General Aviation and 10 Things About the U.S. Airline Industry That Likely Makes You Crazy NASAO Annual Conference Boise, Idaho September 2015 1
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. Mountain 24,362 26,798 28,393 2013 Central 12,366 2013 2010 2007 Great Lakes 30,779 33,972 37,703 2013 Eastern 22,471 2013 2010 2007 New England 6,808 7,610 8,596 2013 Western-Pacific 28,988 2010 2007 12,099 12,769 2010 2007 26,618 25,888 2013 2010 2010 2007 Alaska 5,526 6,113 33,132 35,492 2013 2010 2007 Southwest 29,526 32,340 33,909 2013 2010 2007 Southern 39,031 44,596 42,595 2013 2010 2007 Total U.S. 199,857 223,278 231,456 2007 6,111 Source: GAMA 2014 Databook.
General Aviation Airplane Shipments by Type of Airplane Manufactured Worldwide 2000 2007 2014 103 415 258 465 143 603 1,877 752 2,417 1,137 986 722 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 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
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
U.S. General Aviation Fuel Consumption, 2000 2013 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 2000 201 108 176 737 8 59 15-333 972 1,305 2001 180 76 149 727 7 43 15-279 918 1,198 2002 178 74 152 746 7 41 18-277 938 1,215 2003 182 67 155 729 7 49 17-272 932 1,205 2004 168 80 167 1,005 8 59 18-273 1,231 1,504 2005 173 90 196 1,181 15 149 18-295 1,527 1,822 2006 165 80 190 1,304 17 149 22 0 283 1,643 1,926 2007 158 83 205 1,148 9 132 23 1 274 1,486 1,759 2008 143 70 230 1,313 11 162 23 2 248 1,706 1,954 2009 132 57 209 1,105 11 134 26 1 227 1,447 1,674 2010 133 54 187 1,123 11 125 22 2 221 1,435 1,656 2011E 129 53 188 1,182 11 121 21 2 216 1,491 1,706 2012 127 52 191 1,232 11 120 22 2 212 1,542 1,755 2013E 122 54 208 1,057 11 149 16 1 202 1,413 1,616 Source: GAMA 2014 Databook. 7
General Aviation Aircraft Forecast 225,000 200,000 175,000 150,000 General Aviation Forecast 2015 2025 Number of Airplane by Type 203,270 203,630 204,120 204,615 205,140 205,780 206,450 207,235 208,075 209,040 210,170 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 30,555 125,000 100,000 75,000 50,000 135,980 135,075 134,220 133,390 132,590 131,835 131,100 130,415 129,765 129,160 128,635 25,000 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Airplane - Piston Experimental Airplane - Business Jet Airplane - Turboprop Rotocraft - Turbine Balloons, Dirigbles, Gliders Rotocraft - Piston Special Source: GAMA 2014 Databook. 8
1. CONSOLIDATION: SHOULD I BE UPSET WITH THE AIRLINES OR WITH THE REGULATORS IN WASHINGTON? 9
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 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Aug 14 10
2. CAPACITY DISCIPLINE: SHOULD I BE UPSET WITH THE AIRLINES OR WALL STREET? 11
Capacity Grows Faster Than Real GDP: An Industry That Grew Too Big 250 200 150 100 50 Available Seat Mile Index Real GDP Index 0 1978:4-1982:4 1983:1-1991:1 1991:2-2001:4 2002:1-2009:3 2009:4 - Present Note: SAAR, 2009 Chained Dollars Note: Business cycle 1 = 100 12
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% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: US DOT T-100 database, via Diio online portal. BEA 13
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 1,000 900 800 700 600 500 400 300 Load Factor Domestic Seats 90% 80% 70% 60% 50% 40% 30% Load Factor 200 20% 100 10% 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0% Source: US DOT T-100 database, via Diio online portal. 14
