An Assessment of Competition and Consumer Choice in Today s U.S. Airline Industry Daniel M. Kasper and Darin Lee, Ph.D. June 26, 2017
Assignment We have been asked by Airlines for America ( A4A ) to provide an independent economic assessment of the current state of airline industry competition and consumer choice for U.S. air travelers. Our analysis relies on a variety of publicly available data and information sources, including: Data from various U.S. Department of Transportation ( DOT ) databases, including the Origin & Destination Survey ( DB1B ), Form 41, On-Time Performance and T-100 databases. OAG schedule data. SEC filings, news releases and other publicly available airline industry information sources. Published academic research. 2
Summary of Findings An analysis using established criteria for assessing airline industry competition demonstrates that there is robust competition in the U.S. airline industry. In particular:* U.S. consumers currently enjoy a wide array of choices among competing airlines and products. The Southwest Effect is alive and well and there are now several rapidly growing carriers that substantially lower fares in the markets in which they compete. Robust competition spurred by both the continued growth of lower cost carriers and the expansion by all carriers at competitors hubs has resulted in fare levels among the lowest in U.S. aviation history. Following external shocks that severely impeded the economics of serving small communities, service at small airports has been growing. Improved financial health has enabled U.S. carriers to invest heavily in their products and services, create thousands of well-paying airline jobs, and substantially increase compensation levels for airline employees. The U.S. airline industry s operational performance and customer satisfaction levels are at all-time highs. *The opinions expressed in this presentation reflect the views of the authors and do not necessarily reflect the views of Compass Lexecon or its other experts. This study was commissioned by Airlines for America. 3
1. U.S. Consumers Currently Enjoy an Abundance of Choices for Air Travel at Some of the Lowest Prices in History 4
Avg. Number of Competitors Overall, the Average Number of Competitive Choices for Air Travel Has Increased Over the Past Two Decades The average number of competitors per city-pair has increased consistently for almost two decades. For example, between Dallas and New York, a market with close to 3,000 passengers per day each way ( ppdew ), the number of competitors increased from two to five including the addition of two low cost carriers. Similarly, between Austin and Los Angeles (over 800 ppdew), the number of competitors increased from three to five (including two low cost carriers one of which is new). Simply put, the lack of entry barriers has made it easy for all carriers including low cost and ultra low cost carriers to continue entering and expanding into more citypairs. Average Number of Competitors on U.S. Domestic City-Pairs 4.0 3.5 3.5 3.3 3.4 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000 2007 2016 Sources: U.S. DOT DB1B Database. Notes: A carrier is defined as a competitor on a city-pair if it has at least 5% of O&D passengers. Average number of competitors is weighted across city-pairs by passengers. Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). 5
Avg. Number of Competitors The Number of Competitive Choices per City-Pair Remains Robust Across Cities of All Sizes Overall and at large cities, there has been an increase in the average number of competitors per city-pair since 2007. There was a slight decrease in the number of competitors per city-pair from medium and small cities, but the average city-pair to/from small cities still has close to two competitors while medium cities average over three competitors. The worsening economics of 50-seat (and smaller) regional jets and sharp declines in short-haul travel due to the post-9/11 hassle factor have been the primary causes of the decrease in service at smaller cities. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Average Number of Competitors on City-Pairs from Different Sized Cities 3.3 3.4 3.3 1.8 3.4 3.5 3.4 1.9 3.6 3.5 2000 2007 2016 Total Large Medium Small/NonHub 3.2 1.8 Sources: U.S. DOT DB1B Database; T100; FAA (https://www.faa.gov/airports/planning_capacity/passenger_allcargo_stats/categories/). Notes: Bars show average number of competitors per city-pair where one end of each city-pair includes cities in that size category (based on 2007 enplanements). A carrier is defined as a competitor on a city-pair if it has at least 5% of O&D passengers. Average number of competitors at each city is computed as the passenger-weighted average of competitors on all city-pairs from that city. Average number of competitors for each city size is calculated as the simple average across cities in a size category. City categories are based on 2007 enplanements with: Large Cities greater than 1% of U.S. enplanements, Medium Cities greater 0.25% of U.S. enplanements, Small/Nonhub less than 0.25% of U.S. enplanements and more than 10,000 annual enplanements. Size cutoffs based on FAA airport size definitions. The following airports are grouped into cities: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). All other cities are individual airports. 6
