Cincinnati/Northern Kentucky International Airport 2035 Master Plan Update
Table of Contents
3.1. Summary ...... 1 1 3.1.1. Forecasting Methodology ...... 1 3.1.1.1. Passenger Scenarios ...... 1 3.1.1.2. Cargo Scenarios ...... 2 3.1.1.3. General Aviation and Military Activity ...... 3 3.1.2. Comparison to FAA TAF ...... 3
3.2. Background – CVG and Cincinnati Region ...... 5 5 3.2.1. Catchment Area ...... 5 3.2.1.1. Cincinnati - Economic Statistics ...... 10 3.2.1.2. Historical Enplaned Passenger Trends ...... 11 3.2.1.3. Passenger Operations and Hub Trends ...... 12 3.2.1.4. Fleet Mix ...... 14 3.2.1.5. International Operations and Passengers ...... 14 3.2.1.6. Scheduled Service ...... 15 3.2.1.7. Top Markets ...... 17 3.2.1.8. Relationship Between Fares and O&D Traffic ...... 19 3.2.1.9. O&D Traffic Ratio – CVG vs. Peer Airports ...... 20 3.2.1.10. Domestic Itinerary Fares ...... 21 3.2.1.11. Background (CVG) - Summary ...... 22 3.2.2. Industry Outlook and Trends ...... 22 3.2.2.1. U.S. Capacity and Demand Trends ...... 22 3.2.2.2. Service Trends at Top U.S. Airports ...... 24 3.2.2.3. U.S. Fleet Mix Trends ...... 25 3.2.2.4. FAA U.S. Short-Term Outlook ...... 27 3.2.2.5. Industry Outlook – Summary ...... 28
3.3. Passenger Forecast – Discussion ...... 29 29 3.3.1. Low Reliability of Traditional Trendline Methodology ...... 29 3.3.2. Alternate Forecasting Methods ...... 30 3.3.2.1. Benchmarking Activity to Peer Airports (O&D traffic levels) ...... 31 3.3.2.2. Impact of LCC Entry at Large Airports ...... 32 3.3.2.3. Discussion – Summary ...... 37 3.3.3. Passenger Forecast – Approach and Results ...... 38 3.3.3.1. Dominant Carrier + LCC Scenario ...... 38 3.3.3.2. Multi-Carrier Scenario ...... 43 3.3.3.3. Forecast Development ...... 43 3.3.3.4. Scenario Comparison ...... 47 3.3.4. Baseline Scenario ...... 48 3.3.4.1. Forecast Development ...... 48 3.3.4.2. Comparison to Terminal Area Forecast...... 50 3.3.5. Peak Period Activity ...... 51 3.3.6. Military / General Aviation ...... 60 3.3.7. Air Cargo ...... 60 3.3.7.1. CVG Air Cargo Overview ...... 60
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3.3.7.2. Issues/Risk Factors/Demand Drivers ...... 63 3.3.7.3. Methodology ...... 63
3.4. Summary of Key Forecast Elements ...... 74
3.5. Other Supporting Information ...... 75 3.5.1. FAA 2011 Terminal Area Forecast for CVG ...... 75 3.5.2. Cargo Industry Overview ...... 76 3.5.2.1. Independent Cargo Industry Forecasts ...... 78 3.5.2.2. Air Cargo Segments and Demand Drivers ...... 79
3.6. Sources ...... 81 List of Figures
Figure 3 - 1: CVG Catchment Area Regional Population, 2010 ...... 7 Figure 3 - 2: Non-Stop Destinations Served by Airport in Region, Dec. 2011 ...... 8 Figure 3 - 3: CVG Airport Catchment Area ...... 9 Figure 3 - 4: 2010 MSA Population Comparisons with Combined Cincinnati/Dayton ...... 9 Figure 3 - 5: Gross Regional Product, Cincinnati-Middletown MSA: 2001-10 ...... 10 Figure 3 - 6: Fortune 500 Companies by U.S. City – 2011 ...... 10 Figure 3 - 7: CVG 2010 Local Passenger Mix Profile by Month, 2010 ...... 12 Figure 3 - 8: CVG Annual Seats and Departures 2004 - 2010 ...... 12 Figure 3 - 9: CVG Average Departures and Markets Served ...... 13 Figure 3 - 10: 2010 CVG Fleet Mix ...... 14 Figure 3 - 11: CVG International Passengers and Departures, 2004-10 ...... 15 Figure 3 - 12: CVG Local Fares and O&D Passengers – with National Average Fare ...... 20 Figure 3 - 13: Total U.S. Domestic Departures: 2000-10 ...... 23 Figure 3 - 14: Monthly U.S. Schedule Domestic Departures: 2006-10 ...... 23 Figure 3 - 15: U.S. Domestic RPMSs, 1998-2010 ...... 24 Figure 3 - 16: 2010 vs. 2005 Departure Levels: Top 35 U.S. Airports ...... 25 Figure 3 - 17: Boeing North American Fleet Outlook, 2011 ...... 26 Figure 3 - 18: U.S. Carriers System Load Factors: 2000-10 ...... 27 Figure 3 - 19: 2010 FAA Enplanements Forecast, 2010 - 2031 ...... 28 Figure 3 - 20: Regression Analysis of CVG Originating Enplanements – 1991-2011 ...... 30 Figure 3 - 21: CVG Peer Group Airport Local O&D Trends, 1990-2035 ...... 32 Figure 3 - 22: CVG Fares vs. Peer Airport, 2002 - 2011 ...... 33