Smaller airports are still seeing the largest cuts in service Overall U.S. airports saw net decreases in domestic flights from 2014-2015, 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 9 8 7 6 5 4 3 2 1 0 Large Medium Small Nonhub 2009 2010 2011 2012 2013 2014 2015 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
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
3. SEQUESTRATION: YOU SHOULD BE UPSET WITH THE GOVERNMENT 17
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 $101.00 $2,831.50 $47,691 2 California-Lexington Park, MD MSA $1,693.10 $1,704.00 $39,940 3 Amarillo, TX MSA $3,296.90 $3,577.70 $31,407 4 Huntsville, AL MSA $5,559.30 $6,377.20 $30,799 5 Norwich-New London, CT MSA $3,311.00 $3,350.20 $27,848 6 Gulfport-Biloxi-Pascagoula, MS MSA $2,735.80 $3,978.80 $27,651 7 Washington-Arlington-Alexandria, DC- VA-MD-WV MSA $32,918.20 $71,099.00 $23,768 8 Kennewick-Richland, WA MSA $15.80 $2,241.40 $19,813 9 Oshkosh-Neenah, WI MSA $1,701.70 $1,710.10 $19,044 10 Sierra Vista-Douglas, AZ MSA $648.50 $655.10 $18,903 11 Virginia Beach-Norfolk-Newport News, VA-NC MSA $10,907.70 $11,822.90 $16,488 12 Jacksonville, NC MSA $748.30 $755.00 $15,490 13 Palm Bay-Melbourne-Titusville, FL MSA $1,395.90 $2,453.80 $12,749 14 East Stroudsburg, PA MSA $107.80 $673.10 $12,708 15 Tucson, AZ MSA $3,955.00 $4,162.10 $11,751 Source: Chmura Economics & Analytics, JobsEQ, FedSpendTop. Employment data as of 2015q2, Spending data FY2014. 18
4. FUEL: BROUGHT YOU ANCILLARY FEES, CAPACITY DISCIPLINE AND MADE SMALL JETS UNECONOMIC 19
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
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
5. FARES: OFTEN DISCUSSED RARELY UNDERSTOOD 22
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
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). 1200 1000 Histogram of Percent Change in Average Gross Fares for Top 5,000 O&D Markets, 2010-2014 Number of Markets 800 600 400 200 0-50% -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
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
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
6. PILOT SUPPLY: WHO IS TO BLAME AIRLINES, LABOR OR GOVERNMENT? 27
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 302 70-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
A CRITICAL ASSUMPTION IN THE ANALYSIS: THE REGIONAL SECTOR WILL BE THE SOLE SUPPLIER OF PILOT LABOR AND REMAINS RELATIVELY FIXED OVER TIME 29
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
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
7. IF AIRPLANES ARE GETTING BIGGER, CAN ALL COMMUNITIES SUPPORT THE SERVICE? 32
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
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 150-200 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
8. LOOKING AT THE STATES WITH THE MOST ROUTES, FREQUENCIES AND SEATS ADDED 35
There is an airline story where new routes are being added. 2007-2015 2014-2015 State August 2007 August 2015 Absolute Change Florida 439 519 80 Texas 458 500 42 Illinois 245 277 32 Washington 127 147 20 North Carolina 186 203 17 South Carolina 67 82 15 North Dakota 20 34 14 New Jersey 99 107 8 Maryland 65 72 7 Oregon 77 84 7 Colorado 180 185 5 Iowa 34 39 5 Indiana 61 64 3 Wyoming 20 23 3 South Dakota 24 26 2 Massachusetts 104 103-1 Montana 70 69-1 Hawaii 76 74-2 Mississippi 28 26-2 Vermont 14 12-2 West Virginia 28 26-2 State August 2014 August 2015 Absolute Change Texas 454 500 46 Florida 483 519 36 Washington 122 147 25 North Carolina 190 203 13 Pennsylvania 176 187 11 Indiana 57 64 7 South Carolina 75 82 7 Tennessee 109 116 7 Mississippi 20 26 6 California 425 430 5 Missouri 117 122 5 Iowa 36 39 3 Nebraska 31 34 3 Illinois 275 277 2 Louisiana 60 62 2 Maryland 70 72 2 New Mexico 35 37 2 North Dakota 32 34 2 Ohio 157 159 2 Oklahoma 41 43 2 West Virginia 24 26 2 Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 36
