MAHONING VALLEY AIR SERVICE UPDATE. September 20, 2017 Mike Mooney, Managing Partner Volaire Aviation Consulting Volaireaviation.

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1 MAHONING VALLEY AIR SERVICE UPDATE September 20, 2017 Mike Mooney, Managing Partner Volaire Aviation Consulting Volaireaviation.com

2 Airline Industry Highlights Consolidation Hub closures and capacity and gauge shifts. Negative impacts of new pilot flight, duty and qualification rules. Segmentation Five sectors of airline business models. Risk Aversion Pay to play for smaller cities. Regional Carrier Re-Fleeting. Declining Small Community Air Service Economics. 2

3 Airline Industry Consolidation: Carrier Mergers 3

4 Airline Industry Consolidation: Six Hub Closures since 2000 (Closed Hubs in Red) Six network carrier hubs within 500 miles of YNG have closed since

5 Airlines Are Lowering Operating Costs per Seat by Up-Gauging Equipment Average Domestic US Aircraft Size Change in Scheduled Departures % % % 10.0% 31% % -10.0% -20.0% -30.0% -38% 7% % % < > 100 Source: Boeing Company 5

6 Domestic Industry Sectors DOMESTIC AIRLINE BUSINESS MODELS Model Description Examples Network Large Regional Carriers Value Carriers Global size, domestic and international service, international alliances, regional partners, hub & spoke system Specializing in 50 to 76 seat gauge, Typically operating under network carrier contract, generally invisible to the public Size varies, simplified service product value pricing, more domestic than international service Point to point service, ultra low fares with Ultra Low Cost Carriers ancillary pricing, often less-than-daily or ULCC low frequency Small carriers operating smaller aircraft Independent regionals in EAS or point to point markets. Limited or no brand identiy Sun Country is migrating from the Value to the ULCC category. American, Delta, United SkyWest, Expressjet, Mesa, Republic, Air Wisconsin, Transtates, Envoy, Endevor Southwest, jetblue, Alaska/Virgin America, Hawaiian, Sun Country Allegiant, Frontier, Spirit AirChoiceOne, Cape Air, Contour Air, Boutique Air, Ultimate Air, Southern Air 6

7 Industry Sectors: Distinctions Are Blurring Network Carriers American, Delta, United. Regional Carriers SkyWest, TranStates, Republic - about 12 total. Value Carriers Southwest, jetblue, Alaska/Virgin, Hawaiian, Sun Country. Ultra Low Cost Carriers (most profitable) Allegiant, Frontier, Spirit. Independent Regionals Cape Air, AirChoiceOne, others. 7

8 Industry Sectors: Network Regionals Most network carrier regional jets operated under Capacity Purchase Agreements (CPAs). Under a CPA the regional carrier simply provides the capacity, the network carrier decides where and when it operates. SkyWest (one of the largest regional carriers) has a unique side agreement with American, Delta and United, permitting at-risk operation under the network brand (franchising). This means that with network permission SkyWest can deploy RJs under a network brand at their (SkyWest s) risk. 8

9 Industry Sectors: ULCCs As was noted, the ULCC sector is the most profitable in the industry right now. The network carriers are noticing ULCC growth and fighting back with basic economy and aggressive defense of hubs. Frontier Initial Public Offering (IPO) stalled. Spirit adjusting strategy; smaller gauge Airbuses, consideration of medium sized cities, focus on operational improvements. Allegiant fleet shift, focused on mid sized cities, moving on resort development. (being a travel company, not an airline) 9

10 Industry Sectors: Independent Regionals Struggling sector; hit hard by pilot shortage and economic limitations of available equipment. Difficult to get network access; code share, bag transfer agreements (T&B), Global Distribution System (GDS) display, integrated pricing and brand recognition Focus on Essential Air Service (EAS) or niche services; NCAA, charters, NASCAR, Corporate Shuttles, point to point services. High unit and per seat costs due to small scale and lack of critical mass. 10

11 NORTHEAST OHIO AIR SERVICE

12 Much has Changed Since 2013 > In 2013 United Airlines operated a connecting hub at Cleveland with over 150 daily departures to 50+ cities. > In 2014 United closed that hub. > From 2006 to 2013 Allegiant (YNG) operated the ONLY ULCC Florida service in the NE Ohio/W PA triangle (CLE/CAK/PIT/YNG). > In 2013 the ONLY other ULCC service in the triangle was Frontier Airlines with flights from Cleveland to Cincinnati and Denver. > In 2014 Frontier invaded Cleveland and by yearend operated ULCC flights to 15 cities, including Las Vegas, Phoenix and four Florida cities. 12

13 Much has Changed Since 2013 > In 2015 Allegiant entered Akron (3 destinations) and Pittsburgh (4 destinations). > By yearend Allegiant had more flights and destinations at those cities than at Youngstown. > At Cleveland Frontier had trimmed service and offered flights to six cities with three being in Florida. > Spirit had entered Cleveland and by year end offered flights to ten cities, including Las Vegas, Myrtle Beach and three Florida cities. > In this context Allegiant s moves at Akron and Pittsburgh could be seen as defensive in nature, attempting to block other ULCCs from entering the triangle. 13

