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Presentation by Mike Tretheway at the TTRA Chapter Conference on October 17, 2008
Citation preview
strategictransportation
& tourismsolutions
Tourism & Air Access: Can we survive the next 12 months?
Presentation to TTRA Chapter Conference
17 October 2008
Prepared byInterVISTAS Consulting Inc.
Mike TrethewayExecutive Vice President & Chief Economist
InterVISTAS Consulting Inc.
strategictransportation
& tourismsolutions
Economic Outlook
2
Real GDP Growth – U.S.
0%
1%
2%
3%
4%
5%
6%
7%
8%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Historical Data
Forecast Data
Sources:Historical Data: U.S.: U.S. Bureau of Economic AnalysisForecast Data: U.S.: Bank of Canada
rece
ssio
n
soft
land
ing
?
Revised 2009: +0.1%
denotes revised Oct ‘08 3
Real GDP Growth - Canada
0%
1%
2%
3%
4%
5%
6%
7%
8%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Historical Data
Forecast Data
Sources:Historical Data: Canada: Statistics CanadaForecast Data: Canada: Bank of Canada
no re
cess
ion
near
rece
ssio
n ? 2008 Q1: -0.8%
Q2: +0.3%
As of May 2008
4
Real GDP Growth - Canada
0%
1%
2%
3%
4%
5%
6%
7%
8%19
97
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Historical Data
Forecast Data
Sources:Historical Data: Canada: Statistics CanadaForecast Data: Canada: Bank of Canada
no re
cess
ion
near
rece
ssio
n ? RBC revision:
2008 +0.9%2009: +1.9%
5
Risk of U.S. Recession
Bellone IndexAn average lead of 8 months predicting the last six US recessions correctly predicted every past recessionpredicted 1967 recession which did not occur
1967 credit crunchhas always risen to 100% whenever it jumped to 25%
6
Risk of U.S. Recession recessionleading Index
As of May 2008
7
US Outlook as of May 2008
In first half of 2008it looked as if the US might avoid a recession
8
Revised Recession Risk
9
Current Recession Risk
It is highly likely that the US is in a recession
And that the recession may be long2nd half of 2008 to mid 2009
However, the signals are still mixedPrevious Credit Crises: no recession
19871967
strategictransportation
& tourismsolutions
Fuel Prices
11
Oil Futures: up but loosing steam
Crude Oil Futures Prices
$20
$30
$40
$50
$60
$70
$80
Jan-
03
Apr-
03
Jul-0
3
Oct
-03
Jan-
04
Apr-
04
Jul-0
4
Oct
-04
Jan-
05
Apr-
05
Jul-0
5
Oct
-05
Jan-
06
Apr-
06
Jul-0
6
Oct
-06
Jan-
07
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Oct
-10
Jan-
11
Apr-
11
Jul-1
1
Oct
-11
Jan-
12
Apr-
12
Jul-1
2
Oct
-12
Month of Delivery
US$
Per
Bar
rel
Crude OilFutures Prices - - - - -
May 2003
Apr 2005
Nov 2006
Dec 2005
Crude Oil Spot Prices
Jan 2006
May 2007One Year Ago
12
One Year Ago
The market was indicating that oil prices would stabilise around $70/bbl
13
Crude Oil Futures Prices
$0
$20
$40
$60
$80
$100
$120
$140
$160
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Dec
-09
Dec
-12
Month of Delivery
US
$ p
er B
arre
Jun 2008
Mar 2008
Crude Oil Spot Prices
Crude OilFutures Prices
Nov 2007
Sep 2007
Nov 2006
Oct 2007
May 2008June 2008:
Significant Run-up, losing steam
14
Spot Price West Texas Intermediate, Nominal Prices
1947-2008
$0
$20
$40
$60
$80
$100
$120
$140
47 52 57 62 67 72 77 82 87 92 97 2 7
1947-2008
US$
/Bar
rel
Source: Spot West Texas Intermediate, 1947 to 2008
12
15
Spot Prices, West Texas Intermediate, Constant 2008 Dollars
1947-2008
$0
$20
$40
$60
$80
$100
$120
$140
47 52 57 62 67 72 77 82 87 92 97 2 7
1947-2008
2008
US$
/Bar
re
Source: Spot West Texas Intermediate, 1947 to 2008.
