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Air Service Trends at Commercial Airports (WY)

Stephen D. Van Beek

Select Air Service Committee September 2019 Image Source: Jackson Hole Airport National Aviation Trends in 2019: A Dynamic Industry Sees Accelerating Change

What’s In What’s Out Air taxis A-380s Landside Congestion Airside Congestion Metering Roadways and Curbs Providing Free Access 30-year concessions 30-year airline agreements United Airlines Air Transat A220s Bombardier 100/200 Flexible Fixed Non-aeronautical revenues PFCs

2 | September 2019 Air Service Trends at Commercial Airports (WY) Air Service Trends at Commercial Airports

1. Introduction 2. The National Air Service Picture 3. Small Community Air Service: Trends and an Agenda? 4. Air Service: Wyoming Trends 5. Future Air Service Challenges and Policy Ideas to Consider 6. Airport Revenues: Aeronautical and Nonaeronautical 7. An Airport 2020 Agenda 8. Questions and Discussion

3 | September 2019 Air Service Trends at Commercial Airports (WY) The Airport Industry’s SWOT 2019

Strengths Opportunities • Traffic at airport gateways & large hubs (e.g. DEN, DFW) • Passenger growth and low rates providing historic • Airline orderbook of long-haul, fuel efficient, aircraft opportunity for airport capital investments • Liberalization / global traffic diversification • New equity and developer players providing options for • Growing airports’ economic performance development • Dollar easing for some inbound travelers • Technology applications enabling airports to improve the passenger experience and raise new revenues • Low fuel prices permitting aviation growth • Ground transportation offering new options and efficiencies but requiring new models (e.g. garage pick- up/drop-off for efficient operations)

Weaknesses Threats • U.S. DOT and FAA abdicating public funding model, • Recession as well as interest rate and fuel price increases challenging airports with large capital investments • Airport debt loads • Airport industry’s relative political position • Reversal of trend of air service liberalization and • Diversion of security and facilitation revenues tightening of visa policy hurting levels of service • Further airline consolidation (Canada 60%?) • High cost of adding even marginal new capacity • Political pressure by outside interests seeking new • Connectivity for smaller airports challenged regulations and to capture airports’ value without paying • Boeing 737-Max for it (e.g. curb access) • Air traffic control interruptions

4 | September 2019 Air Service Trends at Commercial Airports (WY) Airline Traffic Delivering More Frequency and More Pax Per Operation

With competition …. … and larger aircraft Airline departures at SEA 737 Max-10, up to 230 seats

5 | September 2019 Air Service Trends at Commercial Airports (WY) The National Air Service Picture Change in departing seats across U.S. airports 2000-2019

Departing Seat Capacity Growth of U.S. Hubs % Change of Departing Seats (Relative to 2000, Full Year – 2019 Forecast) 20% 12%

10% 3%

-10% -10%

-20% -21%

-30%

-40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Large Medium Small Non-Hub Overall

7 | September 2019 Air Service Trends at Commercial Airports (WY) Domestic seat growth driven by non-legacy carriers (2009-2019)

Modest but stable growth from legacy carriers (e.g. American, Delta, United) Million Domestic Seats (January to September)

Compound Annual Growth Rates

Category 2013-19 2009-19 Legacy Carriers +2.3% +1.1% Other Full Service Carriers +6.5% +3.3% Low Cost Carriers +4.3% +4.2% All Airlines +3.2% +1.8%

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) and U.S. Federal Aviation Administration (2018) Note: Reported years measure seat capacity from January to September and may be subject to change Legacy Carriers include American Airlines, Delta Air Lines, and United Air Lines (merged airline groups)

8 | September 2019 Air Service Trends at Commercial Airports (WY) International growth also driven by full service and low-cost carriers

Modest, but stable growth from U.S. legacy carriers (e.g. American, Delta, United) Million U.S./International Seats (January to September)

Compound Annual Growth Rates

Category 2013-19 2009-19 U.S. Legacy Carriers +1.5% +0.8% Other Full Service Carriers +5.7% +4.4% Low Cost Carriers +15.1% +16.3% All Airlines +5.1% +3.9%

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) and U.S. Federal Aviation Administration (2018) Note: Reported years measure seat capacity from January to September and may be subject to change U.S. Legacy Carriers include American Airlines, Delta Air Lines, and United Air Lines (merged airline groups)

9 | September 2019 Air Service Trends at Commercial Airports (WY) ULCC capacity has replaced some of the lost seat capacity

Seat capacity only slightly down at Small Hubs, still lower than 2008 highs despite strong growth in traffic nationwide Million Departing Seats from Small Hubs

