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Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute [email protected]. If you want to be a millionaire, start with a billion dollars and open an airline. Soon enough you will be a millionaire. – Sir Richard Branson, Founder Virgin Atlantic Airlines. Outline. - PowerPoint PPT Presentation
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Airport & Airline EconomicsAirport & Airline Economics
Jeff Borowiec, Ph.D.Jeff Borowiec, Ph.D.
Texas Transportation InstituteTexas Transportation Institute
[email protected]@tamu.edu
If you want to be a millionaire, start with a billion dollars and open an airline. Soon enough you will be a millionaire. – Sir Richard Branson, Founder Virgin Atlantic Airlines
OutlineOutline Air Transportation IndustryAir Transportation Industry
– BackgroundBackground– SignificanceSignificance– StructureStructure– Cost/revenue frameworkCost/revenue framework
AirportsAirports– Where do airports get their moneyWhere do airports get their money– Who pays to operate/improve themWho pays to operate/improve them– How/where do they spend itHow/where do they spend it
AirlinesAirlines– Varied and complicated beastsVaried and complicated beasts– Legacy vs. Low Cost CarriersLegacy vs. Low Cost Carriers– Economic CharacteristicsEconomic Characteristics
Airspace Airspace (time permitting)(time permitting)– Its impacts on airport and airlines and their economicsIts impacts on airport and airlines and their economics
QuestionsQuestions
State of the IndustryState of the IndustryAirline BankruptciesAirline Bankruptcies
State of the IndustryState of the IndustryMergers and AcquisitionsMergers and Acquisitions
State of the IndustryState of the IndustryNew FeesNew Fees
The The Airport Airport
System System
Airside Airside vs. vs.
LandsideLandside
Airport DesignAirport DesignPrimary Design Elements Drive EconomicsPrimary Design Elements Drive Economics
RunwaysRunways TaxiwaysTaxiways Terminal Area/ApronTerminal Area/Apron PavementsPavements Airport Site SelectionAirport Site Selection Navigational AidsNavigational Aids AirspaceAirspace
Primary Design Guidance: Primary Design Guidance: AC 150-5300-13 Change 15AC 150-5300-13 Change 15
Passenger TerminalsPassenger Terminals Landside AccessLandside Access Cargo TerminalsCargo Terminals SecuritySecurity Emergency ServicesEmergency Services
ll
National Economic BenefitsNational Economic Benefits
Civil aviation contributed over Civil aviation contributed over $1.315 Trillion$1.315 Trillion
11.5 million jobs11.5 million jobs
$400 Billion in earnings.$400 Billion in earnings.
5.6 percent of the total U.S. GDP5.6 percent of the total U.S. GDP
Source FAA/The Economic Impact of Civil Aviation on the U.S. Economy Source FAA/The Economic Impact of Civil Aviation on the U.S. Economy December 2009December 2009
Importance of the Texas Airport Importance of the Texas Airport SystemSystem
Link to national transportation systemLink to national transportation system
Connects rural & urban populationsConnects rural & urban populations
Provides 784,000 jobsProvides 784,000 jobs
Generates $49 billion annuallyGenerates $49 billion annually
Current Status of IndustryCurrent Status of Industry
New Large AircraftNew Large Aircraft Very Light Jets – Increased Mobility/Air Taxi Very Light Jets – Increased Mobility/Air Taxi
servicesservices SATS – Small Aircraft Transportation SystemSATS – Small Aircraft Transportation System Recovering EconomyRecovering Economy Growth in Air CargoGrowth in Air Cargo Dependent on Air Transportation SystemDependent on Air Transportation System Fractional OwnershipFractional Ownership
Current Status of IndustryCurrent Status of Industry
Industry consolidationIndustry consolidation Lower marginsLower margins Increased Break-Even Load FactorsIncreased Break-Even Load Factors Emerging Aircraft with better costs per seatEmerging Aircraft with better costs per seat
(Larger RJs and Mainline aircraft)(Larger RJs and Mainline aircraft) Fewer Small Communities with Air ServiceFewer Small Communities with Air Service
Current Status of IndustryCurrent Status of Industry
Half of U.S. airports depend on only one or two Half of U.S. airports depend on only one or two destinations to connect them with the air destinations to connect them with the air transportation systemtransportation system
44 percent of U.S. airports with at least 5 weekly 44 percent of U.S. airports with at least 5 weekly departures are served by one carrierdepartures are served by one carrier
