The Global Airline Industry

Challenges & Opportunities For US Airports

Keep On Doing What Might Have Worked In The Past And Thats Exactly Where Itll Leave You 16th Annual Boyd Group International Aviation Forecast Summit
www.AviationForecastSummit.com All Contents 2011 Boyd Group International, Inc. All Rights Reserved

Small Airports In The Economic Cross Hairs:

Airports with under 150,000 passengers are generally going to be challenged by the new economics. But even some larger ones can be threatened
Airlines want profitability, not flying to marginal markets, or markets that dont fit their long term strategies The number of airline systems has shrunk materially in the last 20 years, and the fleets under their brand have changed, too Tumble to it: Survival in the global economy means access from the rest of the world not necessarily local air service to get to Orlando Its not a matter of a route being profitable its a matter of being profitable and compatible with the airlines strategy

Key Airline & Air Service Trends

Ignore The Hype Retaining Air Service Access - Not Necessarily Local Air Service - Will Be The Future Challenge For Many Communities

Traffic Demand: Dont get misled by 2011 airline financials. They

were strong because the industry adjusted to the economy, not because of a booming business environment.

Revenues: Driven by ancillary fees and tight control of capacity this

will continue. Capacity monitoring reduces the potential for at-risk flying to small & mid-size communities

Expansion: Airlines are capitalizing on their strengths, but are adding

strong, targeted markets that fit specific strategies

Low Fare Carriers: The revenue hurdles are going up by the day
and the WN/FL merger does not change that situation

The Future: Air Service Access May No Longer Be At The Local Airport.

Key Trends
Fleets:
The industry is awash in excess 50-seat regional jets and that is not an opportunity

Operator Conundrum: lose less flying em than parking them?

Conundrum: maintenance costs going up like a moon launch. At @ 40,000 hours they start to turn into financial pumpkins Solution at least for now: high-yield feed markets. AAs found military points & EAS markets for Eagle but theyre limited in number, and not necessarily all-up profitable Get pre-emptive: monitor RJ hub-feed performance distance/local yield/flow contribution. Then make hard decisions

Key Trends
Air Access Is Via Network Carriers, At The Carriers Hubsites
Small communities need access to connecting hubs to aggregate enough traffic to support air service Therefore, air access is by definition via a comprehensive network carrier system These CNCs are less able to attain an adequate ROI at smaller airports Independent airlines? Not a chance. No hub to aggregate traffic, then no chance of survival. Point: long term, local air service EAS or not that is not connective to a network brands hub connectivity, isnt air service. Its a waste of fuel. The Only Alternative: Assuring global access at a regionalized airport that can aggregate sufficient traffic to support service that consumers particularly inbound consumers will use. Can your airport fill this role?

There Are No Airline Alternatives

Travel Company Operators
Allegiant, Vision, & semi-charter operators are great to pursue
They generate lots of mostly net-new travel volumes But they arent in business to fill a communitys air service needs They focus on taking discretionary dollars from other sources This type of operator is excellent for small airport revenue streams, but dont do much to retain/recapture leakage to other airports Point: Keep on recruiting efforts. But dont get mislead into believing this is access from the rest of the globe

Todays Cargo Cult Air Service Distractions

Like: Another leakage study to find out - yet again - that 70% of the traffic is using another much larger airport 40 minutes away in some cases, its not going to change How bout: An internet survey to find where people want to fly usually data that are a non sequitur the airline & hub access options are clear before the first unscientific result is posted on the net. E Pluribus Dumb: A Chamber of Commerce coalition to let an airline know how much the community needs the airline, and how they need lower fares Goin Hollywood: A YouTube video, showing civic leaders imploring the target airline to fly to the community these have all the impact of a hostage video

You sure thisll work better than a travel bank?

Tumble to hard reality: its a matter of airlines no longer having airplanes that can serve many smaller markets - period.

Lets Review Some of The Snake Oil

These flim-flam, go-nowhere schemes really happened:
A small, unserved airport, 40 minutes away from two low fare carriers, being told they have local service potential for a hundred thousand passengers or more A mid-size airport told that it can be a regional hub, fed by 9-seat airplanes, even though no carriers bank flights there whatsoever The Jet America fiasco: Communities persuaded to spend thousands marketing a nonexistent airline promising three flights a week to the East Coast Communities advised that just getting more direct (read: nonstop) flights will instantly spike demand by 40%.... Airports with barely 150,000 enplanements, being told they can lure a low cost carrier with a couple $K in incentives

These sorts of scams might make communities feel better, but they are just re-arranging the deck chairs, not planning for the future

Air Service: Its Subject To The Laws of Physics, Too Hey, Captain Smith, lets do a study and find the solution!!!