Compound Annual Growth Rates

Category 2008-18 Ultra Low Cost Carriers +12.0% Network Carriers -0.6% Other Large Carriers -1.2% Other Carriers -16.0% All Airlines -0.1%

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

10 | September 2019 Air Service Trends at Commercial Airports (WY) Non Hubs airline mix has stayed more constant, with significant growth in ULCC capacity

Network carriers continue to operate 70% of seat capacity to non-hubs, an essential part of the future of small airports Million Departing Seats from Non-Hubs

Compound Annual Growth Rates

Category 2008-18 Ultra Low Cost Carriers +8.0% Network Carriers -0.5% Other Large Carriers -2.6% Other Carriers -3.7% All Airlines -0.4%

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

11 | September 2019 Air Service Trends at Commercial Airports (WY) Growth in Capacity (Seats) compared to Domestic GDP

Departing Seat Capacity year on year growth of U.S. Hubs % Change of Departing Seats (Relative to 2000, Full Year – 2019 Forecast)

12 | September 2019 Air Service Trends at Commercial Airports (WY) Domestic Traffic: Market Share of Airlines (2019)

Share of Domestic Seats by Carrier Type (January to September 2019)

Low Cost Legacy Carriers Others

34% 58% 8%

13 | September 2019 Air Service Trends at Commercial Airports (WY) International Traffic: Market Shares of U.S. and Foreign Carriers (2019)

Share of U.S./International Seats by Carrier Type (January to September 2019)

Legacy Carriers Other Full Service Carriers (Top 5) Low Cost Carriers (Top 5)

38% 45% 17%

Volaris 9%

Westjet 11%

14 | September 2019 Air Service Trends at Commercial Airports (WY) Global Domestic Products in Comparison (2017) National Gross Domestic Products (2018)

15 | September 2019 Air Service Trends at Commercial Airports (WY) Small Community Air Service: Trends and an Agenda? Factors Behind Small Airport Services Challenges

Airports have focused on several industry trends that are placing pressure on small community air service:

• Pilot Shortage, exacerbated by 1500 hour rule • Accelerated retirement, and lack of production, of 50-seat RJs and other metal • Fuel prices (volatility, how long will they stay historically low?) • Scope clauses (< 86,000lb MTOW) • Legacy airlines focus on flying from, and feeding, their gateway hubs

There has been less focus on airline business models and the effects policy has had on air service: • Mergers and Consolidation • Consolidation of traffic into gateways and hubs Focus • Growth of ULCCs • Decline of secondary hubs and access points for “spokes”

These are the principal factors behind the loss of connectivity.

17 | September 2019 Air Service Trends at Commercial Airports (WY) Definitions of Airports and Airlines

The landscape for smaller airports in the United States is changing.

Smaller airports are defined as those FAA Hub Categorization airports with less than 2.2 million FAA Definition Number of enplanements in 2017 and are Category (National Annual Passenger Boardings) Annual Enplanements Airports categorized by the FAA as: Large Hub Over 1% 8,657,340+ 30 • Small Hubs Medium Hub Between 0.25 and 1% 2,164,365 – 8,657,340 31 • Non Hubs Small Hub Between 0.05 and 0.25% 432,867 – 2,164,364 70 • Commercial Service Airports Non Hub Over 10,000 but less than 0.05% 10,001 – 435,866 259 Commercial Services Less than 10,000 1 – 10,000 742

Airlines have been classified into Airline Classifications 4 service categories in order to Definition Example Airlines understand the changing mix of service at Ultra Low Cost Carriers Allegiant, Frontier, Spirit and Sun Country small airports Network Carriers American, Delta, and United Other Large Airlines Southwest, Alaska, JetBlue and Hawaiian Others All other carriers – primarily small operators

18 | September 2019 Air Service Trends at Commercial Airports (WY) The mix of service has changed – small airports have seen a significant drop in flights

The positive industry trends for larger Seats from Small and Non Hub Airports 2008-2018 airports have not delivered Million Departing Seats commensurate benefits for smaller airports:

At smaller airports there are 3 primary trends of note:

1. Service levels are down

2. There has been some service substitution with ULCCs increasing market share at the expense of more traditional full service carriers

3. Upgauging poses an ongoing threat Departures from Small and Non Hub Airports 2008-2018 to the volume and nature of air Million Departures service

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

19 | September 2019 Air Service Trends at Commercial Airports (WY) Ultra Low Cost Carriers, using larger aircraft, have helped backfill some lost seat capacity…

ULCCs have increased rapidly in the Category 2008 2018 last 10 years and operations across Small Airports served by ULCC 83 114 the U.S. have expanded through the Small Airports with commercial service 662 615 use of small airports and secondary hubs ‘neglected’ by network carriers. ULCC Service Share 13% 19%

The percentage of small airports Airports served by ULCC Carriers 2008-2018 served by ULCCs has increased to Airports served by ULCC in 2008 Airports where ULCCs have started service after 2008 and still have ULCC service 19% in 2018; the map on the right shows the airports served by at least one ULCC in 2008 and those that have since added service.

