General Aviation and 10 Things About the U.S. Airline Industry That Likely Makes You Crazy. NASAO Annual Conference Boise, Idaho September 2015

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1 General Aviation and 10 Things About the U.S. Airline Industry That Likely Makes You Crazy NASAO Annual Conference Boise, Idaho September

2 General Aviation Metrics

Number of Active General Aviation Aircraft and On-Demand Part 135 in the U.S. by Region 2013 2010 2007 N.W.

3 Number of Active General Aviation Aircraft and On-Demand Part 135 in the U.S. by Region N.W. Mountain 24,362 26,798 28, Central 12, Great Lakes 30,779 33,972 37, Eastern 22, New England 6,808 7,610 8, Western-Pacific 28, ,099 12, ,618 25, Alaska 5,526 6,113 33,132 35, Southwest 29,526 32,340 33, Southern 39,031 44,596 42, Total U.S. 199, , , ,111 Source: GAMA 2014 Databook.

4 General Aviation Airplane Shipments by Type of Airplane Manufactured Worldwide , ,417 1, Single-Engine Piston Multi-Engine Piston Turboprop Business Jet Source: GAMA 2014 Databook. 4

Customer Delivery Region for General Aviation Airplane Shipments by Type of

20% Asia- Pacific 12% Latin America 9% Asia- Pacific 20% Latin America 15%

North America 51% Business Jet Europe 20% Asia- Pacific 11% Latin America

5 Customer Delivery Region for General Aviation Airplane Shipments by Type of Airplane Manufactured Worldwide Share of Total 2014 Piston Turboprop Europe 20% Asia- Pacific 12% Latin America 9% Asia- Pacific 20% Latin America 15% Europe 8% Middle East & Africa 4% Middle East & Africa 6% North America 55% North America 51% Business Jet Europe 20% Asia- Pacific 11% Latin America 9% Middle East & Africa 8% North America 52% Source: GAMA 2014 Databook. 5

6 Total Hours Flown by General Aviation Airplane Type (in thousands) Rotorcraft 2,949 Business 3,488 Turboprop 2,587 Experimental 1,191 Other 308 Gliders 68 Lighter-Than-Air 67 Piston 12,352 Special Light-Sport 173 Source: GAMA 2014 Databook. 6

7 U.S. General Aviation Fuel Consumption, Millions of Gallon Year Single- Engine Piston Airplane Multi- Rotorcraft Experimental and Other Total Fuel Consumed Engine Turboprop Business Jet Piston Turbine Aircraft Light-Sport Avgas Jet Fuel Total Piston , , , , , ,231 1, , ,527 1, , ,643 1, , ,486 1, , ,706 1, , ,447 1, , ,435 1, E , ,491 1, , ,542 1, E , ,413 1,616 Source: GAMA 2014 Databook. 7

8 General Aviation Aircraft Forecast 225, , , ,000 General Aviation Forecast Number of Airplane by Type 203, , , , , , , , , , ,170 10,175 10,190 10,230 10,285 10,355 10,445 10,550 10,685 10,820 11,000 11,205 12,250 12,540 12,875 13,225 13,600 14,010 14,425 14,855 15,315 15,800 16,325 26,415 26,880 27,305 27,705 28,100 28,500 28,900 29,310 29,715 30,130 30, , ,000 75,000 50, , , , , , , , , , , ,635 25, Airplane - Piston Experimental Airplane - Business Jet Airplane - Turboprop Rotocraft - Turbine Balloons, Dirigbles, Gliders Rotocraft - Piston Special Source: GAMA 2014 Databook. 8

9 1. CONSOLIDATION: SHOULD I BE UPSET WITH THE AIRLINES OR WITH THE REGULATORS IN WASHINGTON? 9

10 Today the Big 4 U.S. Airlines Hold 85% of the Domestic Market Delta Northwest United Continental Southwest AirTran American TWA US Airways American West Aug 14 10

11 2. CAPACITY DISCIPLINE: SHOULD I BE UPSET WITH THE AIRLINES OR WALL STREET? 11

12 Capacity Grows Faster Than Real GDP: An Industry That Grew Too Big Available Seat Mile Index Real GDP Index :4-1982:4 1983:1-1991:1 1991:2-2001:4 2002:1-2009:3 2009:4 - Present Note: SAAR, 2009 Chained Dollars Note: Business cycle 1 =

Domestic seat capacity has remained stagnant despite economic growth Represents a recent shift in airline strategy; typically, airlines grow capacity in times of domestic economic growth.

