A $1 million revenue shortfall over the first three months of operation for American Airlines’ Tucson to New York nonstop flights will be covered by the City of Tucson, Pima County and private backers.
As part of a two-year deal that brought the flights to Tucson International Airport last year, a $3 million revenue guarantee was created that the airline could dip into when performance was lackluster.
While interest has grown and recent months have met or exceeded ticket expectations, the company has burned through a sizable portion of that pool, the vast majority of which is private money.
On Tuesday, the Pima County Board of Supervisors voted 4-1 to release the $100,000 county administration had pledged as a part of the deal. The City of Tucson, the only other public body involved, committed $75,000, according to County Administrator Chuck Huckelberry.
Bill Assenmacher, who is on the Tucson Airport Authority Board of Directors and helped coordinate the deal with the Tucson Metro Chamber, said American came in around $1.3 million under guaranteed revenue levels through the end of December. Those who pledged are being asked to deposit half their commitment in a fund controlled by the chamber, which for Pima County is $50,000.
“From a positive perspective, all the hotels and the people involved in tourism are very happy with what’s happened,” Assenmacher said. “We’re just not that happy that we’re burning through the revenue guarantee fund at a faster pace than what was predicted.”
In January, American decided to suspend the nonstop daily flights starting in early May, and intends to start them back up in mid-December to avoid the low summer months.
In October, 5,889 passengers filled 72.2 percent of the 8,160 available seats, below American’s average of 82 to 83 percent, according to a TAA memo sent to Assenmacher in December. That resulted in a $455,279 shortfall, according to the terms of the minimum revenue guarantee.
David Hatfield, the TAA’s business development and marketing director, said that averages for February and March have been “in the 80 percent range,” and this week essentially every seat was booked. Huckelberry told the supervisors that 80 percent is about “break even” for the New York City flight.
“They are running very strong right now,” Hatfield said.
When flights exceed the revenue guarantee, American keeps the revenue excess, which may not be applied to meet the minimum revenue requirement of the following quarter, according to the terms of the contract.
During the discussion of the measure, Supervisor Ally Miller, who voted against releasing the $100,000, raised concerns about the deal, which she noted had not come to the supervisors for approval. Huckelberry said the deal was made between “private parties and county management.”
“They made a bad deal. It wasn’t any shock when it failed,” Miller said, adding: “Why are we now going back to taxpayers and asking them to subsidize this bad deal?”
Responding to Miller’s criticism, Mike Varney, CEO of the Tucson Metro Chamber, which has the revenue guarantee contract with American, said, “the way the game is played today, the chess board is all about public-private partnerships.”
Supervisor Steve Christy, who voted for the release, described the deal as “a perfect example” of such partnerships.
“If we’re going to spend our money for economic development, it shows good faith on the county to at least participate when individual citizens and business organizations are willing to step up to the plate,” he added.
Huckelberry said the county participated in an effort to “try to increase the amount of hotel bed taxes that the region receives.”
In his memo to the board on the deal, Huckelberry said that revenue guarantees are a common practice among other communities trying to attract more visitors and direct flights.
Assenmacher said that it can take “a year or two to work the bugs out” of a new flight like American’s New York service. But with the $3 million pool diminishing faster than anticipated, he said “an additional revenue source” may be necessary.
“It may have to be available next winter in order to keep this thing rolling,” he added.