Air Service Assessment & Benchmarking Study Marquette, MI September 2015
Historical Airline Industry Overview 1978-2009: Massive financial losses during a period of excess capacity Yields (Price): Fell over 70% after inflation airlines were pricing seats below cost, due to noted over capacity (capacity growth outpaced economic (GDP) growth) Mostly during a period of tranquil oil prices Then oil prices spiked in the late 2000 s 2010-current: Most profitable period in U.S. airline history Example: Delta Air Lines expecting 15% operating margin for full year 2014 Sharp capacity reductions, particularly in smaller, shorter-haul markets Result: Sharply higher yields (fares), driven by fare increases and ancillary revenues Going forward: More of same expected Constrained capacity, resulting in continued higher fares and unit revenues Smaller markets will continue to take hits 2
Most of industry capacity (seat) reduction has been on short-haul, small regional jet routes 3
These capacity (seat) reductions have typically hit smaller markets hardest 0% Seat Decline by Airport-size Since 2008 Large Hub: Largest airports in the U.S. Have to generate 1% or more of U.S. enplanements -5% -10% -15% -20% -25% -30% -9% -26% -18% -15% -5% -21% -14% Medium hub: Next largest tier of airports. At least 0.25% of U.S. enplaned, but less than 1% Small hub: At least.05% of U.S. enplaned, but less than 0.25% Non-hub: At least 2,500 enplaned, but not more than 10,000 EAS: Essential Air Service airports; these are subsidized by Federal Government 4
Primary manufacturer forecasts a 70% decline in small jets by 2032 Bombardier expects <60-seat jets to decline by 70% by 2032 From 3,500 today to 1,050 by 2032 It is expected that many of these 1,050 will be in 3 rd world countries Similar to Turboprop aircraft today 60-99 seat jets are expected to increase significantly by 2032 From 2,600 to 6,950 worldwide Biggest increase in U.S. Also ties to assumed improvements in Pilot Scope Clauses Overall shift to larger aircraft; this also assumes continued high oil prices 5
Recent pilot regulations further complicate fleet shifts Based on pilot retirements at the four largest US carriers (American, Delta, Southwest and United), 14,000 aviators will be needed at those airlines by 2022 just to continue providing the same level of flying as today. If the regional industry is to be the primary supply for pilot labor to the network carriers, there are only 18,000 pilots within the sector. If replacing retiring mainline pilots is first and foremost, then the regional industry will be but a fraction of itself by 2022. This doesn t include the fast-growing LCC segment of the industry All of our members, large and small, are having trouble finding qualified 1,500-hour pilots, says Roger Cohen, president of the Regional Airline Association. Every community, large and small, if you re not concerned about losing some or all of your air service, should be. 6
Growth options are limited, as 4 airlines control 83% of U.S. airline capacity U.S. Airline Industry (June 2015) Share of Seats by Airline G4 1% AS 4% F9 2% HA 2% NK 2% B6 4% Oher 2% DL 22% WN 21% UA 16% AA 24%
Low Cost Carriers (LCCs) have & will grow much faster than legacy carriers like Delta and United 40% 30% 20% Seat Capacity Change 2015 vs 2005 10% 0% -10% -18% 9% -16% -16% 25% 121% 386% 25% 76% 474% -20% -30% DL WN UA AA AS B6 NK F9 HA VX G4 Network airlines have been reducing service consistently over the past decade+ American (AA), Delta (DL) & United (UA) At the same time, Low Cost Carriers (LCC s) have been growing In particular, Allegiant (G4),Spirit Airlines (NK) & JetBlue (B6) Virgin America (VX) hadn t started service in 2005 8
Benchmarking: MQT versus U.S. Trends 9
MQT vs U.S.: Passenger Trends 35% 25% MQT vs U.S. Onboard Passengers Indexed to CY 2001 MQT US Passenger volume has fallen about 45% since 2006; at the same time, U.S. passenger volumes are roughly unchanged 15% 5% Since 2001 (13 years), MQT s traffic volume is down almost 40%, while the U.S. is up about 22% -5% -15% -25% -35% -45% During this same 13-year time period, as will be shown shortly, U.S. departing seats are essentially unchanged, while MQT s are down over 50% As noted earlier, smaller airports in general have suffered relatively larger traffic losses as compared to the U.S. 10
