Call to Order and Roll Call
The Program Review and Investigations Committee met on Tuesday, August 17, 2010, at 1:00 PM, in Room 154 of the Capitol Annex. This was a joint meeting with the Interim Joint Committee on Economic Development and Tourism, whose co-chair, Representative Eddie Ballard, called the meeting to order. The secretary called the roll.
Present were:
Members: Senator John Schickel, Co-Chair; Senators Jimmy Higdon, Vernie McGaha, R.J. Palmer II, Joey Pendleton, Dan "Malano" Seum, Brandon Smith, and Katie Kratz Stine; Representatives Dwight D. Butler, Leslie Combs, Terry Mills, David Osborne, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.
Guests: John Mok, Chief Executive Officer, Kenton County Airport Board and Tim Zeis, Chief Operating Officer, Cincinnati/Northern Kentucky International Airport; Eric Frankl, Executive Director, Blue Grass Airport; Charles Miller, Executive Director, Louisville International Airport; Steve Stevens, President, Northern Kentucky Chamber of Commerce; and Mary Bryan Hood, Director, and Mr. Dean Stanley, Chairman, Owensboro Museum of Fine Art.
LRC Staff: Greg Hager, Committee Staff Administrator; Rick Graycarek; Christopher Hall; Colleen Kennedy; Van Knowles; Lora Littleton; Sarah Spaulding; Cindy Upton; Stella Mountain, Committee Assistant.
Kentucky’s Airport Industry—Issues and Challenges
Senator Kerr said the issues and challenges facing Kentucky’s airports are of great concern to the committee and the legislature. At the request of Senator Stine and Representative Palumbo, the Interim Joint Committee on Economic Development and Tourism and the Program Review and Investigations Committee asked representatives from Kentucky's major airports to testify at today’s meeting.
Senator Stine said the airports are a vital economic engine to the Commonwealth and thanked the co-chairs for opening dialogue on this issue.
Steve Stevens, President of the Northern Kentucky Chamber of Commerce, introduced the other members of the panel. Mr. Stevens said even with the downsizing of Delta Airlines, the Northern Kentucky airport is still an important generator of economic activity. The national economy is highly dependent on commercial aviation, which is directly or indirectly responsible for 5.2 percent of the gross domestic product (GDP) and represents 10.9 million jobs nationally. Aviation is critical in Kentucky. According to the Federal Aviation Administration (FAA), in December 2009, 5 percent of Kentucky’s jobs were civil aviation-related with salaries averaging approximately $31,000 and representing 5.3 percent of the state’s GDP. According to a 2004 University of Cincinnati study, the Cincinnati/Northern Kentucky Airport (CVG) provided an annual net economic benefit of $4.5 billion and supported over 50,000 local jobs. The presence of top notch air service with options is critical to economic development, and businesses consider air service a top factor in determining where they will locate. Robust air service is also critical on the international level. According to the Economic Development Cabinet, Kentucky is home to 394 international companies employing 72,581 people full-time. Northern Kentucky has many international businesses, many from Germany, England, and Japan. The CVG used to offer direct flights to Amsterdam and London—a major attractor of many of those firms. Since these flights are no longer offered, the ability to attract international companies is uncertain. Mr. Stevens said today’s testimony will provide recommendations on making Kentucky more competitive and more attractive to air carriers to increase jobs.
Next, Mr. John Mok, Chief Executive Officer, Kenton County Airport Board at the Cincinnati/Northern Kentucky International Airport, presented an air service investment program to help Kentucky’s commercial service airports compete with surrounding states. Mr. Mok said CVG’s influence on corporate site selection is evident with companies like Toyota, Ashland Oil, Dunhumby, GE Capital, and Fidelity. However, domestic seat capacity with network carriers is at its lowest level since 1991. Reducing air capacity increases air service competition resulting in communities competing against each other. New economic development tools are necessary to improve Kentucky’s competitive advantage to attract and retain businesses.
Referring to a PowerPoint presentation, Mr. Mok noted that 33 of 51 airports surveyed by the Airports Council International-North America offer an incentive program for domestic air service, and 23 of 48 airports providing international air service offer incentive programs. During negotiations, once it is decided there is a market, carriers want to know the cost of doing business and what financial incentives are available.
Air service at CVG has decreased significantly. From 2005 to 2010, average weekday departures have gone from 670 to 225. The number of passengers has dropped from 22 million to 10 million; the number of nonstop domestic flights has decreased from 130 to 70, and the number of nonstop European destinations from five to one. Once a major connecting passenger hub, the CVG now services an equal number of local and connecting traffic. Two terminal concourses have been closed and thousands of airline employees have been laid off as a result. To increase air service, CVG is pursing all avenues including identifying new air service opportunities with existing carriers, meeting with business and political leaders, seeking a diversified mix of domestic and international carriers, and improving customer service. Restoring lost international service is a priority as the ability to shorten travel time between international destinations is a distinct advantage in the global marketplace. With the loss of four European nonstop destinations in 2009, the ability to retain and attract international businesses is jeopardized. He noted that cities such as Pittsburgh, Portland and San Diego have invested millions in incentives to secure or retain international service citing hundreds of new jobs and an approximate $100 million annual economic benefit from one direct transatlantic flight.