39 percent of U.S. airports are served 39 percent of U.S. airports are served exclusively by turboprop aircraft which are in exclusively by turboprop aircraft which are in sharp declinesharp decline
Air Transportation NetworkAir Transportation Network
AIRports +AIRports +
AIRplanes +AIRplanes +
AIRways =AIRways =
AIR Transportation NetworkAIR Transportation Network
Air traffic management is important because of the costs associated Air traffic management is important because of the costs associated with delaywith delay
Air Transportation NetworkAir Transportation Network
Airports are usually locally ownedAirports are usually locally owned
Airlines are publicly heldAirlines are publicly held
Airplanes are privately ownedAirplanes are privately owned
Airways are controlled by the federal Airways are controlled by the federal governmentgovernment
Aviation LegislationAviation Legislation Federal Government’s Role Dates to 1933 and the Federal Government’s Role Dates to 1933 and the
Civil Works AdministrationCivil Works Administration Federal Airport Act of 1946Federal Airport Act of 1946 Airport and Airway Development Act of 1970Airport and Airway Development Act of 1970
– Airport Development Aid ProgramAirport Development Aid Program Airport and Airway Improvement Act of 1982Airport and Airway Improvement Act of 1982
– Airport Improvement ProgramAirport Improvement Program– NPIAS airports onlyNPIAS airports only
Airway Safety and Capacity Expansion Act of 1990Airway Safety and Capacity Expansion Act of 1990– Passenger Facility Charges (PFCs)Passenger Facility Charges (PFCs)
Aviation LegislationAviation Legislation U.S. Airline Deregulation Act of 1978U.S. Airline Deregulation Act of 1978
– Fly where they want (route choice)Fly where they want (route choice)– Charge what they want (pricing)Charge what they want (pricing)
Resulted in:Resulted in:– Hub and spoke networkHub and spoke network– New entrantsNew entrants– Increased competitionIncreased competition– Discount faresDiscount fares– Growth in air travelGrowth in air travel– Loyalty programsLoyalty programs
Certificate of public convenience and necessity/US DOT
FAR Part 121 Operating certificate/FAA
Regulated……Regulated……
International AviationInternational Aviation– Open Skies agreementsOpen Skies agreements
Essential Air ServiceEssential Air Service– DOT/Subsidies to carriers serving domestic DOT/Subsidies to carriers serving domestic
locations that are economically challenginglocations that are economically challenging
SafetySafety– FAAFAA
Air Transportation NetworkAir Transportation Network
Governmental EntitiesGovernmental Entities– FAAFAA
Primarily a SAFETY agencyPrimarily a SAFETY agency Airport Improvement ProgramAirport Improvement Program Air Traffic ManagementAir Traffic Management
– NTSBNTSB Accident InvestigationAccident Investigation
– State Aviation AgenciesState Aviation Agencies Block Grant ProgramBlock Grant Program
AirportsAirports
Commercial ServiceCommercial Service
RelieverReliever
General AviationGeneral Aviation
AirportsAirports
Commercial ServiceCommercial Service– Primary: >10,000 enplaned passengersPrimary: >10,000 enplaned passengers– Non-primary: 2500->10,000 enplaned Non-primary: 2500->10,000 enplaned
passengerspassengers– Hub classification:Hub classification:
Large hub:Large hub: 1% or more of total national 1% or more of total national enplanementsenplanements
Medium hub:Medium hub: 0.25% to 0.99%0.25% to 0.99% Small hub:Small hub: 0.05% to 0.24%0.05% to 0.24% Non-hub:Non-hub: less than 0.05%less than 0.05% 2009 National Enplanements = 700 million2009 National Enplanements = 700 million
AirportsAirports
General AviationGeneral Aviation– Everything that is not scheduled passenger Everything that is not scheduled passenger
service or militaryservice or military– RelieversRelievers
Metropolitan airports that reduce congestion at Metropolitan airports that reduce congestion at commercial service airports in the areacommercial service airports in the area
– General aviation airportsGeneral aviation airports Airport roleAirport role Functional classFunctional class Design standardDesign standard
Airport OwnershipAirport Ownership
Local GovernmentsLocal Governments– CitiesCities– CountiesCounties– Airport AuthoritiesAirport Authorities
Private CorporationsPrivate Corporations
State GovernmentsState Governments
NPIASNPIASNational Plan of Integrated Airport SystemsNational Plan of Integrated Airport Systems
The plan identifies 3,332 existing and 48 proposed public-use airports that are significant to national air transportation and therefore, eligible to receive grants under the Federal Aviation Administration Airport Improvement Program (AIP).
