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.