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Figure 3 - 23: CVG Fares vs. Expanded Peer Airport Group, 2002 - 2011 ...... 33 Figure 3 - 24: Elasticity Calculations: CVG Fares vs. O&D Passengers, 2002 - 2011 ...... 34 Figure 3 - 25: Elasticity Impact of LCC Entry at PHL ...... 35 Figure 3 - 26: Elasticity Impact of LCC Entry at PIT ...... 36 Figure 3 - 27: Multiple Airport LCC Entry/Elasticity Profile ...... 37 Figure 3 - 28: Dominant Carrier + LCC Scenario Enplanements ...... 39 Figure 3 - 29: DL non-stop destinations from CVG – 4Q 2011 ...... 40 Figure 3 - 30: OAG Non-Stop Destinations from CVG – 4q 2011 ...... 41 Figure 3 - 31: Dominant Carrier + LCC Scenario Carrier Mix of Departures ...... 43 Figure 3 - 32: Multi-Carrier Scenario Enplanements ...... 46 Figure 3 - 33: Multi-Carrier Scenario Carrier Mix (Departures) ...... 46 Figure 3 - 34: Enplanements: Dominant Carrier + LCC Scenario vs. Multi-Carrier Scenario .....47 Figure 3 - 35: Commercial Passenger Departures: Dominant Carrier + LCC Scenario vs. Multi- Carrier Scenario ...... 48 Figure 3 - 36: Baseline Scenario Enplanements and O&D Traffic: 2011-35 ...... 49 Figure 3 - 37: Enplanements – All Scenarios ...... 49 Figure 3 - 38: CVG Enplanements by Month, 2006 - 2010 ...... 52 Figure 3 - 39: CVG Departure Seats by Month, 2006 - 2010 ...... 53 Figure 3 - 40: CVG Originating Passengers by Month, 2007 - 2010 ...... 53 Figure 3 - 41: CVG Monthly Enplanements, 2010 ...... 54 Figure 3 - 42: CVG Originating Passengers by Hour, June 2010 ...... 54 Figure 3 - 43: CVG Seat Capacity by Day of Week, July 2011 ...... 55 Figure 3 - 44: CVG Departures by Day of Week, July 2011 ...... 55 Figure 3 - 45: CVG Aircraft Operations by Hour, July 2011 ...... 56 Figure 3 - 46: Average Day/Peak Month Operations, 2015 (Multi-Carrier) ...... 56 Figure 3 - 47: Average Day/Peak Month Operations, 2035 (Multi-Carrier) ...... 57 Figure 3 - 48: Commercial Operations Fleet Mix: 2010 ...... 58 Figure 3 - 49: Commercial Operations Fleet Mix: 2015 (Multi-Carrier) ...... 58 Figure 3 - 50: Commercial Operations Fleet Mix: 2020 (Multi-Carrier) ...... 59 Figure 3 - 51: Commercial Operations Fleet Mix: 2025 (Multi-Carrier) ...... 59 Figure 3 - 52: Commercial Operations Fleet Mix: 2035 (Multi-Carrier) ...... 60 Figure 3 - 53: CVG Cargo Landed Weight Summary, 2003 - 2010 ...... 61 Figure 3 - 54: Cargo Forecast by Arrivals – DHL Grows Scenario ...... 66
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Figure 3 - 55: Cargo Forecast by Arrivals – DHL Withdraws Scenario ...... 66 Figure 3 - 56: Cargo Forecast by Landed Weight – DHL Grows Scenario ...... 67 Figure 3 - 57: Cargo Forecast by Landed Weight – DHL Withdraws Scenario ...... 68 Figure 3 - 58: Cargo Arrivals by Month, 2011 ...... 69 Figure 3 - 59: Hourly Cargo Arrivals and Departures: June 2011 ...... 69 Figure 3 - 60: Monthly CVG Forecast Cargo Arrivals: 2012 ...... 70 Figure 3 - 61: Hourly Daily Cargo Arrivals and Departures: June 2012 ...... 70 Figure 3 - 62: Monthly CVG Forecast Cargo Arrivals: 2015 ...... 71 Figure 3 - 63: Hourly Daily Cargo Arrivals and Departures: June 2015 ...... 71 Figure 3 - 64: Monthly CVG Forecast Cargo Arrivals: 2020 ...... 72 Figure 3 - 65: Hourly Daily Cargo Arrivals and Departures: June 2020 ...... 72 Figure 3 - 66: Peak Hour Aircraft Percentages ...... 73 Figure 3 - 67: Current Cargo Hub Facilities ...... 77
Figure 3 - 68: Air Cargo Traffic Timeline ...... 78
List of Tables
Table 3 - 1: Comparison of Master Plan Baseline Forecast with 2011 FAA TAF ...... 4 Table 3 - 2: Top 30 U.S. Metropolitan Statistical Areas, 2010 Census ...... 6 Table 3 - 3: 20 Years CVG Enplanements and O&D Passengers (000), 1991-2010 ...... 11 Table 3 - 4: CVG 1991-2010 Total Departures ...... 13 Table 3 - 5: CVG Non-Stop Markets and Frequencies, 2011 ...... 16 Table 3 - 6: CVG Non-Stop Service by Operating Carrier, July 2011 ...... 17 Table 3 - 7: Top O&D Airports from CVG – 2010 ...... 18 Table 3 - 8: Onboard Domestic Segment Rankings ...... 19 Table 3 - 9: O&D Traffic Ratio by Comparable CVG Markets ...... 21 Table 3 - 10: CVG Domestic Fares vs. Peer and National Airports ...... 21 Table 3 - 11: Projected North American Fleet by Aircraft Size, 2030 vs. 2010 ...... 26 Table 3 - 12: Departure Information by Carrier Type (Dominant + LCC) ...... 41 Table 3 - 13: Dominant Carrier + LCC Scenario Enplanements ...... 42 Table 3 - 14: Dominant Carrier + LCC Scenario Departures ...... 42 Table 3 - 15: Departure Information by Carrier Type (Multi-Carrier) ...... 44
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Table 3 - 16: Multi-Carrier Scenario Enplanements ...... 45 Table 3 - 17: Multi-Carrier Scenario Departures ...... 45 Table 3 - 18: Baseline Scenario Enplanements and Departures ...... 49 Table 3 - 19: 2011 FAA CVG TAF (top) vs. Baseline Forecast (bottom) ...... 50 Table 3 - 20: Average Daily Departures from CVG, 2006-10 ...... 51 Table 3 - 21: Average Daily Seats from CVG, 2006-10 ...... 52 Table 3 - 22: Multi-Year Summary: Average Day/Peak Month Operations (Multi-Carrier) ...... 57 Table 3 - 23: Cargo Forecast Summary ...... 65 Table 3 - 24: Forecast Components ...... 74 Table 3 - 25: Key Forecast Metrics by Planning Activity Level ...... 75 Table 3 - 26: FAA 2011 Terminal Area Forecast for CVG ...... 76 Table 3 - 27: Independent Air Cargo Growth Forecasts –Revenue Ton Kilometers ...... 79 Table 3 - 28: Top 15 Consumer Product Segments ...... 79 Table 3 - 29: Air Cargo Market Segmentation ...... 80
