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Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute If you want to be a millionaire, start with a billion.

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Presentation on theme: "Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute If you want to be a millionaire, start with a billion."— Presentation transcript:

1 Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute 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

2 Outline Air Transportation Industry Air Transportation Industry –Background –Significance –Structure –Cost/revenue framework Airports Airports –Where do airports get their money –Who pays to operate/improve them –How/where do they spend it Airlines Airlines –Varied and complicated beasts –Legacy vs. Low Cost Carriers –Economic Characteristics Airspace (time permitting) Airspace (time permitting) –Its impacts on airport and airlines and their economics Questions Questions

3 State of the Industry Airline Bankruptcies

4 State of the Industry Mergers and Acquisitions

5 State of the Industry New Fees

6 The Airport System Airside vs. Landside

7 Airport Design Primary Design Elements Drive Economics Runways Runways Taxiways Taxiways Terminal Area/Apron Terminal Area/Apron Pavements Pavements Airport Site Selection Airport Site Selection Navigational Aids Navigational Aids Airspace Airspace Primary Design Guidance: AC Change 15 Primary Design Guidance: AC Change 15 Passenger Terminals Passenger Terminals Landside Access Landside Access Cargo Terminals Cargo Terminals Security Security Emergency Services Emergency Services

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14 National Economic Benefits Civil aviation contributed over $1.315 Trillion Civil aviation contributed over $1.315 Trillion 11.5 million jobs 11.5 million jobs $400 Billion in earnings. $400 Billion in earnings. 5.6 percent of the total U.S. GDP 5.6 percent of the total U.S. GDP Source FAA/The Economic Impact of Civil Aviation on the U.S. Economy December 2009 Source FAA/The Economic Impact of Civil Aviation on the U.S. Economy December 2009

15 Importance of the Texas Airport System Link to national transportation system Link to national transportation system Connects rural & urban populations Connects rural & urban populations Provides 784,000 jobs Provides 784,000 jobs Generates $49 billion annually Generates $49 billion annually

16 Current Status of Industry New Large Aircraft New Large Aircraft Very Light Jets – Increased Mobility/Air Taxi services Very Light Jets – Increased Mobility/Air Taxi services SATS – Small Aircraft Transportation System SATS – Small Aircraft Transportation System Recovering Economy Recovering Economy Growth in Air Cargo Growth in Air Cargo Dependent on Air Transportation System Dependent on Air Transportation System Fractional Ownership Fractional Ownership

17 Current Status of Industry Industry consolidation Industry consolidation Lower margins Lower margins Increased Break-Even Load Factors Increased Break-Even Load Factors Emerging Aircraft with better costs per seat Emerging Aircraft with better costs per seat (Larger RJs and Mainline aircraft) Fewer Small Communities with Air Service Fewer Small Communities with Air Service

18 Current Status of Industry Half of U.S. airports depend on only one or two destinations to connect them with the air transportation system Half of U.S. airports depend on only one or two destinations to connect them with the air transportation system 44 percent of U.S. airports with at least 5 weekly departures are served by one carrier 44 percent of U.S. airports with at least 5 weekly departures are served by one carrier 39 percent of U.S. airports are served exclusively by turboprop aircraft which are in sharp decline 39 percent of U.S. airports are served exclusively by turboprop aircraft which are in sharp decline

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20 Air Transportation Network AIRports + AIRports + AIRplanes + AIRplanes + AIRways = AIRways = AIR Transportation Network AIR Transportation Network Air traffic management is important because of the costs associated with delay Air traffic management is important because of the costs associated with delay

21 Air Transportation Network Airports are usually locally owned Airports are usually locally owned Airlines are publicly held Airlines are publicly held Airplanes are privately owned Airplanes are privately owned Airways are controlled by the federal government Airways are controlled by the federal government

22 Aviation Legislation Federal Governments Role Dates to 1933 and the Civil Works Administration Federal Governments Role Dates to 1933 and the Civil Works Administration Federal Airport Act of 1946 Federal Airport Act of 1946 Airport and Airway Development Act of 1970 Airport and Airway Development Act of 1970 –Airport Development Aid Program Airport and Airway Improvement Act of 1982 Airport and Airway Improvement Act of 1982 –Airport Improvement Program –NPIAS airports only Airway Safety and Capacity Expansion Act of 1990 Airway Safety and Capacity Expansion Act of 1990 –Passenger Facility Charges (PFCs)

23 Aviation Legislation U.S. Airline Deregulation Act of 1978 U.S. Airline Deregulation Act of 1978 –Fly where they want (route choice) –Charge what they want (pricing) Resulted in: –Hub and spoke network –New entrants –Increased competition –Discount fares –Growth in air travel –Loyalty programs Certificate of public convenience and necessity/US DOT FAR Part 121 Operating certificate/FAA