14 Much has Changed Since 2013 > By November 2016 Spirit had entered Akron, basically on top of existing Allegiant service. CAK had ULCC service to six Florida cities. > Allegiant was then seeing head-to-head challenges on Florida routes in Akron and Pittsburgh and observing Frontier and Spirit going head-to-head in Cleveland. > In February 2017 Allegiant exited Akron and entered Cleveland. > At Cleveland there was ULCC service to 15 destinations, with Frontier offering service to 11 and Spirit to 10, with head-to-head competition on six routes, including three in Florida. > Frontier had entered Pittsburgh, which now had ULCC service by Frontier and Allegiant to 14 destinations, including 5 in Florida. 14

15 Much has Changed Since 2013 > In May of 2017 Spirit entered the Pittsburgh market and now serves seven destinations from PIT, including two in Florida. > By May of 2017 there are 49 nonstop ULCC destinations being offered from the four Triangle airports. > Cleveland has 28 nonstop ULCC destinations, the highest nondestination airport concentration of ULCC capacity in the nation. > At Cleveland Frontier is offering 16 nonstop destinations and both Spirit and Allegiant are offering 9 each. There is head-tohead competition on 7 routes. There is nonstop service to eight Florida airports. > At Pittsburgh there is nonstop ULCC service to 14 destinations, 8 by Allegiant, 3 by Frontier and 7 by Spirit. There is service to six Florida airports. 15

16 Much has Changed Since 2013 > In 48 months the triangle went from a ULCC backwater to a full scale all out ULCC battleground. > Pittsburgh and especially Cleveland are now enjoying significant service from all three ULCC carriers, with intense pricing competition. NORTHEAST OHIO ULCC AIR SERVICE RECAP: CLE ULCC YNG ULCC CAK ULCC PIT ULCC Region Year Routes Carriers Routes Carriers Routes Carriers Routes Carriers Routes Carriers > Youngstown and Akron are performing poorly in this intense competitive environment. Neither can draw on the nearby metroplexes for passengers, as was once the case. 16

17 Much has Changed Since 2013 > ULCC triangle traffic increase ; +1,017% > ULCC triangle capacity increase ; +849% > ULCC triangle departure increase ; +821% > Allegiant triangle average fare decrease ; -31% Year Carrier Enplaned Change Seats Change Departures Change Load Factor Avg Fare Change F9 131, ,054 1, % $ G4 86,384 94, % $ , ,720 1, % vs 2013 ULCC PARTICIPATION IN THE CLE, CAK, PIT, YNG MARKET F9 532, % 690, % 4, % 77.15% $ % G4 120, % 132, % % 91.35% $ % 653, % 822, % 4, % 79.43% F9 961, % 1,149, % 7, % 83.62% $ % G4 308, % 384, % 2, % 80.32% $ % NK 598, ,186 4, % $ ,868, % 2,312, % 14, % 80.81% F9 1,120, % 1,308, % 7, % 85.63% $ % G4 535, % 630, % 3, % 85.05% $ % NK 774, % 972, % 5, % 79.58% $ % 2,430, % 2,911, % 16, % 83.48% % 849.2% 820.8% 17

18 NORTHEAST OHIO ULCC SERVICE FALL

19 NORTHEAST OHIO ULCC SERVICE FALL

20 NORTHEAST OHIO ULCC SERVICE FALL

21 NORTHEAST OHIO ULCC SERVICE FALL 2016 > 2016 ULCC Northeast Ohio Route Map 21

22 NORTHEAST OHIO ULCC SERVICE MAY

23 Much has Changed Since 2013 > It is likely that current financial results for the three ULCC carriers on triangle routes are weak. > Allegiant was first to the region with service to Youngstown. > The flood of ULCC capacity into the triangle since 2014 simply overwhelmed the once profitable Youngstown service. > Allegiant attempted to play defense in the triangle but that strategy has had to evolve to head-to-head competition at the primary airports of the region. > Youngstown service will end in January. > Spirit load factors at Akron are 8 load factor points under the Spirit system load factor for the November to May period. 23

24 ALLEGIANT AT YNG

25 SERVICE HISTORY > YNG airline traffic YNG Total O&D Passengers 140, , ,000 YNG Air Service Summary (1999) UA-ORD 2x Daily BAe-ATP (2 via CAK) NW-DTW 4x Daily Saab-340 (2 via CAK) US-PIT 5x Daily Beech-1900D YNG Air Service Summary (2000) NW-DTW 2x Daily Saab-340 (2 via CAK) US-PIT 5x Daily Beech-1900D YNG Air Service Summary (2014) G4-SFB 2x Weekly MD-80 G4-MYR 4x Weekly MD-80 G4-PIE 2x Weekly MD-80 G4-PGD 2x Weekly MD-80 YNG Air Service Summary (2011) G4-SFB 2x Weekly MD-80 G4-MYR 2x Weekly MD-80 G4-PIE 2x Weekly MD-80 YNG Air Service Summary (2015) G4-SFB 2x Weekly MD-80 G4-MYR 5x Weekly MD-80 G4-PIE 2x Weekly MD-80 G4-PGD 2x Weekly A ,615 YNG Air Service Summary (2016) G4-SFB 2x Weekly MD-80 G4-MYR 3x Weekly MD-80 G4-PIE 2x Weekly MD-80 ZK-ORD 10x Weekly E145 (7 wks) 129, ,395 80,000 60,000 40,000 20, ,290 57,530 37,570 22,730 YNG Air Service Summary (2001) NW-DTW 2x Daily Saab-340 (2 via CAK) 5,670 YNG Air Service Summary (2010) G4-SFB 2x Weekly MD-80 G4-MYR 2x Weekly MD-80 YNG Air Service Summary (2006) G4-SFB 2x Weekly MD ,270 20,04022,31025,800 45,140 63,020 68,900 85,270 25