It went down strictly due to hard, physical realities Conditions outside of its control changed factors that no longer permitted it to float No amount of consulting schemes or Black Magic could have changed these realities

Scheduled air service is no different there are economic realities that cant be reversed with another study or survey the situation is clear, so deal with it. Or go down with the ship.

The Current State of Rural Air Service

The physical economic realities of air service have changed The cost of flying airplanes across the sky has eclipsed the ability to support it at many communities The same economics are causing major airline systems to re-structure Air service is no longer a matter of flights at the local airport. It is whether whole regions have access to and from the rest of the world

Access & Regionalization are the trends of the future

For many communities, its time to get off that air service Titanic

Its Not A Matter of Finding The Right Airline

Majors
AIR CAL ALASKA AMERICA WEST AMERICAN CONTINENTAL DELTA EASTERN FRONTIER MIDWAY NEW YORK AIR NORTHWEST OZARK PAN AM PIEDMONT PSA REPUBLIC SOUTHWEST TWA UNITED US AIRWAYS WESTERN

Regionals
AIR ILLINIOIS AIR MIDWEST AIR NEW ORLEANS AIR OREGON AR WISCONSIN ASA ASPEN ATLANTIS BAR HARBOR BRITT CASCADE CHAPARRAL COMAIR IMPERIAL MALL MESA METRO MIDSTATE NEW AIR PBA PLIGRIM PRECISION RIO ROCKY MOUNTAIN ROYALE SKYWEST

Consumers could book & buy on at least 21 large jet operator brands, plus over two dozen independent regional airline brands.

Today, airports can turn to just nine large jet operators. And none of the regionals who were around in 1983 are in the retail airline business.

jetBLUE SPIRIT

Not a complete list.

The Fleet Bar Keeps Going Up

Entire Fleet Categories Have Disappeared

Not a complete list.

These Are Shrinking

They are already being retired

Gone already

Lots of them retired more are in line for the desert sun

As we speak, in North America, there are close to 200 of these airplanes sitting inactive, retired. They are economically obsolete.

In the 2Q of 2011, some airlines were paying, all-up, almost $4 per gallon for jet fuel. Spreading this over 50 seats (or less) gets real expensive, real quick.
And, again, theres that maintenance cost issue. Its a matter of time.

That Fleet/Revenue Bar Is Going Up

And no amount of denial will change it:
A Gift From The People: Most of the development costs for CRJ and ERJ were borne by the taxpayers of Canada and Brazil when the manufacturers were privatized.

All 50-seaters are out of production and are getting older Fuel costs on a per-seat basis are getting tougher At 35K 40K hours, they get maintenance-costly And no replacements the next cost-hurdle will be 100seaters (like the E-190) - maybe

The Future Is Clear In One Key Area

Est Hrs 2020

Avg Age Est Avg Hrs

Age 2020

CRJ-100/200
Going out.

10.4 8.8

24,960 21,120

19.4 17.8

46,560 42,720

ERJ-135/145

Long before 2020, most 50-seaters will become cost-prohibitive Between now and 2020, most of these will be in the desert Turboprops? Only 60-70 seaters still in production high ticket airplanes

Lets Summarize The Real Trends

Sheer costs are outrunning ability of markets to support air service locally, so The concentration of service IS gravitating to being regionalized

Going out.

Going up.

Airline resources = highest & best use only

Airline strategies: maximizing revenues v system costs shifting to cooperative Alliance strategies Key metric: revenue flows to/through the alliance is job #1

Its About Alliance Territory, Not Local Markets

Capturing and Defending Revenue Streams.
Based on each Alliances strategies, the goal is to capture revenues that build and strengthen the system.

Don SkyTeam, the oneworld family has given up SFOAustralia to the Star family should we make a move on New Zealand LAX?...?

Globally, Growth By Adding Members, Not Expanding Incumbents

The idea is to get regional strength through recruiting more regional players

Territorial Alliances will stake out turf globally and ceded other turf Concentration of Pooled Resources Today independent fleets. By 2020 pooled fleets, maintenance, purchasing, standards Focus: Global Flows Less ability to serve small & mid-size markets. Less interest, too. Aggregation of traffic at fewer US airports is not just a trend it is a certainty. Communities that ignore this put their economic future at risk in a global economy

Yes, That Scraping Sound Is An Iceberg

Lets Recap Before We Head To The Lifeboats

The types of aircraft that are now serving many communities are going away no question it is a mathematical certainty
There are no aircraft breakthroughs that will result in replacement for regional jets. The 50-seat era is over. No manufacturer is taking the risk to develop a follow-on There are no new airlines coming to the rescue and the LCC growth era is over. Measured expansion, if any and not in rural areas

Howling at the moon wont change economic realities. Neither will social media, best practices, or another consumer survey. Communities must start making contingency plans to assure air service access and that may mean regional cooperation.

