flight deletion be relevant now, unless it was inappropriately included in the prior years?

The LMD program listed 125,719 seats to YVRA in 2011/12, and now 111,700 for 2012/13. That is an 11% drop in their own accounting.

0

mark hartless 1 year, 8 months ago

"Oh what a tangled web we weave, when first we practice to... subsidize."

It's as if nobody ever read the one about the old woman who swallowed the goat to catch the dog to catch the cat to catch the bird to catch the spider to to catch the fly...

It's funny.

Just keep right on tinkering with the free market. Eventually something besides basic economics is bound to work, no? Even a stopped clock is right twice/ day. Trouble is, the rest of the time it's about as useless as United Airlines.

0

dave mcirvin 1 year, 8 months ago

In the midst of a sluggishly improving and yet vulnerable economy, unless airfares are near zero it seems any marketing plan to attract out of region, middle income families for an expensive ski vacation is doomed.

Unless the chuckwagon at the base area switches from hot chocolate to kool-aid, it's doubtful most voters will be lining up to supplement for free airfares.

0

Scott Wedel 1 year, 8 months ago

So Frontier decided that they, without subsidies, could not compete with the other heavily subsidized flights and pulled out? And yet the subsidy folks say that had nothing to do with airline subsidies? Well, their credibility is already zero so that answer is to be expected.

Here is a letter from the CEO of the SB Chamber:

http://www.steamboattoday.com/news/2011/oct/10/tom-kern-real-impact/

The most ridiculous statement that grossly oversold the impact of the subsidies that is simply wrong is: The loss of 40,000 seats equates to a loss of roughly $44 million to our local economy

It is simply wrong because it assumed that every seat is occupied. And if every seat was occupied then there would have been no need for subsidies.

The Chamber, the City the paper and other supporters of the subsidies should be concerned that they grossly over promised and what we are actually going to get from the subsidies is worse than what they said would happen if the subsidies lost at the ballot.

Oh well, at least there is a sunset clause.

0

Steve Lewis 1 year, 8 months ago

A few people know I have been studying the YestoAir numbers, and the LMD's 2012 budget. The late arriving Ballot 2B question allowed no time for real discussion of an important Routt issue. I promised myself then that I would get to know this animal and bring some discussion of it in the coming months.

I have approached LMD board members, the Chamber, and the City finance department to discuss my findings. I hope we can have that discussion.

Transparency was promised. But when I read the corrections to this editorial, which do not agree with the facts, I have to wonder what are we dealing with.

0

John Weibel 1 year, 8 months ago

If you need to have 100,000 seats for revenue guarantees and we are just barely there... maybe a better approach is to work to reduce associated costs of flying into YVRA. That way Frontier which is not subsidized might see fit to fly into YVRA when competing on level ground with the others.

0

Scott Wedel 1 year, 7 months ago

Steve, Whether or not the goal was 150,000 or 160,000 is a largely meaningless distinction. What is important is that tax was supposed to finance a significant expansion of 100% occupied seats, but even after the tax the number of seats is declining.

That there was now substantially increased subsidies paying for the same number of subsidized seats and hence much more subsidy per seat then it should have been obvious to the LMD that this would squeeze the operators of nonsubsidized seats. That the LMD failed to check with those airlines and make sure they were staying is simply unacceptable incompetence.

I don't know if anyone from Frontier would be willing to discuss the topic, but it would be extremely interesting to ask if they enter into subsidized airline flight programs and whether the flights to SB would have remained if subsidized.

Seems to me from the historical flight data that the first 60,000 occupied seats are relatively easy to sell to people willing to make connections to get to SB. But adding seats to bring in more tourists largely results in more empty seats and a modest number of additional tourists.

0

Steve Lewis 1 year, 7 months ago

Scott, I agree the distinction between 150K and 160K has little bearing. At the same time, part of my recent conversation with an LMD board member was about promised LMD transparency. That was the reason I took exception with the "corrections" to this viewpoint. Rewriting history?

Thee LMD also needs a more accessible "front door". Six opportunities/meetings a year to add comment of public record is not good enough when we are taxed close to a $million a year. An LMD email address is appropriate.

