Strategic Choices in an Uncertain Era

Transcription

1 Industry analysis and policy priorities for airport executives Stephen D. Van Beek, Executive Director of Policy and Strategy Airports Council International, North America/ CEO Forum February 7, 2012

2 Today s Agenda The Need, and the Time, for Strategy The Changed Decade Forecast: Uncertainty Policy Imperatives Discussion

3 The Need, and the Time, for Strategy In preparing for battle I have always found that plans are useless, but planning is indispensable. Dwight D. Eisenhower, Supreme Commander, Allied Forces

4 Airport and Aviation s Place in the Global Economy: Time to Think? Notwithstanding dramatic change, little change in the aviation policy framework for at least 15 years Global Economy Aviation 4 ACI NA CEO Forum, February 2013

5 The Changed Decade Unlike the boundaries of the sea by the shorelines, the oceans of the air lap at the border of every state, city, town and home throughout the world. Welsh Pogue, Attorney and former Chairman of the CAB

6 Regional and Inter-Regional Air Service Demand (July 2012) Globalization continues as the Asia markets grow intra regionally as well 6 ACI NA CEO Forum, February 2013

7 Regional Air Service and Alliances Share of Seats (2000 & 2011) While consolidation is occurring everywhere, the North American market leads the way 7 ACI NA CEO Forum, February 2013

8 The Role of Airline Hubs 8 ACI NA CEO Forum, February 2013

9 Regional GDP and Airline Capacity ( ) The dominant position of the Western economies is eroding quickly. Questions: Can North American and European aviation leadership be retained? What impacts will this have on domestic networks? What types of new aviation policies are available to strengthen our position? What are airports places within those policies? 9 ACI NA CEO Forum, February 2013

10 Regional Capacity GDP and Airport Capacity Growth ( ) North America stands as a notable exception to the global trend 10 ACI NA CEO Forum, February 2013

11 U.S. Airport Hub Classification (% of Total 2011 Enplanements) 29 U.S. Airports serve 70% of the nation s enplanements Large Hub Medium Hub Small Hub Non Hub 19% 8% 3% 70% 29 Large Hubs: > 1% of U.S. annual enplanements 35 Medium Hubs 0.25 to 0.99% 73 Small Hubs 0.05 to 0.25% 244 Non-Hubs < 0.05% 121 Commercial Service: > 2,500 annual enplanements 11 ACI NA CEO Forum, February 2013

12 Airport Capacity: The Lost Decade? 17% fewer domestic seats were available for U.S. passengers in 2011 than in 2000 Several waves of capacity reductions as a result of: Fuel crisis Recession and demand drop Industry consolidation The strength of the U.S. economic recovery is still uncertain Communities should expect, at best, weak capacity growth in the near term Effects of United-Continental and Southwest-AirTran mergers continuing to be felt Fuel prices volatile 0% 5% 10% 15% 20% 25% 30% 35% 40% 10.3% 20.3% 23.7% 32.1% Change in Scheduled Domestic Seats Medium hubs Nonhubs Small hubs Large hubs Source: Official Airline Guides accessed February 21, Additional change is in the air 12 ACI NA CEO Forum, February 2013

13 Airline Seat Capacity is Increasingly Concentrated at Large-Hubs Large hub airports accounted for 72.4% of capacity in 2012 Percent of scheduled departing seats 100% 90% 9.2% 8.5% 80% 24.6% 19.1% 70% 60% 50% 40% 30% 66.2% 72.4% 20% 10% 0% Large hubs Medium hubs Small hubs 13 ACI NA CEO Forum, February 2013

14 U.S. Legacy Airlines Are Focused on Large Hubs Large hub airports accounted for 76.4% of U.S. legacy airline capacity in 2012 Percent of scheduled departing seats 100% 90% 9.6% 8.8% 80% 22.2% 14.9% 70% 60% 50% 40% 76.4% 68.2% 30% 20% 10% 0% Large hubs Medium hubs Small hubs 14 ACI NA CEO Forum, February 2013

15 and Developing International Service at Gateway Airports Legacy airline international seats up an average of 0.7% per year between 2000 and International seats (millions) Domestic seats (millions) International Domestic 15 ACI NA CEO Forum, February 2013

16 Short-haul traffic for U.S. Domestic Pax Down ( ) Courtesy A4A based on USDOT O&D data Flight distance in miles Total 12.2% -1.6% -1.0% -17.3% -45.3% 16 ACI NA CEO Forum, February 2013

17 ? The Changed Decade 1. The airport business has changed 2. International trends impact our airports 3. Globalization is a positive for North American aviation

18 Forecast: Uncertainty The only function of economic forecasting is to make astrology look respectable. John Kenneth Galbraith, Economist