16
Spot Prices, West Texas Intermediate, Constant 2008 Dollars
1947-2008
$0
$20
$40
$60
$80
$100
$120
$140
47 52 57 62 67 72 77 82 87 92 97 2 7
1947-2008
2008
US$
/Bar
re
Source: Spot West Texas Intermediate, 1947 to 2008.
As of June 2008
17
Spot Prices, West Texas Intermediate, Constant 2008 Dollars
1947-2008
$0
$20
$40
$60
$80
$100
$120
$140
47 52 57 62 67 72 77 82 87 92 97 2 7
1947-2008
2008
US$
/Bar
re
Source: Spot West Texas Intermediate, 1947 to 2008.
5-7 years
5-7 years ?
18
16 Oct 2008Crude Oil Spot Prices
January 2003 to November 2008
$-
$20
$40
$60
$80
$100
$120
$140
$160
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep
-06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
U.S
. $ p
er b
arre
l
19
The Future
View 1:This is a bubbleabout to burst
declining US demandloaded tankerswith unsold oiltransactions are paper purchases-- not real buyers
May 2008
20
The Future
View 2:Demand will continue to exceed supply
US had reduced its demand by 400,000 barrels per day by mid 2008But China and India were increasing theirs by 600,000 – in spite of high prices
driven by new investment in cars, electric production, …
21
The Future
While expectations are that the oil price bubble will burst…. There is a non-trivial probability of continuing high oil prices in the medium term
thus a high oil price scenario must be part of business planningwith corresponding contingency plans
22
Impact on Air Travel
Less than you might thinkair travel is thought of as ‘price elastic’
10% price increase typically reduces travel by 13%
but when price increase affects all routes, carriers, destinations and modes
air travel is observed to be price inelastic10% price increasereduces travel by only 6%
strategictransportation
& tourismsolutions
North American Carrier near term Capacity
24
Impact of Fuel Price
As of May 2008NY-Los Angeles
$125 per pax fuel cost for NY-Los Angeles (A320)
one wayApril seat price: $149it was more economical for some airlines to park aircraft
25
American
for 4th quarter 2008mainline capacity: reduced 11-12%RJ capacity: reduced 10-11%
retire aircraft40-45 mainline (A300s, MD-80s)35-40 RJs35 Saab (entire fleet)
Oct 2008 – ordered 787sbut delivery after 2012, largely replacement, not suited to transborder
26
United
Plans to cut mainline capacity in 200917% cut in domestic
Retire 80 aircraft in 2008, 20 in 200994 737s6 747s
27
Continental
Cutting all service to 15 citiesCLE hub: loses 23 routesIAH hub: loses 12 routes
Retire 67 planesTotal US capacity: -11%
28
Southwest
Deferred delivery of aircraft But retaining some aircraft scheduled for retirement Has reduced capacity for 1st time in its historyPoised to restore capacity in 2009Code share with WestJet: 2009Q4
street’s expectation: WJ does the flyingSW adds it code
29
Canada
WJ: no reductions at this timeAC:
retire 4 767scut overall capacity 7%cut transborder 13%cut domestic 3%
30
Capacity Cuts
2008 is first anticipatory capacity cut by carriers
should induce load factor and yield increasesload factor increases will mitigate pax traffic losswill reduce GHGEscapacity restoration not assured
US carriers have inadequate replacement aircraft on orderRecovery of transborder market may take years
31
2008 vs 2001-03
By 2003, most major US network carriers were out of cash
restructured through bankruptcyIn 2008, most major US carriers have sufficient cash to weather at least a year
and there may be little to gain from a 2nd round of bankruptcy
strategictransportation
& tourismsolutions
Scenarios
33
Future
Difficult to make predictions of the futureConsider and prepare for alternate scenarios
34
Scenario A: BleakFuel prices continue run upEconomy slips into recession
Consequencespax drops by 10% over 2 years
2000-02: -9.3% recovery 4 years1979-81: -9.8% recovery 4 years
some carriers read chapter 11 or 7
Hard Landing 35
Hard Landing
36
Scenario B: Rapid RecoveryFuel price bubble bursts
return to $80-100Economy avoids recessionCarriers cut domestic capacity 8%
yields riseseat management systems respond to reduced capacity and increase yieldscosts reduced (fuel, operations, capacity)some capacity restored
SOFT LANDING 37
strategictransportation
& tourismsolutions
Will There Be a Eurasian Capacity Glut by 2011?