They have responded in part on transparency, though not without some nudging. I went to the Chamber to peruse the LMD binder of public record, and copied some meeting minutes. When I next requested LMD meeting minutes be placed on the City website, the LMD put their 2012 minutes there. I requested LMD by laws from the City. Now those are also on the City website too (interesting reading, btw).

Its great that they are having an open house in October. How well that is organized and how much of it is recorded as public record will say a lot about the community conversation I hope we are beginning.

When 2B passed, this became our program too. I would like to see your points addressed in October.

0

Scott Wedel 1 year, 7 months ago

Steve, I agree that claiming Frontier was not part of the program is attempting to rewrite history and am rather surprised that the paper accepted that claim as a correction. When Frontier's seats were counted as part of the seats into the valley then losing those seats affects the winter airline program. And the fact that the LMD is now placing a greater subsidy per seat for other airlines likely affected Frontier's view of the SB market. So the LMD airline subsidy probably did affect Frontier precisely because the LMD were not subsidy Frontier's seats while increasing the subsidy for competitor's seats.

IIf the LMD now wants to claim those seats were not part of the winter airline program then the public and the paper should be asking why not? These seats had the lowest subsidy ($0) and so presumably could have been saved for the least amount of money.

0

Steve Lewis 1 year, 7 months ago

Scott, I agree with your points, but prefer the air program not take credit for a route and passengers it has nothing to do with.

You probably agree that it is hard to judge the effectiveness of the program's contracts to Dallas, Chicago, et al, if the data also includes seats, flights, passengers that arrived on non-contracted flights. You have to keep the two separate for viewing benefits from the program. It easy enough to also look at the whole for viewing benefit from the airport.

When Ski Corp alone funded the program in the nineties, including zero subsidy seats as if you delivered them made little difference to anyone. The "actual cost per seat" was deflated and wrong, but who cared? Now the program is on a tightrope and has taxpaying partners, and its performance numbers should reflect what it actually bought.

0

Scott Wedel 1 year, 7 months ago

Steve, Nope, you guessed wrong and I think the unsubsidized seats absolutely should be counted as part of the program's effectiveness.

I think the unsubsidized seats should be viewed as the SB promotional programs working so well that airlines think they don't need subsidies to make a profit flying into SB.

Subsidies vs unsubsidized should be viewed not as a distinct line, but as sections on a spectrum of profitability. Subsidies can range from hugely expensive per seat to not so much and unsubsidized seats could range from break even to very profitable.

Thus, the same circumstances that increase the subsidies needed for flights already receiving subsidies would be expected to reduce the profitability of unsubsidized flights. Which means that as subsidies increase for the subsidized flights then we should expect unsubsidized flights to either need subsidies or those flights to end.

The overall effectiveness of the airline flights program is simply how many seats occupied at what cost. The effectiveness of a particular flight such as to Dallas or Chicago is how many occupied on that flight vs the cost of that flight.

I am absolutely willing to give the airline flights program credit for any free flights bringing in customers. Though, that part of the program would appear to be very effective at a minimal cost and is not, by itself, a justification for paying lots for certain subsidized flights.

0

Steve Lewis 1 year, 7 months ago

Irony. I thought my work to date needed refining to cull out the Denver flights that come of their own accord. But you think the whole is appropriate. I might as well look at both views. I'll throw some numbers at you tomorrow.

0

Steve Lewis 1 year, 7 months ago

Using the whole of winter traffic into Hayden, and according to program data and verbals this morning at the LMD meeting:

Winter …. / Avail. seats .../...$Cost Cap.../ $costcap/seat / Costcap/seat %change 2010/11 ……. 118360 ……. 2690000 ……….. 22.7
2011/12 ……. 124918 ……. 3570000 ……….. 28.6 ………….. 0.26 2012/13 ……. 111000 ……. 4000000 ……….. 36.0 ………….. 0.26

Some slight adjustment may be appropriate with verbal numbers used, but this is very close to the published stuff anyway. CostCap is the contracted max guarantee we are on the hook for if the airline makes too little revenue. Seat relates to total available seats contracted (and also "not contracted" per your scenario).

The contract numbers for this coming season make more sense than folks might think. I agree they needed a lower target, and support the drop. But no one close to the program should have been very surprised at the cost cap/seat.