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

20 | September 2019 Air Service Trends at Commercial Airports (WY) Small Hubs: Loss of service & capacity from network carriers partially offset by ULCC

• Over the last decade, small hubs Departures from Small Hubs, 2008 to 2018 have lost an average of -2.3% of Million Departures departures each year • This is largely driven by the large network carriers reducing their fleets of smaller aircraft and focusing growth on their large hubs • Some of the capacity has been recovered by ULCCs, which operate under a business model focused on secondary, underserved cities and leisure point-to- point traffic • As a result, growth in ULCC The big 3 network carriers have reduced departures by almost 25% since 2008 operations have offset a portion of the lost service

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

21 | September 2019 Air Service Trends at Commercial Airports (WY) Non Hubs face a similar trend, with declining operations only slightly offset by ULCCs

Non Hubs Departures from Non Hubs, 2008 to 2018 Million Departures • Over the last decade, non hubs have lost an average of 2.6% of departures each year • There has been a significant reduction in service from all airline categories except ULCCs, which have grown operations by more than 50% over the time period. However ULCCs remain only a small portion of capacity at Non-Hubs

The big 3 network carriers have reduced Commercial Service departures by 24% since 2008 • CS airports, which are served almost exclusively by small fleet operators, have seen a similar trend – departures are down 19.3% from their 2008 levels • Large carriers have pulled almost entirely out of these markets. Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

22 | September 2019 Air Service Trends at Commercial Airports (WY) On balance there is a loss of connectivity – which business travellers demand

• Upgauging is mitigating the loss of Small Hub Airport Connectivity, 2008 and 2018 frequencies with regard to overall 2008 2018 capacity, but not in terms of connectivity Average Departures per Day from Small Hubs 47 37 • Upgauging by major carriers, Average Departures per Day from Destination Airports 78 71 combined with ULCCs that serve point-to-point routes, has had a Average Daily 1-stop connection options 3,666 2,627 major impact on connectivity options from small airports. At small hubs, Connectivity Example: average daily 1-stop connection options are down 28% since 2008 The compound impact of these reductions is an average -28% drop in connection options from small hubs

Outbound flights from Small Hubs are down 21%

Outbound flights from destination airports are down 9% Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

23 | September 2019 Air Service Trends at Commercial Airports (WY) Upgauging offers mixed value for small airports

• In the Small and Non Hub segment Average Seats per Departure by Airport Size the average aircraft size has increased Average Seats considerably in the last ten years. In some cases, this allows for growth in total capacity and facilitates more passenger traffic. • However, this has led to fewer operations per day and a decrease in movements that is more than proportional to the decrease in seats. • This trend is expected to continue with more smaller and older aircraft being replaced in network carrier and regional airline fleets. • This raises some concern that more service could be cut or consolidated at small airports – leading to further reduction in connectivity.

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

24 | September 2019 Air Service Trends at Commercial Airports (WY) The replacement of 50-seat aircraft jeopardizes air service at small and non-hubs

As 50 seat aircraft are being replaced, Share of Network services from Small airports to Large Hubs airports who have traditionally been % Share served by these aircraft may be at particular risk for additional loss of connectivity. Based on 2018 schedules, 11 Small hub airports average less than 70 seats per operation from Network Carriers in 2018: • CID – Cedar Rapids • TYS - Knoxville • LEX – Lexington • HPN – Westchester • AVL - Asheville • CHA – Chattanooga • • LBB - Lubbock CAK – Akron-Canton Departures by Aircraft Type by Network Airlines from Small Airports, 2008-2018 • DAY – Dayton • SGF – Springfield- Branson Million Departures • ISP – Long Island Islip In addition, many non-hubs will fall below this threshold and face a similar threat

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: ‘50 seater’ defined as any aircraft with 45 to 57 seats, ‘70 seater’ defined as any aircraft with 60 to 80 seats.