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 2015 2016 Real Domestic Price Per Mile (Cents) Ticket Prices Are At or Near Their Historical Lows Notwithstanding the 110% Increase in Jet Fuel Prices Since 1998 and Several Mergers 30 25 20 Real (Inflation Adjusted) Domestic Prices Per Mile, 1990-2016 Real domestic price per mile has declined by 40% since 1990 (and by 36% including bag and change fees) Great Recession 15 10 5 0 Real Domestic Yield Real Domestic Yield w/ Bag and Change Fees Sources: A4A; U.S. Department of Labor Bureau of Labor Statistics; U.S. EIA. Notes: 2016 Dollars. Prices are net of taxes and passenger facility charges. Real domestic price per mile is stage-length adjusted to 1,000 miles. Bag and change fees are domestic unadjusted for distance. 7
DOT s Most Recent Quarterly Fare Report Finds Fares Are at Historically Low Levels Sources: U.S. DOT. 8
In an Increasing Number of City-Pairs, Consumers Can Choose from Full Service Options on Global Network Carriers, Low Cost Options on Carriers Such as JetBlue, and Even Lower Cost Options on ULCCs Such as Spirit Round-trip Non-Stop Base Fare (Excluding Ancillary Fees) Distribution Between Boston and Cleveland $100 RT Source: U.S. DOT DB1B Database 2016. 9
In Response to Strong Demand for Unbundled Fares Offered by ULCCs, Global Network Carriers Have Introduced Basic Economy Fares Source: United.com accessed on June 1, 2017 for outbound travel on June 8, returning on Tuesday June 12 th. Lowest return fares priced at $166 (Basic Economy) on 5:34 PM, 7:35 PM and 9:20 PM departures. 10
2. Rapid Expansion by LCCs and Other Smaller Carriers Has Spurred Robust Competition Putting Substantial Downward Pressure on Airfares 11
Smaller Carriers Have Been Growing Far Faster Than the Four Largest Carriers Growth in Systemwide ASMs Since 2010 Source: OAG. Notes: ULCCs include Allegiant, Spirit and Frontier. Carriers include predecessor airlines. 12
The Geographic Penetration of LCCs/ULCCs/Smaller Carriers is Now Pervasive Percentage of Domestic O&D Passengers with non-global Network Carrier Options, 1998 vs. 2016 1998 2016 Sources: U.S. DOT DB1B and DB1A. Notes: Domestic Passengers with non-global Network Carrier Options defined as passengers traveling in city-pairs where at least one non-global Network Carrier has at least a 5% O&D share. New York and New Jersey are grouped. District of Columbia, Virginia, and Maryland are grouped. 13
Small Carriers with Low Cost Structures Have Captured Nearly All of the Growth in Domestic Demand Since 2007 (Approx. 100,000 Passenger/Day) Avg. Daily Domestic O&D Passengers and Market Share (2007) Avg. Daily Domestic O&D Passengers and Market Share (2016) 2007 Avg. Daily Passengers: 1,312,290 2016 Avg. Daily Passengers: 1,409,682 Source: U.S. DOT DB1B Database. Notes: Numbers indicate average daily O&D passengers for each carrier and their share of total O&D passengers. United includes Continental, Delta includes Northwest, American includes US Airways. LCCs and Low Fare Premium Carriers include Southwest, JetBlue, Alaska, Hawaiian, Virgin America, Sun Country and AirTran. ULCCs include Spirit, Allegiant and Frontier. 14
Smaller Carriers (Alaska, Spirit, JetBlue, etc.) Have Been Growing Rapidly Share of Domestic O&D Passengers Sources: U.S. DOT DB1B. Notes: American, Delta, United and Southwest reflect merged carriers in all years. 15
Percentage of Domestic Passengers with non- Global Network Carrier Options Consumers Options to Choose from Carriers Other Than the Global Network Carriers Have Increased Significantly Over the Past Two Decades 100% Proportion of Domestic O&D Passengers Traveling in City-Pairs With Options Other Than American, Delta or United 90% 80% 70% 65% 70% 72% 75% 78% 79% 82% 85% 85% 85% 85% 86% 87% 87% 88% 88% 88% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Options on Smaller Carriers Options on Southwest Sources: U.S. DOT DB1B. Notes: Domestic passengers. Global Network Carriers includes American, Delta, United, and their predecessors. Passengers with non-global Network Carrier options are passengers on city-pairs where at least one non-global Network Carrier has at least a 5% O&D passenger share. Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). 16
The Assertion That The Southwest Effect is Long Gone Has Been Proven to Be Untrue Some industry observers have asserted that since its merger with AirTran The Southwest Effect is Long Gone. * Such statements are unfounded and have been directly refuted by published research. A recent update of a frequently cited study by Prof. Jan Brueckner, Dr. Darin Lee and Dr. Ethan Singer (known as the BLS study **) demonstrates that the Southwest Effect on fares is alive and well. *See, e.g., Broadening the Lens on Investigating Potential Collusion in the U.S. Airline Industry, The American Antitrust Institute, September 22, 2015. **Jan Brueckner, Darin Lee and Ethan Singer, Economics of Transportation, Vol. 2 (1), 2013, pp. 1-17. 17