0

Scott Wedel 1 year, 7 months ago

Steve, I think the right column should be 26% and not .26. To be clear, your chart says that subsidy cost per seat into the valley has increased 26% each of the last two years. That sort of increase is obviously unsustainable.

Any comments from LMD on expected yield (percentage of seats occupied) and whether there is any expectation that program will end up costing less than the max cap?

0

Steve Lewis 1 year, 7 months ago

Thanks for catching the decimal error: 26% change is what I meant to say.

But this is not the cost per seat. It is the upfront contract amount we put ourselves on the hook for; but we only pay part or all of it when a route's end of season revenue fails to meet a certain level. It is called the "Cost Cap".

The subsidy cost per seat is the end of season amount that is actually paid. That amount is called the "Total Actual Air Service Cost", or some version of that. For 2005/06 the Total Actual Cost was only $258,000, while the Cost Cap was $2,525,000.

The difference between the Total Cost Cap and Actual Air Service Cost wouldn't get your attention. I would normally think of the Actual Cost each year as more relevant. In many respects, it will be. But after seriously reviewing the LMD data, it is my opinion the Cost Cap, and in particular the Cost Cap per available Seat, that defines how this program should be managed.

0

Steve Lewis 1 year, 7 months ago

Sustainable? Doug Monger hit this nail on the head a year ago; this program's approach has proven itself to be unsustainable.

But I know Doug appreciates the flip side as well; each passenger spends $1,100 here. The actual cost subsidy, now approaching $50 for each of those passengers, is still a bargain.

LMD comments on yields and living within the max cap? My recent conversation with 3 air program representatives was well represented in yesterday's article. They emphasize the uncertainties and represent future prospects as unknowable as a roll of the dice. The LMD board submitted a letter to the editor on Friday. Let's see what they add to that.

0

Steve Lewis 1 year, 7 months ago

The nomenclature is simple, but the discussion can be confusing without the correct label. I made such a mistake above. The annual subsidy cost per seat is obviously different than the annual Total Actual Air Service Cost. Sorry.

"Per seat" refers to the number of available seats. It does not refer to the number of passengers. "Deplaned passengers" is the term used for the passenger count.

For instance, one of the LMD columns of data is the "Cost per deplaned passenger".

0

Scott Wedel 1 year, 7 months ago

Steve, Did you get any idea of what LMD officials project Total Actual Cost to be for the upcoming year? That is huge because Total Actual Cost less than Cost Cap is money returned to the LMD for next year's budget. It is certainly possible to get more money returned than is produced by the sales tax hike.

That seems to me to be a big part of evaluating the management of program. Once it managed to have a Total Actual Cost about $2M less that preseason Total Cost Cap and others times the two were the same.

It seems to me that Total Cost Cap is the headline number, but the Total Actual Cost is the one that truly reflects the management of the program. How much Vail Resorts lays out for Total Cost Cap becomes largely irrelevant when their Total Actual Cost ends up being zero for most years. If SB LMD had Total Actual Cost of zero then program could increase Total Cost Cap by millions each year to add whatever desired flights (as long as they were operated to have a zero Total Actual Cost).

0

Scott Wedel 1 year, 7 months ago

Steve, "each passenger spends $1,100 here."

Really, that spectacular claim is support by data?

From personal experience I know that some are used by locals to take a trip elsewhere. Some by guests of locals that are not going to spend much and so on.

At some point there needs to be hard data of actually how many high spending tourists are occupying how many seats. Currently, I believe the data can actually only claim that tourists that pay for lodging AND fly into the valley spend $1,100, but no public data on how many of the seats are occupied by those people. And the accuracy of that data can be challenged because it is calculated based upon surveys of what people liked to do when here and not the direct answer to how much was spent here.

I think if one did a sanity check on the claimed economic benefit of $1,100 per occupied passenger seat then you'd see that is obviously an inaccurate claim. If that $1,100 was for sales taxable items then it'd suggest that airline passengers would be paying more in sales tax than is collected for the entire county for the entire year.

0

Scott Wedel 1 year, 7 months ago

Steve, Oops, blew the conversion from sales to collected sales tax so my sanity check is way off.

