NextGen evaluation: Air carrier perspective Federal Aviation Administration Global Challenges to Improve Air Navigation Performance Asilomar Conference Center February 13, 2015
Airline-specific NextGen assessment and equipage investment decision methodology Methodology 1 Calculate full NextGen benefit for all stakeholders 2 Using FAA SWAC model, calculate direct for specific carriers 3 Calculate equipage-dependent 4 Run NPV analysis based on equipage costs, fleet retirements, and ramp up of NextGen 1
NETGEN BENEFITS NextGen delivers three categories of direct airline/operator, industry, societal Type of benefit Direct airline/ operator Industry Societal Description Direct OpEx savings from reduced flight times (direct routings, ascent/descent) Direct OpEx savings from reduced delay/congestion Savings from network reoptimization Improved predictability (i.e., reduced variance) Flight cancellations Additional capacity for new flights, particularly at busy airports Increased system resiliency, including, faster recovery from irregular operations (e.g., recovery from weather events) Societal for passengers, airports Environmental Safety Example metrics Reduced average flight time Reduced average delay per flight Reduced flight operating costs, including fuel (e.g., ADOC) Increased fleet utilization Reduced flight cancellations Reduced block times Additional industry revenue Additional available flights/seats Additional airport passengers Reduced overall delay during irregular operations Reduction in CO 2 emissions per flight Elimination of lost passenger value of time 2
NETGEN BENEFITS FAA annually assesses NextGen ; current estimates show the program will deliver ~$134B of to NAS through 2030 NextGen cumulative (2013 through 2030) 1 $B, FY2013 133.9 Direct airline Airline cost savings (fuel and non-fuel costs) 2 Additional airline flights 0.2 51.4 Industry Additional airport passengers FAA efficiencies 3 0.2 2.0 Does not include additional value of increased system reliability to airlines and passengers Societal CO 2 Passenger value of time 79.7 0.4 1 Based on FAA's 2014 Business Case for NextGen, plus additional estimates of, based on team analysis 2 Assumed SWAC fuel price = $2.45/gal (constant); internal (fixed costs) to airlines not calculated in direct OpEx, as well as small program benefit estimates that may include some PVT and safety value also included in airline cost savings 3 Benefits from SWIM considered FAA efficiencies SOURCE: SWAC model, NGIP, Form 41 operating expense information, non-swac FAA NextGen studies, Business Case Integration 3
4
NETGEN BENEFITS Implemented improvements have generated >$1.5B in from 2010-2014; future from implemented changes may reach ~$11B NextGen portfolio Time-Based Flow Management Benefits from implemented operational improvements in 2010-2014 ($M FY2014) 635 NAC priorities Bold = large Improvements included in 2010-2014 benefit Traffic Management Advisor (TMA) system at ATL, EWR, FLL, SFO, DTW, LAS, LGA, PHL (implemented, not evaluated at IAH, SAN) Adjacent Center Metering (ACM) at IAD, ATL, SAN, LA, SFO, TEB, HPN, DCA, BWI, CLE Performance Based Navigation Improved Multiple Runway Ops 580 46 RNP & RNP Authorization Required approaches Transition to PBN routing for cruise operations RNAV Standard Instrument Departures (SIDs) and Standard Terminal Arrivals (STARs) at Single Sites: Equivalent Lateral Spacing Operations (ELSOs) Improved Surface Ops 35 Dependent approaches at SFO Use Converging Runway Display Aid Improved Approach & Low-Vis Ops Separation management Approx. $534M accrues to carriers 27 188 Airport Surface Detection Equipment (ASDE-) at 35 large airports Initial tailored arrivals Expanded low visibility ops using lower RVR minima (incl. SA-Cat I, SA-Cat II) Optimized Profile Descents (OPDs) Wake Re-Cat Alaska accidents and Gulf of Mexico Low-Altitude Efficiency Total 1,510 Full evaluation for NAS infrastructure and CATM portfolios pending SOURCE: SWAC team analysis 5