The report estimates that over the next 5 years, there will be $52.2 billion of AIP eligible infrastructure development for all segments of civil aviation.
NPIASNPIAS
Airport Finance – RevenuesAirport Finance – Revenues
Airport Finance - ExpensesAirport Finance - Expenses NPIAS Cost by Type of Development – 2011-2015
$49.7 B$49.7 B
Airport Finance - ExpensesAirport Finance - Expenses NPIAS Cost by Airport Type - 2011-2015
Airport Airport Finance:Finance:
Revenue Revenue
andand
ExpensesExpenses
Major U.S. Major U.S. Airport Airport
ConcentrationConcentration
Texas is BIG!Texas is BIG!
What is the Texas Airport What is the Texas Airport System?System?
300 Airports & 3 Heliports300 Airports & 3 Heliports– 26 Primary Commercial Service26 Primary Commercial Service– 1 Non-Primary Commercial Service1 Non-Primary Commercial Service– 25 Relievers25 Relievers– 248 General Aviation Non-Relievers248 General Aviation Non-Relievers– 3 Heliports3 Heliports
TexasTexas Airport SystemAirport System
Airport FinanceAirport Finance
Who Pays?Who Pays?– FAAFAA
Airport Improvement ProgramAirport Improvement Program– Must meet eligibility requirementsMust meet eligibility requirements
– Aviation user taxes (i.e., passenger ticket taxes)Aviation user taxes (i.e., passenger ticket taxes)
– Commercial AirportsCommercial Airports Passenger Facility Charges (reduces AIP $)Passenger Facility Charges (reduces AIP $) Revenue from advertising, parking, concessions, access feesRevenue from advertising, parking, concessions, access fees
– State Aviation AgenciesState Aviation Agencies– Airport Sponsors (owners)Airport Sponsors (owners)
Local governmentsLocal governments
Who Pays…You Do!Who Pays…You Do!
Ticket Tax ExampleTicket Tax Example
Airport FinanceAirport Finance
Airport funding comes from several sources:Airport funding comes from several sources: Airport bonds 59% Airport bonds 59% AIP grants 21% AIP grants 21% Passenger Facility Charge 13% Passenger Facility Charge 13% State and local funding 4% State and local funding 4% Airport revenue 4% Airport revenue 4%
Source: ASCE/FAASource: ASCE/FAA
Airline EconomicsAirline Economics
CharacteristicsCharacteristics
ActivityActivity
MetricsMetrics
Impacts of Rising Fuel PricesImpacts of Rising Fuel Prices
Airline EconomicsAirline Economics
Industry CharacteristicsIndustry Characteristics
– Service IndustryService Industry
– Capital-IntensiveCapital-Intensive
– Labor-IntensiveLabor-Intensive
Airline StructureAirline Structure
Operations and MaintenanceOperations and Maintenance
Sales and MarketingSales and Marketing
Reservations and TicketingReservations and Ticketing
Management and Administrative StaffManagement and Administrative Staff
Airline MetricsAirline Metrics available seat mile (ASM) One seat transported one mile; One seat transported one mile;
the most common measure of airline seating capacity or the most common measure of airline seating capacity or supply. For example, an aircraft with 100 passenger supply. For example, an aircraft with 100 passenger seats, flown a distance of 100 miles, produces 10,000 seats, flown a distance of 100 miles, produces 10,000 ASMs. Sometimes measured in available seat kilometers ASMs. Sometimes measured in available seat kilometers (ASKs).(ASKs).
revenue passenger mile (RPM) One fare-paying One fare-paying passenger transported one mile; the most common passenger transported one mile; the most common measure of demand for air travel. Sometimes measure of demand for air travel. Sometimes measured in revenue passenger kilometers (RPKs).measured in revenue passenger kilometers (RPKs).