But still, when comparing nightly occupancy totals with number of airline passengers and average length of vacations then airline passengers, if all were tourist, would be around 25% of all tourists, but are spending 60% or so of what all tourists are spending. So then airline tourists are spending, on average, six times as much per person as other tourists?

Anyway, the idea that there is $1,100 of spending per occupied airline seat just does not add up.

0

John Weibel 1 year, 7 months ago

It comes close to adding up. When one factors in probably a four day stay. Lodging, lift tickets, meals and other factors. You have to figure $80/night per person about for the lodging, $60 for tickets, $50 for food and $20 for other things puts me at $800 quickly. That is probably figuring the total fairly inexpensively for those that fly - as they may stay at more expensive lodging, ski more frequently, rent skis and do other things.

Those that drive in from somewhere probably are trying to figure out how to economize a little more.

All said and done, I still think there are far better ways to spend money to make an economy which is resilient and moves the community towards goals, which are moved away from with the tourism industry.

0

Steve Lewis 1 year, 7 months ago

Good points. Not my end of the data, but certainly bearing on the results.

I had not considered how many of these flyers were us. Perhaps May is a representative YVRA month for non-skier related air use of YVRA.

0

Steve Lewis 1 year, 7 months ago

The view from my end, mainly LMD's own data, still finds the Cost Cap/available Seat is the LMD board's real challenge. This guarantee per seat is going up in increasing fashion, with a 5 year average of 19% increases and this last jump at least 25% above the previous year.

The representatives of the program insist this trend is meaningless. On its face, that seems disenginuous given they relied on a deflated estimate of the same trend to create their 2012 budget projection Exhibit F. I suggested the higher trend should be fundamental to prudent LMD planning, because it is easily the most consistent trend of their past and therefore the most dependable prediction of their future. While it is not a prediction of the $ cost of the program, it is by definition a prediction the annual contractual $ exposure of the program.

0

Scott Wedel 1 year, 7 months ago

John, Not that $1,100 is not a crazy amount for a trip.

Where it doesn't add up is when you start comparing it to total number of occupied seats vs total number of tourists using occupancy numbers and total sales tax. reported.

From the reported occupancy numbers, it looks like if every airline seat was occupied by a tourist then that is 25%, maybe up to 33%, or so of all the lodging nights. But then if each airline seat is spending $1,1,00 then that is over half of tourism related sales tax for the month. Which then would mean that the more numerous non airline tourists are spending $200 to $400 on their vacations.

That sort of disparity does not make sense.

Plus, I am not the one claiming that the magic number is $1,100. That number comes from the LMD and the Chamber without them saying where they got it.

0

Scott Wedel 1 year, 7 months ago

Steve, I know that locals take advantage of the additional flight choices during the winter to leave from Hayden instead of DIA. I think one could look at parking revenues from Hayden and confidently say that is not from tourists.

The Cost Cap only becomes an issue when it also becomes Total Actual Cost. Vail Resorts has apparently made their revenue numbers almost every year so their Total Actual Cost is close to zero. So Cost Cap is largely irrelevant for Vail Resorts because they are never close to that number. Thus, the airlines are not particularly concerned what they negotiated for Cost Cap because they know Vail Resorts is going to meet the revenue goals.

SB LMD is in the very bad situation of not meeting revenue goals and not even coming close so that Cost Cap is typically now Total Actual Cost. So airlines are particularly concerned with what they negotiated for Cost Cap because they know they know that SB is not going to come close to meeting revenue goals and Cost Cap is what the airlines will be collecting.

Thus, regardless of overall airline industry issues, until SB starts meeting revenue goals then Cost Cap should be expected to continue to increase to protect the airlines from badly missed revenue targets.

0

Steve Lewis 1 year, 7 months ago

In July I did believe the Cost Cap was higher in part because the airlines were judging our yearly contracts as aggressive. And in part because of industry trends of fuel, consolidation, etc. After looking closer at the numbers, I think our Cap/Seat trend is largely due to the latter - industry trends bigger than us. Because our Cap/Seat trend is too smooth. It seems oblivious to our contract results.