19 Economy: Shares of GDP 2011, 2016 and 2030 (World Bank) By 2030 forecasts predict that less that Europe and North America < 50% of Global Capacity 100% 90% 80% 70% 60% 50% 31.6% 29.6% 27.8% 26.7% 24.5% 23.8% Europe North America Northeast Asia (China) Latin America 40% 30% 20% 10% 0% 20.3% 21.9% 6.6% 6.9% 4.3% 4.5% 3.6% 4.3% 25.4% 7.5% 4.8% 7.2% Actual Forecast Southeast Asia Western Asia (India) Middle East Africa 19 ACI NA CEO Forum, February 2013

20 Energy: Oil Prices 1980 to 2035 (Department of Energy) Single point forecasts suggest long term, real increases in oil prices $250 U.S. dollars per barrel $200 $150 $100 $ dollars Current dollars $ ACI NA CEO Forum, February 2013

21 Energy: Oil Prices (West Intermediate), Jan.2012 Jan. 2015, EIA Even short term forecasts, however, suggest a great deal of uncertainty in oil prices 21 ACI NA CEO Forum, February 2013

22 Traffic: FAA ATO Operations: (FAA TAF) Will the 20% reduction in operations be reversed as the FAA forecasts? Millions FAA forecasts a 2038 return to 2000 levels air traffic operations 20% < ACI NA CEO Forum, February 2013

23 Traffic: FAA Enplanements: (FAA TAF) 2.2% per year long term forecast for North America (by FAA and Boeing) Millions 1,600 1,400 1,200 90% increase forecast for 2011 to , % increase 2000 to ACI NA CEO Forum, February 2013

24 AATF Taxes and Fees: 2013 FAA revenues are driven by passengers, segments and fares (not cost-recovery) 7.5% domestic passenger tax (ad valorem tax) $3.90 segment fee (indexed) 6.25% of property moved by air (ad valorem tax) $17.20 international facilities tax per arrival or departure (indexed) Noncommercial fuel: 19.3 cents AvGas, 21.8 cents other Commercial jet fuel 4.3 cents 24 ACI NA CEO Forum, February 2013

25 FAA Finances: AATF Uncommitted Balance (in $ billions) Update available in February 2013 (for President s FY 2014 budget request) $8.00 $7.00 $6.00 $7.07 $7.35 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $4.82 $3.90 $2.45 $1.94 $1.77 $1.53 $1.44 $0.77 $0.30 $1.40 $ $2.40 FY 2013 assumed USDOT Budget user fee revenue of $863m. from $100 per flight surcharge. Without it, balance remains at $1.6b. The FAA s uncommitted balance represents about a month s reserve for capital programs and operations. 25 ACI NA CEO Forum, February 2013

26 The Historic and Future Role of Taxpayers in Funding the FAA Other than through the Obama Stimulus Program, General Fund Trending Down 120% 100% 80% 60% 40% 20% 0% Taxpayers Share of FAA Budget ( ) Pressures on Taxpayer Spending ? Large budget deficit and national debt Politics right now favoring shared sacrifice or across-the-board cuts PAYGO (Senate) and CUTGO (House) rules enforce discipline and pressure spending Sequestration looms in March 2013, promising reductions in the FAA budget of at least 8-10% With Trust Fund financial issues, infrastructure spending now widely perceived as discretionary Other transportation priorities including highways, transit and rail all lack sufficient dedicated revenues (or dedicated revenues at all), requiring taxpayer funding if they are to be continued 26 ACI NA CEO Forum, February 2013

27 FAA Finances: Major Program Functions FAA Operations growth has squeezed growth in the capital accounts $20 $18 Operations F&E AIP Research (Authorized) I n B i l l i o n s $16 $14 $12 $10 $8 $6 $4 $2 $ Projected Capital Squeeze 27 ACI NA CEO Forum, February 2013

28 Federal Capital Grants (AIP) and Authorized PFCs Airport sources of funding capacity are dropping significantly in real terms 28 ACI NA CEO Forum, February 2013

29 ? Forecast Uncertainty 4. The future high price of oil will constrain aviation 5. Aviation will resume its long term growth 6. FAA finances jeopardize airport infrastructure

30 Policy Imperatives The one who adapts his policy to the times prospers, and likewise that the one whose policy clashes with the demands of the times does not. Niccolo Machiavelli, Statesman/Philosopher

31 Competition: Airline Consolidation and the Future of Aviation North America Europe air services significantly impact domestic networks Baker & Streeter on Consolidation s Meaning for Airline Investors If American and U.S. Airways successfully merged, close to 90% of domestic capacity will be controlled by the Big Three and Southwest Sure, two airlines controlling 100% market share might sound better, but let's be realistic. Four airlines with 90% market share represent the optimal industry structure, and should allow for consistent return generation going forward, in our view. Hubert Horan on What Consolidation Means to the Aviation Industry Consolidation will undermine future growth by reducing pressure for ongoing innovation and productivity; and worsening capital allocation within the industry It is a counter-revolution against liberal, market-based competition. Year Top 3 airlines/alliances % of traffic 51% 47% 97% Competitors with > 2% capacity ACI NA CEO Forum, February 2013

