Something very strange happened last week. St Joe and Southwest agreed to end the subsidy agreement that was put in place to get the airline to start service to Panama City, Florida back in 2010. Now, why is that strange? Because the subsidy was actually successful. But why would Southwest end it if it was successful? There are good reasons.
There’s no question that has been a true success story. Back in October 2009, Southwest said it would begin two daily flights to at least four different cities from what is now called Northwest Florida Beaches International Airport near Panama City. In May 2010, the airline started flying to Baltimore, Nashville, Houston, and Orlando. These flights were easy to put in place, because The St Joe Company, an enormous land developer, agreed to subsidize losses for the first three years. Sounds like a good deal to me. So why is this ending?
Well, it was wildly successful in the sense that the subsidy was never needed. Southwest made enough money all along that St Joe never had to pay up. That’s great for St Joe, it’s great for the community, and of course, it’s great for Southwest. So why the heck is the airline ending the subsidy? Why not keep that backstop in place as long as it could? I can think of two good reasons.
The Pensacola Problem
First, the subsidy restricted Southwest from flying to nearby airports. The airline wasn’t allowed to fly to any airport with 80 miles (which was basically Ft Walton Beach). It also had to pay a penalty if it started flying to any airport within 120 miles (Tallahassee and Pensacola). Well guess who flies to Pensacola? AirTran. Southwest has decided to keep Pensacola in the network, one of the few smaller AirTran cities to not get slashed. So if Southwest didn’t need the subsidy, then why would it bother to pay the penalty just so it could also fly to Pensacola? It wouldn’t.
But that’s only part of the problem. The other issue is the restrictive nature of the subsidy itself in terms of routes.
Two by Four
Remember, the original subsidy required that Southwest fly at least twice daily to four different cities. While it sounds like Southwest did make money overall, I’m guessing some flights did much better than others. But Southwest didn’t have much flexibility. That’s why this summer, the number of frequencies and destinations looks exactly the same as when the service started except that Southwest added a single flight to St Louis.
Requiring two flights a day to four cities is overly restrictive, especially for a seasonal market like the Florida Panhandle where it might make sense to do one or none sometimes. But Southwest couldn’t do that under the subsidy agreement. It seems clear that the decision to ditch the subsidy has already been worked into the new schedule.
If I look out at the Southwest January schedule, we see some changes. Houston and Nashville stay at twice daily, but Baltimore drops down to one daily flight. And Orlando and St Louis lose all flights. Now, I’m told the Panhandle is a summer market, so this makes sense that Southwest would drop service during down times. But it couldn’t do that under the subsidy agreement.
For these two reasons, it seems like a very smart plan to end the subsidy, especially since Southwest has never needed it. Does this mean that other communities should be jumping at this kind of arrangement? They do. Every day.
There are plenty of places that subsidize flights, but the problem is that without them, the flights go away. Just ask Wichita about how long it’s been throwing subsidies at AirTran. I think we’re on year number six now. Maybe seven. But Panama City was in a unique spot.
Shiny New Airport
This was a brand new airport that replaced the old one in town. That in itself doesn’t create demand, but the location in this case does make a difference. There are a ton of commercial airports along that coast all fighting for service. The old airport was convenient for Panama City but not as much for the surrounding areas. This new airport was further away from the crowds of Panama City and made it easier to get to for those outside of town looking for low fare service. It was still the number one choice for those in Panama City but the new location expanded the draw.
In addition, St Joe had been on a building spree. The area had seen dramatic changes and that meant that historical data wasn’t necessary the most reliable. So St Joe took a chance and put its money where its mouth was. My assumption is that Southwest was probably already intrigued by the prospect of flying to the airport but it wasn’t quite there on its own. The subsidy must have been the nudge it needed.
There were a lot of reasons why this worked and why it’s ending. It really is an all-around good story for everyone involved, except maybe for those who want to fly to Orlando in the winter. But I wouldn’t expect that this will be easy to replicate time and time again.
19 comments on “Southwest Rightly Kills A Successful Subsidy on the Florida Panhandle”
Great example of a shared risk that quickly turned into a mutual benefit. Of course, it doesn’t always work this way but certainly nice to see when it does, especially in the airline industry. Congrats to ECP and WN and, as a former north floridian, I hope this service continues to prosper for a long time.
Off topic, but this is an interesting headline in the NYT.
As They Lose Traffic, Once Bustling Airports Have Space to Rent
By JANE L. LEVERE
Focus was on PIT, CVG & STL.