Rigorous Econometric Analysis Demonstrates That a Number of Carriers Including Southwest Put Substantial Downward Pressure on Fares An update of the BLS model demonstrates that, in 2016, Southwest s presence on a route lowered fares by more than 21%. The decline in the Southwest Effect in recent years is primarily attributable to: Rapid growth of other LCCs and ULCCs which has lowered overall market fares nationally. Southwest s strategy of selling bundled fares while other carriers adopt varying degrees of the unbundled strategy (i.e., charging separately for ancillary services such as checked bags, pre-selected seats, overhead space, etc.). Southwest s success in capturing a larger share of higher yielding business passengers. The results shows that a wide range of smaller (but rapidly expanding) carriers also put substantial downward pressure on global network carrier fares, e.g.: Alaska 24.0% JetBlue 25.4% Spirit 18.5% The original BLS report using data from YE-2008-Q2 had a Southwest effect of 26.8% for All Fares. Source: Jan Brueckner, Darin Lee and Ethan Singer, Airline competition and Domestic US Airfares: A Comprehensive Reappraisal, Economics of Transportation, Vol. 2 (1), 2013, p. 7. All Fares Global Network Carrier Fares leg_ns2-0.0187-0.0315* (0.0133) (0.0154) leg_ns3-0.0102-0.0540 (0.0329) (0.0340) D(Alaska nonstop) -0.0944** -0.240** (0.0255) (0.0265) D(Southwest nonstop) -0.217** -0.212** (0.0275) (0.0180) D(JetBlue nonstop) -0.156** -0.254** (0.0384) (0.0214) D(Spirit nonstop) -0.169** -0.185** (0.0269) (0.0185) D(Frontier nonstop) -0.0981** -0.0935** (0.0233) (0.0199) D(Sun Country nonstop) -0.106** -0.0938** (0.0406) (0.0308) Legacy adjacent nonstop -0.0124-0.0347** (0.0119) (0.0128) D(Alaska adjacent nonstop) 0.00167-0.0216 (0.0400) (0.0491) D(Southwest adjacent nonstop) -0.158** -0.145** (0.0162) (0.0157) D(JetBlue adjacent nonstop) -0.144** -0.164** (0.0261) (0.0270) D(Spirit adjacent nonstop) -0.0984** -0.106** (0.0236) (0.0268) D(Frontier adjacent nonstop) -0.0573* -0.0677* (0.0271) (0.0269) D(Sun Country adjacent nonstop) 0.00140 0.0137 (0.0366) (0.0404) D(Allegiant adjacent nonstop) -0.236** -0.180* (0.0644) (0.0726) ltdist 0.297** 0.284** (0.0106) (0.0115) pop 0.00313 0.00728 (0.00394) (0.00408) income 0.00387** 0.00401** (0.00105) (0.00126) tempdiff -0.00332** -0.00448** (0.000527) (0.000628) Constant 3.348** 3.464** (0.0744) (0.0816) Observations 5,668 5,576 Adjusted R-squared 0.817 0.724 ** p<0.01, * p<0.05. Carrier fixed effects, quarterly dummies and additional competition variables (connecting competition, potential competition, Virgin America presence and Allegiant nonstop) suppressed. Standard errors clustered by market in parentheses. Dependent variable: FYE 2016-Q2 natural log of fares. 18
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 2015 2016 Smaller Carriers Share of Domestic Passengers Real Domestic Price per Mile (Cents) Intense Competition from Low Cost and Smaller Carriers Has Kept Airline Prices At or Near Their Historical Low Point 50% 45% 40% 35% 30% 25% 20% 15% Real (Inflations Adjusted) Domestic Prices Per Mile vs. Smaller Carriers O&D Share, 1990-2016 16% 17% 17% 18% 21% Real domestic price per mile has declined by 40% since 1990 (and by 36% including bag and change fees) 24% 24% 23% 23% 25% 27% 29% 30% 32% 32% 33% 35% 38% 39% 40% 41% 42% 43% 43% 44% 45% 46% 30 25 20 15 10 10% 5% 5 0% 0 Non-Global Network Carriers Real Domestic Yield Real Domestic Yield w/ Bag and Change Fees Sources: A4A; U.S. Department of Labor Bureau of Labor Statistics; U.S. DOT DB1B; U.S. EIA. Notes: 2016 Dollars. Prices are net of taxes and passenger facility charges. Smaller carriers are all U.S. carriers except Global Network Carriers (American, Delta, United, and their predecessors). Real domestic price per mile is stage-length adjusted to 1,000 miles. Bag and change fees are unadjusted for distance. 19
Smaller U.S. Carriers Are Also Growing Faster Than the U.S. Global Network Carriers on International Routes Source: OAG. Notes: U.S. carriers only. Transatlantic defined as Europe, Middle East, Indian Subcontinent and Africa; transpacific is defined as Asia and Australia; Latin America defined as Mexico, Central America, South America, and Caribbean countries. Total international capacity excludes Canada. Global Network Carriers include American, Delta, and United. Southwest includes AirTran. 20
International Carriers Have Been Expanding Into the United States As Well Source: OAG. Notes: Excludes U.S. carriers. Transatlantic defined as Europe, Middle East, Indian Subcontinent and Africa; transpacific is defined as Asia and Australia; Latin America defined as Mexico, Central America, South America, and Caribbean countries. Total international capacity excludes Canada. 21
3. Carriers Have Been Relentlessly Expanding into Each Others Hubs 22