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Chapter 3 – Forecast of Aviation Activity
3.1. SUMMARY The Master Plan Update Team prepared this aviation activity forecast for the Cincinnati /Northern Kentucky International Airport (CVG) 2035 Master Plan Update (MPU). This MPU forecasts operations and passenger activity for the period 2011-2035 - and includes projections of passenger enplanements, passenger operations, cargo operations, and cargo landed weights. Forecasts for general aviation (GA) operations, based aircraft, and military operations are based on the FAA’s 2011Terminal Area Forecast (TAF) for CVG. Calendar year (CY) 2010 is used as the base year for all of our forecasts.
Operations volume at CVG is currently primarily driven by Delta Airlines (DL) and DHL. Differing strategies for the carriers affect the operational changes and projections contained in this MPU.
The merger of Delta Airlines and Northwest Airlines accelerated the transformation of the service profile at CVG - from a major commercial hub (Delta) to one that will average approximately 72% of the 170 flights at CVG per day by the end of 2011 (compared to 600 at the 2004 peak). The reduction in DL’s operations has significantly affected CVG’s traffic volume, reducing enplanements from a 2005 peak of 11.4 million to 3.9 million in 2010.
The CVG catchment area is surrounded by five other commercial service airports within a two-hour drive. All of these airports provide low cost carrier service. There is leakage from the catchment area into those other markets, but CVG also serves passengers from those markets who seek route offerings not available at their airports.
DHL signed a land lease in 2009, designating CVG as its North American hub to capitalize on emerging trends in international trade. DHL cargo volume reached a new high through July 2011, with tonnage increasing 500% over 2010 levels. FedEx provides cargo service for the local and domestic air cargo market.
3.1.1. Forecasting Methodology To accommodate these contrasting strategies and project their long-term impact, multiple forecast scenarios were constructed for passenger and cargo operations. All scenarios are unconstrained – and assume that no physical, regulatory, environmental, or other impediments to aviation activity growth exist. Each scenario also includes sensitivity analyses to account for upside/downside outcomes.
3.1.1.1. Passenger Scenarios Due to the volatility of passenger activity at CVG, traditional regression analyses produce very little confidence in trend modeling. Therefore, the passenger forecast was based on econometric modeling. The modeling assumptions for our scenarios are as follows.
A. Baseline: Long-term, O&D traffic levels achieve equilibrium with peer markets – gradually phasing in from base levels calibrated to 2010. Connecting traffic percentages and other drivers are also assumed to achieve industry/peer equilibrium levels – and drive total enplanement figures and other statistics. Total enplanements under the Baseline forecast in 2035 are anticipated to reach 5.77 million by 2035, with 85% of those being originating.
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B. Dominant + LCC (case study simulation): DL’s small hub and current service pattern remain relatively constant, with minor changes by current non-LCC carriers. In addition - a Low Cost Carrier (LCC) is assumed to enter the market in the near-term, albeit with a moderate service pattern. Activity is expected to reach equilibrium with peer markets over the course of the forecast period. Enplanements are projected to total 6.33 million in 2035, with 78% of those being originating. C. Multi-carrier (case study simulation): DL further reduces service to focus city levels, resulting in a near-term service vacuum. This results in a) more significant service increases by other non-LCC carriers, and b) a rapidly developing LCC focus city. Activity is expected to reach equilibrium with peer markets over the course of the forecast period. Enplanements are projected to total 6.56 million in 2035, with 85% of those being originating.
