Title
SOUTHWEST REVENUE GUARANTEE AGREEMENT.
Presented by: Chris Chronis, Chief Financial Officer.
RECOMMENDED ACTION: Approve the agreement and authorize the Chairman to sign.
Body
AirTran Airways entered the Wichita market in 2002 after being offered a revenue guarantee by the City of Wichita. Following AirTran's entry into this market, airfares between Wichita and destinations in the eastern U.S. decreased dramatically, and travel to and from those destinations increased equally sharply. This happened not only for AirTran passengers, but for passengers of all airlines competing with AirTran. In the year ending December 31, 2012, AirTran's last full year of operation in Wichita, 407,000 passengers traveled between Wichita and the 22 eastern cities served by AirTran that fall in the 50 most popular destinations from Wichita. As contrasted with average one-way airfares in 2000 prior to AirTran's entry into this market, those travelers saved 17%, an average of $40 per one-way fare, because of AirTran's presence in this market.
In 2005, Sedgwick County partnered with the City of Wichita in the funding of the revenue guarantee. In 2006, Sedgwick County assumed contractual responsibility for the guarantee, and received funding assistance from Wichita and the Kansas Affordable Airfares program of the State. The program has continued to the present time in the same manner. State funding has been allocated to Sedgwick County for the contract year that starts July 1, and funding from Wichita will be provided upon approval of an agreement between the county and city.
In 2011, AirTran was acquired by Southwest Airlines, and in June of 2013 Southwest replaced AirTran service in Wichita with service by Southwest.
Southwest provides direct flights from Wichita to Chicago, Dallas, and Las Vegas, with connections throughout the United States from those airports. In the third quarter of 2014, after Southwest entered the market, passenger counts increased and average fares decreased to Chicago and Dallas as compared with the third quarter of 2012 before Southwest began serving Wichita. Chicago passenger counts increased 66% and the average fare decreased 22%. Dallas passenger counts increased 138% and the average fare decreased 54%. The results for Las Vegas, which already was served by another low-fare carrier out of Wichita, were less pronounced: passenger counts increased 5% and the average fare increased 3%.
The 2015 contract expired June 30, 2015. The proposed contract is conceptually identical to that one. In it, Southwest agrees to provide at least four daily round-trip flights between Wichita and Dallas, Chicago and Las Vegas, and to provide monthly reports of passenger counts, costs incurred and revenues earned as a result of Wichita service. In return, Sedgwick County agrees to pay Southwest the amount by which costs exceed revenues, up to a maximum total of $6.5-million.
Alternatives:
Commissioners could decline to approve the revenue guarantee. In that event it is possible that Southwest would exit this market. The experience of Wichita with other low-fare carriers as well as other markets with Southwest has been that the departure of low fare competition quickly has been followed by rapid increases in the fare structures of airlines remaining in the markets. Based on estimated savings of passengers in 2014, one might expect the aggregate annual increase of fares paid in Wichita to exceed $127-million.
Financial Considerations:
The revenue guarantee provides that in return for providing at least four flights per day, Southwest will be paid the difference between contractually defined costs and revenues each month in which total costs exceed total revenues. The total amount Southwest can claim during the 12-month term of the contract is $6.5-million. The contract permits Southwest to reduce service based on changes in demand. It also permits Southwest to include non-stop service to other destinations in the computation of monthly revenue guarantee if Southwest elects to provide that service.
The County expects to derive the $6.5-million obligation from a State grant of $4.75-million, matched with $1.75-million of local funds. Half of the local match, $875,000, will be obtained from Wichita, leaving $875,000 to be derived from general revenues of the County.
The City of Wichita funding will be provided pursuant to an interlocal agreement that has not yet been approved. The State grant has been appropriated but not yet received. Should either of these planned funding sources fail to materialize, the contract with Southwest includes a provision allowing the County to terminate the deal with 75 days notice.
Funding is budgeted in the 2015 General Fund (47003-110) for the required matching funds.
Funding is budgeted in the 2015 Affordable Airfares Fund (47001-278) and is in the proposed 2016 budget of the same Fund for the revenue guarantee payments to Southwest.
Legal Considerations: The authority for this action is K.S.A. 19-101. A simple majority is required.
Policy Considerations: N/A
Outside Attendees: N/A
Multimedia Presentation: N/A