MINNESOTA Regional Air Service Study The KRAMER Team June, 2003
Today s Topics Tier 2 Demand Profile Context for Possibilities (The Industry) Air Service Options Likely Build-out Facility Implications Strategies to Recruit Air Carriers Strategies to Lower Air Fares Next Steps Project Wrap-up
Tier 2 Enplanement Activity 350,000 300,000 Eau Claire St. Cloud 250,000 200,000 Rochester 150,000 100,000 50,000 Duluth 0 2000 2001 2002
Capture Rates Duluth Rochester Diverted 49% Local Capture 51% Diverted 57% Local Capture 43% Eau Claire Local Capture 33% St. Cloud Local Capture 19% Diverted 67% Diverted 81%
Total Market St. Cloud Rochester Eau Claire Duluth 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2002 Enplanements Additional Potential
Near Term Potential Rochester: 65% = 198,962 Duluth: 58% = 197,359 St. Cloud: 51% = 61,036 Eau Claire: 65% = 40,756 % = Capture Rate Goal
Context for Possibilities Industry Recovery Future of Hubs Low Cost Carriers Competition
The Bottom: Is it Here? 0.8% 0.8% Domestic Passenger Revenue as % of Nominal GDP 0.7% 0.7% 0.6% 0.6% 0.5% 1989 I 1990 II 1991 III 1992 I 1994 I 1995 II 1996 III 1997 I 1999 I 2000 II 2001 III Courtesy of Eclat Consulting
Market Still Has No Confidence Network Carriers Market Capitalization ($ millions) Available Seat Miles (000) Low Cost/Niche Carriers Market Capitalization ($ millions) Available Seat Miles (000) America West 137 6,962,073 AirTran 534 2,152,809 American/TWA 992 32,933,032 Alaska 506 4,864,673 Continental 728 12,915,744 America Trans Air 54 3,683,876 Delta 1,648 25,656,828 Frontier 208 1,562,942 Northwest 767 14,916,855 JetBlue 2,165 2,229,727 United 142 25,625,719 Midwest Express 47 841,454 US Airways 48 12,008,746 Southwest 12,517 17,637,823 Total $4,461 131,018,997 $16,030 32,973,304
Will the Network Hubs Remain? 30 hubs in the U.S. 30,000 city pair markets 5% of city pairs = 73% of all passengers Rest served by hub & spoke systems Why pressure is on smaller markets
Future of Tier 2 and Tier 3? Extinction? A prolonged and difficult recovery for mainline network carriers (Northwest, American, United, Delta, Continental, US Airways). Continued retirement of turboprop aircraft and deployment of regional jets on mainline routes. A willingness of Minnesota and Wisconsin air passengers to drive to MSP. Absence of competition for incremental passengers at perimeter airports. Bright Future? Premium prices at Tier 2 and Tier 3. Increased highway congestion lengthens travel time & hassle. Time savings to drive, park, and clear security at the local airport. Community interest in sharing the financial risk of added service. A Tier 2 strategy to serve as competitive gateways to the national network of air transportation.