13 Domestic seat capacity has remained stagnant despite economic growth Represents a recent shift in airline strategy; typically, airlines grow capacity in times of domestic economic growth. 6% Year-over-year % Changes in U.S. GDP and Domestic Seat Departures 4% 2% 0% -2% -4% -6% YOY % Chg GDP YOY % Chg Domestic Seats -8% Source: US DOT T-100 database, via Diio online portal. BEA 13

14 Available domestic seats are at their lowest level since 1997 Capacity discipline and schedule rationalization has wiped out nearly 100 million domestic seats. U.S. Average Load Factor and Available Domestic Seat Departures Domestic Seats - Millions 1, Load Factor Domestic Seats 90% 80% 70% 60% 50% 40% 30% Load Factor % % % Source: US DOT T-100 database, via Diio online portal. 14

15 Smaller airports are still seeing the largest cuts in service Overall U.S. airports saw net decreases in domestic flights from , mainly due to loss of flights in smaller airports as large and medium hub airports actually achieved growth in both departures and seats Scheduled Domestic Departures Millions Large Medium Small Nonhub Airport Type % change in domestic flights ( 14-15) % change in domestic seats ( 14-15) Large Hub 0.3% 4.0% Medium Hub 1.0% 4.4% Small Hub -2.7% -0.1% Non-Hub and EAS -2.2% -0.3% All Smaller Airports -2.5% -0.2% All Airports -0.2% 3.5% Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 15

16 Passenger Revenue and Ancillary Fees as a Percent of Gross Domestic Product 1.0% 0.9% Average = 0.90% 0.8% ($29.3 B) Average = 0.76% 0.7% Pax Rev Pax Rev + Ancillary Fees Average = 0.72% 0.6% 0.5% 1Q79 1Q80 1Q81 1Q82 1Q83 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Source: 16

17 3. SEQUESTRATION: YOU SHOULD BE UPSET WITH THE GOVERNMENT 17

18 U.S. Metropolitan Areas Ranked by Spending Per Job Rank MSA DoD Spending (M) Total Spending (M) Spending Per Job 1 Idaho Falls, ID MSA $ $2, $47,691 2 California-Lexington Park, MD MSA $1, $1, $39,940 3 Amarillo, TX MSA $3, $3, $31,407 4 Huntsville, AL MSA $5, $6, $30,799 5 Norwich-New London, CT MSA $3, $3, $27,848 6 Gulfport-Biloxi-Pascagoula, MS MSA $2, $3, $27,651 7 Washington-Arlington-Alexandria, DC- VA-MD-WV MSA $32, $71, $23,768 8 Kennewick-Richland, WA MSA $15.80 $2, $19,813 9 Oshkosh-Neenah, WI MSA $1, $1, $19, Sierra Vista-Douglas, AZ MSA $ $ $18, Virginia Beach-Norfolk-Newport News, VA-NC MSA $10, $11, $16, Jacksonville, NC MSA $ $ $15, Palm Bay-Melbourne-Titusville, FL MSA $1, $2, $12, East Stroudsburg, PA MSA $ $ $12, Tucson, AZ MSA $3, $4, $11,751 Source: Chmura Economics & Analytics, JobsEQ, FedSpendTop. Employment data as of 2015q2, Spending data FY

19 4. FUEL: BROUGHT YOU ANCILLARY FEES, CAPACITY DISCIPLINE AND MADE SMALL JETS UNECONOMIC 19

20 Fuel Price per Gallon $4.00 $3.50 $3.00 $2.50 Average = $2.10 $2.00 $1.50 $1.81 $1.00 Average = $0.69 $0.50 $0.00 1Q79 1Q80 1Q81 1Q82 1Q83 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Source: 20

21 Fuel Cost Change v. Unit Revenue with Ancillaries Percentage Change 80% 60% 40% 20% % Chg - Fuel Price % Chg - Rev w/ancilliaries 0% -20% -40% -60% 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Source: 21

22 5. FARES: OFTEN DISCUSSED RARELY UNDERSTOOD 22

23 Why Should Capacity Discipline Increase Airfares? Economic theory would suggest that airfares would rise as a result of reductions in capacity, assuming demand for air travel stays constant. P S P S S Supply and Demand for Air Transportation P* Q* D Q Capacity restriction causes supply curve to shift P P* Q Q* D Q Indeed, many airports have seen increases in average fare in the last several years. 23

24 The Majority of Large Markets Saw Fare Increases in the Last Five Years Nearly 86% of the top 5,000 domestic O&D markets in 2014 saw an increase in gross fares from 2010 levels. Outliers include cases where LCCs entered or left the market (e.g. ATL-SDF) Histogram of Percent Change in Average Gross Fares for Top 5,000 O&D Markets, Number of Markets % -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% More Percent Change in Gross Fares Source: U.S. DOT DB1B O&D Survey via Diio Mi 24