Deal with it: at least 100-125 non-EAS airports will lose scheduled air service in the next 8 10 years including many that today have over 150,000 O&D

Okay Lets Move Into The Future Year 2020

Fast Forward To Year 2020. Lets Look:

Passenger growth slow up 12% from today - to 517.6 million Enplanements: up @ 10% to 799.1 million Fleets: Smallest jet airliner: @ 100 seats No 50-seat jets are left they are all run out Traffic is concentrating into fewer airports Local air service not always at the local airport
Airports:USA forecasts indicate that air passenger demand will grow much slower than in the past, and much more slowly than FAA forecasts. Remember? In 1992, the FAA predicted enplanements to exceed 1 billion by 2001. Now, their forecasts predict that number to be reached after 2021

Regionalization of access
Service determined by potential for revenue capture, not passenger volume

These Are Your 2020 Local Airline Brands

Year 2020 The Competitive Landscape

Fleets big iron only
The costs of design and development of a new small-capacity airliner simply are too risky Point: the enplanement bar will be up big time.

Competition
Three network carriers Star, oneworld, SkyTeam. A couple of independents Southwest, JetBlue, etc. Face it competition will be minimal the airline business will no longer be one with easy entry or viable return on investment

By 2020, The Traffic Requirements Will Be Much Higher

Remember, there will be no small jets take it to the bank And it will be global alliances that will be driving strategy Where an airline schedules a $30 million airplane is much different than a $15 million unit.

These are rough numbers, but indications of a rough future for local air service Figure what a basic schedule will demand in terms of passengers annually
Flights Per Day Equivalent Days Weeks Seats/Flt L/F Pax Rq

52

100

85.0% 155,938

Assumes three RT flights - six daily segments - & 98% completion factor

The New Global Alliance Market Definition Model

Where Might Your Airport Fit For Each Alliance?

Alliances have specific market systems that are based on their individual strategies & strengths. One Alliances Primary/Anchor market can be anothers secondary or even incremental market.

Primary/Anchor Markets: Connecting Hub Portals: Star: FRA/NRT/IAH, etc. In a very few cases, two alliances may have the same Primary/Anchor market ORD & NRT are examples Secondary Major Markets: Typically large metro airports, including those where the Alliance needs presence at another Alliances primary market. Example: Delta needs ATL-LHR as a secondary major market, even though oneworld is the dominant alliance at Heathrow Incremental: markets where strong feed is provided to the Primary/Anchor airports, specific to each Alliance Marginal: markets that provide Alliance presence, and/or feed that is additive, but not critical to the Alliance strategy Ceded Markets: Routings, and even regions where the Alliance is not strong enough to maintain a brand presence.

Point: Alliances are splitting turf between themselves and that turf includes regions of the US and Canada

Its Not Just Very Small Airports: A Few Potential Examples Of Airports At Service-Risk
Airports With Over 50,000 Annual Passengers That Are Likely To Lose Scheduled Service By 2020
Yakima Marquette

Toledo Redding Springfield Champaign

Fort Smith

Abilene San Angelo

Tyler College Station

Brow nsv ille

These do not include over 100 smaller airports where retirement of small airliners will end service

Regionalization of Air Service The Traffic Is Still There Except There Is At Another Airport

Regionalization Is In Progress
Passengers Aren't Lost - Just Using Other Airports

Since 1990 passenger traffic has shifted to centralized Bloomington/Normal The region has grown by 10% in air traffic, but Bloomington/Normal has now grown by over 350%, capturing over 40% of the 5-airport region traffic - up from 9% in 1990 - 120,000 passengers O&D in 1990 to over 560,000 in 2010 Reason: Central location allows carriers to "regionalize" traffic capture at one airport. Same dynamic in other regions of the country

Total traffic in the region is up 10%... But regionalization has resulted in BMI jumping 350%

Do All The Surveys, Studies, Best Practices And Other Voodoo You Want, But: Its A Mathematical Certainty By 2020 Dozens of Local Airports Will Lose Service
Market Dynamics:
Small Jet Airliner Retirements 2011 2020 Mergers Have Reduced Competitive Choices
Code-Share & Frequent Flyer Program Sharing Between Alliance Partners Control Consumer Brand Choice

Regional Airlines which today are just leasing aircraft to majors, shrink dramatically

The New Air Transportation System:

100+ Fewer Cities With Local Air Service Capacity Aimed At Bottom Line, Not More Passengers Trend: Less Competition

Airline Capacity Additions Very Slow & Anticipatory To Economy

Global Alliance Strategies Increasingly Focus on Maximizing Revenue Flows Not Flying More Places.