32 Competition: Canadian Style Canada s market size presents significant issues for competition Grant Bishop, The Globe and Mail, December 24, 2012 The current rules on foreign ownership deprive Canadians of choice. For example, Australia has allowed a right of establishment for foreign carriers, resulting in lower fares and expanded routes. In Canada, we remain beholden to Canadian-owned carriers if we want to fly between two Canadian cities. The result is an oligopoly that gouges travelers and takes their business for granted. Ambarish Chandra of the University of Toronto found that, relative to Americans, we often pay between 50 and 100 per cent more for comparable travel between Canadian cities. Various expert reviews of the airline industry including by the Competition Bureau and the 2002 independent observer on airline restructuring have recommended allowing a right of establishment for foreign carriers on domestic routes to put pressure on our laggard airlines to improve. 32 ACI NA CEO Forum, February 2013

33 Competition: U.S. DOT Competition and Aviation Policy Assessing U.S. DOT s performance on aviation policy The U.S. Department of Transportation s Office of Aviation and International Affairs has three primary goals: 1. Liberalizing international air services by seeking market liberalization; 2. Ensuring the benefits of a deregulated, competitive domestic airline industry; and 3. Developing policies to improve air service and/or access to the commercial aviation system for small and rural communities. To its credit, USDOT has resisted anti-competitive slot regimes and worked to include airport interests in schedule coordination and slot regimes, which are susceptible to gaming and excluding airport interests (i.e., small communities and competition). Such concerns exist as well with Collaborative Decision Making (CDM). 33 ACI NA CEO Forum, February 2013

34 Competition: Capacity growth in 2012 vs (Airline Weekly) Smaller airlines are driving growth and, in some cases, encouraging a competitive response 34 ACI NA CEO Forum, February 2013

35 The Foundations of U.S. Aviation Infrastructure and Airport Policy These four pillars formed the foundation between at least 1990 and today Tax-Exempts PFC Authority AIP $ Trust Fund 35 ACI NA CEO Forum, February 2013

36 The Four Airport Pillars of the Trust Fund and PFC Era These four have been critical enablers of airport and aviation growth Historic Intent 1. Airport and Airway Trust Fund: capital for aviation system infrastructure such as F&E and AIP. Helped fuel growth in aviation infrastructure; with user $. 2. AIP: funding base for small airports and large airport discretionary projects 3. PFCs: source of local capital independent of use and lease agreements, key instrument to promote competition and capacity. 4. Tax-Exempt Debt: variety of instruments promote infrastructure investment by state and local governments. By providing cost of capital advantage to public airports, subsidies deterred privatization. Today s Reality 1. Airport and Airway Trust Fund: inadequate revenues generated by users due to softness in air travel and unbundling of airline fares. One recession away from insolvency. 2. AIP: full entitlement funding and LOIs in jeopardy. 3. PFCs: continued loss of PFC value likely through 2015 with congressional rejection of increases in $3.00 and $4.50 ceilings. 4. Tax-Exempt Debt: increasing pressure on tax subsidies because of congressional scoring of airport bonds. This federal emphasis adds to the challenge of getting either a PFC increase or enhanced flexibility. 36 ACI NA CEO Forum, February 2013

37 In case you forgot Policymakers avoided tough choices on aviation policy The current four-year FAA reauthorization (through FY 2015): fails to bring funding stability to the Airport and Airway Trust Fund; endangers future NextGen investments; provides inadequate resources to AIP; is overly optimistic about the growth in FAA Operations freezes the PFC ceiling for four additional years; and increases regulations on airports. 37 ACI NA CEO Forum, February 2013

38 GAO, Airport and Airway Trust Fund (January 2012) Continuing funding uncertainty will make long term infrastructure planning challenging Congress will determine the future budget resources available to meet FAA s operating and capital investments, including NextGen improvements. Even within the currently constrained federal budget environment, it appears that based on the President s budget request estimates, FAA expenditures will continue to exceed trust fund revenues in future years. As federal budget resources continue to be constrained, Congress may face some difficult choices about whether to reduce FAA s appropriations, which could increase FAA s total costs and delay the benefits associated with investments such as NextGen, or to either increase revenues going into the trust fund or increase appropriations from general revenue. 38 ACI NA CEO Forum, February 2013