I recall when this subsudy started and am pleased to hear it wasn’t necessary after all, but did the other airports in the region suffer for this? I feel like there are far too many airports in N. Florida, especially in a seasonal location like this. If I were headed to the region an extra 25-50 miles in a rental car is nothing if I can save some $$ on the flight so I’m not really motivated to be loyal to any one airport in the region. Long term don’t you see problems for at least one of those airports down there?
A – Yeah, this area is pretty unique in not having a ton of population but having a silly number of airports. The one most likely to feel the hit is Ft Walton Beach but that has service from the big four legacies so apparently it’s still holding up.
The loss of ECP-MCO was one of the several intrastate cuts WN announced in their latest schedule release. FLL-MCO, TPA-PBI & RSW-MCO are getting the ax too. Other short haul hops like MDW-IND, ABQ-ELP and LGA-BWI will disappear soon too…..looks like WN’s ‘new reality’ cost structure is making short haul flying unprofitable.
TPA – PBI or TPA – MCO? You can drive that distance in about 3 hours or less, so flying isn’t nessessary.
tPa-PBi was nice for connecting traffic though. My mom has flown SAT-TPA-PBI and back several times.
Or maybe not really connecting traffic through as much as “well we’re almost flying over it, might as well stop there and get one of our required flights for the day done..”
I agree…but allot of this short hop p2p was the backbone of the ‘old’ WN network. (remember flights like CMH STL MCI OKC PHX LAS BUR SJC)
I’m just speculating that their current seat mile costs are making this milk run flying unprofitable.
We used ECP last summer on a trip through Florida that ended in Destin. The other nearby airports were far too expensive so we drove the hour or so from Destin to Panama City and flew home on WN. The region doesn’t see a lot of mainline flying nor competition so I was pleased to see ECP get added to the WN map and keep things competitive. ECP was a good airport and seems to be making the right decisions to keep it alive. The area attracts many high-paying travelers, so it may be able to sustain a few regional airports, but ECP looks like they’re on their way to being a bigger player in the area.
Interesting how that all turned out.
So then what’s the problem in Branson? F9 seems to be juggling things every other month and that Branson Air Express is not really doing much.
Is it the advantage of the Florida beaches that Branson doesn’t have?
Good question, Sanjeev. I’m not sure Branson isn’t doing well, at least in some cases. Frontier, for example, is now running a 319 on it almost daily. I think it started with an Embraer so it’s growing. As for AirTran, some routes have had staying power while others haven’t. I think that’s the same as we see in Florida.
If SW did not really need the subsity, one has to wonder about their motivation in accepting such a restrictive deal. In the end, it is still about butt-in-seat revenue miles. (Or Cheeks/2?) In a different situation, one involving interenational flights, PDX (Portland, OR) has been in the same boat for 15-20 years. Portland seriously wants to have a couple of non-stop international flights beyond North Amerika. At various times they have have tried several sponsored arrangements to Japan and/or a couple of major hubs in Europe. But over the longer term, neither generated quite enough paid butts in seats to make the ventures truly profitable for the several carriers involved. One could argue that the the carriers used oversized aircraft, but that’s only a part of the logistical issue. I do not know PDX’s current international status, but I suspect that it is down to one daily flight to Europe and that, ,probably on a seasonal b asis. On the end, some cities simply do not have q u i t e the volume necessasry to support the sponsored flights and once the subsity contract ends, they move their capacity to markets with better potential. One should also recognize that the sponsorship deals are usually in the form of marketing assistance ir airport concessions. They may involve a lot mare marketing that the carrier would otherwise do, or service concessions that don’t have much affect on the bottom line. They rarely come in the form of cold cash.
Cook, PDX has 2 DL daily international flights. One is to Tokyo, the other is to Amsterdam. The tokyo flight was an NW holdover while the Amsterdam flight was a replacement for a Frankfort flight on LH.
Isn’t the problem with PDX & international flights the simple fact that Sea-Tac is only a 3 hour drive away with very good international options? I was in Portland last week but flew through SEA only because cost and flight times made the car trip more economical, and that was a domestic trip.
Portland is a medium sized city that really has more service than it would be it not for it’s west coast relatively remote location. There are several Portland & larger sized cities out east with a fraction the service because they are nearby JFK and Logan and Dulles, etc.
This is an example of how subsidies should work whether private or public.
SovietWest who cares, Just another cattle carrier