MQT vs U.S.: Load Factor Trends 90% 85% 80% 75% 70% 65% 60% 55% MQT vs U.S. Load Factor Trends Indexed to CY 2001 MQT US MQT Load Factors have been relatively low through 2010-11, not seeing the relative improvement experienced by the broader U.S. market Then in 2012, MQT realized a sharp Load Factor improvement to over 80% In 2013, MQT saw a 34% increase in departing seats - during a time, AA had 2 daily departures and DL 3 Subsequently, both airlines reduced capacity, with DL pulling back to 2 daily departures and AA 1 and Load Factors increased sharply 50% 2013 results are likely making both airlines skittish about again adding capacity 11
Benchmarking: How MQT compares versus Peers 90% Retention of Catchment Area Bookings CY 2014 MQT s relative leakage compares well to other airports 80% 70% 60% 50% 40% 30% 20% 10% 0% 32% 58% 57% 52% 79% 76% 22% 20% 34% 46% 40% 21% 40% 48% 77% Leakage is largely due to air service options nearby & relative air fares MQT benefits from relative isolation and proximity to alternative air service options Still, 24% are making the long drive to MKE, GRB or DTW Additionally, opportunities may exist to capture larger shares of other U.P. markets, particularly if Essential Air Service (EAS) program sees any major modifications 12
MQT vs U.S.: Revenue & Departing Seat Trends 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Departing Seats (Annualized) Indexed to 2001 U.S. MQT 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% MQT Airline Revenue (in 000 s) Indexed to CY 2001 MQT U.S. MQT departing seats are down 54% since 2001, with most of the decline since the 2007-09 recession (particularly after 2009); U.S. departing seats are essentially unchanged since 2001 MQT airline revenue outpaced U.S. trends until 2009-10, which corresponds to the height of the recession and when MQT capacity was sharply being reduced. Since 2010, airline revenue is roughly flat not increasing during 2013 when capacity increased, but also not dropping during capacity declines in 2012 & 2014 13
MQT air fares have generally moved in line with U.S. trends, although increasing more since 2011 $600 $550 MQT vs U.S.: Average Paid Round-Trip Fare Including taxes & fees $536 $500 $450 $400 MQT U.S. $482 $350 $300 $250 $200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 14
MQT: Growth Opportunities 15
Current Carrier Results at MQT: Summary MQT s current air service, at current capacity levels is performing well Delta s RASM is well above mileage-adjusted averages, indicative of relative profitability In addition, Delta s Load Factor is well above system averages, particularly seasonally American Airlines results at MQT are nearing system averages and improved markedly in 2014 after capacity reductions (by both American and Delta) The big question: Can MQT profitably absorb more capacity? 2012 results were similar to 2014, then both AA & DL added capacity in 2013 2013 results dropped significantly, then capacity was reduced in 2014 and results were materially better again While both AA & DL will likely be reluctant to add capacity (given 2013 results), possibly the answer is somewhere in between? 16
Summary: MQT Growth Options 1. Additional capacity on Delta Air Lines to DTW; either in the form of additional frequency or larger aircraft 2. Additional capacity on American Airlines to ORD, mostly likely in the form of a second trip; also could approach SkyWest about flying as a pro-rate market, stimulating local O&D traffic 3. New Delta Connection service, operated by SkyWest on a pro-rate basis, to Minneapolis-St. Paul 4. New Allegiant Airlines service, 2x weekly, to Orlando-Sanford, using an Airbus 320; somewhat dependent on strength of the U.S. Dollar. Also, other Florida markets could be options (Tampa-St. Petersburg & Punta Gorda) Options #1-#3 could be in the form of additional seasonal (summer) capacity initially. 17
