2013 Update: Trends and Market Forces Shaping Small Community Air Service in the U.S.

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1 2013 Update: Trends and Market Forces Shaping Small Community Air Service in the U.S. Michael D. Wittman MIT International Center for Air Transportation June 2014

2 MIT Small Community Air Service White Paper Series Series of research papers intending to examine and analyze small community air service in the U.S. Most recently: 2013 Data Update: Trends and Market Forces Shaping Small Community Air Service in the U.S. (June 2014) An Assessment of Air Service Accessibility for U.S. Metropolitan Regions, (June 2014) Public Funding of Airport Incentives in the U.S.: The Efficacy of the SCASD Grant Program (Jan. 2014) Papers are available on the MIT International Center for Air Transportation (ICAT) website: ( 2

3 Year-over-Year % change in available domestic seats The Last Nine Years of Domestic Aviation Can Be Divided Into Three Epochs 10% 5% 0% -5% -10% Rationalization Capacity Discipline AA DL + NW UA + CO US + HP WN + FL -15% -20% Source: Diio Mi Previous status quo 3

4 What Are Rationalization and Capacity Discipline? Rationalization ( ): an active reduction of available seat capacity as a result of macroeconomic shocks to the airline industry and a new normal of higher fuel prices. Capacity discipline (2010 present): a restriction of seat capacity growth by network carriers (and Southwest) even as passenger enplanements have continued to increase. Analysis of 2013 schedule data suggests that capacity discipline is the new normal for U.S. airlines. [Yield growth between ] would have been impossible without capacity discipline. John Gebo, SVP Financial Planning, United Airlines, August

5 Millions of Domestic Departures The Big Picture: 1.4 Million Domestic Flights/Year Have Been Cut Since Scheduled Domestic Departures from U.S. Airports Large Hub Non-Large Hub % % % 59.4% 0 Source: Diio Mi

6 Millions of Departures Capacity Discipline Has Not Been Applied Evenly Smaller airports saw a disproportionate share of the cuts in flights and available seats as a result of capacity discipline. Scheduled Domestic Departures at Smaller U.S. Airports Medium Hub Small Hub Non Hub EAS Airport Type % change in domestic flights (07-12) Large Hub -8.8% Medium Hub -26.2% Small Hub -18.2% Non-Hub -15.4% EAS -5.0% All Smaller Airports All Airports -21.3% -14.3% Source: Diio Mi 6

7 % Change in Air Service Accessibility from Source: Wittman, M.D An Assessment of Air Service Accessibility for U.S. Metro Regions. Report No. ICAT

8 Millions of Scheduled Domestic Flights Capacity Discipline Remains the Status Quo Scheduled domestic flights decreased by 1.1% from % Source: Diio Mi

9 Millions of Domestic Seats Billions of Domestic ASMs Airlines Showed Minimal Growth in Domestic Seats and ASMs Despite a Decrease in Departures Both available domestic seat-departures and ASMs increased from Seats increased by 0.4% and ASMs increased by 1.6% year-over-year. Reflects upgauging; increases in average stage length. Seats ASMs % +0.4% Source: Diio Mi

10 Domestic Seat Capacity Growth Remains Stagnant Despite Economic Growth YoY % Change GDP YoY % Change Domestic Seats 6.0% 4.0% 2.0% 0.0% % -4.0% -6.0% -8.0% Source: BTS T-100 via Diio Mi, BEA 10

11 Millions of Domestic Seats Growth in Both Available Domestic Seats and Load Factors Was Flat in showed little increase from 2012, when available domestic seats had fallen to their lowest level since Load Factor Domestic Seats 1,000 90% % % 60% 50% 40% 30% 20% % Source: BTS T-100 via Diio Mi, BEA 0% 11

12 Millions of Domestic Flights Fuel Prices and Capacity Rationalization According to the MIT Airline Data Project, airline fuel prices have stabilized, yet scheduled domestic flights have not rebounded. Domestic Flights Fuel Price per Gallon 12 $ $ $2.50 $2.00 $ $ $ Source: Diio Mi and MIT Airline Data Project $- 12

13 Constant 2013 Cents Rising Real Unit Costs Have Made It More Difficult For All Carriers to Justify Uneconomic Flying The unit cost gap between low-cost carriers and network carriers has also shrunk, adjusting for inflation cents cents Network LCC Source: MIT Airline Data Project, adjusted for inflation using BLS CPI 13

14 Millions of Scheduled Domestic Flights 7 6 LCCs Now Lead Network Carriers in Cutting Capacity ULCC departures continue to grow (+10.4% from ), but they only represent 1.4% of the total domestic capacity in the United States. Network carriers (-0.8%) and LCCs (-4.1%) continued to cut scheduled flights from % Network LCC ULCC 2-4.1% 1 0 Source: Diio Mi % 14

15 Millions of Scheduled Domestic Flights Smaller Airports Are Still Seeing the Largest Cuts In Service Although all airport types saw net decreases in domestic flights from , once again, smaller airports saw larger decreases in flights than large-hub airports. Large-hub and medium-hubs saw seat growth of 1.0% and 0.3%, respectively. Large Hub Medium Hub Small Hub Non-Hub Airport Type % change in domestic flights ( 12-13) % change in domestic seats ( 12-13) Large Hub -0.2% 1.0% Medium Hub -2.2% 0.3% Small Hub -3.0% -1.4% Non-Hub and EAS -4.2% -2.5% All Smaller Airports All Airports -2.9% -1.1% 0.6% 0.4% Source: Diio Mi 15

