MITMIT Overview of Recent Trends in ICATICAT the Industry

Prof. R. John Hansman MIT Department of Aeronautics and Astronautics

Traffic Source: Sage Analysis courtesy Prof Ian Waitz [email protected] 617-253-2271 MITMIT World Population Distribution ICATICAT and Air Transportation Activity

North America 37% Pax 27% Pax 26% Cargo 28% Cargo ~40 ~80 Airlines Asia/ ~4100 Airports ~2400 Airports Pacific 26% Pax 36% Cargo Latin America/ ~60 Airlines Middle East Caribbean ~1800 Airports 4% Pax 5% Pax 2% Pax 5% Cargo 3% Cargo 2% Cargo ~12 Airlines ~40 Airlines ~20 Airlines ~230 Airports ~580 Airports ~300 Airports

Population Source:http://www.ciesin.org/datasets/gpw/globldem.doc.html Air Transport Source: ICAO, R. Schild/Airbus Passenger and freight traffic represent RPK and FTK share in 2002 MITMIT Conceptual Model ICATICAT

Direct / Indirect / Induced employment effects

Economy Economic Enabling Effect (Access to people / markets / ideas / capital)

Pricing & Schedule Demand Supply NAS Travel/Freight Need Capability

Airlines Financial Equity/ Revenue/Profitability Debt Markets

Air Transportation System

Vehicle Capability MITMIT Correlation Between US GDP and ICATICAT Scheduled Passenger Traffic

30% Sch. RPMs 25% GDP Deregulation 20% Recessions (%) 15%

10% Growth

5% Annual 0%

-5%

-10% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Source: US BEA and BTS data; Recession data from National Bureau of Economic Research MITMIT Air Cargo and GDP ICATICAT (Mainland China)

Relationship between carried air cargo and GDP 2500

02 2000 00

99 01

1500 98 97 96 95 1000 94 93 92 Carried Air Cargo (000 tonne) 500 91 90

0 500 1000 1500 2000 2500 3000 3500 GDP (1978 RMB Bn) MITMIT US Passenger Growth Trends ICATICAT Effect of De-Regulation

Scheduled Revenue Passenger Miles in US

800 pre-dereg 19.4 billion 700 post-dereg RPMs per year 600 Linear (pre- dereg) Deregulation (billion) 500

Miles 400 8.35 billion Pax 300 RPMs per year

200 Revenue

100

0 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002

Source: BTS data MITMIT European Passenger Growth Trends ICATICAT Effect of De-Regulation

Scheduled Revenue Passenger-Kilometers in Europe

1000

Regulation Transition Deregulation 800

600 (billion)

400 RPK

Gulf War 200

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO data MITMIT Asian Passenger Growth ICATICAT Trends

Scheduled Revenue Passenger-Kilometers in Asia

1000

800

600 (billion)

400 RPK

200

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO data MITMIT RPK by Region ICATICAT

Scheduled Revenue Passenger-Kilomters by Region 1400

1200

1000

Europe 800 Asia and Pacific (billion) 600 Latin America & Caribbean RPK Middle East 400 Africa

200

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO, scheduled services of commercial air carriers MITMIT Freight Trends by Region ICATICAT

Freight Tonne-Kilomters by Region 45

40

35 North America 30 Europe

25 Asia and Pacific (billion) 20 Latin America & Caribbean FTK 15 Middle East

Africa 10

5

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO, scheduled services of commercial air carriers MITMIT US Airlines Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 11.3 yr eFolding Time = 6.3 yr

40

30 Predicted Losses 2003 $15.6 B 20 2004 $15.0 B 2005 $8.4 B

10

0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

-10

-(ATA) -20 Estimate

-30 MITMIT World Airline Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 10.8 yr eFolding Time = 8 yr

50

40 Predicted Losses 2003 $21.5 B 30 2004 $18.1 B 2005 $ 6.7 B 20

10

0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Net Profit (Current US$B) -10

-20

World World Fit -30 MITMIT Net Profit and Aircraft Deliveries Hypothesize that instability driven by capacity ICATICAT response phase lag World Airlines Net Profits vs. Aircraft Deliveries 15 1200

10 1000

5 Net Profits 800

0

600 -5 Deliveries Aircraft Deliveries (unit) Net Profit (Current US$ Bn) 400 -10

-15 200 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO data MITMIT Growth Limits ICATICAT Constraints vs Damping