Airline MetricsAirline Metrics
unit revenue The average amount of revenue The average amount of revenue received by the airline per unit of capacity received by the airline per unit of capacity available for sale. Most often used to measure the available for sale. Most often used to measure the effectiveness with which revenue management effectiveness with which revenue management activity balances price and volume to generate activity balances price and volume to generate passenger revenue per ASM, known as PRASM or passenger revenue per ASM, known as PRASM or RASM.RASM.
yield The average amount of revenue received per yield The average amount of revenue received per revenue passenger mile (RPM) or revenue ton revenue passenger mile (RPM) or revenue ton mile (RTM), net of taxes.mile (RTM), net of taxes.
AirlinesAirlines
MajorsMajors– revenue > $1Brevenue > $1B
NationalsNationals– revenue between $100M and $1Brevenue between $100M and $1B
RegionalsRegionals– limited service/specific markets/city-pairslimited service/specific markets/city-pairs– fastest growing since deregulationfastest growing since deregulation
Airlines by CategoryAirlines by Category
Top 25 U.S. AirlinesTop 25 U.S. Airlines
Determinants of DemandDeterminants of Demand
Demand = Revenue Passenger Miles (RPMs)Demand = Revenue Passenger Miles (RPMs) Ticket priceTicket price Competitor’s ticket priceCompetitor’s ticket price Passenger incomePassenger income State of the economyState of the economy Availability of other modesAvailability of other modes Customer loyaltyCustomer loyalty In-flight amenitiesIn-flight amenities Frequency of serviceFrequency of service SafetySafety Random factors – SARS, 9/11, terrorism threatRandom factors – SARS, 9/11, terrorism threat
Characteristic of DemandCharacteristic of Demand
Constant fluctuationConstant fluctuation CyclicalityCyclicality Seasonality and peakingSeasonality and peaking Directional flowDirectional flow PerishabilityPerishability Schedule wait timeSchedule wait time Airport access timeAirport access time Flight timeFlight time Hub connection timeHub connection time Denied boarding timeDenied boarding time
Factors Affecting SupplyFactors Affecting Supply
Supply = available seat miles (ASMs)Supply = available seat miles (ASMs) Ticket priceTicket price Price of resources – aircraft, fuel, labor, Price of resources – aircraft, fuel, labor,
maintenancemaintenance Technological improvementsTechnological improvements Behavior of the competitionBehavior of the competition Random factorsRandom factors Government regulationGovernment regulation
Characteristics of SupplyCharacteristics of Supply
Two characteristics that shape the industry Two characteristics that shape the industry are:are:– SeasonalitySeasonality
Pull existing capacity off of other routesPull existing capacity off of other routes Have excess/idle capacity somewhere in systemHave excess/idle capacity somewhere in system
– RigidityRigidity Can be difficult to reduce/increase supply Can be difficult to reduce/increase supply
dramaticallydramatically Schedules are created six months in advanceSchedules are created six months in advance
Airline MarketsAirline MarketsMarket ContinuumMarket Continuum
Evolution Evolution of U.S. of U.S. Airline Airline
IndustryIndustry
Major U.S. Airline ConcentrationMajor U.S. Airline Concentration
Recent Airline MergersRecent Airline MergersAirlines/Announced/Closed/Resulting EntityAirlines/Announced/Closed/Resulting Entity
Airline CostsAirline Costs
Airline Cost TrendsAirline Cost Trends
Airline Cost Index 2000-2010Airline Cost Index 2000-2010
Airlines Keeping Pace?Airlines Keeping Pace?