39
The 2011 Eurasian Capacity Glut
new capacity may exceedreplacement needsconsumer demand
main impact will be on Asia-Europe
may result in Euro and Asian carriers redeploying capacity to N America
40
Aircraft Orders: 1995-2007
0
500
1,000
1,500
2,000
2,500
3,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Tota
l Airc
raft
Ord
ers
Airbus BoeingSource: Airbus and Boeing websites 41
Aircraft Orders: 1995-2008
0
500
1,000
1,500
2,000
2,500
3,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Tota
l Airc
raft
Ord
ers
Airbus BoeingSource: Airbus and Boeing websites
2008 may be another strong year for aircraft orders
2008
?
42
Aircraft Deliveries: 1995-2015
0
200
400
600
800
1,000
1,200
1,400
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Tota
l Airc
raft
Del
iver
ies
Airbus BoeingSource: Airbus and Boeing websites
The Airline Monitor, July 2007
Projected
Aircraft deliveries increasing, large to Middle East, Asia, Europe
43
Conclusions
Increased capacity in M East, Europe, Asia
will exceed demandwill put downward pressure on yields
European and Asia/Pacific carriers may need to shift focus to NA,
where resident carriers have been slow to renew/modernize their fleet
44
But …Canadian Policy is an Obstacle
The increased capacity of Asian carriers is an opportunity for Canada
ButCanada’s implementation of air transport policy is an obstacle
45
The IssueThe ChallengeAir transport delivers Canada’s highest spending touristsAir Access to Canada from some key markets is impeded by
federal policyborder and other regulations costs
46
Key Issues
Example:YVR has viable routes and additional frequencies that are blocked by policy
This blocked capacity is the equivalent of 8 daily 747 flights, reducing 2008 tourism spend by $100 million per annum. By 2015 this may represent over $225 million in foregone tourism revenueYVR will be primary gateway to 2010 Olympics/Paralympics
Korea, Taiwan,
Singapore,
Manila, Paris,
Chile, France
Hong Kong
47
Key Issues
Canada’s 2006 Blue Sky policyis an excellent policybut is not being implemented
Fast enoughWith the right priorities Without using loopholes
Most treaties since 2006 have been restrictive !
48
New Singapore ‘Treaty’
Canada concluded treaty with Singapore in Oct 2007
Restrictive: not Blue Sky or Open SkySingapore still confined to 3x weekly service via SeoulSingapore cannot serve via Japan or Taipei
note that no Canadian carrier serves TaipeiThe only positive element:
SQ now has a treaty, no longer needs annual exemption
49
New Singapore ‘Treaty’
The Singapore agreement was a critical test case
would Canada place the interests of tourism, communities and shippers on equal par with carrier interest?The Singapore outcome manifests a hollow policy
50
Other Issues: Milking Air Transport
Canada is not cost competitive for air carriers
Airport rents, PILT have no equivalent in USVarious taxes higher in CanadaUS airports receive subsidies and interest rate advantages
51$-
$100
$200
$300
$400
$500
$600
$700
Montréal Vancouver Toronto U.S. airports
$mill
ion
Costs to operate Mirabel
Higher Canadian SafetyStandardsEAS and SCASDP Subsidies
NAV CANADA Asset Purchase
Must pay GILT/PILT
Due to Terminal 3 Purchase –InterestGST paid by leisurepassengersOther US Aviation subsidies(non-AIP)Airline Fuel Tax not reinvested
Excess Interest due to deferredspendingNo Provision for Tax-FreeBondsNo AIP Funding (subsidyportion only)Must pay Ground Rent
Annual Costs Imposed on Canadian Air TransportThat are not imposed on US airports
$40 per originating YVR pax
Source: InterVISTAS study for gateway airports and ATAC
52
State of the Airline Industry
Not so Goodstrategic
transportation& tourismsolutions
Thank Youwww.InterVISTAS.com
54
0%
1%
2%
3%
4%
5%
6%
7%
8%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Historical Data
Forecast Data
Real GDP Growth - Mexico
Sources:Historical Data: Mexico: OECD StatisticsForecast Data: Mexico: The Economist website
2008 +2.3%2009: +1.6%
denotes revised Oct ‘08