25 | September 2019 Air Service Trends at Commercial Airports (WY) Air Service: Wyoming Trends Jackson Hole is driving Wyoming Seat Capacity above the national Non Hub Average

Departing Seat Capacity Growth of U.S. Hubs vs Wyoming Trends % Change of Departing Seats (Relative to 2000, Full Year – 2019 Forecast)

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) and U.S. Federal Aviation Administration (2018)

27 | September 2019 Air Service Trends at Commercial Airports (WY) Jackson Hole and Casper-Natrona make up for more than 80% of total WY enplanements

Enplanements Map of WY Airports Airport 2018

JAC 367,167

CPR 89,301

COD 39,033

GCC 26,868

RKS 21,012

LAR 16,978

CYS 990

RIW 31

SHR -

WRL -

Source: Steer Analysis (2019) of Federal Aviation Administration Terminal Area Forecast (2019)

28 | September 2019 Air Service Trends at Commercial Airports (WY) Jackson Hole's Share of Capacity for Wyoming airports has been increasing over time

Departing Seat Capacity Growth at JAC by Airline % Seat Capacity Change 2018

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: All figures are full year. 2019 Figures are forecasted.

29 | September 2019 Air Service Trends at Commercial Airports (WY) Jackson Hole Airport Overview

• Jackson Hole Airport is a public JAC Services Route Map airport located seven miles (11 km) north of Jackson, in Teton County, Wyoming and the only commercial airport in the United States located inside a national park. • Only one runway approximately 6,300 ft long which is the limit for a 737-800 or an A320 (although A-220 presents a new opportunity) • Most common aircraft operating at JAC are Regional Jets (CRJs and Embraer) and A319s • The route with the most departures is Denver (DEN) with an average of 20 flights every week which is 25% of all weekly departures. JAC Fleet Mix

Source: Steer Analysis (2019) of Federal Aviation Administration Terminal Area Forecast (2019)

30 | September 2019 Air Service Trends at Commercial Airports (WY) Legacy carriers have been the only operators at JAC. Frontier has recently started 3-times weekly to/from Denver

United is the largest carrier at JAC Thousand Departing Seats

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: All figures are full year. 2019 Figures are forecasted.

31 | September 2019 Air Service Trends at Commercial Airports (WY) Other airports in Wyoming mostly served by United. Allegiant exited CPR in 2017-18

United is also the largest carrier at other WY airports Thousand Departing Seats

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: All figures are full year. 2019 Figures are forecasted.

32 | September 2019 Air Service Trends at Commercial Airports (WY) Seats have been growing at 1.6% CAGR while Operations have decreased at 3.1% CAGR

Departing Seat and Operations Growth at WY Airports (Indexed) vs growth in Seats/ATM 2000-2019 Full Year – 2019 Forecast Growth Index (2000=1) Seats Per Air Traffic Movement

30 Seaters 50 Seaters 70 Seaters

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: All figures are full year. 2019 Figures are forecasted.

33 | September 2019 Air Service Trends at Commercial Airports (WY) Future Air Service Challenges and Policy Ideas to Consider 50-seaters are being steadily removed from the US fleet – forecast is that they will be gone in 10 years

• According to FAA data, very small Regional Aircraft Fleet by Seat Size, 2002 to 2038F regional jets (40 seats and under), Aircraft in U.S. Fleet

have declined -14% per year since Forecast 2002, while small regional jets, including 50-seat aircraft , have declined -1% per year • The number of regional jets in the 61 – 80 seat range have grown +23% per year and are now the largest segment of the regional fleet • The FAA forecast anticipates a continued decline in very small and small regionals, while medium size (c. 70 seat) and large regional jets will continue to see growth

Seat Classification Aircraft Included 40 and under EMB-135, 328JET 41-60 seats CRJ-200, EMB-140, EMB-145 61-80 seats CRJ-700, CRJ-900, EMB-170, EMB-175, EMB-175E2 81 and up EMB-190, EMB-190E2, EMB-195E2, MRJ-90, BAE-146 Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) and Federal Aviation Administration (2019)

35 | September 2019 Air Service Trends at Commercial Airports (WY) 50-seat forecast and risks for future air service

• Small airports have already lost Share of US Regional Fleet by Aircraft Size, 2002-2038F service and a larger amount of % Share of U.S. Regional Jets connectivity to hubs. • Future retirements of 50-seaters mean losses coming in: — Seats — Frequency — Business Destinations — Yields

• If retirements are compounded by a recession or by failure or acquisition of one or more ULCCs, small community air service could drop even further.

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) and Federal Aviation Administration (2019)

36 | September 2019 Air Service Trends at Commercial Airports (WY) This will result in a significant loss of flight frequencies to small airports

• To understand the potential impact of Fleet mix from small airports Impact on Operations % Share 50-seat fleet replacements, we Departing Avg Daily analyzed the actual departing Seats* Flights* Avg Seats flights capacity for seats and flights from smaller airports. 24,234,771 488,020 50 4.3 • The analysis is focused only on flights sold and/or operated by Network 24,234,771 346,211 70 3.0 Carriers as this is where the impact will be primarily felt. • By keeping the seat offer constant -29% and replacing the aircraft fleet from 50 to 70 seaters, the corresponding number of flights needed would be reduced by approximately 30%. • The way each small airport would cope with this decrease would vary from airport to airport based on how reliant those markets are on the 50 seater fleet.