Fuel Costs Raise Revenue Requirement Bar

Low Cost Carriers Not Low Cost, Anymore

Yeahbutt New Airlines Will Pop Up

No, they wont
Passengers Are Not Being Lost There will be little opportunity for new airlines to serve small and mid-size airports the cost of entry is high, the ROI is abominable, and heres the kicker Those passengers lost at MKG or CMI or PLN or PUB are still flying its just at other airports. A new carrier to fill these supposed gaps in rural air service would be taking on incumbents, big time.

What will they fly? Retired RJs will be run-out and uneconomic at $3 - $4 a gallon for jet-A. Economics make no sense for designers to try newgeneration small jets the R&D cost are prohibitive

There are no viable openings for new airlines trying to fly to East Cupcake. Like inter-urban rail of the early 20th century, its transportation mode that cannot be supported any longer
Low Cost Carriers? Their cost is too high to take advantage of the opportunities at Fort Smith or Muskegon, or Champaign/Urbana

Factors Defining Future Regional Gateways

The main decisions on where an airline alliance will place lift comes from the front office and you cant always count on logical decisions from that area But there are factors that make one airport more attractive than others Strong Industrial Base. Particularly an international-focused business base: Montgomery Charleston WV etc. Anchor Business W/ Big Travel Budget: Alliances will salivate at getting the travel budget of major employer State Farm at BMI Surrounded By Smaller Markets Nearby: This is business, nothing personal. If strong traffic currently, your airport has as good a chance as any as long as its current service is already strong. Examples: Grand Rapids. Midland TX Yields: This is one area where you want to have strong airline fares. The goal is access from the rest of the globe. No center of el cheapo fares, thats the deal. Shreveport: your high fares dont make airlines unhappy. And happy airlines bring service to town

Regional v Metro Peripheral Markets

Not all traffic will automatically funnel into regional gateways Some markets are stand-alone: Traverse City. Saginaw. Flagstaff.

There are markets that have local traffic sufficient to maintain strong local service particularly where local industry is strong and focused Binghamton. Lincoln. L.A. Basin.
Watch population & business trends Flint got strong access to migration out of Detroit. Toledo did not. It just moved north, not south nor west, toward Lansing

The move toward regionalization is driven by a combination of consumer & airline strategies, so
Pro-Active regional planning will facilitate the process the region can control it or, it can be haphazard, or not at all

The airlines of 2020 will be heavily-dependent on road hubbing markets with strong 4lane feeder systems will have the advantage

So, How To Plan

First: all of the financial factors have changed for the airline industry the air service recruitment techniques of 2010 are now like trying to put a vacuum tube into an iPad. Meeting and schmoozing with airline planners is nice, but now you have to have more than a travel bank, a leakage study, or a slide deck of size to rival War & Peace. What revenue streams do you offer to the airline/alliance system? Identify which category of market you fit into or can work to fit into for each alliance. Assume that individual airline brands will evolve into an alliance identity US & UA will represent one alliance strategy What type of regional role does your airport face? A true regional gateway? A stand-alone with strong industries to support future service? A Metro-peripheral access point? Or, worst case, one that needs to plan for assuring access that may be at another airport in the region. Civic hubris to avoid reality can be very expensive in the future.

What is your regional airport competition? Competitively awake? Asleep? Side-tracked with dumb air service schemes? Whats your most likely path try to dominate the region, or recognize other airports have the advantage? What emerging industries are in the region, and what value do the represent to the alliance carriers serving your airport?
If regional jets got replaced tomorrow with 100 seaters, where would you stand, revenue v cost? Load factors? Hub access. Facilities. What is the distance to the current connecting hubs where you have service. The more distant, the more vulnerable. Hard analysis: What are the airport alternatives in the region? What are the airline strategies at each? Are you a potential GRR? Or a candidate for regionalization to other airports? Just a glance at where EAS airports are headed increasingly to single-engine, nonconnecting service is a harbinger for larger airports in the <150,000 O&D range. Remember, your economic future depends on access from the rest of the world and airlines dont give a rip about local sensibilities. The sooner communities work together, the better chance of assuring access in the future.

More? Give Boyd Group International a call well be up front about where we think we can help crafting an aggressive air service plan that addresses these futurist issues. Well also be upfront regarding the realities we see for your airport and your region. Unlike other consultants, we turn down any assignments where the air service goals are inconsistent with reality, and we let clients and potential clients know this right up front.

Air Service Success In The Global Economy Will Go To The Communities That Boldly Plan Within The Context of The Future Airline System.
For Straight Talk To Assist In Developing An Air Service Strategy That Fits The Future, Call Us At (303) 674-2000. No Fluff. Well Give You The Facts As-Is & Where-Is
The 16th Annual International Aviation Forecast Summit Albuquerque