25 Caveats with Aggregate Fare Analyses Average fares reflect prices across a variety of markets for all types of tickets, including first-class and business seats. Average fares at an airport include many different itineraries with varying elasticities of demand and stage lengths. Airlines sell the same seat on a given flight at a variety of different prices average fare data does not give information on distribution of prices on a flight. Fares don t tell the whole story: ancillary fees need to be taken into account, particularly at the network carriers and the ULCCs. 25

26 The BTS Quarterly Fare Report is an Analysis of Average Fares BTS Quarterly Fare Reports are based on average fare data from the DB1B Airline Origin and Destination Survey 10% sample of tickets sold for itineraries originating in the U.S. Every ticket number ending in 0 is reported in the survey According to Diio, no one really understands the methodology DOT uses to make their Quarterly Fare Reports Mix of one-way, round-trip, and multi-city itineraries Uses gross fares (incl. taxes) instead of net fares Omits routes with passengers below a given threshold Better methodology: Diio breaks down itineraries into one-way net fares to do an apples-to-apples comparison and includes all routes with passenger traffic. Source: Diio Mi 26

27 6. PILOT SUPPLY: WHO IS TO BLAME AIRLINES, LABOR OR GOVERNMENT? 27

28 Understanding the Scope of the Problem Retirements and New Equipment Will Put a Strain on Labor Supply Between now and 2022, the Big 4 US airlines will retire 14,200 pilots that need to be replaced just to maintain the network being flown today Today, the regional industry has seat aircraft on order that will also need to be staffed As an example, the industry will need to park 569 smaller units just to staff the larger equipment Regulatory issues have already impacted the pilot supply from expanding to the degree necessary to respond to these pressures 28

29 A CRITICAL ASSUMPTION IN THE ANALYSIS: THE REGIONAL SECTOR WILL BE THE SOLE SUPPLIER OF PILOT LABOR AND REMAINS RELATIVELY FIXED OVER TIME 29

30 Limiting Pilot Supply Could Lead To Disastrous Effects -- All communities would feel the effects as the regional industry shrinks Suppose that the regional pilot labor force in 2014 stayed fixed over time. Not an outrageous assumption, considering the new 1500-hour rule that is making it impossible for carriers to fill new classes. Based on replacement of retiring pilots at the mainline and aircraft being delivered to the regional industry: By 2017, all turboprop aircraft would likely be retired along with 215 small jets Remaining small jets likely to be retired by 2020 By 2022, the regional industry would be but 20 percent of its 2014 self 30

31 Republic Airways Holdings Inc. tumbled the most ever, losing half its value, after saying a worsening pilot shortage may create more disruptions in flights it makes for larger carriers. Talks are under way with American, Delta and United airlines to possibly reduce regional flying the rest of this year and into 2016, Republic said late Friday. The Indianapolis-based company also disclosed that it hired Seabury Group to evaluate options for its future. Republic is suffering a dearth of pilots after the U.S. Federal Aviation Administration boosted the required flight experience for first officers by sixfold to 1,500 hours and set new limits on duty times, the airline said. Attrition among existing workers has grown because it hasn t been able to reach a new labor contract with competitive pay rates. July 27, 2015 Bloomberg News 31

32 7. IF AIRPLANES ARE GETTING BIGGER, CAN ALL COMMUNITIES SUPPORT THE SERVICE? 32

33 Only 138 of 357 (39%) of Small and Non-Hub Airports Are Supporting 70-Seat Service Today Markets Supporting 70-Seat Service Previously Served With 50-Seat RJs 29 of 29 Large hub airports 29 of 29 Medium hub airports 61 of 67 Small hub airports 77 of 290 Non-hub Airports 177 Non-hub markets have below average propensity to fly Note: Only 15 markets with below average propensity to fly have 70-seat service today 33

34 Conclusions Nobody is excited today as it is only frequency cuts and not market exits 2015 marks the first year where it will difficult to replace lost seats at the historical level.and it only gets harder Fear is that markets likely have insufficient traffic or population to support larger jet service If you are on the sidelines regarding the pilot supply issue, I urge you to rethink your position Regulatory change is necessary Need to focus on increasing the pilot supply Small RJ/Turboprop service is essential for many small communities 34

35 8. LOOKING AT THE STATES WITH THE MOST ROUTES, FREQUENCIES AND SEATS ADDED 35

36 There is an airline story where new routes are being added State August 2007 August 2015 Absolute Change Florida Texas Illinois Washington North Carolina South Carolina North Dakota New Jersey Maryland Oregon Colorado Iowa Indiana Wyoming South Dakota Massachusetts Montana Hawaii Mississippi Vermont West Virginia State August 2014 August 2015 Absolute Change Texas Florida Washington North Carolina Pennsylvania Indiana South Carolina Tennessee Mississippi California Missouri Iowa Nebraska Illinois Louisiana Maryland New Mexico North Dakota Ohio Oklahoma West Virginia Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 36

