Sixth Annual Airport Project Delivery Systems Summit June 9 th, 2011 San Jose, California
The U.S. Airline Industry The first decade of the new millennia was the most financially challenging of any in the airline industry s 80+ years of existence US airlines lost $60B 46 airline bankruptcies resulted in 24 airlines ceasing operations 160,000 airline jobs lost Recorded the two largest year-over-year declines in passenger revenue 2009 18% 2001 14% 1
The Only Thing Constant in this Industry is Change. 1,200 1,000 800 600 400 200 0 US Carriers Capacity (Billion ASMs) 1971 1972 1973 Oil Crisis Source: ATA, U.S. Airlines Braniff-1 1982 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 DL / Western 1987 CO / People Ex 1987 Frontier NW / Republic 1986 PATCO Strike Braniff-2 1990 Eastern 1990 Midway 1990 US / PSA 1989 US / Piedmont 1989 Western Pacific 1998 Pan Am 1991 Gulf War 1 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 AA / TWA 2001 AA / Reno Air 1999 Industry Capacity CAGR: 30 Years = 2.7% 10 Years = 0% Independence 2006 US / America West 2005 Vanguard 2002 9/11 + Gulf War 2 + SARs Recessions RED text indicates liquidations BLACK text indicates mergers 1999 2000 2001 2002 2003 2004 2005 2006 Aloha ATA Big Sky SkyBus DL / NW 2008 H1N1 + Bank Crisis 2007 2008 2009 F9/YX 2009 UA/CO 2010 WN/FL 2011
This Economic Cycle is Different Sustained, high fuel prices Maturing Low-Cost Carriers slower growth Lower relative legacy carrier costs due to recent bankruptcies Industry consolidation fewer, more-rational competitors Legacies-Greater reliance on international revenue due to macro globalization trends. LCC-ancillary revenue; schedule optimization U.S. Industry Operating Margin (%) 10% 1988-1998 1998 -? 8% 6% 4%? 2% 0% (2%) (4%) (6%) (8%) High Oil, H1N1, Financial Crisis Interrupt Recovery (10%) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: ATA, U.S. Airlines
The U.S. Airline Industry To secure survival, airlines have taken dramatic action in response to these industry changes Financial restructurings through bankruptcy (DL, NW, UA, US) Mergers (DL/NW, F9/VX, CO/UA, WN/FL,?/?) More robust marketing arrangements and alliances Network Rationalization / Hub Closures Retiming hubs to eliminate peaks Shifting aircraft to new markets Eliminating aged aircraft and modernizing fleets Developing and adopting new revenue sources 4
The U.S. Airline Industry In response to declining yields, capacity throughout the domestic system has experienced dramatic cuts 0% Change in Domestic Service vs. 2007 (1%) (2%) (3%) (4%) (5%) (6%) (7%) (8%) (9%) (10%) 1q08 2q08 3q08 4q08 1q09 Flights (2.3%) (1.6%) (4.6%) (7.2%) (7.8%) Seats (1.0%) (1.3%) (4.2%) (7.4%) (7.2%) ASMs* (0.1%) (1.3%) (5.1%) (8.8%) (8.2%) 5
The U.S. Airline Industry Which have had a significant impact on airline employees Full-Time Equivalent Employees (000) at U.S. Passenger Airlines Source: Bureau of Transportation Statistics (http://www.bts.gov/programs/airline_information/number_of_employees/) 6
The Challenge Ahead The industry must move beyond mere survival Only a profitable industry will be capable of both weathering future storms and investing to meet future air travel demand It is imperative that the airline industry solve the most basic economic equation: Revenues must exceed Costs! There is no single answer; everything must be examined Operations Costs Governmental Requirements, Limits and Taxes Revenue and revenue enhancers 7
The Revenue Challenge Spending on air travel as a percentage of GDP is shrinking by almost 35% since 2000 Domestic Passenger Revenue as Share of U.S. Gross Domestic Product 8
The Revenue Challenge Fares in the deregulated era have not kept pace with the change in CPI. Price of Air Travel vs Other Goods and Services Product (Unit) 1978 2008 %Change College Tuition Public (Year) $ 688.00 $ 6,585.00 857 College Tuition Private (Year) $ 2,958.00 $ 25,143.00 750 Prescription Drugs (Index) $ 61.60 $ 378.30 514 Unleaded Gasoline (Gallon) $ 0.67 $ 3.27 388 New Vehicle $ 6,470.00 $ 28,350.00 338 New Single Family Home $ 55,700.00 $ 232,100.00 317 CPI (All Items $ 65.20 $ 215.30 230 Movie Ticket $ 2.34 $ 7.18 207 1st Class Domestic Stamp $ 0.15 $ 0.42 180 Whole Milk (Index) 81.00 $ 217.20 168 Grade A Large Eggs (Dozen) $ 0.82 $ 1.99 143 Air Travel International (Mile) $ 0.0749 $ 0.1352 81 Air Travel Domestic (Mile) $ 0.0849 $ 0.1384 63 Television (Index) 101.8 14.0 (86.00) 9
The Revenue Challenge And are now at 1998 levels Wednesday, October 28, 2009 - Average domestic air fares in the second quarter of 2009 fell to their lowest April-to-June level since 1998, dropping 13.0 percent from the second quarter of 2008 in the largest year-to-year decline on record, BTS reported today. Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm) 10 www.airlines.org