The Four Largest U.S. Carriers Aggressively Compete Against One Another Including at Each Others Hubs % Capacity Growth By the Four Largest U.S. Carriers at Other Carriers Hubs/Focus Cities, 2010 to 2017* Competitors Hub Cities U.S. GDP Growth Competitors Hub Cities U.S. GDP Growth Competitors Hub Cities U.S. GDP Growth Competitors Hub Cities U.S. GDP Growth American Hub United Hub Delta Hub Southwest Focus City Alaska Hub Virgin America Hub Source: OAG, World Bank. Notes: *Capacity measured by ASMs. Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Dallas (DFW, DAL), Houston (HOU, IAH, EFD), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco Bay Area (SFO, OAK), and Washington DC (DCA, IAD, BWI). Growth in real U.S. GDP from 2010 to 2017 using World Bank forecasts. 23
Smaller Carriers Have Been Rapidly Expanding Into Large Carrier Hubs Increase in Daily Seats By Smaller Carriers at Large Carrier Hubs/Focus Cities, 2010 to 2017 Competitors Hub Cities Competitors Hub Cities Competitors Hub Cities Competitors Hub Cities American Hub United Hub Southwest Focus City Delta Hub Source: OAG. Notes: Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Dallas (DFW, DAL), Houston (HOU, IAH, EFD), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco Bay Area (SFO, OAK), and Washington DC (DCA, IAD, BWI). 24
LCC/Other Smaller Carrier Domestic O&D Passenger Share LCCs and Other Smaller Carriers Have Grown Rapidly at U.S. Global Network Carriers Hub Cities and Now Carry a Significant Share of Passengers at Those Cities 45% 40% 35% 30% 25% LCCs/ULCCs and Other Smaller Carriers Share of Domestic O&D Passengers 35% 33% 29% 29% 29% 30% 30% 31% 27% 25% 25% 24% 28% 27% 39% 20% 15% 10% 10% 9% 8% 10% 15% 15% 13% 16% 5% 3% 0% 60% 50% 40% 30% Charlotte, NC Philadelphia, PA New York, NY-NJ Atlanta, GA Detroit, MI Minneapolis/St. Paul, MN 26% 31% 39% 36% 43% 34% 33% 45% 46% 37% 40% 47% 50% 50% 36% 44% Salt Lake City, UT 53% 46% 34% Dallas/Ft.Worth, TX 39% 57% 20% 20% 18% 15% 10% 0% Chicago, IL Miami, FL Houston, TX Washington, DC Phoenix, AZ Los Angeles Basin, CA San Francisco- Bay Area, CA 2000 2007 2016 Source: U.S. DOT DB1B. Notes: Share of domestic O&D passengers on U.S. carriers other than American, Delta, United, and predecessor carriers. Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Dallas (DFW, DAL), Houston (HOU, IAH, EFD), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco Bay Area (SFO, OAK), and Washington DC (DCA, IAD, BWI). Denver, CO 25
Hub-and-Spoke Networks Enable Scores of Itinerary Options For Travelers Example Itinerary Options Between St. Louis and San Francisco Carrier Type of Flight Departure Time Arrival Time Carrier St. Louis-San Francisco/Bay Area Flights for Thursday Jun-22, 2017 Type of Flight Departure Time Arrival Time Carrier Type of Flight Departure Time 1 American one-stop 5:00 AM 9:48 AM 46 American one-stop 7:18 AM 2:54 PM 91 Delta one-stop 11:58 AM 4:50 PM 136 American one-stop 4:10 PM 10:58 PM 2 United one-stop 5:15 AM 11:00 AM 47 United one-stop 7:25 AM 11:49 AM 92 United one-stop 12:00 PM 4:04 PM 137 United one-stop 4:25 PM 8:39 PM 3 United one-stop 5:15 AM 11:48 AM 48 United one-stop 7:25 AM 1:04 PM 93 United one-stop 12:00 PM 4:54 PM 138 United one-stop 4:25 PM 9:50 PM 4 Southwest one-stop 5:30 AM 10:10 AM 49 United one-stop 7:25 AM 2:18 PM 94 American one-stop 12:43 PM 7:47 PM 139 Delta one-stop 4:48 PM 10:30 PM 5 Southwest one-stop 5:30 AM 10:15 AM 50 American one-stop 7:45 AM 12:14 PM 95 United one-stop 1:26 PM 6:30 PM 140 United one-stop 4:50 PM 9:50 PM 6 Southwest one-stop 5:30 AM 11:25 AM 51 American one-stop 7:52 AM 12:46 PM 96 United one-stop 1:26 PM 9:07 PM 141 United one-stop 4:50 PM 11:36 PM 7 Southwest one-stop 5:35 AM 10:15 AM 52 American one-stop 7:52 AM 2:39 PM 97 Southwest one-stop 1:35 PM 6:30 PM 142 Southwest one-stop 5:05 PM 9:00 PM 8 Southwest one-stop 5:35 AM 10:25 AM 53 United one-stop 8:05 AM 1:16 PM 98 Southwest one-stop 1:35 PM 6:45 PM 143 Southwest one-stop 5:05 PM 10:20 PM 9 Southwest one-stop 5:35 AM 11:40 AM 54 Southwest one-stop 8:05 AM 2:10 PM 99 Southwest one-stop 1:35 PM 7:25 PM 144 Delta one-stop 5:08 PM 12:17 AM 10 Southwest one-stop 5:35 AM 12:10 PM 55 Southwest one-stop 8:05 AM 2:15 PM 100 Southwest one-stop 1:35 PM 8:15 PM 145 Delta one-stop 5:08 PM 10:36 PM 11 Southwest one-stop 5:50 AM 9:35 AM 56 United one-stop 8:05 AM 2:52 PM 101 Southwest one-stop 1:35 PM 8:20 PM 146 Southwest one-stop 5:10 PM 12:05 AM 12 Delta one-stop 5:50 AM 9:40 AM 57 United one-stop 8:05 AM 3:34 PM 102 Southwest nonstop 1:40 PM 3:45 PM 147 Southwest one-stop 5:10 PM 9:15 PM 13 Southwest one-stop 5:50 AM 9:45 AM 58 Southwest one-stop 8:20 AM 2:35 PM 103 Southwest nonstop 1:40 PM 3:50 PM 148 American one-stop 5:25 PM 10:13 PM 14 Delta one-stop 5:50 AM 12:30 PM 59 Southwest one-stop 8:20 AM 2:40 PM 104 Southwest one-stop 1:50 PM 7:00 PM 149 American one-stop 5:25 PM 11:46 PM 15 American one-stop 6:00 AM 10:49 AM 60 United one-stop 8:25 AM 1:30 PM 105 Southwest one-stop 1:50 PM 7:05 PM 150 United nonstop 5:30 PM 8:01 PM 16 United one-stop 6:00 AM 11:12 AM 61 United one-stop 8:25 AM 3:26 PM 106 Southwest one-stop 1:50 PM 8:45 PM 151 Southwest one-stop 5:40 PM 12:05 AM 17 United one-stop 6:00 AM 11:49 AM 62 Delta one-stop 8:42 AM 2:20 PM 107 Southwest one-stop 2:00 PM 5:55 PM 152 Southwest one-stop 5:40 PM 10:10 PM 18 American