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: Capacity/flights from Network Carriers operated by 50-seaters

37 | September 2019 Air Service Trends at Commercial Airports (WY) The reduction of 50-seat aircraft is an air service threat to smaller airports

• Within the Small Hub segment the Small Hubs – Historical movements from “50-seaters” by Airline amount of flights operated with a 50 Thousand Departures seat aircraft has declined over time at approximately -8% per year • This decrease is a combination of airlines switching to bigger aircraft and airlines cutting frequencies from Small Hubs • On the other hand, more flights are being operated by 70 seats aircraft (+6%)

• 50 and 70 seats aircraft are key to Small Hubs – Historical movements from “70-seaters” by Airline maintaining connections between Thousand Departures small airports and large hubs served by network carriers

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: ‘50 seater’ defined as any aircraft with 45 to 57 seats, ‘70 seater’ defined as any aircraft with 60 to 80 seats.

38 | September 2019 Air Service Trends at Commercial Airports (WY) As a result, many small airports will lose even more connectivity…

A number of airports have been flagged Map of Top 20 Airports Affected (by size) as ‘at risk’ of losing connectivity into large hubs due to fleet up-gauging.

The airports ‘at risk’ have been selected using the following criteria: • Reliance on 50 seaters: airports which have a share of flights operated by 50 seaters over 35% of total flights (operated by Network Carriers) • Lost connectivity: airports which would lose more than 25% of their daily regional connections • For Example: Richmond (RIC) share of 50-seaters is 37% and its average Flights operated from the airports in the map… daily departures would decrease from With 50 Seaters With 70 Seaters 24 to 17 (-30%) 121,243 86,016 (-29%)*

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019) Note: Analysis assumes Seat Capacity to be constant and 100% replacement of 50 seaters with 70 seaters aircraft

39 | September 2019 Air Service Trends at Commercial Airports (WY) …and other airports are at risk of losing network carriers altogether

Smaller airports that rely entirely on 50 Map of Top 20 Airports Affected (by size) seat aircraft from network carriers are ‘at risk’ of losing all network service. The airports ‘at risk’ have been selected using the following criteria: • Reliance on 50 seaters: airports with more than 50% of flights operated by 50 seaters over total flights (operated by Network Carriers) • Lost connectivity: airports which after the flight reduction due to fleet increase would be left with less than a double daily service. • For Example: Huntington, WV (HTS) share of 50-seaters flights is 100% and its average daily departures would decrease from 3 to less than 2.

Source: Steer Analysis (2019) of OAG Schedule Analyzer (2019)

40 | September 2019 Air Service Trends at Commercial Airports (WY) Air Service Challenges: Conclusion

The Problem: • Air service to most small communities has declined over the last decade, with reductions in seat capacity and even greater reductions in frequencies. The majority of the lost air service consists of connections to a now reduced number of network carrier hubs. • The introduction and growth of ULCC service into many markets has brought welcome air service to many destination markets. ULCC aircraft are generally larger and have helped to offset overall capacity reductions. • Reduction of frequency of regional jet operations into small communities continues to challenge air service in many markets. • Taken together, however, represent not only a net loss of air service to the vast majority of markets, but also a loss of connectivity to network hubs and markets beyond. • Additional risks include an industry contraction, higher fuel prices and reduced competition—all of which would exacerbate these challenges.

Forecast of Smaller Aircraft: • Over the next several years, the continuing reduction, leading to the elimination of all 50-seat RJs in the next 10-15 years, will severely challenge many smaller communities. • Given that there are no current industry plans to manufacture RJs with less than 70 seats, there is a need to find business and policy strategies to stimulate more sustainable passenger demand so that service to smaller communities remains viable.

41 | September 2019 Air Service Trends at Commercial Airports (WY) There are existing statutory authorities and regulatory tools potentially available

The Secretary and DOT’s attention to these issues has been limited to two programs, which while well intentioned, have had limited system-wide effects on addressing air service challenges. Both programs have heretofore untapped legal authorities to encourage interlining and joint-fare arrangements to help address air service challenges.