26 SERVICE HISTORY > Allegiant Air began YNG service in 2006, with year-round flights to Orlando Sanford. In 2010 service was added to St. Pete and Myrtle Beach. In 2013 service was added to Punta Gorda. > In 2014 YNG SFB ranked 15 th out of 55 Allegiant routes in ticket revenue per block hour. For the 12 months 2017Q1 it ranked 62 nd out of 73 markets. > In 2014 YNG PIE ranked 6 th out of 34 markets in ticket revenue per block hour. For the 12 months 2017Q1 it ranked 38 th out of 54 markets. > In late 2016 Allegiant suspended Punta Gorda service. > In August of 2017 Allegiant advised it would terminate all YNG service at year end

27 SO WHAT HAPPENED? > Intense competition at nearby Cleveland, Akron and Pittsburgh. > Load factor decay. > Average fare decay. > Initial Allegiant attempts to defend its position in the region by adding service at Akron and Pittsburgh. > Then Allegiant Akron service was shifted to Cleveland. > Finally the decision to consolidate all services at the two big airports in the triangle. This is not a decision the carrier would make casually or without very careful internal consideration. 27

28 YNG ROUTE PERFORMANCE YNG ALLEGIANT AIR AVG FARE BY ROUTE YNG Avg Fare Avg Fare Chg Avg Fare Chg Avg Fare Chg Change Destination Y/Y 2015 Y/Y 2016 Y/Y MYR $61.22 $ % $ % $ % -33.8% PGD $81.96 $ % $ % $ % -24.7% PIE $83.86 $ % $ % $ % -31.4% SFB $77.23 $ % $ % $ % -32.9% YNG ALLEGIANT LOAD FACTOR BY ROUTE YNG LF % LF % Chg LF % Chg LF % Chg Change Destination Y/Y 2015 Y/Y 2016 Y/Y MYR 89.4% 88.6% -0.9% 79.8% -9.9% 78.0% -2.3% -12.8% PGD 85.0% 90.8% 6.8% 86.2% -5.1% 89.2% 3.5% 4.9% PIE 93.1% 92.3% -0.9% 86.3% -6.5% 88.6% 2.7% -4.8% SFB 92.0% 92.7% 0.8% 87.7% -5.4% 87.8% 0.1% -4.6% > From 2013 to 2016; - MYR fare down 34%, load factor down 13% - PGD fare down 25%, load factor up 5% - PIE fare down 31%, load factor down 5% - SFB fare down 33%, load factor down 5% 28

29 CURRENT NEW SERVICE OPTIONS

30 CURRENT NEW SERVICE OPTIONS > Pursuing less-than-daily leisure market service. > Pursuing independent regional carrier small aircraft service to east coast business destinations. > Pursuing leisure market track program options (gambling resort) > Pursuing network coded RJ service to a network hub (SCASD grant). > Retaining and expanding college sports team charters. 30

31 CURRENT NEW SERVICE OPTIONS > Extremely difficult regional environment for any carrier to enter YNG Florida or Myrtle Beach right now. > Independent regional business market service challenges; - No brand identity and high unit costs - No T&B or limited T&B and no pricing integration - Hub access costs - Best to focus on local O&D > Resort chartered track programs are low risk, low reward. > Network RJ service will require significant MRG funding; - Has to be next best use; aircraft, pilots, gates - Has to make strategic sense for the carrier - Network CPA capacity or SkyWest at-risk capacity > SkyWest at-risk capacity currently focused on EAS options. 31

32 SUMMARY

33 SUMMARY > Near Term Goals; - Refine business case document - Present business case document to viable option carriers - Work on local new service support mechanisms - Maintain airline related airport infrastructure (TSA/ARFF/FBO) - Consider refining and rebranding website/social media > Medium Term Goals; - Get something working, something that will succeed, not fail - Once triangle competition settles, find viable service gaps - Recruit to fill those gaps > Long Term Goals; - Regain at least 10,000 annual enplanements for AIP - Build from there 33

34 NEXT STEPS > Community support; - YNG Air Partners - Chamber - Economic Development - Concerned citizens - Media - Big travel generators > Realistic expectations; - What is possible? - What are you willing to commit to achieve what is possible? - Focus on options that will work, and those may be modest > Patience; - Eventually the intense regional ULCC competition will abate - Continued economic growth 34

35 Mike Mooney Volaire Aviation Consulting Volaireaviation.com