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 Airports Airlines
Background
Significance
Structure
Cost/revenue framework
Airports
Where do airports get their money
Who pays to operate/improve them
How/where do they spend it
Airlines
Varied and complicated beasts
Legacy vs. Low Cost Carriers
Economic Characteristics
Airspace (time permitting)
Its impacts on airport and airlines and their economics
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
Taxiways
Terminal Area/Apron
Pavements
Airport Site Selection
Navigational Aids
Airspace
Primary Design Guidance: AC Change 15
Passenger Terminals
Landside Access
Cargo Terminals
Security
Emergency Services

11. l

14. National Economic Benefits
Civil aviation contributed over $1.315 Trillion
11.5 million jobs
$400 Billion in earnings.
5.6 percent of the total U.S. GDP
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
Connects rural & urban populations
Provides 784,000 jobs
Generates $49 billion annually

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

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

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

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

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

23. Aviation Legislation 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 Essential Air Service Safety
Open Skies agreements
Essential Air Service
DOT/Subsidies to carriers serving domestic locations that are economically challenging
Safety
FAA

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

26. Airports
Commercial Service
Reliever
General Aviation

27. Airports 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
Medium hub: 0.25% to 0.99%
Small hub: 0.05% to 0.24%
Non-hub: less than 0.05%
2009 National Enplanements = 700 million

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

29. Airport Ownership Local Governments Private Corporations
Cities
Counties
Airport Authorities
Private Corporations
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

34. Airport Finance - Expenses
NPIAS Cost by Airport Type

35. Airport Finance: Revenue and Expenses

38. Major U.S. Airport Concentration

39. Texas is BIG!

40. What is the Texas Airport System?
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? FAA Commercial Airports
Airport Improvement Program
Must meet eligibility requirements
Aviation user taxes (i.e., passenger ticket taxes)
Commercial Airports
Passenger Facility Charges (reduces AIP $)
Revenue from advertising, parking, concessions, access fees
State Aviation Agencies
Airport Sponsors (owners)
Local governments

43. Who Pays…You Do!

44. Ticket Tax Example

45. Airport Finance Airport funding comes from several sources:
Airport bonds 59%
AIP grants 21%
Passenger Facility Charge 13%
State and local funding 4%
Airport revenue 4%
Source: ASCE/FAA

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

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

48. Airline Structure Operations and Maintenance Sales and Marketing
Reservations and Ticketing
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).
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).

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.
yield The average amount of revenue received per revenue passenger mile (RPM) or revenue ton mile (RTM), net of taxes.

51. Airlines Majors Nationals Regionals revenue > $1B
revenue between $100M and $1B
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)
Ticket price
Competitor’s ticket price
Passenger income
State of the economy
Availability of other modes
Customer loyalty
In-flight amenities
Frequency of service
Safety
Random factors – SARS, 9/11, terrorism threat

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

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

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

68. Airline Costs by Function

69. Airline Costs by Category

70. Airline Fuel Costs

71. U.S. Air Carrier Traffic Statistics Through November 2010
Twelve Months - System
December November 2010
December November 2009
Scheduled
Non-Scheduled
Total
Revenue 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)

72. U.S. Airlines Annual Pre-Tax Earnings

73. Airline Revenues

78. Low Cost Carriers Carry 1/3 of all US Passengers
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
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 2011-2031
Supply (Domestic ASMs annual percentage growth)
Mainline 2.8
Regionals 4.1
Demand (Domestic RPMs annual percentage growth)
Mainline 2.9
Regionals 4.2
Profitability tied to operating costs  Oil

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

91. Jeff Borowiec

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

93. Delay Costs

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

95. Instrument Approaches

96. Air Traffic Management

97. Air Traffic Management

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.

101. ADS-B
ADS-B uses Global Navigation Satellite System (GNSS) position information processed by aircraft avionics to transmit the aircraft’s 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.

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

103. Air Traffic Management

104. FAA Part 77 Imaginary Surfaces
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

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

108. Jeff Borowiec