Norfolk Looking Ahead In A International Airport Cloudy Industry Air Travel… A Quick Look At The Immediate Future Don’t Plan On Any Real Growth In 2012

Airlines are not planning any real capacity increases – in fact, they are reducing capacity…

The name of the game is now revenue share, not willy-nilly market share Air Travel – Slow Growth

Current Projection Those Passengers From Munich Are Critical

2011 2012 2013 2014 2015 2016 16 v 11

Total Passengers 458,405 461,424 466,949 473,223 480,428 487,763 6.4%

Pax Change Y-O-Y 1.5% 0.7% 1.2% 1.3% 1.5% 1.5%

Enplanements 725,659 730,175 738,844 748,278 758,820 769,421 6.0%

Enplmt Chg Y-O-Y 0.43% 0.62% 1.19% 1.28% 1.41% 1.40%

Enp/Pax Ratio 1.583 1.582 1.582 1.581 1.579 1.577

Direct International Component 76,557 77,764 79,426 81,188 82,332 83,482

Indirect Int'l-Generated Domestic Enplmts 114,836 116,645 119,139 121,782 123,498 125,223

Total Int'l Driven 191,393 194,409 198,564 202,970 205,830 208,705 9.0%

Total Intl-Related 26.4% 26.6% 26.9% 27.1% 27.1% 27.1% Cancel That Study To Find More Airlines…

Majors Regionals

AIR CAL AIR ILLINIOIS ALASKA AIR MIDWEST AMERICA WEST AIR NEW ORLEANS AMERICAN AIR OREGON 1983 2011 CONTINENTAL AR WISCONSIN DELTA ASA Consumers could Today, airports can turn EASTERN ASPEN book & buy on at to just ten large jet FRONTIER ATLANTIS least 21 large jet MIDWAY BAR HARBOR operators, and each has NEW YORK AIR BRITT operator brands, distinct market strategies NORTHWEST CASCADE plus over two and fleets… OZARK CHAPARRAL dozen independent PAN AM COMAIR PIEDMONT IMPERIAL regional airline None of the regionals PSA MALL brands. who were around in 1983 REPUBLIC MESA SOUTHWEST METRO are in the retail airline TWA MIDSTATE business. UNITED NEW AIR US AIRWAYS PBA WESTERN PLIGRIM Fewer airlines… larger PRECISION airliners… do the math. RIO Virgin America ROCKY MOUNTAIN jetBLUE ROYALE SPIRIT SKYWEST Not a complete list. It’s Now Hitting Small Jets

All 50-seaters are out of production and are getting older…

Fuel costs on a per-seat basis are getting tougher…

At 35K – 40K hours, they get maintenance-costly

And no replacements… the next cost-hurdle will be 100- seaters (like the E-190) - maybe

Factoid:

Most of the development costs for CRJ and ERJ were borne by the taxpayers of Canada and Brazil when the manufacturers were privatized. The actual development costs were not reflected in the sales price to airlines. The Airline Industry Is Losing Its Rural Reach

Fleets are aging – and more small jets are coming out of the system

As a result – RJ fleets will shed @ 780 units…

It’s going to shift airline fleets and the structure of the airline industry…

Source: Boyd Group International Global Fleet Trend & Demand Forecast, 2011 - 2020 Air Service: It’s Subject To The Laws of Physics, Too…

Hey, Captain Smith, let’s do a study and find the solution!!!

It went down strictly due to hard, physical realities… Scheduled air service is Conditions outside of its control changed factors that no longer permitted it to no different – there are float economic realities that can’t be reversed. No amount of consulting or Black Magic could have changed these realities It’s A Mathematical Certainty…

Dozens of Airports Will Lose Service “Regional Airlines” – which today are just Small Jet Airliner leasing aircraft to majors, Retirements 2011 – 2020 shrink dramatically

Mergers Have Reduced Competitive Choices

Code-Share & Frequent The New Air Flyer Program Sharing Between Alliance Transportation Partners System: Airline Capacity Additions – Very Slow & 100+ Fewer Cities With Local Anticipatory To Economy Air Service

Global Alliance Strategies Capacity Aimed At Bottom Increasingly Focus on Line, Not More Passengers… Maximizing Revenue Flows Trend: Less Competition

Fuel Costs Raise Revenue Requirement Bar

“Low Cost Carriers” – Not Low Cost, Anymore A New, Secondary Model… Impulse Carriers

Allegiant: creates its own traffic with low cost, but high value vacation packages… Mostly from small & secondary airports – Elmira, Bangor, Shreveport. Almost totally out of the line of fire from major carrier systems

Spirit – looks to create net new traffic at large markets with very low fares (and enough fees to make up the difference.) Not a model tried before – the open question is whether majors will respond on key business routes

Okay…

Let’s Move Into The Future Year 2020 Fast Forward To Year 2020

• Passenger growth slow– up 12% from today - to 517.6 million

• Enplanements: up @ 10% to 799.1 million – less connections from rural airports

• Fleets: Smallest jet airliner: @ 100 seats

• No 50-seat jets are left – they are all run out

• Airline Traffic is concentrating into fewer airports

• Service determined by potential for revenue capture

• Entire regions of the nation are no longer connected to the scheduled air transportation system – it’s raw economics Year 2020 – The Competitive Landscape

Fleets – big iron only

The costs of design and development of a new small-capacity airliner simply are too risky

Point: the enplanement bar will be up – big time.