Essential Air Service (49 USC 41744): (a) In General.— If the Secretary of Transportation determines that extraordinary circumstances jeopardize the reliable performance of essential air service under this subchapter from a subsidized essential air service community to and from an essential airport facility, the Secretary may require an air carrier that has more than 60 percent of the total annual enplanements at the essential airport facility to take action to enable another air carrier to provide reliable essential air service to that community. Actions required by the Secretary under this subsection may include interline agreements, ground services, subleasing of gates, and the provision of any other service or facility necessary for the performance of satisfactory essential air service to that community.

SCASDP statute (49 USC 41743): (f)Additional Action.— Under the program established under subsection (a), the Secretary shall work with air carriers providing service to participating communities and major air carriers (as defined in section 41716(a)(2)) serving large hub airports to facilitate joint-fare arrangements consistent with normal industry practice.

42 | September 2019 Air Service Trends at Commercial Airports (WY) U.S. Department of Transportation (Title 49 §40101) Aviation Policy

The Secretary of DOT has been assigned numerous goals with respect to the economic regulation of air transportation. By their nature, they require balancing and a variety of actions to address the goals. Several of these are directed toward small community air service and airline competition:

(a) Economic Regulation.—In carrying out subpart II of this part and those provisions of subpart IV applicable in carrying out subpart II, the Secretary of Transportation shall consider the following matters, among others, as being in the public interest and consistent with public convenience and necessity: (4) the availability of a variety of adequate, economic, efficient, and low-priced services without unreasonable discrimination or unfair or deceptive practices. (6) placing maximum reliance on competitive market forces and on actual and potential competition (7) developing and maintaining a sound regulatory system that is responsive to the needs of the public and in (8) encouraging air transportation at major urban areas through secondary or satellite airports if consistent with regional airport plans of regional and local authorities, and if endorsed by appropriate State authorities (10) avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier unreasonably to increase prices, reduce services, or exclude competition in air transportation.

43 | September 2019 Air Service Trends at Commercial Airports (WY) U.S. Department of Transportation (Title 49 §40101) Aviation Policy

(11) maintaining a complete and convenient system of continuous scheduled interstate air transportation for small communities and isolated areas with direct financial assistance from the United States Government when appropriate. (12) encouraging, developing, and maintaining an air transportation system relying on actual and potential competition— • (a) to provide efficiency, innovation, and low prices; and • (b) to decide on the variety and quality of, and determine prices for, air transportation services. (13) encouraging entry into air transportation markets by new and existing air carriers and the continued strengthening of small air carriers to ensure a more effective and competitive airline industry. (16) ensuring that consumers in all regions of the United States, including those in small communities and rural and remote areas, have access to affordable, regularly scheduled air service

* Addressing these goals requires balancing measures in an industry that continues to evolve *

44 | September 2019 Air Service Trends at Commercial Airports (WY) Case Study: Code-Shared Hawaiian Inter-Island Flights

• Inter-island flights in Hawaii offer a rare example multiple Example: Honolulu to Kona codesharing among large US airlines.

• Hawaiian Airlines dominates the inter-island market, offering frequent service on 717 narrow-body jets with 128 seats.

• Other large domestic carriers, including the 3 large network carriers as well as Alaska Airlines, operate service exclusively from the U.S. mainland to Hawaii, without any Hawaiian dominates inter-island service. the HNL-KOA route, and operates it with • As a result, Hawaiian allows these other large US airlines to high frequency codeshare on their inter-island operations, increasing their service on 717s distribution channels for these flights while allowing the larger network carriers to sell tickets to more destinations in 2017 Hawaii. HA and Island Air Passengers from HNL to KOA 571,220 • The effect is a significant increase in connectivity options Non HA/Island Air Ticketed Domestic Passengers 39,210 to/from small airports such as Kona (KOA). Share of HNL-KOA Traffic 7.3% • American and Delta show the codeshares are on sale: Hawaiian Gets: Incremental traffic on its inter-island service, increasing route profitability

Other US Carriers Get: Ability to market Kona as a destination in their network from many origins

Kona Passengers/Residents Get: Easier access to global networks via a Source: Steer Analysis (2019) of U.S. DOT O&D Survey, American Airlines, Delta Airlines diverse hub at HNL

45 | September 2019 Air Service Trends at Commercial Airports (WY) Airport Economics: Global Airport Revenues: Europe and Asia Largest Regions (2019) Global airport revenues totaled $172 bn in 2017 (+6.2%)

% Share of Revenue by Source (2017) Aeronautical Non-Aeronautical Non-Operating

1% 10% 60%

8% 39% 36% 31.1bn 54% 56.9bn 1%

49% 48% 14.0bn 51% 43% 56.1bn

8% 4% 3.9bn 96%

10.2bn 49% 43%

Source: ACI and Steer (2019) Note: Definitions of revenues may vary.