LCC s Exploit Mainline Troubles 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Low Cost Carrier Growth vs Difference in Cost per ASM 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 LCC ASM Share CASM Diff. 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Courtesy of Eclat Consulting
Top 10 CMSA Markets, March 2003 Low Cost Carrier Market Share Total San Francisco 29% San Francisco 2% San Jose 39% Los Angeles 22% Oakland 61% Long Beach 46% Burbank 64% Ontario 54% Total Los Angeles 31% Large Hub Medium Hub Small Hub Orange County 18% Total Houston 28% Total Chicago 17% Total Dallas/Ft. Worth 24% Houston (IAH) 3% Houston (HOU) 76% Chicago (ORD) 0.3% Dallas/Ft. Worth (DFW) 2% Dallas/Ft. Worth (DAL) 87% Total Philadelphia 2% Chicago (MDW) 75% Total Washington 17% Manchester 20% Washington (BWI) 46% Total Boston 6% Boston 3% Westchester County Providence Newark 18% 1% Islip 47% New York (JFK) 22% New York (LGA) 3% Washington (IAD) 3% Total Atlanta 13% Washington (DCA) 1% Total New York 8% Courtesy of Eclat Consulting
Mainline Carriers Fight Back with Regional Jets 80 70 60 50 40 30 20 10 Seat Mile Costs Mainline and 50-Seat Regional Jet 0 0 500 1000 1500 2000 2500 3000 RJ Cost Curve Mainline Cost Curve (Pre-Restructuring) Hypothetical Cost Curve (Post-Restructuring) Courtesy of Eclat Consulting
Real Competition is Other Major Carriers Share of Passengers in Each Carrier's LCC Markets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% AA AS CO DL HP NW UA US Major LCC Other Maj Courtesy of Eclat Consulting
Air Service Options Planning Parameters Key Markets Service Build-up
Aircraft Planning Parameters Aircraft Seats Trips/day Trips/year Seats/year Enplaned Load Factor @ 70% Saab 340 34 6 2,190 74,460 52,122 ERJ 135 37 3 1,095 40,515 28,361 ERJ 140 44 3 1,095 48,180 33,726 CRJ 200 50 3 1,095 54,750 38,325 CRJ 700 70 3 1,095 76,650 53,655 ERJ 190 100 3 1,095 109,500 76,650
Direct Operating Costs (DOC) Aircraft Seats Average DOC per ASM Carrier Saab 340 34 0.16 Northwest ERJ 135 37 0.099 American Eagle ERJ 140 44 0.079 American Eagle CRJ 200 50 0.093 Air Wisconsin CRJ 700 70 0.053 American Eagle ERJ 190 100 new Jet Blue ASM = seats X trip miles
Estimating Direct Route Costs Aircraft Saab 340 ERJ 140 CRJ 200 Carrier Northwest American Eagle Air Wisconsin Seats 34 44 50 Route STC-MSP DLH-ORD EAU-ORD Stage Length 65 397 268 ASM's per Trip 2,210 17,468 13,400 Cost/ ASM 0.16 0.079 0.093 Direct Costs Per Segment $354 $1,380 $1,246 Six Segments per day (3 RJ's) $2,122 $8,280 $7,477 Annual Direct Operating Cost $774,384 $3,022,139 $2,729,178 Based on Average Costs/ASM, IIIQ, 2002
Total Revenue Parameters Direct Operating Costs do not include company administration or the cost of operating the hub & spoke network. Carriers assign a fully allocated cost to each segment that includes DOC plus overhead. Every company has a different formula for fully allocated costs. Range is approximately 50% to 200% more than direct operating costs. Profitable Route = Fully Allocated Costs
Top Markets for Tier 2 Airports Rank Market CY 2002 1 O'Hare Intl, IL (ORD) 37,910 2 Sky Harbor Intl, AZ (PHX) 23,770 3 Denver Intl, CO (DEN) 18,590 4 Orlando Intl, FL (MCO) 17,620 5 McCarran Intl, NV (LAS) 15,830 6 Ronald Regan Natl, DC (DCA) 15,260 7 La Guardia, NY (LGA) 14,890 8 Dallas/Ft Wor Int, TX (DFW) 13,890 9 Los Angeles Intl, CA (LAX) 13,520 10 Seattle/Tacoma In, WA (SEA) 13,440 11 Wm B Hartsfield, GA (ATL) 13,420 12 San Francisco In, CA (SFO) 12,550 13 Logan Intl, MA (BOS) 12,470 14 Wayne County, MI (DTW) 11,210 15 Lindberg Field, CA (SAN) 9,850 Subtotal 244,220 Other 353,430 Total 597,650 3 flights 50 Seat CRJ @ 70% LF = 38,325/yr USDOT O&D Survey and 298C Data, 2002
Air Service Models Improved Network Access Shuttle to Chicago s Midway Airport Satellite Airports Alternate Airport
Improved Network Access Current Daily Summer Schedule Airports Minneapolis Chicago Denver Duluth 9 Eau Claire 5 Rochester 9 4 St. Cloud 5