40

30

20 Upside: Capacity, Market

10

0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

-1 0 Downside: Financial -2 0

-3 0 MITMIT Medium Term Trends ICATICAT

• Trends since Sept 11 • Economic Down Cycle • Capacity Reductions  Rolling Hubs  Regional Jet Usage • Web Effects • Low Cost Carrier Envy • Bankruptcies • Labor Reductions and Givebacks MITMIT US Domestic RPMs ICATICAT

Domestic Traffic -- RPMs (Billions) 50

45

40

35

30

25 2000 2001 2002 2003 2004 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Passenger Traffic Report Source: ATA, US member airlines, scheduled mainline service MITMIT US Airline Load Factors 2000-2003 ICATICAT

Monthly Load Factor -- System (Percent) 85

80

75

70

65

60

55 2000 2001 2002 2003 2004 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Passenger Traffic Report Source: ATA, US member airlines, scheduled mainline service MITMIT Annual Change in Average ICATICAT Domestic Fare (2000-2004)

Average Domestic Air Fare (Percent Change from Previous Year) 10

5

0

-5

-10

-15

-20 2000 2001 2002 2003 2004 -25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Airfare Report; eight US major airlines excluding Southwest (WN) MITMIT Airline Profitability Impact of ICATICAT Sept 11

Slow Recovery Quick Recovery $/ASM

Security costs Insolvency

CASM RASM

9/11-9/13 Time MITMIT Air Transportation Stabilization Act ICATICAT Internationally Seen as Bailout for US Airlines Slow Recovery Quick Recovery $/ASM

Aviation Insolvency Disaster CASM Relief RASM

9/11-9/13 12/31 Time MITMIT All Major Carriers On “Slow Recovery” ICATICAT Trajectory Except Southwest and Cargo

$1,600 West Coast Dock Strike $1,200 SARS Iraq War 9/11 Attacks $800

millions $400 in

$0

(Loss) 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3

$(400) Income $(800) AA UA

Net DL NW $(1,200) CO WN UPS FedEx $(1,600)

Source: companies’ annual reports MITMIT Market Cap: US Majors, 4/7/04 ICATICAT With Jet Blue

ATA US Airways Alaska United America 0.5% West 1.1% 3.4% 0.8% 1.7% Continental 4.2% Northwest Jet Blue 4.4% 13.1% Delta 4.9% American Southwest 10.4% 55.6%

Total Market Cap: $21.3 billion

Source: Yahoo! Finance. Includes ATA MITMIT Current Market Cap vs. RPM Share ICATICAT US Majors and ATA

25%

20% American

United Delta 15%

Northwest 10% Southwest Continental RPM Share 01/04 US Airways 5% American West Alaska JetBlue ATA 0% 0% 10% 20% 30% 40% 50% 60% Relative Market Cap 02/04 Network vs Cost Efficiency Questions

Source: Yahoo! Finance and airline traffic reports MITMIT Hub and Spoke vs Direct ICATICAT Networks

Completely Connected Network = 2(N-1) Flights (eg., 50 Airports, 98 Flights) MITMIT Fully Connected Network ICATICAT

Completely Connected Network = N(N-1) (eg., 50 Airports, 2450 Flights) MITMIT Global Emergence of ICATICAT Low-Cost Carriers

Canada (5) Europe (58, 2 in 2004) CanJet Westjet Aer Arann Baboo Fairline Austria Sun Express HMY Airways Air 2000 Basiq Air German Wings Swedline Airlines Air Baltic Bexx Air Germania Express Air Berlin BMI Baby Globespan V Bird Air Finland British European Hapag Lloyd Express Virgin Express USA (19, 4 in 2003/2004) Air Luxor Lite BudgetAir Hellas Jet VLM Airlines AirTran Spirit Airlines Air Polonia Corendon Helvetic Airways VolareWeb Allegiant Air Song Air Scotland Deutsche BA Iceland Express Windjet Vola American West Sun Country Airlines Duo Snalskjutsen Smart Wings ATA USA 3000 Airlines Air Wales EasyJet SnowFlake Airlines Wizz Air Frontier Airlines Vacation Express Sterling Interstate Jet Ted Excel Airways JetBlue Airways Independence Air Asia/Pacific (20, 9 in 2004) Midwest Express Virgin USA Air Arabia Virgin Blue Pan American Africa (2) Air Asia Southeast Airlines South America (3) 1Time Air Deccan BackpackersXpress Southwest Airlines Athena Air Services Jetstar Bra Kulula Gol Citilink New LCC by Qantas U Air Freedom Air Nok Air Lion Airways Pacific Blue One-Two-Go SkyAsia Skymark Airlines Tiger Airways Skynet Asia Airways ValuAir