47 | September 2019 Air Service Trends at Commercial Airports (WY) The Current State of the Airport Economic Policy Agenda Global airport revenues totaled $172 bn in 2017 (+6.2%)

Airport Improvement Program: • Airport and Airway Trust Fund at risk if there is a recession, absence of reform (airlines paying fewer taxes per passenger given ancillary fees) • Risk that some well-meaning advocates of the PFC may wish to “detach” historic relationship between AIP and PFCs (i.e., takedown that funds the small airports fund) Passenger Facility Charges: $10.05 • $3.00/$4.50 statutory ceilings constrain investment, enhancing airline control $4.50 • Rates static, not cost or market oriented $2.04 • FAA regulatory creep on application process

Bonds Authorized Actual Value If Inflated Value • Reclassification of bonds possible threat to AMT and non-AMT issuances

Economic Regulation (all compare unfavorably to ICAO principles used outside of USA): • Historic cost accounting standard uniquely bizarre, limits airports’ charges • No pre-funding of projects (charging airlines directly for projects prior to opening) • Airport Investment Partnership Program (AIPP) restrictive

48 | September 2019 Air Service Trends at Commercial Airports (WY) FAA places firm limits on incentivizing air carrier service, U.S. airports Global airport revenues totaled $172 bn in 2017 (+6.2%)

U.S. Airports Have Fewer Options Than Their Foreign Counterparts

Regulatory Restrictions Based on Interpretations of: • Revenue Use Policy • Exclusive Rights • Economic Nondiscrimination • Preemption • Rates and Charges Policy

Allowed/Not Allowed: • Incentives (e.g., foregoing landing fees) ok with limits, subsidies prohibited • New entrant service for up to one year, new service, regardless of carrier, for two years • Any new market okay—but incentives based on aircraft type, number of pax, or seasonal service prohibited • Marketing flight ok, marketing destination no • Policy makes no distinction on an airport’s financial system or whether revenue is aeronautical or nonaeronautical • Remains a system predicated on “mother may I”?

49 | September 2019 Air Service Trends at Commercial Airports (WY) London Stansted: Traffic Up 41% with Commercial Pricing and Incentives

• Manchester Airports Group took control in 2013. STN is the 3rd busiest airport in London and the 4th busiest in the United Kingdom

• Traffic between 2014 and 2016 increased from 17 million to 24 million (41%)

• Airport using a combination of strategies to incentivize new traffic: Select U.S. airports could — Adopting a Peak (April 1 to November 1) and Non-Peak (November 1 increase traffic, revenue and to March 31) airport charges schedule. Charges vary approximately utilization with similar 75% and for different classes of aircraft management strategies — Negotiating with air carriers incentives and subsidies for new markets — Negotiating volume discounts for those airlines that increase traffic — Departure taxes for passengers set at £11.16, with a rebate of £2.52 for those passengers served through a remote hard stand

50 | September 2019 Air Service Trends at Commercial Airports (WY) An airport economic agenda to stimulate investment

1. Answer the question: Do airports want more commercial authority and economic flexibility OR do they want to be “protected” from downtown and lobbying by air carriers?

2. Protect AIP and the link between large and small airports

3. Push for economic deregulation • PFC rate-making flexibility • Unrestricted use of commercial revenues • Permissive air service incentives (and subsidies) • Alternatives to value assets (moving away from historic cost) • Full range of pricing strategies • Expanded airport privatization

51 | September 2019 Air Service Trends at Commercial Airports (WY) New Thinking: Understand the Challenges and Realities of Airport Parking 2019

Challenges • Traffic growth > Revenue growth • Gateways, on-airport roadways and curbs congested • TNCs seizing access market share • Off-airport providers often beating airports on price and product

Realities • Lack of clear strategy (operational focus) • Outdated equipment (have to write code to change prices) • Unincentivized pricing • Poor product mix and offerings • Unclear customer marketing • Contract costs often buried (inefficient operations) • No SLAs/metrics on performance

52 | September 2019 Air Service Trends at Commercial Airports (WY) New Thinking: Understand the Challenges and Realities of Airport Parking 2019

• Distressed valet at Boston Logan • How can airports offer a better customer experience and lower operating costs?? • Reservations: provide a guaranteed parking space • Improved Products: offer alternatives for customers— e.g., valet and drop and go • Both of these are key enablers for increasing revenue and regaining airport market share

53 | September 2019 Air Service Trends at Commercial Airports (WY) Airport Parking: The future of daily tariffs

Airport Parking Example % Occupancy 120% Revenue Maximized Depending on elasticity)