The two simulation scenarios assume that CVG will acquire some level of LCC presence within the first five years of the forecast period, leading to a more diverse portfolio of service providers. This would be consistent with industry trends, given that Greater Cincinnati is currently the largest U.S. metropolitan area without LCC service – a situation that the forecasters see as unsustainable. This unusual competitive situation has driven distortions in passenger trends, demand generation, and pricing. Average O&D fares have ranged from 40% to 88% higher than those at regional competitor airports over the past five years. We project that these distortions will dissipate throughout the forecast period, leading to capacity adjustments through the region. In summary – the introduction of LCC service is expected to drive pricing and demand levels into equilibrium with CVG’s peer facilities, resulting in traffic levels more in line with the macroeconomic profile of Greater Cincinnati.
3.1.1.2. Cargo Scenarios DHL activity dominates the cargo market at CVG, and therefore the forecast was based on discussions with DHL focusing on their potential future growth or constraints that could restrict their operations at CVG. The modeling assumptions for the two cargo scenarios are as follows.
A. DHL grows: DHL grows its hub based on current corporate strategy and investment plans at CVG - which are set through 2015 with other lease options through 2025. Other cargo would continue a modest growth. This results in a total of 33,390 cargo operations in 2035. B. DHL withdraws: DHL halts its growth strategy within five years. Other cargo would continue a modest growth. This results in a total of 10,000 cargo operations in 2035.
The DHL grows strategy is based on DHL’s commitment to current leases and land options to develop aircraft pads for future growth - and assumes current DHL corporate strategy and investment plans, which are set through 2015 (per CVG records and interviews with DHL management). These interviews also confirmed that DHL’s corporate strategy may include ventures with other businesses, which could facilitate a more aggressive growth scenario.
To balance this growth scenario, the Master Plan Update Team developed a scenario that has DHL retracting from its current growth profile after five years and reverting to pre-2010 volume levels. Should this occur, other cargo carriers are assumed to absorb local demand by the end of 2015.
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3.1.1.3. General Aviation and Military Activity Forecasts for military and general aviation activity were not part of the scope of this forecast update, as they represent a very small portion of the total activity profile. These categories of activity are presumed to follow the FAA’s Terminal Area Forecast for CVG through 2035.
3.1.2. Comparison to FAA TAF The Baseline enplanement forecast is within the FAA-allowed 10% tolerance throughout the reporting period. Baseline operations forecasts are within the 10% tolerance through 2026, with variances ranging slightly out of tolerance starting in 2027 - driven primarily by widening gaps in aircraft gauge. The CVG forecasts are consistent with industry trends in assuming regional jet upgauging and a moderate mainline LCC presence.
Table 3 - 1 below compares the Baseline forecast with the 2011 FAA TAF.
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Table 3 - 1: Comparison of Master Plan Baseline Forecast with 2011 FAA TAF
BASELINE FORECAST AIRPORT NAME: Cincinnati/Northern Kentucky International (CVG)
CAGR from 2010 A. Forecast Levels & Growth Rates 2010 2015 2020 2025 2030 2015 2020 2025 2030 Passenger Enplanements Air Carrier 1,518,402 2,185,000 3,027,792 3,879,911 4,743,734 7.6% 7.1% 6.5% 5.9% Commuter 2,577,446 1,366,218 1,162,598 888,778 550,680 -11.9% -7.7% -6.9% -7.4% TOTAL 4,095,848 3,551,218 4,190,390 4,768,689 5,294,414 -2.8% 0.2% 1.0% 1.3%
Operations Itinerant Air carrier 67,112 78,384 103,685 129,818 154,653 3.2% 4.4% 4.5% 4.3% Commuter/air taxi 116,176 69,848 59,226 44,543 27,268 -9.7% -6.5% -6.2% -7.0% Total Commercial Operations 183,288 148,232 162,911 174,362 181,921 -4.2% -1.2% -0.3% 0.0% General aviation 4,618 4,851 4,851 4,851 4,851 1.0% 0.5% 0.3% 0.2% Military 158 139 139 139 139 -2.5% -1.3% -0.9% -0.6% TOTAL OPERATIONS 188,064 153,222 167,901 179,352 186,911 -4.0% -1.1% -0.3% 0.0%
Tracon Operations 286,945 249,478 271,131 289,972 305,723 -2.8% -0.6% 0.1% 0.3% Peak Hour Operations - arrivals* 28 33 36 38 40 3.3% 2.6% 2.1% 1.8% Peak Hour Operations - departures* 35 34 38 40 41 -0.4% 0.7% 0.9% 0.9% Cargo landed weight - (tons) 1,216,112 1,727,852 2,407,452 3,285,120 4,177,029 7.3% 7.1% 6.8% 6.4%
Based Aircraft 13 13 14 16 18 0.0% 0.7% 1.4% 1.6%
B. Operational Factors 2010 2015 2020 2025 2030 Average aircraft size (seats) 64 72 77 82 87 Average enplaning load factor 78% 79% 80% 80% 80% GA operations per based aircraft 355 373 347 303 270
* represents hourly operations during the peak hour/peak month of each year
Source: La Costa Consulting, February 2012
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Airport AF/TAF Year Forecast TAF % h/(l) Passenger Enplanements Base yr. 2010 4,095,848 4,095,848 0.0% Base yr. + 5yrs. 2015 3,551,218 3,588,286 -1.0% Base yr. + 10yrs. 2020 4,190,390 4,088,876 2.5% Base yr. + 15yrs. 2025 4,768,689 4,521,905 5.5%
Commercial Operations Base yr. 2010 183,288 183,288 0.0% Base yr. + 5yrs. 2015 148,232 161,974 -8.5% Base yr. + 10yrs. 2020 162,911 179,329 -9.2% Base yr. + 15yrs. 2025 174,362 192,664 -9.5%
Total Operations Base yr. 2010 188,064 188,064 0.0% Base yr. + 5yrs. 2015 153,222 166,964 -8.2% Base yr. + 10yrs. 2020 167,901 184,319 -8.9% Base yr. + 15yrs. 2025 179,352 197,654 -9.3%
NOTE: Actual data represents FY for 2010-11, CY for 2012-35 Source: La Costa Consulting, February 2012
3.2. BACKGROUND – CVG AND CINCINNATI REGION This section provides background on various elements of the current environment at CVG and the Cincinnati market in total, including regional demographics and economics, existing service, traffic levels, and local pricing. The trends and conclusions discussed in this section form the basis for much of the analysis and forecast methodology discussed later in the document.