Competition

Three network carriers – Star, oneworld, SkyTeam. A couple of independents – Southwest, JetBlue

Face it – competition will be minimal – the airline business will no longer be one with easy entry or viable return on investment

Forget “Airlines” – Think Alliances…

• Capturing and Defending Revenue Streams. Based on each Alliance’s strategies, the goal is to capture revenues that build and strengthen the system.

• Globally, Growth By Adding Members, Not Expanding Incumbents The idea is to get regional strength through regional players

• Territorial Alliances will stake out turf - globally

• Concentration of Pooled Resources “… Don SkyTeam, the Today – independent fleets. 2015 – pooled fleets, maintenance, oneworld family has given purchasing, standards up San Francisco -Australia to the Star family… should • Focus: Global Flows we make a move on New Less ability to serve small & mid-size markets. Less interest, too Zealand – Los Angeles?...?” It’s Not Just Very Small Airports: Some Cities & RegionsA Few Will Examples Simply Change Airports

Airports With Over 50,000 Annual Passengers That Are Likely To Lose Scheduled Service By 2020 Yakima Marquette

Toledo Redding Springfield Champaign

Fort Smith

Abilene Tyler San Angelo College Station

Brownsville

These do not include over 100 smaller airports where retirement of small airliners will end service Michigan – Harbinger Of Future Challenge

• Example: Muskegon (MKG) generated @ 80,000 annual passengers in 2000.

• It still has 80,000 passengers – except 50,000 are now using much larger Grand Rapids, That’s Regionalization

• But the Upper Peninsula will have second-tier (at best) air service –

• General aviation is a partial soluton – not a political enemy

Shrinking Airlines – More Regionalization The Shifts Are Real… Let’s Talk Norfolk… Current Air Service Access To Norfolk

There are no gaping service gaps…

Ten full-blown airline connecting hub gateways…

Plus New York/LGA, Boston & Jacksonville

One-connects from Asia – SIX hub options

No Jump In Additional Capacity

Comparison of first half of 2011 v current schedules for 2012

Departures Seats

Carrier System % Change % Change

American -1.8% -3.3% Continential -19.8% -19.0% Delta 6.4% 5.8% UA -1.2% 6.6% US Airways -2.9% -0.7% Southwest -5.8% -5.4%

Total -2.6% -1.2% Comparative Fares

Norfolk Newport News Richmond Rank Market Psgr Avg Fare Psgr Avg Fare Psgr. Avg Fare 1 MCO 131,708 $147.67 64,591 $130.97 159,911 $132.10 2 SAN 108,079 $270.59 10,571 $275.75 46,068 $238.43 3 JAX 106,681 $150.55 7,842 $183.55 30,501 $167.96 4 ATL 99,811 $178.34 160,229 $129.88 241,139 $150.78 5 LGA 92,315 $153.69 96,312 $120.95 149,239 $164.73 6 LAX 90,663 $243.45 21,583 $242.00 78,182 $245.77 7 TPA 88,963 $161.83 14,369 $175.07 50,067 $175.84 8 LAS 84,764 $230.73 23,572 $219.28 77,374 $226.09 9 ORD 79,178 $206.93 12,323 $181.85 131,529 $239.62 10 DFW 73,324 $268.14 28,674 $188.56 121,384 $252.43

All Markets 3,137,128 $223.52 1,046,266 $185.70 3,091,790 $211.32 Alliance Share of Norfolk

Due geographic location – Norfolk has excellent alliance competition…

A lliance P sgr PDEW % P sgr

oneworld 221,024 302.8 7.0% SkyTeam 788,071 1,079.5 25.0% Star 1,262,023 1,728.8 40.1% Unallied 877,599 1,202.2 27.9%

oneworld – American SkyTeam – Delta Star – United, US Airways, Continental Newport News – The Air Tran Hit

1 ATL 160,229 Top ten markets from Newport News – 2010 2 BOS 98,940 Q3 through 2010 Q2… 3 LGA 96,312 4 MCO 64,591 All but two markets are served by remaining 5 DEN 41,696 incumbents 6 DFW 28,674 7 LAS 23,572 8 LAX 21,583 But New York & Boston are problematic due to 9 FLL 21,208 routing issues over Atlanta and Charlotte – 10 HOU 16,410 the remaining network carriers Filter Totals 573,215 Other replacement carriers? Not highly likely Totals 1,046,968 Air Tran Departure From Newport News

There will be diversion of some traffic to Norfolk… Looking at New York & Boston… Newport Est Norfolk Market Norfolk Net New News Capture

New York/LGA 96,312 92,315 25% 24,078 Boston 98,940 56,514 25% 24,735

Totals 195,252 148,829 48,813

The open question is how much more capacity will Delta and US Airways add to Newport News with the departure of AirTran Changing Airline Industry

The Next 12 Months

US passenger demand will soften – airlines will continue to cut capacity

Global alliance strategies will move to eclipse local national strategies

It’s all about consolidating revenues, not about competition

Growth will be dependent on airline capacity expansion – i.e., how much of the potential traffic global airlines want to chase after

“Low Cost Carriers” - the fare variances will moderate – but there won’t be a lot of new carriers

So, The Future For Norfolk

Slow growth – it will be paced by the capacity that carriers add – or take away…

Incumbents are all strong – no shocks to the system (up or down) expected

Likely: Delta may eliminate Norfolk – Cincinnati

Additional markets: limited opportunities… Denver? Frontier is uncertain & for sale. United is reducing spokes

Hard fact: Norfolk will be the main Coastal Virginia gateway – the airlines have made that decision.

Thank You

Boyd Group International 78 Beaver Brook Canyon Road Evergreen, Colorado 80439 (303) 674-2000 www.AviationPlanning.com