The health of local economies and airline strategies explain everything. 2007-2015 2014-2015 State August 2007 August 2015 Percentage Change North Dakota 1,452 2,062 42.0% Washington 20,051 21,437 6.9% North Carolina 30,956 29,849-3.6% Alaska 7,883 7,591-3.7% Illinois 48,004 44,831-6.6% New Jersey 14,826 13,761-7.2% Louisiana 7,361 6,774-8.0% Massachusetts 20,969 19,182-8.5% Minnesota 18,475 16,724-9.5% Texas 76,673 67,994-11.3% Arizona 32,792 28,799-12.2% South Dakota 1,905 1,664-12.7% Maryland 10,640 9,272-12.9% Georgia 42,145 36,642-13.1% Oregon 11,179 9,611-14.0% South Carolina 6,705 5,757-14.1% Maine 2,758 2,351-14.8% Florida 50,417 42,530-15.6% Virginia 31,876 26,872-15.7% Colorado 29,613 24,862-16.0% California 83,035 68,903-17.0% State August 2014 August 2015 Percentage Change Washington 17,131 21,437 25.1% Indiana 5,440 5,881 8.1% Florida 39,742 42,530 7.0% Maine 2,257 2,351 4.2% Tennessee 10,500 10,896 3.8% Georgia 35,410 36,642 3.5% Idaho 2,568 2,646 3.0% North Dakota 2,002 2,062 3.0% Alabama 3,552 3,651 2.8% Mississippi 1,674 1,720 2.7% Texas 66,394 67,994 2.4% Iowa 2,806 2,867 2.2% Maryland 9,078 9,272 2.1% Pennsylvania 23,170 23,500 1.4% Virginia 26,593 26,872 1.0% Nevada 15,192 15,325 0.9% New Jersey 13,657 13,761 0.8% Ohio 15,194 15,306 0.7% South Carolina 5,735 5,757 0.4% North Carolina 29,774 29,849 0.3% Louisiana 6,760 6,774 0.2% 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 20.8% Louisiana 592,439 669,113 12.9% Massachusetts 1,492,358 1,654,803 10.9% South Carolina 445,170 491,975 10.5% North Carolina 2,665,983 2,895,254 8.6% Oregon 984,782 1,064,289 8.1% Maine 152,743 158,254 3.6% Georgia 4,569,728 4,706,193 3.0% Montana 242,964 249,242 2.6% Minnesota 1,872,411 1,887,465 0.8% Texas 7,715,351 7,678,800-0.5% Alaska 550,461 545,804-0.8% New Jersey 1,494,281 1,463,162-2.1% California 9,310,895 9,105,423-2.2% Colorado 2,867,883 2,797,948-2.4% Maryland 1,312,374 1,272,348-3.0% Illinois 4,830,046 4,658,369-3.6% Kansas 113,672 107,770-5.2% Florida 6,063,659 5,745,431-5.2% Iowa 202,664 189,672-6.4% State August 2014 August 2015 Percentage Change Indiana 461,471 533,160 15.5% Ohio 1,255,856 1,412,671 12.5% Washington 2,246,552 2,468,889 9.9% Florida 5,261,227 5,745,431 9.2% Virginia 2,313,800 2,475,001 7.0% Texas 7,190,261 7,678,800 6.8% Alaska 511,350 545,804 6.7% Maine 148,366 158,254 6.7% Tennessee 945,847 1,005,206 6.3% Oregon 1,002,058 1,064,289 6.2% South Carolina 463,838 491,975 6.1% Michigan 1,801,485 1,906,256 5.8% Nevada 2,179,027 2,297,045 5.4% Georgia 4,464,615 4,706,193 5.4% Massachusetts 1,570,477 1,654,803 5.4% Louisiana 635,800 669,113 5.2% Illinois 4,442,116 4,658,369 4.9% Maryland 1,216,117 1,272,348 4.6% New Jersey 1,400,332 1,463,162 4.5% California 8,728,329 9,105,423 4.3% Minnesota 1,813,339 1,887,465 4.1% Source: InterVISTAS analysis of Innovata schedules, via Diio online portal. 38
9. ARE MORE SERVICE CUTS AHEAD? 39
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
10. WELL THEN. WHAT ABOUT TOMORROW WITH NO PILOTS AND NO SMALL JETS 41
NATURE ABHORS A VACUUM 42
William S. Bill Swelbar Executive Vice President InterVISTAS Consulting LLC 1150 Connecticut Avenue, NW Suite 601 Washington, DC 20036 P +1-202-688-2243 C +1-703-625-1130 Email: william.swelbar@intervistas.com www.intervistas.com 43