3.2.1. Catchment Area The U.S. Office of Management and Budget (OMB) define Metropolitan and Micropolitan Statistical Areas (MSA) according to published standards that are applied to U.S. Census Bureau data. The general concept of an MSA is that of a core area containing a substantial population nucleus - together with adjacent communities having a high degree of economic and social integration with that core. Population, personal income, and overall business activity generate local aviation demand - and are therefore typically primary drivers of an aviation activity forecast.
The Cincinnati-Middleton MSA represents the core local market for CVG’s origin and destination passenger traffic. With an estimated 2010 MSA population of more than 2.1 million, greater Cincinnati is the 27th most populous metropolitan area in the United States. The Cincinnati- Middleton MSA has experienced a ten-year growth rate (2001-10) of 6%, placing it slightly below the median of similarly sized regions.
Table 3 - 2 lists the Top 30 U.S. Metropolitan Statistical Areas from the 2010 Census.
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Table 3 - 2: Top 30 U.S. Metropolitan Statistical Areas, 2010 Census
Change 1990-2000 2000-2010 2010 Metropolitan Statistical Area 2010 Census Number % Number % rank New York-Northern New Jersey-Long Island, NY-NJ-PA 18,897,109 1,476,956 8.8 574,107 3.1 1 Los Angeles-Long Beach-Santa Ana, CA 12,828,837 1,091,907 9.7 463,210 3.7 2 Chicago-Joliet-Naperville, IL-IN-WI 9,461,105 916,240 11.2 362,789 4.0 3 Dallas-Fort Worth-Arlington, TX 6,371,773 1,172,250 29.4 1,210,229 23.4 4 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 5,965,343 251,597 4.6 278,196 4.9 5 Houston-Sugar Land-Baytown, TX 5,946,800 948,174 25.2 1,231,393 26.1 6 Washington-Arlington-Alexandria, DC-VA-MD-WV 5,582,170 673,924 16.3 785,987 16.4 7 Miami-Fort Lauderdale-Pompano Beach, FL 5,564,635 951,336 23.5 557,071 11.1 8 Atlanta-Sandy Springs-Marietta, GA 5,268,860 1,179,006 38.4 1,020,879 24.0 9 Boston-Cambridge-Quincy, MA-NH 4,552,402 257,449 6.2 161,058 3.7 10 San Francisco-Oakland-Fremont, CA 4,335,391 439,628 11.9 211,651 5.1 11 Detroit-Warren-Livonia, MI 4,296,250 203,858 4.8 -156,307 -3.5 12 Riverside-San Bernardino-Ontario, CA 4,224,851 666,028 25.7 970,030 29.8 13 Phoenix-Mesa-Glendale, AZ 4,192,887 1,013,378 45.3 941,011 28.9 14 Seattle-Tacoma-Bellevue, WA 3,439,809 484,742 18.9 395,931 13.0 15 Minneapolis-St. Paul-Bloomington, MN-WI 3,279,833 430,030 16.9 311,027 10.5 16 San Diego-Carlsbad-San Marcos, CA 3,095,313 315,817 12.6 281,480 10.0 17 St. Louis, MO/IL 2,812,896 117,967 4.6 114,209 4.2 18 Tampa-St. Petersburg-Clearwater, FL 2,783,243 328,038 15.9 387,246 16.2 19 Baltimore-Towson, MD 2,710,489 170,822 7.2 157,495 6.2 20 Denver-Aurora-Broomfield, CO 2,543,482 512,357 30.7 364,242 16.7 21 Pittsburgh, PA 2,356,285 -37,202 -1.5 -74,802 -3.1 22 Portland-Vancouver-Hillsboro, OR-WA 2,226,009 404,140 26.5 298,128 15.5 23 Sacramento--Arden-Arcade--Roseville, CA 2,149,127 315,637 21.3 352,270 19.6 24 San Antonio-New Braunfels, TX 2,142,508 303,958 21.6 430,805 25.2 25 Orlando-Kissimmee-Sanford, FL 2,134,411 419,717 34.3 489,850 29.8 26 Cincinnati-Middletown, OH-KY-IN 2,130,151 164,717 8.9 120,519 6.0 27 Cleveland-Elyria-Mentor, OH 2,077,240 45,895 2.2 -70,903 -3.3 28 Kansas City, MO-KS 2,035,334 199,511 12.2 199,296 10.9 29 Las Vegas-Paradise, NV 1,951,269 634,397 85.6 575,504 41.8 30 Source: U.S. Census 3-6 Forecast of Aviation Activity June 2013
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For sensitivity analysis and unconstrained demand criteria, the Master Plan also considers the market potential of a broader catchment area. A catchment area is a critical measurement for assessing the potential market size of an airport’s region and total source of demand. It is well- documented that passengers will travel one or more hours to reach an airport that provides their desired services or fare level. Often, the catchment area population doesn’t conform to the OMB definition of the area as MSA is budgeting metric for Congress. The airline industry defines catchment areas as potential market and revenue pool.