24 Regulated…… International Aviation International Aviation –Open Skies agreements Essential Air Service Essential Air Service –DOT/Subsidies to carriers serving domestic locations that are economically challenging Safety Safety –FAA

25 Air Transportation Network Governmental Entities Governmental Entities –FAA Primarily a SAFETY agency Primarily a SAFETY agency Airport Improvement Program Airport Improvement Program Air Traffic Management Air Traffic Management –NTSB Accident Investigation Accident Investigation –State Aviation Agencies Block Grant Program Block Grant Program

26 Airports Commercial Service Commercial Service Reliever Reliever General Aviation General Aviation

27 Airports Commercial Service Commercial Service –Primary: >10,000 enplaned passengers –Non-primary: 2500->10,000 enplaned passengers –Hub classification: Large hub:1% or more of total national enplanements Large hub:1% or more of total national enplanements Medium hub:0.25% to 0.99% Medium hub:0.25% to 0.99% Small hub:0.05% to 0.24% Small hub:0.05% to 0.24% Non-hub:less than 0.05% Non-hub:less than 0.05% 2009 National Enplanements = 700 million 2009 National Enplanements = 700 million

28 Airports General Aviation General Aviation –Everything that is not scheduled passenger service or military –Relievers Metropolitan airports that reduce congestion at commercial service airports in the area Metropolitan airports that reduce congestion at commercial service airports in the area –General aviation airports Airport role Airport role Functional class Functional class Design standard Design standard

29 Airport Ownership Local Governments Local Governments –Cities –Counties –Airport Authorities Private Corporations Private Corporations State Governments State Governments

30 NPIAS National 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.

31 NPIAS

32 Airport Finance – Revenues

33 Airport Finance - Expenses NPIAS Cost by Type of Development – $49.7 B $49.7 B

34 Airport Finance - Expenses NPIAS Cost by Airport Type

35 Airport Finance: Revenue and Expenses

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38 Major U.S. Airport Concentration

39 Texas is BIG!

40 What is the Texas Airport System? 300 Airports & 3 Heliports 300 Airports & 3 Heliports – 26 Primary Commercial Service –1 Non-Primary Commercial Service – 25 Relievers – 248 General Aviation Non-Relievers – 3 Heliports

41 Texas Airport System

42 Airport Finance Who Pays? Who Pays? –FAA Airport Improvement Program Airport Improvement Program –Must meet eligibility requirements –Aviation user taxes (i.e., passenger ticket taxes) –Commercial Airports Passenger Facility Charges (reduces AIP $) Passenger Facility Charges (reduces AIP $) Revenue from advertising, parking, concessions, access fees Revenue from advertising, parking, concessions, access fees –State Aviation Agencies –Airport Sponsors (owners) Local governments Local governments

43 Who Pays…You Do!

44 Ticket Tax Example

45 Airport 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/FAA Source: ASCE/FAA

46 Airline Economics Characteristics Characteristics Activity Activity Metrics Metrics Impacts of Rising Fuel Prices Impacts of Rising Fuel Prices

47 Airline Economics Industry Characteristics Industry Characteristics –Service Industry –Capital-Intensive –Labor-Intensive

48 Airline Structure Operations and Maintenance Operations and Maintenance Sales and Marketing Sales and Marketing Reservations and Ticketing Reservations and Ticketing Management and Administrative Staff Management and Administrative Staff

49 Airline Metrics available seat mile (ASM) One seat transported one mile; the most common measure of airline seating capacity or supply. For example, an aircraft with 100 passenger seats, flown a distance of 100 miles, produces 10,000 ASMs. Sometimes measured in available seat kilometers (ASKs). available seat mile (ASM) One seat transported one mile; the most common measure of airline seating capacity or supply. For example, an aircraft with 100 passenger seats, flown a distance of 100 miles, produces 10,000 ASMs. Sometimes measured in available seat kilometers (ASKs). available seat mile (ASM) available seat mile (ASM) revenue passenger mile (RPM) One fare-paying passenger transported one mile; the most common measure of demand for air travel. Sometimes measured in revenue passenger kilometers (RPKs). revenue passenger mile (RPM) One fare-paying passenger transported one mile; the most common measure of demand for air travel. Sometimes measured in revenue passenger kilometers (RPKs). revenue passenger mile (RPM) revenue passenger mile (RPM)