one-stop 6:00 AM 12:46 PM 63 Southwest one-stop 9:00 AM 1:30 PM 108 Southwest one-stop 2:00 PM 6:05 PM 153 Southwest one-stop 5:40 PM 10:45 PM 19 United one-stop 6:00 AM 12:49 PM 64 Delta one-stop 9:09 AM 1:49 PM 109 Southwest one-stop 2:00 PM 7:40 PM 154 Alaska one-stop 5:48 PM 11:31 PM 20 United one-stop 6:00 AM 1:04 PM 65 Delta one-stop 9:09 AM 4:50 PM 110 Southwest one-stop 2:00 PM 7:45 PM 155 Southwest one-stop 5:50 PM 12:10 AM 21 United one-stop 6:00 AM 1:30 PM 66 United one-stop 9:12 AM 2:18 PM 111 Southwest one-stop 2:00 PM 8:00 PM 156 Southwest one-stop 5:50 PM 12:20 AM 22 American one-stop 6:05 AM 1:01 PM 67 United one-stop 9:12 AM 4:04 PM 112 Southwest one-stop 2:00 PM 8:15 PM 157 Southwest one-stop 5:50 PM 9:40 PM 23 Delta one-stop 6:15 AM 10:57 AM 68 Southwest one-stop 9:15 AM 1:45 PM 113 Delta one-stop 2:00 PM 10:30 PM 158 Southwest one-stop 5:50 PM 9:45 PM 24 Delta one-stop 6:15 AM 1:49 PM 69 Southwest one-stop 9:25 AM 1:20 PM 114 Southwest one-stop 2:20 PM 6:45 PM 159 United one-stop 6:30 PM 11:40 PM 25 Southwest one-stop 6:20 AM 11:35 AM 70 Southwest one-stop 9:25 AM 2:20 PM 115 United one-stop 2:30 PM 8:18 PM 160 United one-stop 6:37 PM 1:19 AM 26 Southwest one-stop 6:20 AM 12:20 PM 71 Southwest one-stop 9:25 AM 2:35 PM 116 Frontier one-stop 2:30 PM 8:50 PM 161 United one-stop 6:37 PM 11:36 PM 27 Southwest one-stop 6:20 AM 12:35 PM 72 Southwest one-stop 9:25 AM 2:40 PM 117 United one-stop 2:30 PM 9:58 PM 162 Southwest one-stop 6:45 PM 12:15 AM 28 Southwest one-stop 6:20 AM 1:00 PM 73 American one-stop 9:35 AM 2:39 PM 118 Southwest one-stop 2:35 PM 10:10 PM 163 Delta one-stop 6:45 PM 11:01 PM 29 Southwest one-stop 6:30 AM 11:20 AM 74 American one-stop 9:35 AM 2:54 PM 119 American one-stop 2:40 PM 6:37 PM 164 Southwest one-stop 6:45 PM 11:05 PM 30 Alaska one-stop 6:30 AM 12:05 PM 75 American one-stop 9:35 AM 4:39 PM 120 American one-stop 2:40 PM 6:57 PM 165 Delta one-stop 6:45 PM 11:36 PM 31 Alaska one-stop 6:30 AM 12:09 PM 76 American one-stop 9:35 AM 5:03 PM 121 Southwest one-stop 2:50 PM 9:00 PM 166 American one-stop 7:15 PM 11:46 PM 32 Alaska one-stop 6:30 AM 2:06 PM 77 United one-stop 10:00 AM 3:26 PM 122 Southwest one-stop 3:05 PM 8:15 PM 167 Delta one-stop 7:43 PM 12:17 AM 33 Delta one-stop 6:32 AM 2:20 PM 78 United one-stop 10:00 AM 4:43 PM 123 Southwest one-stop 3:05 PM 9:10 PM 168 Southwest one-stop 8:10 PM 12:10 AM 34 American one-stop 6:45 AM 12:29 PM 79 United one-stop 10:00 AM 6:02 PM 124 Delta one-stop 3:13 PM 8:15 PM 169 Southwest one-stop 8:10 PM 12:20 AM 35 American one-stop 6:45 AM 1:59 PM 80 United one-stop 10:05 AM 2:52 PM 125 Delta one-stop 3:13 PM 10:36 PM 36 United nonstop 6:55 AM 9:12 AM 81 United one-stop 10:05 AM 3:34 PM 126 United one-stop 3:15 PM 9:07 PM 37 United one-stop 6:55 AM 11:48 AM 82 United one-stop 10:05 AM 4:42 PM 127 United one-stop 3:15 PM 9:50 PM 38 United one-stop 6:55 AM 1:16 PM 83 United one-stop 10:05 AM 5:54 PM 128 American one-stop 3:30 PM 8:23 PM 39 United one-stop 6:55 AM 2:52 PM 84 Delta one-stop 10:15 AM 6:00 PM 129 American one-stop 3:30 PM 10:13 PM 40 Southwest one-stop 7:05 AM 11:20 AM 85 Southwest one-stop 10:25 AM 2:25 PM 130 Southwest one-stop 3:45 PM 8:15 PM 41 Southwest one-stop 7:05 AM 11:45 AM 86 United one-stop 11:30 AM 4:42 PM 131 Southwest one-stop 3:45 PM 10:15 PM 42 Southwest one-stop 7:05 AM 1:00 PM 87 United one-stop 11:30 AM 5:54 PM 132 Southwest one-stop 3:45 PM 10:25 PM 43 Southwest one-stop 7:05 AM 1:30 PM 88 United one-stop 11:30 AM 6:30 PM 133 Southwest one-stop 4:00 PM 9:00 PM 44 Southwest one-stop 7:05 AM 1:50 PM 89 American one-stop 11:35 AM 4:39 PM 134 American one-stop 4:00 PM 11:08 PM 45 American one-stop 7:18 AM 1:01 PM 90 American one-stop 11:35 AM 6:13 PM 135 American one-stop 4:10 PM 9:28 PM Arrival Time Carrier Type of Flight Departur e Time Arrival Time Source: OAG for June 22, 2017. Notes: One-stop and nonstop options based on scheduled flights. Includes connections with a minimum and maximum connection time of 45 minutes and four hours, respectively, and a maximum circuity (relative to great circle distance) of 1.5. San Francisco Bay Area includes SFO and OAK. 26
Number of Itinerary Options to Small Cities Number of Itinerary Options to Large Cities Because of Hub-and-Spoke Networks, Even De-Hubbed Airports Remain Well Connected 300 Number of Itinerary Options from De-Hubbed Cities to Other Cities 250 200 150 100 50 169 164 148 139 117 73 77 161 126 169 242 166 61 83 49 152 Options from De-Hubbed City St. Louis Memphis Cleveland Cincinnati Pittsburgh 158 106 88 84 92 97 88 74 148 0 70 60 San Francisco/Bay Area LA Basin New York Boston Miami/Ft. Lauderdale 64 58 59 50 40 30 20 27 28 32 36 45 30 34 30 30 29 27 14 16 36 29 42 32 47 42 28 28 21 10 0 Sacramento Albany, NY Raleigh/Durham Charleston Norfolk/Va. Beach/Wmbg Destination Source: OAG for June 22, 2017. Notes: One-stop and nonstop options based on scheduled flights. Includes connections with a minimum and maximum connection time of 45 minutes and four hours, respectively, and a maximum circuity (relative to great circle distance) of 1.5. Airports in the following metropolitan areas are grouped: Chicago (ORD, MDW), Dallas (DFW, DAL), Houston (HOU, IAH, EFD), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco Bay Area (SFO, OAK), Washington DC (DCA, IAD, BWI), and Tampa (TPA, PIE). 27