For metro Cincinnati - nearby counties represent additional regional contributors to the CVG catchment area, as shown in Figure 3 - 1. Butler and Clinton Counties add 407,063 to the population count with a ten-year average growth rate of 0.6% (2001-10). Greene/Miami/Montgomery/Preble counties add 835,063 to the population count – although this region declined at an average rate of 0.2% over the same time frame. Clark and Greenville counties provide another 231,198 to the population count, with an average decline rate of 0.3%.
Figure 3 - 1: CVG Catchment Area Regional Population, 2010
0.408mm 0.231mm
2.130mm 0.842mm
Cincinnati OH-IN-KY metro Dayton, OH MSA Wilmington, OH metro Springfield-Greenville, OH metro
Source: U.S. Census
CVG’s ability to attract traffic from a broad catchment area is enhanced by its diverse service offerings (as measured by non-stop destinations), as shown in
Figure 3 - 2, CVG offers more non-stop destinations than any of the other five airports in its catchment area, as can be illustrated by examining comparative service to top markets like Chicago/ORD. Despite the fact that both airports are served by legacy carriers charging comparable fares, CVG averages 221 passengers per day each way (PDEW) while DAY averages 33. To New York’s/LGA, CVG also commands the preference (233 to 96 PDEW) despite a higher average fare than from DAY.
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Figure 3 - 2: Non-Stop Destinations Served by Airport in Region, Dec. 2011
60 14,000 53 50 12,000
10,000 40 34 33 8,000 29 30 6,000 Daily seats
Markets Served Markets 20 16 15 4,000
10 2,000
0 - Cincinnati Indianapolis Columbus Louisville Dayton Lexington
Source: OAG, December 2011
There is a significant diversity in service levels between the regional facilities. While LEX is included in the regional survey of markets it only offers nonstop service to 15 destinations, a number of them consist of non-daily frequency - resulting in only a 4% share of total regional seats and having a nominal competitive impact with CVG. That lower level of service is contrasted by Cincinnati and Indianapolis, which offer both frequent service and enhanced seat levels to similar markets.
An alternative method of estimating the size/scope of the CVG domestic catchment area is to combine the Cincinnati and Dayton MSAs (for purposes of comparison to other metropolitan areas). As Dayton is a short drive from CVG, airlines will sometimes utilize this approach to analyze nonstop service from CVG - given that a majority of O&D passengers will not be served nonstop from DAY. Figure 3 - 3 depicts the airport catchment area while Figure 3 - 4 presents a population comparison of the combined Cincinnati/Dayton MSA.
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Figure 3 - 3: CVG Airport Catchment Area
Source: La Costa Consulting, August 2011
Figure 3 - 4: 2010 MSA Population Comparisons with Combined Cincinnati/Dayton
20,000,000 30.0% 18,000,000 25.0% 16,000,000 14,000,000 20.0% 12,000,000 15.0% 10,000,000 8,000,000 10.0% 6,000,000 5.0% MSA pop 4,000,000 0.0% 2,000,000 10 yr growth 0 -5.0% 2 Metro LA Metro 2 1 Metro NYC Metro 1 4 Dallas/FW 4 22 Pittsburgh 22 23 Portland 23 32 Columbus 32 3 Chicago 3 Diego San 17 24 Sacramento 24 15 Seattle 15 5 Philadelphia 5 19 Tampa 25 San Antonio San 25 Cincinnati + Dayton Cincinnati 18 St Louis18 St 21 Denver 21 34 Indianapolis 34 20 Baltimore 20 16 Minneapolis 16 42 Louisville 42 - St. Pete St. - OC
Source: U.S. Census, La Costa Consulting, August 2011
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In summary - it is important to remember that while MSA populations are utilized as the initial basis for comparisons between markets, a full catchment area analysis is critical to understanding any market’s true O&D traffic potential. This is particularly relevant for a market like CVG, given the limited service patterns at DAY, current fare distortion and significantly populated regions just outside of the formal Cincinnati MSA.
3.2.1.1. Cincinnati - Economic Statistics Economic health of a region is another indicator of a market’s potential to produce aviation demand. According to statistics from the Bureau of Economic Analysis, the Gross Regional Product (in current dollars) of the Cincinnati-Middletown MSA increased from 2001-2010 by nearly 30% (while the US grew by 41%) - resulting in a Compound Annual Growth Rate (CAGR) of 2.9%.
Figure 3 - 5: Gross Regional Product, Cincinnati-Middletown MSA: 2001-10
Source: http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=2, La Costa Consulting, Dec. 2011
In addition, Cincinnati continues ranks 10th among U.S. cities as the home to Fortune 500 headquarters with six located in the city. Three more are located in Kentucky for a total of nine in the MSA. There are 12 other cities tied with 5 Fortune 500 companies (Biz Journal).
Figure 3 - 6: Fortune 500 Companies by U.S. City – 2011
Source: Fortune Magazine, La Costa Consulting, December 2011
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3.2.1.2. Historical Enplaned Passenger Trends Enplaned passenger numbers (or “enplanements”) represent the total passengers who board (“enplane”) an aircraft at a particular airport. Enplanements reflect the sum of originating or destination (O&D) passengers (who begin or end their trip at the airport) and connecting passengers (who arrive/depart at the airport but change planes to travel to a final destination).