Source: http://www.etn.nl/lcostair.htm, airline news Total 107 LCCs, 15 in 2003/2004 MITMIT US Airline Performance Cycling Up ICATICAT Faster Than Predicted

40

30 Prediction 2003 ($15.5B) Actual 20 2003 ($1.8) US$B) 10 (Current 0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Profit

Net -10

-20 US US Fit -30 MITMIT Profitability Improvement ICATICAT Factors

• Cargo Airlines Profitable • Yields Turned the Corner • Wage Concessions  US: $1 billion  UA: $2.56 billion  AA: $2 billion • Distribution Costs  $1 billion • Operating Efficiencies  $4 billion • Debt Restructuring & Chapter 11 • Pensions  (Pension Benefit Guaranty Corporation (PBGC)) • Security Costs and Insurance? • Fuel MITMIT Trends in Fuel Price ICATICAT

Historical: Average Jet Fuel and Crude Oil Prices

130 45 System (L) Crude Oil: Dollars per Barrel 120 Crude Oil (R) 40 110 35 100 30 90 25 80 20 70 15 60 10 Jet Fuel: Cents per Gallon 50 5 40 0 Jan-98 Jan-03 Jan-96 Jan-04 Jan-97 Jan-02 Jan-95 Jan-00 Jan-93 Jan-01 Jan-94 Jan-99 Jan-92 Jan-90 Jan-89 Jan-88 Jan-91 Jan-87 Jan-86

Source: ATA data; All US Majors, Nationals, Large Regional – All Services MITMIT Capacity and Delays ICATICAT US Air Traffic Density (11/14/02) MITMIT Flight Delays Reemerging ICATICAT

OPSNET National Delays 60000

50000

40000 2004 2003 2002 30000 2001 2000 Total Delays 20000

10000

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month

Source: FAA MITMIT ICATICAT Capacity Limit Factors

• Airport Capacity  Runways  Gates  Landside Limits (including Security)  Weather • Airspace Capacity  Airspace Design  Controller Workload  Balkanization • Demand  Peak Demand  Hub & Spoke Networks • Environmental Limits  Noise (relates to Airport)  Emissions (local, Ozone, NOX, CO2) MITMIT Airport System ICATICAT Capacity Limit Factors

• Runways • Weather  Capacity Variability  Convective Weather • Landside Limits  Gates  Terminals & Security  Road Access • Downstream Constraints • Controller Workload • Environmental  Community Noise  Emissions • Safety Passenger Hassle Increased MITMIT Delays Variable ICATICAT Airport as an Adaptive System

Add’l Pax Screen Gate Security Passengers Boarding Check Drop-off Check-In Parking

Ckd Bag Bags/Cargo Screen Ground Gates Transport

Pick-up Bag Claim Parking Security Point

AirsideAirside LandsideLandside MITMIT CTX 9000 Explosive Detector ICATICAT

500 Bags/hr MITMIT Example EDS Before Ticketing ICATICAT Check In

Source: Transsolutions Website MITMIT Other Threats ICATICAT Portable SAMs

SAM-7 Fired at Arkia Airlines B757-300 Mombassa , Nov 2002 MITMIT Trends in Aircraft Size ICATICAT

220 210 Domestic International Total 200 190 180 170 departure 160

per 150 140 130 seats 120 110 100 90 Average 80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Data source: Form 41 Traffic data from Bureau of Transportation Statistics (includes Regional Jets and Turboprops) MITMIT World Jet Fleet Summary ICATICAT (as of May 14, 2003)

Total 17,995 Jet Aircraft 2500

Boeing Airbus Bombardier Embraer BAe Dornier Fokker Other 2558

2000 1918

1500

1222 1108 1129 1019 966 1000 856 863 764 716

528 491 489 429 500 390 264 258 228 208 182 186 198 161191 104 103 94 100 71 64 81 43 2 11 0 0 747 727 707 757 717 777 767 DC-9 DC-8 A320 A310 A321 A330 A319 A300 A340 Other DC-10 MD-11 MD-90 MD-80 737NG 328JET CRJ200 CRJ700 CRJ900 ERJ-135 ERJ-140 ERJ-145 BAe 146 Fokker 70 737 (JT8D) 737 (CFMI) Avro RJ-70 Others include L-1011, Fokker 100, and Russia/Ukraine a/c (Yak, IL, An, Tu). Avro RJ-85/100

Source: Airclaims, published by ATW, July 2003 MITMIT Worldwide Stored Jet Aircraft ICATICAT (as of May 14, 2003)

Total1,610 Jet Aircraft Stored 350 Boeing Airbus Bombardier Embraer BAe Other 597