Competitiveness at the Hub Airports Has Kept Fares Low On average, fares at hub airports are no higher than at other airports.* 20.0% Average Distance Adjusted Fare vs. National Average To the extent that some hub airports have higher fares than the national average, this reflects service quality factors at hubs, including: Non-stop service to a broader range of destinations, including many smaller communities that are more costly to serve due to lower passenger density. 15.0% 10.0% 5.0% 0.0% -5.0% 1.3% -1.8% Higher flight frequency. Greater mix of premium fare travelers (i.e., passenger mix). -10.0% -15.0% -20.0% Hubs Non-Hubs Sources: U.S. DOT DB1B. Notes: *Fare differences are measured against a distance adjusted national average fare, as described in Borenstein, Severin, U.S. Domestic airline Pricing, 1995-2004, University of California, Berkeley, Jan. 2005. Top 50 U.S. cities by 2016 passengers. Hubs are for American (DFW, ORD, CLT, DCA, PHX, MIA, PHL), Delta (ATL, MSP, DTW, SLC, LGA, JFK, SEA), United (IAH, EWR, SFO, DEN, LAX, IAD). Non-hubs include CMH, PIT, IND, SAT, STL, BNA, AUS, MSY, RDU, MCI, HOU, SNA, SMF, MKE, BOS, HNL, RSW, MDW, SAN, DAL, TPA, SJC, BWI, PDX, MCO, LAS, SJU, FLL, OAK, CLE. 28
4. Service at Small Airports Has Been Rebounding in Recent Years 29
Average Daily Departing Seats After Several Years of Decline Due to External Shocks That Severely Impeded the Economics of Serving Small Communities, Capacity at Small Cities Has Been Growing 350,000 Daily Seats from U.S. Airports Excluding Large and Medium Hub Cities 300,000 250,000 200,000 150,000 100,000 50,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: U.S. DOT T100, OAG. Notes: Scheduled seats. All U.S. carriers. Excludes all cities with more than 0.25% of annual enplaned passengers in 2007. The following airports are grouped into cities: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). All other cities are individual airports. 30
Percentage Change In Number of Passengers Since FYE 2001- Q2 By Nonstop Distance 9/11 Resulted in a Permanent Drop in Demand for Short-Haul Travel by Air, Impacting Smaller Airports Air service to/from communities tends to be short-haul routes to hub airports and are therefore disproportionally impacted by external shocks that undermine the economics of short-haul routes. Following 9/11 the security related hassle factor made traveling by air less convenient and more time consuming, thereby permanently reducing demand for air service on short-haul routes. As more consumers opted to use ground transportation rather than flying for shorthaul travel, service on many routes involving small communities within driving distance to larger airports became uneconomic. In addition to rail and private automobiles, the reduction in short-haul traffic by air coincides with a dramatic increase in inter-city express bus services, which grew from only 2.3 million passenger trips in 2008 to 11.6 million 2015. 30% 20% 10% 0% -10% -20% -30% -40% Percentage Change in Domestic O&D Passengers By Distance, 2007 vs. FYE 2001-Q2 Over 15 Million Fewer Short-Haul Passengers Per Year -29.6% -5.0% 12.3% 18.2% 21.4% 0-250 250-500 500-1000 1000-2000 >2000 Distance (Miles) Sources: U.S. DOT O&D Survey FYE 2001-Q2 and 2007; The Remaking of the Motor Coach: 2015 Year in Review of Intercity Bus Service in the United States, Chaddick Institute for Metropolitan Development, page 14. 31
Rising Fuel Prices after 9/11 Rendered 50-Seat Regional Jet Services Uneconomic on Many Routes, Making It Even More Difficult to Sustain Service to Some Small Communities Daily Departures on Regional Jets with 50 or Fewer Seats on A4A Members and Delta The bulk of RJs with 50 (and fewer) seats were ordered by U.S. carriers when jet fuel prices were below $1/gallon. Source: OAG; EIA. Includes merged carriers in all years. Jet fuel per gallon cost in 2016 dollars. Carriers include Alaska, American, Delta, Hawaiian and United (including their predecessor carriers). 32
As Smaller, Less Fuel-Efficient, 50-Seat RJs Are Retired from U.S. Carriers Fleets, Passengers Benefit from More Comfortable 76-Seat RJs and More Mainline Flights Percent of Domestic Departures by Aircraft Size on A4A Members and Delta 76 Seat RJs/Mainline: Wi-Fi, Economy Plus, First Class, overhead luggage space, etc. 50-seat RJs: No Wi-Fi, Economy Plus or First Class Source: OAG. Notes: Shows percentage of domestic departures by aircraft gauge for A4A members and Delta. Includes merged carriers in all years. A4A passenger carriers are Alaska, American, Hawaiian, JetBlue, Southwest, and United. 33
Airports Serving Small Communities Generate Insufficient Levels of Traffic to Support More Than Two Carriers The number of carriers serving an airport is directly related to the level of traffic at the airport. Smaller airports tend to have fewer carriers due to the lack of demand. For example, airports served by only one carrier average only 78 passengers per day, while airports with two carriers serve an average of 137 passengers per day. Number of Carriers Serving Airport Source: OAG; U.S. DOT DB1B, 2016. Notes: Domestic passengers and carriers only. A carrier serves an airport if it has at least 10 annual departures in 2016. Excludes airports with less than one ppdew. 34