As shown in Table 3 - 3, total enplanements at CVG grew from approximately 4.7 million in 1991 to peak in 2005 at approximately 11.4 million. From 2005 to 2010, enplanements declined sharply to 3.9 million. This 70% drop is reflective of DL’s reduction in connecting opportunities, which will be discussed later in the document. International enplanements have historically accounted for less than 5% of the CVG total, and have dropped to 3.3% in 2010. CVG O&D traffic has remained relatively unchanged, with the exception of spikes during periods of tangibly lower fares in 2005 and 2009. O&D traffic peaked in 2005 at 3.1 million - roughly 40% higher than 2010’s total of 2.2 million. Delta’s share of origin traffic has dropped from a high in 2005 of 85% to 73% at the end of 2010. Total connecting traffic at the airport is also at its lowest point since 1991 after peaking at 79% in 2003.
Table 3 - 3: 20 Years CVG Enplanements and O&D Passengers (000), 1991-2010
Year Total O&D Connection Enplanements % Connection 1991 2,007 2,696 4,702 57% 1992 1,952 3,340 5,292 63% 1993 1,971 3,500 5,471 64% 1994 2,012 3,755 5,767 65% 1995 1,936 4,291 6,227 69% 1996 2,150 5,478 7,628 72% 1997 2,328 5,621 7,949 71% 1998 2,377 5,743 8,120 71% 1999 2,474 5,576 8,049 69% 2000 2,810 7,456 10,267 73% 2001 2,450 6,135 8,585 71% 2002 2,363 7,950 10,313 77% 2003 2,271 8,311 10,582 79% 2004 2,524 8,526 11,050 77% 2005 3,066 8,304 11,370 73% 2006 2,456 5,637 8,092 70% 2007 2,121 5,693 7,814 73% 2008 1,901 4,678 6,579 71% 2009 2,120 3,140 5,259 60% 2010 2,200 1,752 3,951 44% Source: DOT DB1A and T-100, La Costa Consulting, December 2011
The airport performed recent leakage studies and updates that have indicated that up to 33% of the current demand in the Cincinnati MSA is “leaked” to other airports in the region, attributable primarily to persistently high fares at CVG. As illustrated above in Table 3 - 3, originating enplanements increased significantly in 2005 when DL temporarily lowered fares – and again
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increased slightly during DL’s 2009 fare initiatives. These examples suggest that with more competitive pricing, local passengers will utilize CVG rather than drive to another airport in the region. A more extensive review of fares and demand generation is covered later in this report. Figure 3 - 7shows general declines throughout 2010 in the percentage of local CVG traffic, as well as DL’s share of CVG originating traffic. Figure 3 - 7: CVG 2010 Local Passenger Mix Profile by Month, 2010
Source: DOT DB1A and T-100, La Cost Consulting, August 2011
3.2.1.3. Passenger Operations and Hub Trends The results of Delta’s near-continuous reductions at CVG since the mid-2000s can be seen in the declines in seat capacity (69%) and operations (66%) from 2004-2010 in total seats and departures. Figure 3 - 8 shows the CVG Annual Seats and Departure.
Figure 3 - 8: CVG Annual Seats and Departures 2004 - 2010
18,000,000 250,000 16,000,000 14,000,000 200,000 12,000,000 150,000 10,000,000 Seats Deps. 8,000,000 100,000 6,000,000 4,000,000 50,000 2,000,000 0 0 2004 2005 2006 2007 2008 2009 2010 Seats 15,862,86 15,513,98 10,187,62 9,845,809 8,413,298 6,556,243 4,925,991 Departures 228,565 221,417 155,343 149,603 125,028 100,719 77,558
Seats Departures
Source: T-100 reported departures and seats (all carriers), La Costa Consulting, August 2011
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As shown in Table 3 - 4, peak activity occurred in 2005 with 229,258 passenger aircraft departures. In 2010, activity was approximately equal to 1995 traffic levels. Passenger aircraft operations have been in decline since 2005 as Delta has deemphasized the Cincinnati hub. Table 3 - 4: CVG 1991-2010 Total Departures
Passenger Aircraft Departures 1991 69,920
1992 73,122
1993 73,157
1994 73,285
1995 81,494
1996 92,361
1997 92,523
1998 91,737
1999 91,186
2000 156,798
2001 146,771
2002 202,472
2003 227,146
2004 236,989
2005 229,258
2006 160,746
2007 154,026
2008 129,331
2009 104,624
2010 81,186
Source: DOT T-100, La Costa Consulting, August 2011
The trend line in Figure 3 - 9depicts the daily departures each way (DDEW) and markets served at CVG for the 27 months ending December 2011. Both numbers continue to trend downward, resulting in less overall capacity and fewer nonstop and continuing destinations for this growing, economically stable region. Long term continuation of this trend could result in a predisposition of local travelers to drive to competing airports for more choices of destinations and lower fares.
Figure 3 - 9: CVG Average Departures and Markets Served
Source: OAG, La Costa Consulting, August 2011
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3.2.1.4. Fleet Mix As shown in Figure 3 - 10, fleet mix at CVG is dominated by 50-seat RJ carriers, resulting in an average of just over 73 seats per departure. DL has historically used 50 seat regional jets to build large scale hub operations at CVG to connect passengers throughout its network. This strategy has been impeded by the higher unit cost or regional jets as oil has increased. The trend moving forward will be use of larger regional jets and narrow bodies (see industry trend section).