MASKED EAMPLE AIRLINE BENEFITS Airline A operations are estimated to reduce costs by ~$M (~Y% of OpEx, Z% of current operating income) due to NextGen in 2020 Ariline A 2020 cost improvements from impacts of NextGen technologies 1 $M FY2013 91% 9% 1% 51% 39% Additional savings from improved block time predictability not included here 5 Fuel savings 2 Non-fuel OpEx savings (crew, maintenance, Direct OpEx savings Flying overhead expense Benefit of additional capacity etc.) 2 1 2 3 4 Total 2020 1 Benefits for some ADS-B, CATM-T, DataComm, NVS, TBFM, Colorado WAM, AIM, TFDM, NWP improvements taken from PMO estimates and apportioned based on Airline A s share of NAS departures in 2013; SWIM not included; assumes full compliance with ADS-B Out mandate and ~30% DataComm equipage across NAS 2 Assumed SWAC fuel price = $2.45/gal (constant); ADOC escalated to FY2014 3 Estimated based on YE3Q2014 SOURCE: SWAC model, NGIP, Form 41 operating expense information, non-swac FAA NextGen studies, SEC filings 6
MASKED EAMPLE AIRLINE BENEFITS NextGen are sensitive to key assumptions; benefit range for Airline A is $YM to $ZM in 2020 Scenarios High sensitivity assumptions Assumption Low benefit case Expectation High benefit case Air traffic growth 1 No annual operations growth ~2% CAGR ops growth (airport specific, TAF 4 ), ~2% CAGR enplanement growth ~3% CAGR operations growth Fuel price 1 Fuel price 20% lower Fuel price = $2.45/gallon Fuel price 20% higher NextGen rollout 1 Average program delayed 1 year Programs delivered on-time per 2014 NextGen implementation plan Average program accelerated 1 year 2020 equipage 1 Static FY14 levels: + ADS-B 100% ADS-B 7% DataComm NextGen projection: 100% ADS-B out 30% DataComm Full equipage: 100% ADS-B out 100% DataComm Runway infrastructure 2 All runway projects accelerated by 2 years All runway projects delivered as planned (includes FLL, SAT, ORD, etc.) Runway projects delayed by 2 years Airline-specific Assumptions All scenarios assume flight schedule is grown proportionally and fleet migrated within size categories to newer models 3 2020 ops benefit (FY13) $YM SOURCE: SWAC model, team analysis $M $ZM 1 Estmates based on SWAC model sensitivities and benefit growth rates; 2 Assumes airline is impacted by runway infrastructure that has <1% impact on overall from basecase; 3 This ensures NextGen is not credited with from inefficient aircraft; realistic fleet model is used in equipage investment case; 4 TAF is a demand based model but accounts for gauge, load factor etc. assumptions to derive operations projection 7
MASKED EAMPLE AIRLINE BENEFITS 1 + 2 NextGen delivers operating improvements: example flight from LGA to ATL saves 11% airline OpEx cost Reduction in block time is modeled at the flight plan level Flight Base case (sked. dept. 7:00pm EST) LGA (dept. 7:00pm EST) 1 18 min 127 min 12 min (sked. arr. 9:45pm EST) ATL (arr. 9:37pm EST) Time min 157 Fuel cost $ 6,729 Non-fuel cost $ 6,363 Total $ 13,093 NextGen LGA (dept. 7:07pm EST) 1 13 min 114 min 11 min ATL (arr. 9:25pm EST) 138 6,011 5,612 11,623 Savings: 19 718 751 1,469 Specific programs drive At LGA & ATL: Wake ReCat, TSS (Terminal Sequencing and Spacing), GIM (Ground-Based Interval Management), RNAV improvements to TBFM, En Route Path Stretching for Delay Absorption, EFVS to 100 ft., EFVS to touchdown, improved terminal airspace capacity, Optimized Profile Descents (OPDs) En-route: increased direct routing OpEx cost assumptions are applied to all flights Fuel SWAC model for B757-200 aircraft: Avg. airborne fuel burn rate = 61 kg/min Surface fuel burn rate = 13 kg/min Accounts for cruise, continuous descent and ground fuel expenditure Price = $2.45/gallon (constant $ FY2013) Non-fuel 11% OpEx reduction FAA uses ~$2400/hr for B757-200 aircraft, Includes Form 41 reported OpEx items: Pilots, copilots personnel costs Cabin crew Direct maintenance, incl. labor and material 1 Gate delay modeled in SWAC SOURCE: SWAC model; DIIO MI (Form 41), airline industry benchmarks 8