Avg. Number of Competitors Consumers in Small- and Medium-Sized Communities Continue to Have Competitive Choices, Notwithstanding the Reductions in Service At Some Cities Although the challenges of providing service to small communities resulted in some airports experiencing a reduction in service over the past decade, passengers in all but the smallest communities (i.e., those with insufficient demand to support multiple carriers) still benefit from competitive choice. For example, the average city-pair to/from small cities still has close to two competitors and passengers using small cities are increasingly benefitting from service on larger 76-seat regional jets with Wi-Fi, First Class, Premium Economy, etc. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Average Number of Competitors on City-Pairs from Cities Based on Size 3.3 1.8 3.4 1.9 3.2 2000 2007 2016 Medium Small/NonHub 1.8 Sources: U.S. DOT DB1B Database; T100; FAA (https://www.faa.gov/airports/planning_capacity/passenger_allcargo_stats/categories/). Notes: Bars show average number of competitors per city-pair where one end of each city-pair includes cities in that size category (based on 2007 enplanements). A carrier is defined as a competitor on a city-pair if it has at least 5% of O&D passengers. Average number of competitors at each city is computed as the passenger-weighted average of competitors on all city-pairs from that city. Average number of competitors for each city size is calculated as the simple average across cities in a size category. City categories are based on 2007 enplanements with: Large Cities greater than 1% of U.S. enplanements, Medium Cities greater 0.25% of U.S. enplanements, Small/Nonhub less than 0.25% of U.S. enplanements and more than 10,000 annual enplanements. Size cutoffs based on FAA airport size definitions. The following airports are grouped into cities: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). All other cities are individual airports. 35
5. Profitability Has Enabled U.S. Airlines to Increase Investment, Hire More Employees and Raise Compensation While Simultaneously Delivering Low Fares 36
Net Income (billions), 2014 dollars Since Its Deregulation, Profitability in the U.S. Airline Industry Has Been Highly Volatile and Unpredictable U.S. Passenger Carrier Net Income (1960-2016) $20 $15 $10 1979 Oil Crisis 1990-1991 Gulf War I and Recession 2008 Oil Prices Spike 2002-2003 SARS Epidemic 2008-2009 Global Financial Crisis and Great Recession; H1N1 Epidemic $5 1980-82 Recessions 2005 Hurricane Katrina $0 -$5 2000 Dot Com Bust -$10 -$15 -$20 1978 Airline Deregulation 2001 9/11; Recession 2003 Iraq War Begins 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 Source: Airlines for America; U.S. BEA; U.S. DOT Form 41; Carrier s SEC 10-Ks and 8-Ks. Notes: System wide operations. 2016 dollars. Excludes cargo carrier income in the years 1978-2016. Excludes bankruptcy and merger related special charges for American, United, Delta, Northwest, US Airways, and Southwest for 2002-2016. Excludes other special charges in 2013 through 2016. 2011 Volcanic Eruptions in Iceland and Japanese Tsunami 37
After Shedding Over 120,000 Mainline Jobs Between 2000 and 2009, a More Profitable U.S. Airline Industry Has Restored Employment and Compensation Growth for U.S. Airline Workers Number of Employees and Average Salaries and Benefits Per Employee at A4A Carriers + Delta Source: U.S. DOT Form 41. Notes: Mainline service. Average salaries and benefits in 2016 dollars. Merged carriers included for all years. A4A passenger carriers are Alaska, American, Hawaiian, JetBlue, Southwest, and United. 38
Capital Expenditure ($Billions) Profitability Has Also Allowed U.S. Carriers to Triple Capital Expenditures Over the Past Six Years $18 $16 A4A Carrier and Delta Capital Expenditures May 2015 - United announces $781 million in airport improvements at LAX and IAH Dec. 2016 - United unveils Polaris front-cabin service July 2015 Delta announces LGA redevelopment project $15.8 $16.5 $14 $12 Dec. 2014 - American Airlines announces more than $2 Billion in planned customer improvements Jun. 2014 - JetBlue debuts Mint Premium cabin Apr. 2013 Southwest opens new terminals at Love Field $12.1 $13.3 $10 Oct. 2012 Alaska places $5 billion Boeing order Jun. 2011 American places order for 460 new narrowbodies $9.6 $8 $7.8 $7.7 $6 $6.2 $5.7 $5.5 $6.0 $5.8 $5.0 $6.5 $4 $2 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: SEC filings and press releases of American, Alaska, Delta, Hawaiian, JetBlue, Southwest, and United. Notes: Includes merged carriers in all years. 39