We performed relatively better in 2010/11 and reduced our previous actual costs $.7 million down to $1.9 million. The next Cap/Seat went up 26%.

We performed poorly and nearly doubled our actual costs, to $3.5 million in 2011/12. The next Cap/Seat went up 26%.

0

Scott Wedel 1 year, 7 months ago

Steve, Saying that 2010/11 managed to have Total Actual Cost to be $700K less than Cost Cao does nothing to remove the expectation that revenue will fall well short of Cost Cap. That was an epic snow year and all SB managed to do was modest reduction of Total Actual Cost from Cost Cap. That probably reinforces the expectation that Cost Cap will be Total Actual Costs.

From an airlines business perspective, the airline must determine a total required revenues that generates the profits they require. They then must determine a ticket revenues that they think will be met. And then Cost Cap is Total Required Revenues minus Likely Ticket Revenues. So when Total Actual Costs equals Cost Cap then Likely Ticket Revenues was the same or less than expected.

So when the airlines are working with SB, they know to keep lowering Likely Ticket Revenues and will keep doing so until SB consistently exceeds Likely Ticket Revenues which then means Total Actual Costs would have to be consistently less than Cost Cap.

Meanwhile, when the airlines are dealing with Vail Resorts they have the situation that ticket revenues will probably exceed Total Required Revenues and so they will probably end up with additional profits. But to control their risks, the airlines will still require a Cost Cap, but the Likely Ticket Revenues is going to be much closer to Total Required Revenues so Cost Cap will be less per seat than for SB.

So, airline costs such as fuel which increases the airlines Total Required Revenues will thus increase Cost Cap. It also means that to have a sustainable flight program that the LMD has to be driving up Likely Ticket Revenues at least as fast as airline costs increase.

0

Steve Lewis 1 year, 7 months ago

Scott, We have differing views on the logic of the Cost Cap, but get roughly to the same end result recognizing the effect of airline cost increases. (And airline industry trends.) Another similar end result; The low snow hurt us last year. Yet the air program also needed a ballot for sales tax help months after an excellent snow year.

The cost of underperforming goes up. If we become more conservative we avoid the penalty. Aggressive contracts with high seats will continue to have the allure of $1,160 of spending by the passenger whose seat we subsidized with $100.

0

Steve Lewis 1 year, 7 months ago

I think it makes for a great conversation and one we need to have. How well do we understand this business model with it's whopping penalties and how well aligned are the partners to this venture? I feel the taxpayers and City (with their mortgages, inventories and revenue streams) are averse to the economic air program cliffs that Ski Corp visits with greater ease. Ski Corp is generally more flexible as a service industry with less inventory need. They are also built for revenues that rise and fall in any given year with good/bad snow.

Ski Corp began and ran the air program alone for years. Then got lodging tax help. And now has Steamboat wide sales tax help. It is time for the City to pull it's chair to the LMD table and represent the interests of the taxpayers in this program.

0

Scott Wedel 1 year, 7 months ago

"have the allure of $1,160 of spending by the passenger whose seat we subsidized with $100."

I still say that $1,160 per occupied passenger seat is not supported by factual data.

0

Steve Lewis 1 year, 7 months ago

It is my understanding CDOT has a similar number close to that, for money each spends in the State. And yes, going forward we should refine the amount. We should also be able to say how much of it goes to Steamboat's economic sectors of lodging, lift tickets, restaurants, retail, etc… And surely these restaurant and retail dollars recirculate. How much?

Even if we concede for now that the $ spent per passenger is $800, there is still a valid argument to subsidize their flights. But from here the argument needs to be much more than "these flights are deemed essential"; Let's educate ourselves and know what percent of our Routt, Steamboat, and personal economies ride in these airline seats.

0

Scott Wedel 1 year, 7 months ago

Steve, Well, number first issue with $1,160 per passenger seat is that it is known that not every passenger is a tourist. Hayden collects far too much in parking revenues to support the idea that locals are not using these flights to leave town on a trip.

Much is made of how much money is claimed that the airline program brings in, but if the objective is economic benefits then where is the overall plan? The airline program is purely ad hoc spending of a lot of money on the assumption that it is effective.