16 Changes in Fleet Mix Among Network Carriers at Smaller Airports At smaller airports, United continues to maintain almost exclusively regional-jet operations. Delta s percentage of mainline service at smaller airports actually increased over the last year, due to a drawdown in 50-seat RJ service % of Mainline/Regional Domestic Departures at Smaller Airports Airline % Mainline % Regional % Mainline % Regional American 31.2% 68.8% 31.2% 68.8% Delta/Northwest 25.9% 74.1% 29.2% 70.8% United/Continental 12.5% 87.5% 11.6% 88.4% US Airways/America West 19.5% 80.5% 16.1% 83.9% Source: Diio Mi 16

17 37-50 Seat RJ Departures at Smaller Airports How are Network Carriers Using Small RJs at Smaller Airports? Delta is cutting its use of 50-seat regional jets at smaller airports at a staggering pace There was further 12.7% reduction in DL small RJs at small airports in the last year. SkyWest will likely follow soon for UA and AA/US DL+NW UA+CO AA US Source: Diio Mi

18 51-76 seat RJ Departures at Smaller Airports Limited Upgauging of 50-Seat RJ service at Smaller Airports Delta has shown minimal growth in 76-seat RJ service at smaller airports to replace 50-seat RJ service DL+NW UA+CO AA US Source: Diio Mi

19 What Have Been the Effects of Rationalization and Capacity Discipline? For airlines: Yields Increased For airports/pax: Smaller Airports Affected Most Load Factors Increased Service Consolidated at Primary Airports Profitability Stabilized Increase in Fares Nearly 100% of Flights To/From Hubs Uncertainty for Airport Infrastructure Planning 19

20 Capacity Discipline Has Led Airlines to Exit Many Small Markets Small airports have often lost significant amounts of service as a result of airline capacity discipline. According to our May 2013 report, 23 small airports lost all network carrier service entirely from 2007 to 2012; airline exists often caught these airports by surprise. Airlines have shown less patience in evaluating the success of new service even ULCCs like Allegiant Air have shown a habit of pulling service less then 12 months after it commences if the economics do not support it. Small airports are virtually required to turn to incentives to win new service or maintain existing service. 20

21 Number of Departures The Players Have Shifted At EAS Airports EAS Departures by Marketing Airline Network Carriers Cape Air & Great Lakes Source: Diio Mi

22 The Small Community Air Service Development Grant Program SCASDP was first introduced in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21) in 2000, and first funded in Provides funding to airports to support incentive packages, marketing programs, air service studies, or other projects intended to gain new service or maintain existing service. Grant applications are favorably evaluated for airports with: Higher-than-average airfares; Limiting existing service; Broad community support; Public-private partnerships; and Letters of airline support. 22

23 Total SCASDG Funding Number of Accepted Grants The Size and Scope of the SCASDP Has Varied Widely From 2002-present Total Funding # of Grants $25,000, $20,000, $15,000, $10,000, $5,000, $

24 Number of SCASD Grants The Majority of SCASDP Applications Target New Service 25 New Service Rev. Guarantees Marketing Study Other * Note: Revenue guarantee category is not mutually exclusive 24

25 Number of Grantees Success Rate The SCASDP Success Rate Was Under 50% in All Years The average program success rate from was 36.5%. Successes Failures Success Rate % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Wittman, M.D Public Funding of Airport Incentives in the United States. Report No. ICAT

26 What Can Influence the Success or Failure of a SCASDP Grant? There are a number of reasons why SCASDP grantees might fail to meet their objectives: Many SCASDP applications are highly speculative with no airline support; Economic slowdown or fuel price spike could torpedo air service development efforts; Exogenous airline-specific factors (mergers, bankruptcies, etc.); and/or Pushback from unsubsidized airlines currently operating at the airport. Successful SCASDP grantees often had: Significant community and airline buy-in and support; Substantial community match component to the SCASD application; A history of success with public funding of air service in the past (such as Essential Air Service); and/or Above-average passenger enplanements (small-hub airports success rate was 83% in 2011, compared to 24% for non-hubs). 26

27 To Succeed in Today s Capacity-Restricted Environment, Look Beyond the Traditional Players Most network carrier growth in the last few years has been ad medium-hub and large-hub airports to bolster international feed. Small airports that have grown have done so by targeting carriers that are in growth mode: specifically, ULCCs like Frontier, Allegiant, and Spirit. Frontier s network shakeup was a boon to small airports like TTN, ILG, and PHF, and even to larger airports like CLE that were hit hard by network carrier service reductions. ULCCs may not provide the same level of connectivity as network carriers, but they are the best chance of growth opportunities for small airports in today s environment. 27

28 Capacity Discipline: Where Do We Stand? Although U.S. airlines are currently practicing system-wide capacity discipline, competitive pressures are causing changes in service at many individual airports. We do not expect to see any NLC or LCC increase domestic departures by more than 6% in the 2014 calendar year. Spirit, Frontier, and Allegiant may see more significant growth, but these airlines represent only a small fraction of the domestic market. Removal of 50-seat jets in small markets will certainly continue and likely spread to all carriers. Low maintenance costs of these aircraft are keeping them in operation. While some domestic markets may show minor growth, the general attitude in the U.S. is a focus on international expansion with limited new domestic activity. 28

29 Thank You! Contact me about this presentation or for more information about the MIT Small Community White Paper Series and the MIT Airline Industry Consortium, which funded this research. Mike Wittman: (after July 1) Download a copy of the white papers at: 29

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