Best near-term aircraft to grow from MQT: 50-seat RJs 50-seat RJ Flights By Stagelength (June 2015) > 1000 5% 650-1000 15% Matches to Delta policy of not flying 50-seat RJs over 650 miles Interpretation: MQT will need to focus upon markets within 650 miles of MQT Although, selected aircraft upgrades on DTW flying may be an option particularly seasonally (summer) < 650 80% 18
With one exception, this will mean additional/new service to DTW, ORD or MSP (in the near-term) DL 592 miles DL 1,280 miles UA, WN, F9 974 miles UA, AA, WN 315 miles DL 363 miles UA, DL 789 miles AA 770 miles AA, WN 1,570 miles AA, WN 1,070 miles DL 905 miles AA 854 miles 19
The exception: Allegiant Airlines service to Florida Top MQT O&D Markets Daily, Directional w/g4 Rank Dst Usage Leakage Booked Weekly Stimulation 1 DTW 4.9 6% 5.2 2 LAX 2.9 17% 3.5 3 LGA 2.7 18% 3.3 4 RSW 2.4 66% 7.1 50 297 5 ATL 2.3 39% 3.8 6 DCA 2.2 29% 3.1 7 DFW 2.1 14% 2.4 8 DEN 2.0 32% 3.0 9 SFO 2.0 37% 3.2 10 FLL 2.0 46% 3.7 11 SEA 2.0 24% 2.6 12 MCO 1.9 65% 5.5 39 233 13 LAS 1.7 15% 2.0 14 PHX 1.6 27% 2.2 15 BOS 1.6 10% 1.7 16 IAH 1.5 27% 2.1 17 TPA 1.4 65% 4.0 28 167 18 PHL 1.4 9% 1.5 19 STL 1.2 8% 1.3 20 SAN 1.0 23% 1.3 New market opportunities are identified in yellow Allegiant s focus is to Florida, Phoenix and Las Vegas Florida would be focus for MQT Allegiant has and will be the fastest/2 nd fastest growing airline in the U.S. over the next few years Allegiant has been very successful serving markets on the U.S. Canadian border, although this has been tempered over the past 18 months by the strength of the U.S. Dollar 20
MQT: Among highest CRJ-200 Load Factor markets for Delta out of DTW Delta's CRJ Flying from DTW Ranked by Load Factor (Descending Order) Rank Dest Deps/Day Onboards Load Factor 1 MKE 1.0 17,137 90% 2 GRR 2.1 33,618 89% 3 GSP 1.6 25,954 89% 4 MHT 1.0 13,896 88% 5 ALB 1.6 26,343 88% 6 MQT 1.7 26,835 88% 7 IND 1.3 21,617 88% 8 YUL 1.4 22,472 88% 9 DAY 1.3 20,688 87% 10 ERI 2.1 33,591 86% 11 YYZ 2.2 33,878 86% 12 BTV 2.5 39,289 86% 13 YOW 1.4 22,306 86% 14 RIC 0.6 9,527 85% 15 SWF 2.3 35,509 85% 16 BUF 0.5 7,188 85% 17 DSM 2.2 34,065 85% 18 AVP 2.1 32,177 84% 19 CAK 2.0 31,402 84% 20 IAD 1.6 23,856 84% * Greater than 1.0 daily CRJ departures annually MQT is among Delta s highest Load Factor markets out of DTW Furthermore, most of markets on list are flown multiple times per day with larger aircraft and the CRJ-200 in these markets is only a filler at offpeak times Indicates potential spill on MQT flying Again, challenge will be explaining what happened in 2013 Time period: Year-ending May 2015 21
MQT: Also among highest American Eagle Load Factor markets out of ORD American's ERJ/CRJ Flying from ORD Ranked by Load Factor (Descending Order) Rank Dest. Deps/Day Onboards Load Factor 1 DTW 3.3 53,457 90% 2 SYR 1.6 25,733 89% 3 ROC 1.6 26,631 89% 4 CLE 2.1 32,539 88% 5 BNA 2.7 42,313 87% 6 CMH 5.3 79,510 87% 7 BWI 1.2 18,212 86% 8 OMA 1.9 29,786 86% 9 MQT 0.8 12,633 85% 10 SGF 3.6 55,213 85% 11 DSM 2.7 41,025 85% 12 BUF 1.3 20,542 85% 13 PIT 0.9 13,356 85% 14 CHO 1.9 29,864 84% 15 CHA 1.1 15,353 84% 16 CWA 1.9 27,872 84% 17 COU 1.2 17,407 84% 18 GRR 4.0 60,190 84% 19 YYZ 2.1 30,576 83% 20 RST 3.7 53,607 82% Similar story for American at ORD, as it pertains to MQT MQT is one of top 50-seat RJ markets out of ORD for AA Again, other markets are mostly those that have more capacity on larger jets Again, indicative of the need for more capacity Time period: Year-ending May 2015 22
1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 Potential MSP Service: MQT historically generated good MSP O&D demand 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Passengers Daily, Each Way MQT-MSP has historically on many occasions generated in excess of 10 O&D daily passengers 17.4 12.0 9.4 7.6 5.3 11.1 9.1 SkyWest under a pro-rate agreement, would lower air fares and stimulate demand Example: SkyWest entered the DLH-ORD market a few years ago and stimulated O&D demand from roughly 10 daily passengers to 40, or a 4-fold increase Given historical demand, in conjunction with potential stimulation, 1x or possibly 2x daily MSP service is possible, particularly seasonally 23