50 Airline Metrics unit revenue The average amount of revenue received by the airline per unit of capacity available for sale. Most often used to measure the effectiveness with which revenue management activity balances price and volume to generate passenger revenue per ASM, known as PRASM or RASM. unit revenue The average amount of revenue received by the airline per unit of capacity available for sale. Most often used to measure the effectiveness with which revenue management activity balances price and volume to generate passenger revenue per ASM, known as PRASM or RASM. unit revenue unit revenue yield The average amount of revenue received per revenue passenger mile (RPM) or revenue ton mile (RTM), net of taxes. yield The average amount of revenue received per revenue passenger mile (RPM) or revenue ton mile (RTM), net of taxes. yield

51 Airlines Majors Majors –revenue > $1B Nationals Nationals –revenue between $100M and $1B Regionals Regionals –limited service/specific markets/city-pairs –fastest growing since deregulation

52 Airlines by Category

53 Top 25 U.S. Airlines

54 Determinants of Demand Demand = Revenue Passenger Miles (RPMs) Demand = Revenue Passenger Miles (RPMs) Ticket price Ticket price Competitors ticket price Competitors ticket price Passenger income Passenger income State of the economy State of the economy Availability of other modes Availability of other modes Customer loyalty Customer loyalty In-flight amenities In-flight amenities Frequency of service Frequency of service Safety Safety Random factors – SARS, 9/11, terrorism threat Random factors – SARS, 9/11, terrorism threat

55 Characteristic of Demand Constant fluctuation Constant fluctuation Cyclicality Cyclicality Seasonality and peaking Seasonality and peaking Directional flow Directional flow Perishability Perishability Schedule wait time Schedule wait time Airport access time Airport access time Flight time Flight time Hub connection time Hub connection time Denied boarding time Denied boarding time

56 Factors Affecting Supply Supply = available seat miles (ASMs) Supply = available seat miles (ASMs) Ticket price Ticket price Price of resources – aircraft, fuel, labor, maintenance Price of resources – aircraft, fuel, labor, maintenance Technological improvements Technological improvements Behavior of the competition Behavior of the competition Random factors Random factors Government regulation Government regulation

57 Characteristics of Supply Two characteristics that shape the industry are: Two characteristics that shape the industry are: –Seasonality Pull existing capacity off of other routes Pull existing capacity off of other routes Have excess/idle capacity somewhere in system Have excess/idle capacity somewhere in system –Rigidity Can be difficult to reduce/increase supply dramatically Can be difficult to reduce/increase supply dramatically Schedules are created six months in advance Schedules are created six months in advance

58 Airline Markets Market Continuum

59 Evolution of U.S. Airline Industry

60 Major U.S. Airline Concentration

61 Recent Airline Mergers Airlines/Announced/Closed/Resulting Entity

62 Airline Costs

63 Airline Cost Trends

64 Airline Cost Index

65 Airlines Keeping Pace?

66 Airline Load Factors

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68 Airline Costs by Function

69 Airline Costs by Category

70 Airline Fuel Costs

71 Twelve Months - System December November 2010 December November 2009 ScheduledNon-ScheduledTotalScheduledNon-ScheduledTotal Revenue Passenger Enplanements (000)718,7195,845724,564704,2535,390709,643 Revenue Passenger Miles (000)795,432,42411,031,526806,463,950769,711,68010,536,280780,247,960 Available Seat Miles (000)969,734,23319,390,318989,124,551959,327,05418,125,515977,452,569 Passenger Load Factor (%) Revenue Freight Ton Miles (000)7,127,21066,0127,193,2225,615,05653,1995,668,255 Total Revenue Ton Miles (000)87,359,3001,169,17288,528,47283,316,1041,106,84584,422,949 Available Ton Miles (000)140,489,2073,136,906143,626,113138,450,2892,909,910141,360,199 Ton Mile Load Factor (%) Revenue Departures Performed9,500,010170,4659,670,4759,567,245153,9639,721,208 Revenue Aircraft Miles Flown (000)6,927,46398,2447,025,7076,862,29089,3396,951,629 Revenue Aircraft Hours (Airborne)16,436,281262,51016,698,79116,426,716238,80116,665,517 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

72 U.S. Airlines Annual Pre-Tax Earnings

73 Airline Revenues

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78 Low Cost Carriers Carry 1/3 of all US Passengers Carry 1/3 of all US Passengers LCC Presence in Largest 1,000 Domestic City Pairs Has Increased by More Than 30% Since 2000 LCC Presence in Largest 1,000 Domestic City Pairs Has Increased by More Than 30% Since 2000 Low Cost Carriers Compete In Markets Accounting For 80% Of All Domestic Air Travelers Low Cost Carriers Compete In Markets Accounting For 80% Of All Domestic Air Travelers Legacy Carrier Operating Costs Have Gone Down and LCC Costs Have Gone Up Legacy Carrier Operating Costs Have Gone Down and LCC Costs Have Gone Up