37 The health of local economies and airline strategies explain everything State August 2007 August 2015 Percentage Change North Dakota 1,452 2, % Washington 20,051 21, % North Carolina 30,956 29, % Alaska 7,883 7, % Illinois 48,004 44, % New Jersey 14,826 13, % Louisiana 7,361 6, % Massachusetts 20,969 19, % Minnesota 18,475 16, % Texas 76,673 67, % Arizona 32,792 28, % South Dakota 1,905 1, % Maryland 10,640 9, % Georgia 42,145 36, % Oregon 11,179 9, % South Carolina 6,705 5, % Maine 2,758 2, % Florida 50,417 42, % Virginia 31,876 26, % Colorado 29,613 24, % California 83,035 68, % State August 2014 August 2015 Percentage Change Washington 17,131 21, % Indiana 5,440 5, % Florida 39,742 42, % Maine 2,257 2, % Tennessee 10,500 10, % Georgia 35,410 36, % Idaho 2,568 2, % North Dakota 2,002 2, % Alabama 3,552 3, % Mississippi 1,674 1, % Texas 66,394 67, % Iowa 2,806 2, % Maryland 9,078 9, % Pennsylvania 23,170 23, % Virginia 26,593 26, % Nevada 15,192 15, % New Jersey 13,657 13, % Ohio 15,194 15, % South Carolina 5,735 5, % North Carolina 29,774 29, % Louisiana 6,760 6, % Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 37

The same is true for seats deployed. 2007-2015 2014-2015 State August 2007 August 2015 Percentage Change North Dakota 88,497 130,676 47.7% Washington 2,044,242 2,468,889 20.

38 The same is true for seats deployed State August 2007 August 2015 Percentage Change North Dakota 88, , % Washington 2,044,242 2,468, % Louisiana 592, , % Massachusetts 1,492,358 1,654, % South Carolina 445, , % North Carolina 2,665,983 2,895, % Oregon 984,782 1,064, % Maine 152, , % Georgia 4,569,728 4,706, % Montana 242, , % Minnesota 1,872,411 1,887, % Texas 7,715,351 7,678, % Alaska 550, , % New Jersey 1,494,281 1,463, % California 9,310,895 9,105, % Colorado 2,867,883 2,797, % Maryland 1,312,374 1,272, % Illinois 4,830,046 4,658, % Kansas 113, , % Florida 6,063,659 5,745, % Iowa 202, , % State August 2014 August 2015 Percentage Change Indiana 461, , % Ohio 1,255,856 1,412, % Washington 2,246,552 2,468, % Florida 5,261,227 5,745, % Virginia 2,313,800 2,475, % Texas 7,190,261 7,678, % Alaska 511, , % Maine 148, , % Tennessee 945,847 1,005, % Oregon 1,002,058 1,064, % South Carolina 463, , % Michigan 1,801,485 1,906, % Nevada 2,179,027 2,297, % Georgia 4,464,615 4,706, % Massachusetts 1,570,477 1,654, % Louisiana 635, , % Illinois 4,442,116 4,658, % Maryland 1,216,117 1,272, % New Jersey 1,400,332 1,463, % California 8,728,329 9,105, % Minnesota 1,813,339 1,887, % Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 38

39 9. ARE MORE SERVICE CUTS AHEAD? 39

40 The virtuous circle of air service challenges for small U.S. airports. Operational No 50 seat and less replacement aircraft in the pipeline In the wing oil in excess of $50 per barrel Economic Smallest new production aircraft likely to be at least 100 seats 40,000 cycle decision Strategic Capacity discipline at major carriers has reduced frequencies and seats Prevalence of low cost carriers in primary catchment areas Pilot shortage surely to impact regional sector of the business Flight Time/Duty Time regulations cause staffing challenges Government-Induced 40

41 10. WELL THEN. WHAT ABOUT TOMORROW WITH NO PILOTS AND NO SMALL JETS 41

42 NATURE ABHORS A VACUUM 42

43 William S. Bill Swelbar Executive Vice President InterVISTAS Consulting LLC 1150 Connecticut Avenue, NW Suite 601 Washington, DC P C william.swelbar@intervistas.com 43

Financial and Economic Indicators for the Air Transport Industry. NASAO Legislative Conference Washington DC February 2016

Financial and Economic Indicators for the Air Transport Industry NASAO Legislative Conference Washington DC February 2016 General Aviation Metrics Number of Active General Aviation Aircraft and On-Demand