39 FAA Management Advisory Council Current group serving three year terms through 2013 Management Advisory Council (MAC) Public Law , The Federal Aviation Reauthorization Act of 1996, Sec 230, mandated the Council. The law was further amended by PL , Sec The MAC provides the FAA Administrator general advice from a broad spectrum of aviation interests. The council functions as an oversight resource for management, policy, spending and regulatory matters. Juan J. Alonso, Stanford University David J. Bronczek, FedEx Express Lynn Brubaker, Consultant Russell A. (Chip) Childs, Skywest Airlines Gina Marie Lindsey, LAX James C. Little, TWU Jack J. Pelton, Cessna Steven Pennington, USDOD John D. Porcari, USDOT Steven Predmore, MV Transportation Ramon Ricondo, Ricondo (Chair) Paul Rinaldi, NATCA Stephen D. Van Beek, LeighFisher 39 ACI NA CEO Forum, February 2013

40 Industry Reform: MAC Priorities and Feedback Factors to consider given past efforts at reform 1. Financial Sufficiency: agreement that the FAA does not have a sustainable flow of resources to adequately plan multi-year capital investments. Belief that Congress will not fill the gap. 2. User Fees and General Fund: agreement that general fund dollars increase congressional involvement; can and should a non-user benefit be institutionalized?. 3. Revenues: revisions in excise taxes must be accompanied by changes in governance to ensure stakeholders more of a role in defining priorities. 4. Spending/Regulation: codify the myriad and often conflicting sets of regulations - perhaps linked with the adoption of more riskmanagement measures - that can provide cost savings and improve policy. 5. FAA as Regulator/Operator: mixed views about commercializing and separating ATC (and safety) from the other parts of FAA. Consensus appears to be to solve the financial sustainability and stakeholder involvement issues without recommending separation of ATO. 40 ACI NA CEO Forum, February 2013

41 Industry Reform: Principles for the Way Forward The best chance at airport reforms may be through aviation reform 1. Accept that the current system is not sustainable 2. Financial Sufficiency: provide a long-term strategy that enables the FAA to plan and invest 3. User Fees and General Fund: make the FAA as self-sufficient as possible to separate it from the cyclical swings of the industry 4. Codify FAA Authorities: review FAA roles and responsibilities toward simplifying regulatory responsibilities and addressing contradictions (e.g., compliance (part 139) vs. data-driven processes (SMS)). 5. Governance: provide more industry input about future capabilities and investments made by the FAA 6. Congressional Oversight: by making the FAA more self-sufficient, provide incentive for Congress to oversee on the FAA s strategic direction without interfering with tactical business decisions 41 ACI NA CEO Forum, February 2013

42 ACRP s Look at Future Research Industry Needs Report due out Spring 2013 Megatrends 1. Globalization 2. Sovereign debt and fiscal policy challenges 3. Redistribution of aviation traffic/small communities 4. Competition/new entrants 5. General aviation s future 6. Funding of airport capacity 7. Costs and management of security/facilitation 8. Concerns over the environment 9. Aviation stakeholder relationships 10.Airport governance Policy Responses 1. Visa/CBP reform 2. Encourage industry self-sufficiency and/or public support 3. Assess USDOT funding programs (e.g. EAS/AIP) 4. Review air service restrictions 5. Follow-up on FAA Asset Study 6. Lift regulatory constraints 7. Improve service levels and/or review funding regime 8. Be proactive, not defensive, in community and industry forums 9. Develop new models of airlineairport relationships 10.Explore alternatives 42 ACI NA CEO Forum, February 2013

43 One option for airport reform This trade off is a premise of many of the proposals to reallocate funding and roles Under Grant Assurance 24, airports are required to be as selfsustaining as possible under their circumstances. Yet according to statute, regulation and policy the FAA paradoxically enforces more stringent requirements on those airports that have achieved more financially sustainable operations and that subsidize the network. Economic Regulation New FAA Airport Policy FAA $ Contribution to Airport CIP A new airport policy would promote airport economic deregulation in return for reallocating their AATF revenues to those parts of the FAA program that cannot operate on cost-recovery whether Operations, Next Gen or smaller airports 43 ACI NA CEO Forum, February 2013

44 ? Policy Imperatives 7. Airports need to engage competition policy 8. Airport reform is accomplished through aviation reform 9. Prioritize airport funding to those airports that rely on it

45 Strategy and tactics may have to go together in 2013! 2013 may put the aviation and airport policy regime to the test Sequestration: Scheduled for implementation March 1. Risk of impact on air traffic control services to a significant number of airports. Appropriations: Appropriations expire March 27, Release of AIP funding delayed. Debt Limit: Near-term issues resolved by extension but playing field is fluid. Grand Bargain or Muddle through: Position aviation and airports with go-forward plans. AND/OR FAA Reauthorization: Expires September 30, Opportunity begins with next Congress unless FAA funding does not make that long? 45 ACI NA CEO Forum, February 2013

46 Stephen D. Van Beek LeighFisher Plaza America Drive, Suite 310 Reston, Virginia U.S.A (703)