79 Fuel Price Impact

80 Cyclical?

81 Airline Operating Statistics

82 Top 25 Airlines

83 Top U.S. City Pairs

84 Top U.S. Travel Markets

85 Airline Operating Trends

86 Texas Aviation Activity Passenger Enplanements

87 Texas Commercial Service Enplanements

88 Texas Aviation Activity Texas Air Carrier Enplanements (% of U.S.)

89 Growth Going Forward U.S. Commercial Air Carriers U.S. Commercial Air Carriers Supply (Domestic ASMs annual percentage growth) Supply (Domestic ASMs annual percentage growth) –Mainline 2.8 –Regionals4.1 Demand (Domestic RPMs annual percentage growth ) Demand (Domestic RPMs annual percentage growth ) –Mainline 2.9 –Regionals4.2 Profitability tied to operating costs Oil Profitability tied to operating costs Oil

90 Compelling Issues Influencing/Affecting Air Transportation Future of airline industry/consolidation Future of airline industry/consolidation Future funding/authorization Future funding/authorization User fees User fees Other Fees Other Fees Security Security Alternative fuels Alternative fuels Workforce development Workforce development Land use/development/encroachment Land use/development/encroachment Privatization – efficiency, capital infusion, conversion to tax paying entity Privatization – efficiency, capital infusion, conversion to tax paying entity NextGen – advanced technologies/air space management/ADS-B NextGen – advanced technologies/air space management/ADS-B

91 Jeff Borowiec

92 Air Traffic Management Air Traffic Control Air Traffic Control VFR / IFR VFR / IFR Instrument Approaches Instrument Approaches Landing Landing –Non-precision approach/Precision approach Terminal Airspace Terminal Airspace

93 Delay Costs

94 Air Traffic Management Phases of Flight Phases of Flight –ATC Tower –TRACON –ARTCC RVSM RVSM Area of greatest potential for efficiency gains Area of greatest potential for efficiency gains

95 Instrument Approaches

96 Air Traffic Management

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98 GPS 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.

99 Glass Cockpits B-777 Garmin 1000 Cirrus S-22 G550

100 ADS-B An air traffic system that will provide more precise surveillance data to air traffic controllers and to ADS-B equipped aircraft at the same time. This information will significantly enhance pilots situational awareness. An air traffic system that will provide more precise surveillance data to air traffic controllers and to ADS-B equipped aircraft at the same time. This information will significantly enhance pilots situational awareness.

101 ADS-B ADS-B uses Global Navigation Satellite System (GNSS) position information processed by aircraft avionics to transmit the aircrafts location to ground receivers for presentation to air traffic controllers. ADS-B uses Global Navigation Satellite System (GNSS) position information processed by aircraft avionics to transmit the aircrafts location to ground receivers for presentation to air traffic controllers. Pilots with ADS-B avionics will receive traffic and weather information on their cockpit displays. Controllers will see the information on automation displays they are already using, so little additional training will be needed. ADS-B signals are transmitted once per second, providing a more accurate tracking system for pilots and controllers. Pilots with ADS-B avionics will receive traffic and weather information on their cockpit displays. Controllers will see the information on automation displays they are already using, so little additional training will be needed. ADS-B signals are transmitted once per second, providing a more accurate tracking system for pilots and controllers.

102 ADS-B Improved efficiency Improved efficiency Improved situational awareness Improved situational awareness Improved safety Improved safety Greater ATC predictability Greater ATC predictability Cost savings Cost savings

103 Air Traffic Management

104 FAA Part 77 Imaginary Surfaces Physical Obstacles Physical Obstacles –Ensure and preserve safety of operations in the airspace in the immediate vicinity of airports –Surfaces protect approaches to runways, takeoffs, and missed approaches from obstructions –Objects can be man-made or natural –They impact height-hazard zoning restrictions and could affect construction costs/airport viability

105 FAA Part 77 Imaginary Surfaces

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107 Compelling Issues Affecting Air Transportation Future of airline industry Future of airline industry Future funding/authorization Future funding/authorization User fees User fees Alternative fuels Alternative fuels Workforce development Workforce development Land use/development/encroachment Land use/development/encroachment Privatization – efficiency, capital infusion, conversion to tax paying entity Privatization – efficiency, capital infusion, conversion to tax paying entity NextGen – advanced technologies/air space management NextGen – advanced technologies/air space management

108 Jeff Borowiec


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