Any analysis of lodging numbers makes it abundantly clear that there airlines flights are not bringing in most of local winter tourists. Which means that we are spending a lot for a minority of winter tourists and completely ignoring the larger group. Maybe there are reasons to subsidize airline flights and completely ignore drive up traffic, but has anyone seriously studied if that is the best approach?

Seems to me that a flights program was started because "it was a good idea" and it has never be studied as part of an overall plan to encourage winter tourism. And now we get blatantly misleading statements suggesting every seat including is bringing in a winter tourist (Mr Kern's letter to the editor prior to the election).

0

Steve Lewis 1 year, 7 months ago

Looking back, the main gripe I had with the 2B question was it had a very short fuse attached to feared economic uncertainty. With more time, written rebuttals could cure written inaccuracies in calm fashion. We didn't have time though, and the fear left little room, for conclusive math or calm debate. Tom Kern probably thought he had an honest appraisal in his letter, and I expect he would earnestly consider your correction.

We have the time now. And it looks like the conversation is on. The LMD's recent letter to the editor was the first I can remember. They'll have an open house in October. See you there.

0

Scott Wedel 1 year, 7 months ago

Steve, I posted my objections to Mr Kern's letter regarding the obviously false claim that every added seat, including the expected empty seats, would be occupied by a tourist bringing in $1,100. There was never any correction issued.

In politics there are many that believe the end justifies the means. If Mr Kern had concern that his claimed benefits in the letter to the editor prior to the election was not accurate then he has had since the day his letter was published to issue a correction. Since the airline program supporters felt the need to ask the Pilot to make a correction to this editorial, but not Mr Kern's letter then I believe they are far more interested in favorable publicity than an honest discussion.

Thus, I do not believe the LMD is interested in an honest conversation, but is primarily interested in controlling favorable publicity. An open house is not the setting for an honest conversation because there is no time to research and question their answers at that event.

If the LMD was truly interested in an honest conversation then there are more than enough questions for the LMD to inform the public prior to the open house.

The information the LMD has released is the smallest amount possible of merely number of seats for this winter and how much it cost. They have chosen to not release any additional information that is needed to have an honest conversation. Such as: 1) What percentage of seats do they expect to be occupied this winter? 2) What is their expectation of Total Actual Cost? 3) How many tourists do they expect to be flying into Hayden this year? 4) The flight program brings in what percentage of the total number of winter tourists into SB? 4a) How many winter tourists drive or take shuttle to SB? 4b) How many winter tourists fly in via private planes? 4c) How do the spending patterns of 4a and 4b compare to airline passengers? 5) What are their expectations of total winter seats and Total Actual cost for the next few years? 6) What is the factual basis for this claimed $1,160 per passenger seat?

If they were to be open and provide those sort of answers then it is possible to have an honest conversation at the open house and ask questions like: Is there a point where cost per seat would make them question the effectiveness of the airline flight subsidies program? Are there other programs worth subsidizing? And should winter marketing be a mixture of airline subsidies and other programs?

I presume the Chamber and the LMD can read. There is truly no reason they cannot describe in some detail prior to the October meeting of the facts which underlie the current program and where they see it heading. Until then it is not possible to have a conversation. As of now it is limited to being an attempt to extract enough facts so that a conversation could occur at a later date.

0

Steve Lewis 1 year, 7 months ago

Scott, I would say these are your most important questions: 4) The flight program brings in what percentage of the total number of winter tourists into SB? 5) What are their expectations of total winter seats and Total Actual cost for the next few years? 6) What is the factual basis for this claimed $1,160 per passenger seat?

Among 4), it would be important to know how many passengers arrive through the Denver flights and how much are these subsidized. It is my understanding there is a small subsidy to United (and once to Frontier) to switch their flights to jet instead of props. It makes sense the Denver flights will grow with any loss of other direct flights.

I believe the $1160 comes from a CDOT Economic Impact Study of Aeronautics in Colorado.

0

Scott Wedel 1 year, 7 months ago

Steve, What is important depends upon your point of view. Questions 1-3 ask what they expect for this year so it can be compared to actual results so the public can decide whether they are effectively managing the LMD program.

Questions 4-6 ask whether the program is justified and sustainable.

0

Requires free registration

Posting comments requires a free account and verification.