Operational Reliability Since the Most Recent Set of Mergers Has Increased to Its Highest Level in Years On-Time Arrival Rate (A:14) Flight Cancellation Rate (For Any Reason, Including Weather) Source: U.S. DOT On Time Performance. Notes: Domestic A4A and Delta rates, including regional carriers (Mesa, Express Jet, Endeavor) with 1% of annual revenue passengers. Includes merged carriers in all years. A:14 rate is percentage of completed flights arriving within 14 minutes of scheduled arrival time. Cancellation rate is percent of cancelled scheduled operations. A4A passenger carriers are Alaska, American, Hawaiian, JetBlue, Southwest, and United. 40
Mishandled Bags and Denied Boarding Rates Are at Their Lowest Rates in the Last Decade Mishandled Baggage Per 10,000 Passengers Denied Boarding Per 100,000 Passengers Source: U.S. DOT Air Travel Consumer Reports. Notes: A4A carriers and Delta, including reporting regional carriers. Passengers are denied boarding if they are involuntarily bumped from their reserved seat due to oversale. A4A passenger carriers are Alaska, American, Hawaiian, JetBlue, Southwest, and United, including predecessor carriers. 41
Customer Satisfaction Rating JD Power s Latest Study Shows that Customer Satisfaction Has Increased to the Highest Level in a Decade 850 JD Power North America Airline Satisfaction Study, 2007 v. 2017 800 807 810 803 750 765 758 736 716 733 710 750 700 668 663 663 682 650 600 550 500 Alaska Delta American United Southwest JetBlue Total 2007 2017 Source: JD Power North America Airline Satisfaction Study, 2007-2017. Notes: Based on 1,000 point scale. Ratings are based on performance in seven factors (in order of importance): cost & fees; in-flight services; aircraft; boarding/deplaning/baggage; flight crew; check-in; and reservation. 2007 carrier ratings are based on the simple average of merged carriers (e.g., United s plus Continental s score in 2007 divided by two). 42
Embry-Riddle s 27 th Annual Airline Quality Rating Indicated that Overall Airline Quality Reached Its Highest Level Ever in 2016 According to the recent Airline Quality Rating 2017 study: The 2016 score is the best AQR score in the 26 year history of the rating. Improved performance was seen in all four of the areas tracked. Improvement in industry performance in all of areas in the ratings is a positive sign for consumers and airlines alike. Source: Airline Quality Rating 2017, Brent D. Bowen and Dean E. Headley, Embry-Riddle Aeronautical University, April 2017. 43
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Passenger Satisfaction The American Customer Satisfaction Index Demonstrates that Passengers Are More Satisfied With U.S. Airline Services than They Have Ever Been ACSI Passenger Satisfaction Improvement in Passenger Satisfaction Metrics, 2016 v. 2017 80 75 70 65 60 55 50 63 75 Ease of check-in process Ease of making a reservation Courtesy of flight crew Timeliness of arrival Website satisfication Baggage handling Boarding experience Call center satisfaction Range of flight schedules Loyalty program Quality of inflight services Seat comfort 2017 2016 82 81 82 80 81 79 81 79 81 79 80 77 79 78 78 75 77 75 76 73 74 71 71 67 Source: American Customer Satisfaction Index. Notes: U.S. airlines. Based on a 100 point scale. All satisfaction metrics shown. 44
6. Conclusions 45
The U.S. Airline Industry s Renaissance Has Resulted in Robust Competition Benefitting Consumers, Airline Employees and Communities Across the Country Flourishing Consumer Choices No reduction in the average number of competitors per city-pair since mergers. Rapid expansion by premium-value carriers such as Alaska and JetBlue, as well as ULCCs. Multitude of fare and service options (i.e., Basic Economy, Economy, Premium Economy, Business/First) on Global Network Carriers. Highly Competitive Fares The Southwest Effect is alive and well. Rapid expansion by ULCCs charging fares well-below even those of Southwest and the other LCCs, and competitive responses by global network carriers hold fares down. Average domestic fares at or near their lowest level in history (with or without bag fees). Higher Quality Service On-time rate and completion factors at highest levels in a decade. Mishandled bag and denied boarding rates at their lowest levels in a decade. Customer satisfaction rates at well above pre-merger levels. Profitability Benefits Stakeholders Capital spending has tripled since 2007 as airlines renew fleets and upgrade airports. Resumption of job increases and wage growth for airline employees following more than a decade of furloughs and restructuring in bankruptcy. 46
Author Bios Daniel M. Kasper J.D. and MBA, University of Chicago Senior Consultant, Compass Lexecon Former Director of International Aviation at the U.S. Civil Aeronautics Board Formerly on the faculties of the Harvard Business School and University of Southern California School of Business Administration Dr. Darin Lee Ph.D. in Economics, Brown University Executive Vice-President, Compass Lexecon Author of nearly 20 published articles on the airline industry in leading economic journals such as the Journal of Law & Economics, Journal of Labor Economics, Economics of Transportation and Journal of Economic Strategy & Management. Editor of volumes 1 and 2 of Advances in Airline Economics. 47