Airline Load FactorsAirline Load Factors
Airline Costs by FunctionAirline Costs by Function
Airline Costs by CategoryAirline Costs by Category
Airline Fuel CostsAirline Fuel Costs
Twelve Months - SystemDecember 2009 - November 2010
December 2008 - November 2009
Scheduled Non-Scheduled Total Scheduled Non-Scheduled TotalRevenue Passenger Enplanements (000) 718,719 5,845 724,564 704,253 5,390 709,643
Revenue Passenger Miles (000) 795,432,424 11,031,526 806,463,950 769,711,680 10,536,280 780,247,960
Available Seat Miles (000) 969,734,233 19,390,318 989,124,551 959,327,054 18,125,515 977,452,569
Passenger Load Factor (%) 82.03 56.89 81.53 80.23 58.13 79.82
Revenue Freight Ton Miles (000) 7,127,210 66,012 7,193,222 5,615,056 53,199 5,668,255
Total Revenue Ton Miles (000) 87,359,300 1,169,172 88,528,472 83,316,104 1,106,845 84,422,949
Available Ton Miles (000) 140,489,207 3,136,906 143,626,113 138,450,289 2,909,910 141,360,199
Ton Mile Load Factor (%) 62.18 37.27 61.64 60.18 38.04 59.72
Revenue Departures Performed 9,500,010 170,465 9,670,475 9,567,245 153,963 9,721,208
Revenue Aircraft Miles Flown (000) 6,927,463 98,244 7,025,707 6,862,290 89,339 6,951,629
Revenue Aircraft Hours (Airborne) 16,436,281 262,510 16,698,791 16,426,716 238,801 16,665,517
SOURCE: Bureau of Transportation Statistics, T-100 Market and Segment (Excludes all-cargo services. Includes domestic and international)
U.S. Air Carrier Traffic Statistics Through November 2010
U.S. AirlinesU.S. AirlinesAnnual Pre-Tax EarningsAnnual Pre-Tax Earnings
Airline RevenuesAirline Revenues
Low Cost CarriersLow Cost Carriers Carry 1/3 of all US PassengersCarry 1/3 of all US Passengers
LCC Presence in Largest 1,000 Domestic City Pairs LCC Presence in Largest 1,000 Domestic City Pairs Has Increased by More Than 30% Since 2000Has Increased by More Than 30% Since 2000
Low Cost Carriers Compete In Markets Accounting Low Cost Carriers Compete In Markets Accounting For 80% Of All Domestic Air TravelersFor 80% Of All Domestic Air Travelers
Legacy Carrier Operating Costs Have Gone Down Legacy Carrier Operating Costs Have Gone Down and LCC Costs Have Gone Upand LCC Costs Have Gone Up
Fuel Price ImpactFuel Price Impact
Cyclical?Cyclical?
Airline Operating StatisticsAirline Operating Statistics
Top 25 AirlinesTop 25 Airlines
TopTopU.S. U.S. City City
PairsPairs
Top U.S. Travel Markets - 2009Top U.S. Travel Markets - 2009
Airline Operating TrendsAirline Operating Trends
Texas Aviation ActivityTexas Aviation ActivityPassenger EnplanementsPassenger Enplanements
Texas Commercial Service Texas Commercial Service EnplanementsEnplanements
Texas Aviation ActivityTexas Aviation ActivityTexas Air Carrier Enplanements (% of U.S.)Texas Air Carrier Enplanements (% of U.S.)