MASKED EAMPLE AIRLINE BENEFITS 3 Category Analysis suggests ~$M annual flying overhead expense savings in 2020 Description Unit cost improvement Estimated savings Airport gate savings Reduced gate delay frees up gatesand streamlines operations Annual gate fees of ~$800,000 $ M Reserve crew savings Fewer pilot, FO, FA, reserve crews daily Pilot/FO at $170k all-in pay; FA @ $36k $ M Flight dispatch savings NextGen systems and automation reduce workload demands on dispatchers $97k all-in pay per dispatcher $M Ground personnel savings Reduced delay and better information power efficient allocation of rampers, gate and ticketing agents $24k annual pay per gate agent / ramper $ M Airframe lease reduction Efficient air traffic management reduces delays and reallocates utilization of airframes, which can be used for other flying Average narrowbody lease rate for mid-age 738 of $200k/month $2.4M/year $ M Off-schedule recovery Revenue protection and cost avoidance due to incremental off-schedule operations recovery, excluding delay and cancellation savings 1 10% improvement on OSO recovery and spoilage costs of $50M per anum $ M Note that excess resources are valued at cost in this estimation; resources such as gates and personnel could also be used to generate revenues Total: $ M 1 Delay and cancellation savings modeled in "direct " SOURCE: Air Finance Journal, Airport Authorities, team analysis 9
MASKED EAMPLE AIRLINE BENEFITS 4 NextGen adds ~9% capacity at Core 30 airports and increases potential Base case operations ops by 11% in poor weather VMC conditions capacity 2 at major airports Average hourly movements possible, FY2020 ORD 240 ATL 192 19 211 DTW 162 11 173 22 262 NextGen added capacity % increase in movement rate 1, FY2020 9% ORD Additional operations with NextGen IMC conditions capacity 2 at major airports Average hourly movements possible, FY2020 175 ATL 167 14 181 DTW 116 15 131 16 190 MSP 146 6 152 11% MSP 103 6 109 SLC 141 9 150 SLC 105 10 114 LA 127 15 142 LA 105 15 120 MCO 129 10 139 MCO 110 13 123 BOS 106 5 111 BOS 73 10 83 SEA 96 6 102 SEA 64 7 71 LAS 84 8 JFK 83 9 92 92 VMC conditions IMC conditions LAS 59 11 70 JFK 69 11 80 LGA 67 3 70 LGA 56 6 62 DCA 61 2 63 DCA 49 2 50 1 Weighted average calculated from average frontier for Pareto curve for Core 30 NAS airports 2 Calculated from average frontier of Pareto curve SOURCE: SWAC Base Case 10
MASKED EAMPLE AIRLINE BENEFITS 4 Forecasts estimate that added NextGen capacity may reduce per flight delay by 5-25% at major stations Average ATC delay under NextGen Additional expected average ATC delay without NextGen Average ATC delay 1 at major stations (expected growth) Average delay minutes per flight by arrival airport, FY2020 Average ATC delay 1 at major stations (no traffic growth) Average delay minutes per flight by arrival airport, FY2020 LGA 17 6 23 LAS ATL 16 15 3 4 19 19 DCA 15 2 17 BOS 15 2 17 ORD MCO JFK 15 14 13 2 2 3 17 16 16 LA 13 2 15 DTW 13 1 14 MSP 12 1 13 SLC SEA 12 12 1 13 1 13 25% 14% 20% 11% 12% 11% 14% 18% 13% 8% 7% 6% 8% LGA 16 5 21 23% LAS 14 2 15 10% ATL DCA BOS 13 14 14 2 2 2 16 16 15 15% 10% 11% ORD 14 1 15 8% MCO 13 1 14 10% JFK 10 4 14 26% LA 12 1 13 10% DTW 12 1 13 8% MSP 12 1 12 5% SLC 12 0 12 3% SEA 11 1 11 5% 1 Includes taxi in, taxi out, airborne, and gate delay; GDP excluded to avoid double counting; all delay attributed to arrival airport of segment SOURCE: SWAC Base Case 11
MASKED EAMPLE AIRLINE BENEFITS 5 Improvements in predictability enable carriers to reduce buffers and block times Original flight without NextGen Departure airport Buffer Taxi-out Flight time Taxi-in Buffer Arrival airport Scheduled block time NextGen reduces both average flight time and average delay, allowing for shorter flights Departure airport Buffer Taxi-out Flight time Taxi-in Scheduled block time Buffer Arrival airport NextGen improves delay predictability, allowing for tighter scheduling Departure airport Buffer Taxi-out Flight time Taxi-in Buffer Arrival airport Scheduled block time The savings opportunity was sized for each airline in $ s, based on simulated improvement in predictability across all flights 12
MASKED EAMPLE AIRLINE BENEFITS 5 NextGen flight and delay time savings are accompanied by an increase in system predictability, allowing airlines to fully bank savings Change in delay time and variation for sample 2020 airline high-traffic, high-delay flights Delay time Minutes 45 40 35 30 25 20 80 th percentile decreases 30% No NextGen NextGen Mean 20 th -80 th percentile For high-traffic highdelay segments, NextGen reduces both delays and delay uncertainty Airlines can bank delay time savings through schedule changes (incl. OpEx and overhead savings) without impacting on-time performance and other operational performance metrics 15 10 5 0 Flight Departs Flight Arrives ATL LGA Mean decreases 18% LGA JFK SFO LA ATL LA ATL ATL Delay variance reduction is even more dramatic than time reduction Significantly improved delay predictability allows further reduction in OpEx savings and flying overheads without increasing operational risks SOURCE: SWAC, team analysis 13