The targeted travel market segment must be considered in developing an air service investment program as well as the program's value to the community. International air service offers the most economic benefit and requires the most resources. Historically CVG has proven there is local demand for transatlantic nonstop service; however, competition from cities that offer air service incentives makes it hard to complete. The implementation of an air service investment program for Kentucky’s airports will create a level playing field.
Next, C.T. “Skip” Miller, Executive Director of the Louisville Regional Airport Authority, gave an overview of the airport’s air service. Mr. Miller said the airport offers 92 commercial service flights daily by seven major airlines. There are 25 nonstop destinations, 17 of which service the top 20 destinations. The airport served 3.2 million passengers in 2009. The airport’s main goal is enhancing access to destinations important to the business community. Business travel is the core component of the commercial airline industry. Mr. Miller said an example of good investment in aviation is United Parcel Service (UPS) who provides a significant economic benefit to the state through jobs, taxes, and the ability to attract other companies.
The airport’s passenger air service development strategy is to create sustainable air service while focusing on new domestic nonstop service; particularly through expanded hub access as well as regional connections, and enhanced leisure options without sacrificing network carriers that support the business marketplace. Partnerships including one with the Louisville Chamber of Commerce have been formed to help build sustainable service. A successful air service development program has three essential ingredients: a well thought-out plan, sustainable service that is efficient and reliable, and buy-in through the community to help attract and promote service and reduce start up costs. He concluded by saying that today’s economic climate has changed the face of air service.
Mr. Eric Frankl, Executive Director of Lexington Blue Grass Airport, said the airport serves approximately 1 million passengers a year, averaging 40 flights a day to 14 cities. He noted the impact an airport has on local business and stated air service is almost always a consideration by companies and site selectors when evaluating options. The airline industry has suffered from enormous economic pressure since deregulation in 1978, resulting in many communities having decreased passenger service as a result. Mr. Frankl said the airport representatives before the committee today were there to seek help. He explained the impact of low fare airline service to a community. Lexington recently received a United States Department of Transportation Small Community Air Service Development Grant for $600,000 with a local match of $150,000 to attract a low fare service to Lexington to counter the steady drop in passenger activity over the previous four years. Through a revenue guarantee, AirTran Airways began direct service to Orlando and Fort Lauderdale. In the first six months, passenger activity increased 16 percent over one year ago. This demonstrates the challenge airports have of legally providing a revenue guarantee regardless of whether the money is available. Because of this challenge it is not uncommon for state governments to implement air service grants. Kansas offers incentives based on the belief that an annual investment of $5 million will save citizens over $40 million through lower airfares. This benefits the average consumer and companies in the community.
Representative Palumbo said without airport service Kentucky can neither serve consumers nor the domestic business and international community.
Responding to a question on how to maintain and create jobs, Mr. Mok gave examples of how other cities offer programs such as revenue guarantees. Airlines are most concerned with minimizing risk when entering a new market, and one way to avoid this is to minimize the cost of entry into the market. European and Asian airports typically provide all required operations handling services—a significant cost of entry. One consideration would be to offer similar airline handing services. Seed capital and training and development funds would be helpful as well. Tim Zeis, Chief Operating Officer at CVG gave an example of the state providing a $400,000 jobs incentive for the 1994 Delta and ComAir expansion that resulted in the purchase of property that is still in use by the airport.
Representative Palumbo said smaller regional airports should also be included in discussions.
Mr. Frankl added that each airport has different operations and requires different strategies for reaching the same end goal. Any assistance by the state would need to be flexible.
Mr. Miller said the Louisville Airport is not looking for a handout but a hand up to be prepared to compete with other states’ incentives. The airport representatives agreed that while they are competitors, the success of the Commonwealth is their main focus.
Responding to Senator Stine’s questions, Mr. Mok said that while virtually every airport in Europe and Asia provides ground support, no major commercial airport in the United States does due to the origins of the airline industry in the U.S. As the industry evolves, airlines are now outsourcing these services. Area Chambers of Commerce have been collaborative and supportive of CVG. He said a skilled labor pool is important for carriers considering the market and one exists due to recent layoffs. The airport is working with local college to ensure training remains available.
Senator Smith suggested investigating the use of coal fuel as a more economical and local source of airline fuel.
Representative Clark asked for a business plan before tax incentives are decided upon. Mr. Mok said the board is committed to diversifying air service providers at CVG. Due to multiple factors, it is not expected that Delta will ever rebuild to their previous numbers.