Growth Going ForwardGrowth Going Forward
U.S. Commercial Air Carriers 2011-2031 U.S. Commercial Air Carriers 2011-2031 Supply Supply (Domestic ASMs annual percentage growth)(Domestic ASMs annual percentage growth)
– Mainline Mainline 2.82.8– RegionalsRegionals 4.14.1
Demand Demand (Domestic RPMs (Domestic RPMs annual percentage growthannual percentage growth))– Mainline Mainline 2.92.9– RegionalsRegionals 4.24.2
Profitability tied to operating costs Profitability tied to operating costs Oil Oil
Compelling Issues Influencing/AffectingCompelling Issues Influencing/AffectingAir TransportationAir Transportation
Future of airline industry/consolidationFuture of airline industry/consolidation Future funding/authorizationFuture funding/authorization User feesUser fees Other FeesOther Fees SecuritySecurity Alternative fuelsAlternative fuels Workforce developmentWorkforce development Land use/development/encroachmentLand use/development/encroachment Privatization – efficiency, capital infusion, conversion Privatization – efficiency, capital infusion, conversion
to tax paying entityto tax paying entity NextGen – advanced technologies/air space NextGen – advanced technologies/air space
management/ADS-Bmanagement/ADS-B
Air Traffic ManagementAir Traffic Management
Air Traffic ControlAir Traffic Control VFR / IFRVFR / IFR Instrument ApproachesInstrument Approaches LandingLanding
– Non-precision approach/Precision approachNon-precision approach/Precision approach
Terminal AirspaceTerminal Airspace
Delay CostsDelay Costs
Air Traffic ManagementAir Traffic Management
Phases of FlightPhases of Flight– ATC TowerATC Tower– TRACONTRACON– ARTCCARTCC
RVSMRVSM
Area of greatest potential for efficiency gainsArea of greatest potential for efficiency gains
Instrument ApproachesInstrument Approaches
Air Traffic ManagementAir Traffic Management
Air Traffic ManagementAir Traffic Management
GPS and WAASGPS and WAAS•The Global Positioning System (GPS) is a system of 24 satellites operated by the Department of Defense (DOD) under joint DOD/Department of Transportation (DOT) management. •Wide Area Augmentation System uses a series of ground stations to augment or enhance the GPS signal increasing its accuracy.
Allowed for new instrument approaches and reduced minimums.
Glass CockpitsB-777 Garmin 1000Cirrus S-22 G550
ADS-BADS-B
An air traffic system that will provide more An air traffic system that will provide more precise surveillance data to air traffic precise surveillance data to air traffic controllers and to ADS-B equipped aircraft controllers and to ADS-B equipped aircraft at the same time. This information will at the same time. This information will significantly enhance pilots’ situational significantly enhance pilots’ situational awareness.awareness.
ADS-BADS-B
ADS-B uses Global Navigation Satellite System (GNSS) ADS-B uses Global Navigation Satellite System (GNSS) position information processed by aircraft avionics to position information processed by aircraft avionics to transmit the aircraft’s location to ground receivers for transmit the aircraft’s location to ground receivers for presentation to air traffic controllers.presentation to air traffic controllers.
Pilots with ADS-B avionics will receive traffic and weather Pilots with ADS-B avionics will receive traffic and weather information on their cockpit displays. Controllers will see information on their cockpit displays. Controllers will see the information on automation displays they are already the information on automation displays they are already using, so little additional training will be needed. ADS-B using, so little additional training will be needed. ADS-B signals are transmitted once per second, providing a more signals are transmitted once per second, providing a more accurate tracking system for pilots and controllers.accurate tracking system for pilots and controllers.
ADS-BADS-B
Improved efficiencyImproved efficiency
Improved situational awarenessImproved situational awareness
Improved safetyImproved safety
Greater ATC predictabilityGreater ATC predictability
Cost savingsCost savings
Air Traffic ManagementAir Traffic Management
FAA Part 77 Imaginary SurfacesFAA Part 77 Imaginary Surfaces
Physical ObstaclesPhysical Obstacles
– Ensure and preserve safety of operations in the Ensure and preserve safety of operations in the airspace in the immediate vicinity of airportsairspace in the immediate vicinity of airports
– Surfaces protect approaches to runways, takeoffs, and Surfaces protect approaches to runways, takeoffs, and missed approaches from obstructionsmissed approaches from obstructions
– Objects can be man-made or naturalObjects can be man-made or natural
– They impact height-hazard zoning restrictions and could They impact height-hazard zoning restrictions and could affect construction costs/airport viabilityaffect construction costs/airport viability
FAA Part 77 Imaginary FAA Part 77 Imaginary SurfacesSurfaces
Compelling Issues Affecting Air Compelling Issues Affecting Air TransportationTransportation
Future of airline industryFuture of airline industry Future funding/authorizationFuture funding/authorization User feesUser fees Alternative fuelsAlternative fuels Workforce developmentWorkforce development Land use/development/encroachmentLand use/development/encroachment Privatization – efficiency, capital infusion, Privatization – efficiency, capital infusion,
conversion to tax paying entityconversion to tax paying entity NextGen – advanced technologies/air space NextGen – advanced technologies/air space
managementmanagement