MASKED EAMPLE AIRLINE BENEFITS 5 Additional savings from predictability adds $M in 2020 benefit If airlines schedule block time to 80 th percentile delay time instead of mean delay, NextGen improvements to system predictability will drive addtiional $M in benefit 2020 time savings Millions minutes per year Example airline 2020 cost improvements from impacts of NextGen technologies, including predictability savings $M FY2013 1 2 From reduced average delay From reduced delay variation Total NextGen time savings Assumes airlines schedule to 80 th percentile delay time instead of mean delay Fuel savings 1 Non-fuel OpEx savings 1 Direct OpEx savings Flying overhead expense Profit from additional capacity Total 2020 1 Assumes maintainance costs are not saved through variability reduction, only accounts for crew costs based on scheduled block-times; subject to airline ability to capture 2 Assumes reserve crew savings, flight dispatch savings, airframe lease reduction and off-schedule recovery reduction apply to time savings form reduced delay variation SOURCE: SWAC model, NGIP, Form 41 operating expense information, non-swac FAA NextGen studies 14
EQUIPAGE INVESTMENT Equipage-dependent NextGen of $M for Airline A imply a Y- year payback period PRELIMINARY 2020 NextGen for Airline A $M FY2013, SWAC model base case NextGen Requires ADS-B Out and DataComm 1 Does not require equipage 82% 18% Cumulative equipage cost and annual benefit implies a Y- year payback 1 Most of equipage dependent benefit from SWAC model, remainder from PMO estimates 2 Also required for ADS-B In ADS-B Out 2 (100% equipage assumed by 2020) DataComm (30% equipage assumed by 2020) Benefits of equipage Enables operational improvements for: Improved metering ATC surveillance, including Gulf of Mexico, Alaska and Colorado surveillance Enhanced visual approach Enables operational improvements for: Digital tower predeparture, clearance services, route revisions En-route DataComm enabling controllers to provide pilots with frequency handoffs, altitude changes and inflight reroutes SOURCE: FAA SWAC model, non-swac FAA NextGen studies, team analysis 15
EQUIPAGE INVESTMENT NextGen grow 15% per annum and the proportion of equipage dependent rises from 18% to 42% 2020-2030 NextGen for Airline A $M FY2013, SWAC model base case Non-equipage Equipage dependent +15% p.a. 58% By 2030, 42% of NextGen will rely on equipage: Operational improvements in the early years (pre-2020) focus on non-equipage dependent improvements Large interval management and en-route DataComm impacts kick-in between 2020-2025 82% 75% 42% 18% 25% 2020 2025 2030 Level of equipage ADS-B Out (100%) DataComm (30%) ADS-B Out (100%) ADS-B In (32%) DataComm (40%) ADS-B Out (100%) ADS-B In (74%) DataComm (66%) SOURCE: SWAC model, team analysis 16
EQUIPAGE INVESTMENT For each airline, we presented the equipage investment case and sensitivity analyses around the NPV Assumptions All values calculated in 2013 dollars Assumed 4% inflation-adjusted WACC Fleet retirement at ~27 years Benefits grow at 2% p.a. Benefits accruing between equipage and 2020 not counted Average cost for ADS-B Out and partial DataComm : $154,000 (retrofit) or $82,000 (forward fit) Fleet 737-700 737-800 737-900 747-400 757-200 757-300 767-300 767-400 777-200 788/789/781 737 MA A319 A320 A350 2020 Airframes PV of 2020-2030 equip-driven benefit (2013 $M) $ NPV return on equipage investment: sensitivity to aircraft retirement and equipage cost (2013 $M) Equipage costs: Reduced cost (-10%) Expected Increased cost (+10%) PV of equipage cost 1 (2013 $M) $ 2020-2030 NPV return on equipage investment (2013 $M) 10-year NPV $ Aircraft retire at: 25 years 27 years 30 years $ $ $ $ $ $ $ $ $ Total YYY 1 Assumes full ADS-B out, 30% DataComm equipage SOURCE: SWAC & BADA models, ACAS fleet data 17