Senator Webb said the state should hear from a broad range of carriers to understand what is needed to expand into Kentucky before the state invests, and asked for information on any federal commitment to expand before the state attempts to craft a plan. She asked for information programs offered by other states, and that detailed information is needed before the legislature can move forward.
Responding to Representative Koenig’s question about assistance to airlines, Mr. Miller said a number of offerings are available including cooperative advertising, fee abatement programs, and a pool of resources and assets offered to carriers to defray startup costs. Any assistance available is tied to continuation and maintenance of a certain level of services.
Responding to Representative Wuchner’s questions, Mr. Mok said the largest European markets from CVG are London, Frankfurt, and Paris. He explained that the use and lease agreement with Delta expires in 2015, and that separate terminal leases with Delta expire from 2015 to 2025. He said the original exclusive lease with Delta was modified when they filed bankruptcy.
In response to Senator Kerr’s question Mr. Frankl said that while the Blue Grass Airport has suffered some missteps, the airport has come a long way with new board members and an internal reorganization in progress. Redevelopment should conclude within six months to a year.
Representative Moore expressed concern that the industry may be addressing symptoms rather than some of the market’s underlying problems. He encouraged the airport representatives to give members of the legislature and the committee specific recommendations on how to help the state’s airport industry. Given the state of the economy he asked for suggestions for nonmonetary adjustments the legislature could make as well to encourage carriers to expand.
Senator Schickel thanked the presenters and noted that the Program Review and Investigations Committee would be aggressively working towards a report to be reviewed at the October meeting. He said the September 9th meeting would cover workforce development for older workers. The minutes of the last meeting will be approved then as well.
Owensboro Museum of Fine Art
Representative Thompson introduced representatives from the Owensboro Museum of Fine Art and stressed the importance of a cultural environment and the role it plays in Kentucky’s communities, particularly the connection between a cultural environment and the ability to attract and retain jobs in a community.
Ms. Hood, Executive Director of the Owensboro Museum of Fine Art, said since its inception in 1977, the Owensboro Museum has become the state’s second largest art museum with over 70,000 visitors annually. It has evolved into a regional center for the visual arts. The museum, now housed in three wings, also offers two outdoor sculpture parks. She said while this dynamic growth is the result of generous financial support and extensive gifts to the art collection, it is more the result of the enthusiastic response from regional residents to its broad programming and arts education. Two of western Kentucky’s most important historical structures enhance its physical plan. Both are national historic sites—the Carnegie Building built in 1910 and a civil war era mansion, the John Hammond Smith House. They were structurally joined by a $2.5 million expansion creating an architectural concept called the village environment containing 14 galleries. The site also features two outdoor sculpture parks that include green space and a walking trail. The museum features local artists, folk art, and national touring exhibitions. More than 30,000 school children visit the museum annually to view the exhibits, watch performing arts events, and participate in the museum’s educational opportunities. There is a month-long summer camp as well.
Ms. Hood introduced a video featuring the museum.
Mr. Dean Stanley, chairman of the museum's board of directors, explained that the museum needs financial help. The community saw a need for greater cultural awareness and decided to commit their time and resources to making it happen by supporting the museum. It is an educational resource and an asset to economic development and tourism. Most importantly, it directly contributes to the quality of life in the region. The museum has the potential to offer even greater educational opportunities to the people of western Kentucky. These enhanced opportunities are even more important in light of the recent financial challenges faced by regional school systems, and the museum’s experience in planning and implementing creative educational programs could benefit the regional in much the same way as the Kentucky Historical Society does with its state-assisted programs. Mr. Stanley noted that eastern Kentucky is represented through the Prestonsburg Mountain Arts Center and the Kentucky Artisan’s Center in Berea. A western Kentucky Center for the Visual Arts could serve the same purpose for western Kentucky. This vision was recently shared with the Governor’s Office as well. Mr. Stanley asked that the legislature include funding for the museum as a line item in the state’s next biennium budget. The museum is requesting approximately $400,000 a year to develop the regional center. Based on an economic study by American’s for the Arts, art centers create jobs and contribute to the economy. He said many cities are working to attract a young, educated and professional workforce through arts and cultural offerings.
Representative Ballard said the Owensboro Museum is a valuable asset to western Kentucky.
Representative Palumbo said the museum has a wonderful collection of fine art. She supported helping the museum any way possible.
Senator Rhoads said the museum’s reputation as a cultural center is rightly deserved.
Responding to Senator Westwood’s question, Mr. Stanley said to create the outreach program through the Western Kentucky Center for the Visual Arts they would need funding for additional staff and expansion of the museum as the museum’s size limits its offerings. Ms. Hood added that the museum is a source of direction to other museums wanting to offer similar services and additional funding would also allow them to provide greater assistance to other arts facilities.
There being no further business, the meeting adjourned at 3:00 PM.