100% Daily Rate @ $35

80% Foregone Foregone Revenue Revenue

60%

40%

20%

0% Su M T W Th F Sa Business, paid by employer, competitive Leisure, paid by customer, uncompetitive

54 | September 2019 Air Service Trends at Commercial Airports (WY) Parking: Transaction v. Tariff Pricing

• “Fill and Build”: Daily pricing part of a supply-centric era in which there was lower competition for the airport access market (e.g., no TNCs) and vehicle miles traveled were steadily increasing. Airports responded to the market by building additional lots to accommodate demand. • Customer Choice: Customers have more choices today and airports must provide ground transportation services, products and prices in ways to attract customers and win market and modal shares. • Daily Prices: A $35 daily rate, for example, is only competitive for short-stay trips typically at peak (Tu-Th), while the price would normally uncompetitive for the shoulders (M/F) and especially for off-peak. • Pricing by transaction: Looks at total revenue generated by the trip and compares that against other trips of varying lengths. It discounts those times that are underutilized in order to capture the business. At airports with full transaction pricing, average stays tend to increase from 2 to 3 days to 4 or 5 days. • The result? Increased revenue, improved utilization, and better customer service.

55 | September 2019 Air Service Trends at Commercial Airports (WY) Rate Optimization and Scenario Analysis

Summary Proposed Tariff Schedule – Example Scenario 1

• Steer analyzes existing parking data to understand the % Transactions Area Rate Type Current Rate Proposed % Revenue Change specific usage of each lot within an airport campus Change • Steer analyzes multiple pricing adjustments for various Lot 1 Hourly 5.00 6.00 +9.2% -9.0% “time bands” and models the expected impact on Hourly 4.00 4.00 Lot 2 - - customer behavior Daily 25.00 25.00 • By analyzing price elasticity and substitution options, Hourly 4.00 4.00 including transit, TNCs and off-airport competition, Lot 3 Daily Rate (First 3 Days) 16.00 16.00 +1.3% +4.0% Steer can propose “optimized” pricing adjustments Daily Rate (After 4th Day) 15.00 14.00 that help airports maximize the value of existing parking assets Hourly 2.00 2.00 Lot 4 +3.4% -17.3% Background and Context Daily 8.00 10.00 Lot 5 (Valet) Multiple Rate Types Variable No Changes +0.1% +0.1% • If airports have data from before and after a recent price change, Steer will consider the historical Total +1.2% -4.5% elasticity of demand and factor this into the optimization model Summary Impact – Example Scenarios 1-5 • Goals can differ from airport to airport – some focus 10% on maximizing revenue, while others look to increase efficiency by impacting passenger behavior to better 5% utilize airport infrastructure 0% • Forecasts are estimated on a flat traffic scenario – -5% airports with growing traffic will likely mitigate the loss of transactions associated with price adjustments as -10% the natural demand for parking capacity increases -15% • Analysis considers only a traditional “static” pricing Scenario 1 Scenario 2 (High) Scenario 3 Scenario 4 Scenario 5 scenario – which is ideally used in the interim while airports transition to fully dynamic pricing (Original) (Medium) (Modest) (Mixed) Revenue Transactions

56 | September 2019 Air Service Trends at Commercial Airports (WY) Components of Digital Parking Strategy and Offer

• Recognition that it is a Commercial Offer • Modern PARCs equipment • Prebook/Reservation System (module) > yield management • Parking operator properly incentivized (“below and above the line”), costs transparent • Transaction pricing (discount pricing from roll-up) • Airport CRM (own pax information) • Clear product offering that attracts customers at various price points, including serious valet offer

57 | September 2019 Air Service Trends at Commercial Airports (WY) Booking Widget Created for Ontario’s (ONT) Website

58 | September 2019 Air Service Trends at Commercial Airports (WY) A Revenue Management Platform (STN, 9-2018), Courtesy MAG

59 | September 2019 Air Service Trends at Commercial Airports (WY) Optimized E-Commerce (Content, Products, and Pricing)

60 | September 2019 Air Service Trends at Commercial Airports (WY) Contact information

For further details, please contact: Stephen D. Van Beek, Ph.D. Director and Head of North American Aviation [email protected] +1 703 788 6878

Steer 28-32 Upper Ground London SE1 9PD

+44 20 7910 5000 DISCLAIMER: This work may only be used within the context and scope of work for which Steer was commissioned and may not be relied www.steergroup.com upon in part or whole by any third party or be used for any other purpose. Any person choosing to use any part of this work without the express and written permission of Steer shall be deemed to confirm their agreement to indemnify Steer for all loss or damage resulting [email protected] therefrom.

61 | September 2019 Air Service Trends at Commercial Airports (WY)