The Cost Challenge Given the changes in the airline industry during the past decade, expectations for a long, slow economic recovery and natural limits on airline revenue growth, costs must remain a significant focus Airlines must bring their costs in line with the reasonable expectations for revenue No business can survive in an environment where costs surpass and increase disproportionately to revenue 11
The Cost Challenge Much has been done to date to reduce controllable costs, but airlines remain vulnerable to costs outside their control Fuel Taxes and Security Costs Airport Costs 12
The Cost Challenge Fuel is on the rise again The historical perspective contradicts the common misperception that jet fuel prices have plummeted Average Jet Fuel Price per Gallon 13
Inflation Adjusted Oil Prices Near All Time Highs $/bbl $120 $100 $80 $60 5-yr. Avg. = $79 5-yr. Avg. = $69 $40 $20 HIGHEST 5 YEARS LAST 5 YEARS $0 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: Dept. of Energy U.S. averages, CPI-U adjusted to June 2010 Note: annual data masks true peaks and valleys; June 2008 avg. = $126, Feb. 2009 = $32 http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp
The Cost Challenge U.S. Aviation* Taxes/Fees Up Substantially From 2000 Collections, in Billions * U.S. passenger and cargo carriers; FAA taxes are commercial aviation only Source: ATA, BTS, DHS, FAA 15
The Cost Challenge Tax Bite on a $300 Ticket* Has Nearly Tripled 1972 Taxes 7% ($22)* 1992 Taxes 13% ($38)* 2009 Taxes 20% ($60)* Airfare Taxes * Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees. 16
Airport Costs Airport costs have been and are continuing to grow at a rate that exceeds CPI increases and airline ticket fares These cost increases cannot be passed along to passengers or absorbed by increasing fares Historic IND Lease Agreement recognizes the importance of Airport costs to both the airlines and the airport. 9
Airport Costs Per Enplanement Charting the growth trend of CPE against Fares and CPI, depicts the imbalance that has occurred over the last decade $14.00 All components charted using CPE at the base $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Dom Fares Airline CPE Over the analysis period airfares have fallen (11.2%,) while CPI has increased 28.5%, and CPE has increase 62.6% CPI Based on figures from 2000 2009, but average CPE for CY2009 not yet available, so no change was assumed from CY2008 18
Airport Operating Expenses Operating expenses per enplanement at U.S. airports have increased 60.6% since 2000 an average of 6.7% per year Operating Cost per Enplanement 60.6% $14.52 Sources: Federal Aviation Administration (FAA) Form 127 and Air Carrier Activity Information System 19
Airport Costs Per Enplanement Growth in Operating Expenses directly relates to the increase in the average CPE Avg. Airline Cost per Enplanement* Average Airline CPE is up 62.6% since 2000, or 7% per year $7.10 62.6% $11.49 Sources: Federal Aviation Administration (FAA) Form 127 and Air Carrier Activity Information System 20
IND Challenged in CPE Comparison Total Aeronautical Costs per Enplanement - Medium Hubs FY2008 $40 36.28 $35 $30 $25 22.40 Weighted Average = $10.49 $20 18.91 $15 15.58 14.62 14.10 13.77 13.68 11.89 11.46 11.20 $10 10.45 10.44 10.38 10.31 10.15 9.99 9.98 9.65 9.14 8.63 8.19 7.92 7.87 7.48 7.25 7.12 7.10 6.89 $5 5.94 5.79 5.51 5.45 4.21 4.01 2.98 $0 ANC ONT PIT OAK MEM SJU STL PDX CLE IND PVD BDL ABQ SJC TUS SNA RSW MSY HOU AUS CMH BUF SMF RNO PBI SAT CVG OMA MCI MKE BUR JAX RDU BNA OGG DAL
IND Compares Very Favorably in Non Airline Reveneues Total Non-Aeronautical Revenue per Enplanement - Medium Hubs FY2008 $18 $16 $14 16.24 14.97 14.55 14.51 14.49 14.08 13.90 13.83 13.73 13.70 13.05 13.03 12.53 12.44 Weighted Average = $10.52 $12 11.87 11.82 11.70 11.47 11.33 10.98 10.75 10.42 $10 9.95 9.16 9.11 8.66 8.25 $8 7.65 7.28 7.08 6.49 $6 6.08 5.93 5.85 5.61 $4 4.30 $2 $0 IND BUR JAX SMF TUS RNO CMH SNA SJC ONT OAK RDU MCI PBI PVD BNA RSW PDX PIT MKE AUS ABQ BUF CLE OMA SAT OGG BDL DAL HOU STL ANC CVG MEM MSY SJU
IND Compares Favorably in % of Airline Revenues to Total Revenues % of Aeronautical Revenues To Total Op Revenues - Medium Hubs FY2008 90% 86% 80% 77% 70% 60% 71% 68% 64% 63% 62% 58% 58% 56% 55% 54% 54% Weighted Average = 50% 50% 50% 49% 46% 46% 46% 45% 44% 43% 42% 42% 41% 40% 38% 38% 36% 35% 35% 35% 33% 30% 29% 29% 28% 27% 26% 20% 10% 0% ANC SJU MEM STL MSY PIT ONT BDL HOU CLE CVG OAK PDX ABQ PVD RSW AUS SAT BUF OMA SJC SNA TUS IND CMH PBI RNO MCI SMF MKE OGG RDU DAL BUR JAX BNA
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