300 270

250

200

150 126

100 82 89 66 71 51 55 50 42 29 26 25 11 11 15 15 11 2 5 1 4 5 7 6 3 3 0 767 747 777 707 717 727 757 DC-9 DC-8 A321 A300 A310 A330 A340 A319 A320 Other DC-10 MD-80 MD-11 (CFMI) 737NG CRJ200 BAe 146 ERJ-145 737 737 (JT8D) Avro RJ-85/100

Source: Airclaims, published by ATW, July 2003 MITMIT Emergence of Regional Jets ICATICAT

ERJ 145 (50 seats) CRJ 200 (50 seats) MITMIT U.S. Regional Jet Growth ICATICAT

1400

1200

1000 CRJ900 CRJ700 800 CRJ200 CRJ100 600 EMB135 EMB145 BAE145 400

200

0 2001Q2 2001Q4 2002Q2 1999Q2 2002Q4 1999Q4 1997Q4 2000Q2 1995Q3 1995Q1 1997Q2 1996Q4 1996Q1 2000Q4 1998Q2 1998Q4 2003Q2 2003Q4

Source: FAA registration data from 1995 until the present MITMIT DFW Departures ICATICAT

January 1998 January 2003 MITMIT RJ-NB Boundary Blurred ICATICAT

Regional Jets Narrow-body 2400 New Aircraft

2200 B735/6 B737 ERJ170 ERJ190 2000 MD-90 CRJ900 1800 CRJ700 CRJ200 A319 1600 ERJ145 Range (nm) A318

1400 B717 MD-80

1200 DC-9

1000 20 40 60 80 100 120 140 160 A/C Seats

Source: based on manufactures’ a/c specifications. Full pax range of standard version MITMIT EMB 170 ICATICAT

• March Deliveries  Lot   US Airways • Orders  US Airways  85 MITMIT EMB 190 ICATICAT

• First Flight  3/12/04 • Orders  Jet Blue  100  Air  45 MITMIT A-380 ICATICAT

• A380 Baseline  Shrink  Stretch  ER Variants • 555 passengers (3 class)

• 14,800km/8,000nm range

• Payload: 330,000lbs over 10,400km/5,600nm

• Rolls-Royce Trent 900 engines or GP7200 engines

•http://www.airbus.com/ MITMIT Boeing 7E7 ICATICAT

•200 pax •7800 nm range •http://www.boeing.com/commercial/7e7/k62790.html MITMIT Boeing 7E7 ICATICAT

• Boeing 7E7 Baseline (20% fuel efficiency gain)  Short Range Version  Stretch Version • Seating: 200 passengers in three-class configuration 300+ in single-class configuration

• Range: 7,800 nautical miles (14,500 km)

• WingSpan: 193 feet (59 meters)

• Length: 182 feet (56 meters) Cruise

• Speed: Mach 0.85 Cargo

• Capacity After Passenger Bags: 5 pallets + 5 LD3s

• Maximum Takeoff Weight: 452,500 lbs

• Program Milestones:  Authority to offer: Late 2003/Early 2004  Assembly start: 2006  First flight: 2007  Certification/Entry into service: 2008

•http://www.boeing.com/commercial/7e7/k62790.html MITMIT Small Turbofan Passenger Aircraft ICATICAT

Eclipse Jet Cessna Mustang

Adam 700 Honda Jet MITMIT Williams F22 Engine ICATICAT

• Derivative of Cruise Missile engine • Automotive mass production techniques • 700 lb thrust • 14.5 inches diameter • Low cost • Originally planned for Eclipse Jet • Reliability issues

• Other comparable engines  PW Canada PW 615F (1350 lb thrust) - Mustang  Honda-GE HF 118 (1650 lb thrust) - Honda Jet MITMIT Electronic Processing ICATICAT

• Airline Tickets #1 Web Product by Value  Browser 1st page effect on marketing • Increase in e-Tickets  Interlining of e-Tickets • Kiosk check-in

• CAPPS II

Source: 2000 US Statistical Abstract MITMIT Distribution ICATICAT

US Internet Sales by Catagory

9

8

7 Airline 6 Hotel

(Billion) 5 Car Rental PC's 4 Books Sales Software 3 Apparel USD 2

1

0 1998 1999 2000 Year

• - Reduction in commissions to travel agents • - Shift to e-tickets (additional charges for paper tickets) • - Increased restrictions on low fares (USAir charges)

Source: 2000 US Statistical Abstract MITMIT Safety Trend ICATICAT

Source: Boeing 2001 Statistical Abstract