Near Term Service Increment Airports Goal Notes Duluth Chicago Reinstatement of Chicago Service Eau Claire Rochester St. Cloud More MSP Chicago Denver More MSP Chicago Higher Frequency, better connecting schedule at MSP, confirm capture rate, go after Chicago Begin Denver recruitment, targets: United and Frontier Higher Frequency, better connecting schedule at MSP, RJ s to Chicago
Chicago Hubs Changing 500-559 600-659 700-759 800-859 900-959 1000-1059 1100-1159 1200-1259 1300-1359 1400-1459 1500-1559 1600-1659 1700-1759 1800-1859 1900-1959 2000-2059 2100-2159 2200-2259 2300-2359 34 24 26 32 29 42 28 31 30 31 37 37 32 35 7 12 14 2 2 Inbound 17 18 5 Outbound 27 38 27 28 35 31 32 27 35 28 30 38 36 33 400-459 500-559 600-659 700-759 800-859 900-959 1000-1059 1100-1159 1200-1259 1300-1359 1400-1459 1500-1559 1600-1659 1700-1759 1800-1859 1900-1959 2000-2059 2100-2159 2200-2259 2300-2359 61 32 26 49 29 42 42 39 41 37 49 43 30 33 2 9 2 3 2 3 Inbound 12 17 38 30 16 27 45 43 44 37 48 49 26 20 Outbound 61 61 American De-Peaked United Connecting Banks
Shuttle to Midway - Concept Goal: To get into the low cost carrier systems Challenge: Address security and baggage issues. Solve: Interline issues at Midway Solve: Low cost shuttle to Midway
Low Cost Carrier Chooses Tier 2 Satellite Airports Assumption: LCC does not go to MSP Duluth too far Rochester infrastructure sufficient St. Cloud has location but needs to build out Eau Claire constrained by urban development? A Southwest-scale operation solidifies a larger role for Tier 2 airports in the future Strategic positioning - Yes Premature investing No
Metro Area Goes Regional Alternate Airport Big LCC goes to Tier 2 MSP originating passengers double NW ramps up MSP hub; significant capacity and delay issues Formal relationship between MSP & Tier 2 Ground access improved to alternate airport Regional Plan in place to coordinate & invest
Infrastructure Needs Network Improvements Loading bridges compatible with RJ s Additional parking at STC Satellite Airport Improve roadway access at RST County Road 16 and Highway 63 Modify/expand terminal at EAU, expand ramp and increase parking area Expand terminal at STC, expand ramp, increase car parking, and improve roadway access
Infrastructure Needs (cont.) Alternate Airport Initially, same as Satellite Airport Longer range, add parallel runway Expand or replace terminal Expand or replace ramp, depending on terminal location and design Expand car parking Category II precision instrument approach Connect to downtown MSP via rail or other system.
Recruiting New Service Good numbers not enough Minimum revenue guarantees Travel Bank Local support for station and staff costs Advertising Congressional interest and support
Strategies to Lower Air Fares Near term, support MSP initiatives to attract smaller low cost carriers Decide best airports for Southwest Schedule a Minnesota day at Southwest (even if you can t agree on airports) Consider partnering with DIA in efforts to attract LCC
Next Steps Force Multiplier THE INCUBATOR Build Enplanement Base at Tier 2 Regional Plan Reserve St. Cloud option Legislative Actions Revise MN Air Service Program to reflect today s reality Support Federal initiatives to promote investment in regional and the regional concept of airports
For more information on this study, please contact: Office of Aeronautics The Minnesota Department of Transportation 222 East Plato Boulevard St. Paul, Minnesota 55107-1618 (800) 657-3922 (651) 297-1600 www.mnaero.com KRAMER aerotek, inc. 580 Utica Avenue Boulder, Colorado 80304-0775 (303) 247-1762 www.krameraerotek.com Acknowledgment The preparation of this document was financed in part through a grant from the Federal Aviation Administration (Project No: 3-27-000-S8) and with the financial support of the Minnesota Department of Transportation, Office of Aeronautics. The contents do not necessarily reflect the official views or the policy of the FAA or the Office of Aeronautics. Acceptance of this report does not in any way constitute a commitment to fund the development depicted herein.