Figure 3 - 10: 2010 CVG Fleet Mix
Source: OAG Airport Fleet Activity All Carriers 2010, La Costa Consulting, August 2011
3.2.1.5. International Operations and Passengers International departures peaked in 2004 and international passengers peaked in 2005, as shown in Figure 3 - 11, International service at CVG at the end of 2011 included service to Paris/CDG and Toronto/YYZ. International traffic has been between 10-12% of the overall CVG passenger market.
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Figure 3 - 11: CVG International Passengers and Departures, 2004-10
600,000 9,000 8,000 500,000 7,000 400,000 6,000 5,000 300,000 4,000 Deartures Passengers 200,000 3,000 2,000 100,000 1,000 0 0 2004 2005 2006 2007 2008 2009 2010 Passengers 502,232 538,837 466,802 351,222 331,026 232,145 133,419 Departures 8,424 7,841 5,403 4,423 4,303 3,905 3,626
Passengers Departures
Source: DOT T-100 International, La Costa Consulting, August 2011
3.2.1.6. Scheduled Service Table 3 - 5 shows monthly departures from CVG to various markets throughout 2011. Most significant is the “0” values representing routes that have either been cancelled
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Table 3 - 5: CVG Non-Stop Markets and Frequencies, 2011
ORIGIN DESTINATION Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 CVG Atlanta(Intl) 219 196 217 210 218 208 212 202 203 213 180 185 CVG Austin(Bergstrom Intl) 2 0 0 0 0 0 0 0 0 0 0 0 CVG Baltimore(Intl) MD 111 101 125 110 110 108 108 112 106 104 101 103 CVG Boston(Intl) MA 77 74 89 81 83 82 83 85 82 73 73 64 CVG Cancun Mexico 10 8 8 9 4 8 10 6 4 5 4 0 CVG Charlotte NC 288 264 296 282 265 264 267 262 237 233 254 268 CVG Chicago(O'Hare) IL 561 507 585 603 612 620 627 638 590 576 548 520 CVG Cleveland(Intl) OH 129 119 137 126 126 127 130 132 128 126 81 63 CVG Dallas/Ft. Worth(Intl) TX 233 214 240 278 294 288 294 296 281 280 257 242 CVG Denver(Intl) CO 92 82 93 117 123 136 142 126 78 74 55 67 CVG Des Moines IA 0 0 0 0 0 0 21 11 0 0 0 0 CVG Detroit(Metro Wayne) 213 194 217 207 217 210 217 218 210 212 189 151 CVG Evansville IN 224 203 228 214 217 213 206 220 210 208 199 176 CVG Fayetteville(Regional) 54 50 58 55 57 50 45 54 52 51 47 25 CVG Ft. Lauderdale(Intl) FL 54 50 62 60 53 57 62 56 35 31 51 56 CVG Ft. Myers(Southwest Fl) 78 64 71 62 41 43 45 35 30 31 38 54 CVG Ft. Wayne IN 57 53 58 55 57 56 56 28 0 0 0 0 CVG Grand Rapids MI 87 80 89 85 88 80 82 85 84 73 75 75 CVG Greensboro/H.Pt/Win-Sal NC 31 26 27 25 26 26 25 27 25 26 25 25 CVG Greenville/Spartanburg NC 31 28 31 30 31 27 26 29 27 26 25 25 CVG Harrisburg(Intl) PA 57 54 58 55 57 56 56 58 55 52 47 39 CVG Hartford(Bradley Intl) 81 74 93 85 88 80 108 98 99 99 96 73 CVG Houston(G.Bush Intl) TX 185 158 171 142 140 160 167 170 117 93 62 91 CVG Houston(Hobby) TX 0 0 0 0 0 0 0 0 45 52 50 50 CVG Huntington WV 57 51 2 0 0 0 0 0 0 0 0 0 CVG Jacksonville(Intl) FL 62 54 62 30 31 52 61 46 30 26 26 25 CVG Kansas City(Intl) MO 87 79 89 85 88 86 87 89 85 78 75 73 CVG Knoxville TN 57 52 58 0 0 0 0 0 0 0 0 0 CVG Las Vegas(Intl) NV 50 44 53 47 52 58 62 57 48 48 52 56 CVG Los Angeles(Intl) CA 65 65 88 60 62 79 87 89 78 74 75 56 CVG Louisville KY 88 78 89 55 57 56 56 58 10 0 0 0 CVG Madison(Dane County) WI 27 26 31 30 31 30 31 31 30 26 25 25 CVG Memphis TN 95 86 93 90 93 90 93 93 87 88 87 88 CVG Miami(Intl) FL 127 112 124 94 93 90 93 93 90 93 88 104 CVG Milwaukee WI 115 102 116 110 88 86 87 89 85 78 74 75 CVG Minneapolis/St. Paul MN 180 167 186 180 217 210 217 216 207 207 202 211 CVG Montreal(P.E. Trudeau) CN 27 24 31 25 26 26 25 13 0 0 0 0 CVG Nashvill(Intl) TN 111 99 120 110 113 112 112 114 102 94 75 75 CVG New Orleans(Intl) LA 49 46 62 55 57 56 56 42 26 26 25 25 CVG New York(Kennedy) NY 93 84 93 116 124 120 124 126 120 124 106 93 CVG New York(Laguardia) NY 142 134 150 149 151 149 153 155 145 140 133 134 CVG Newark/New York(Liberty) NJ 57 52 58 55 57 15 0 0 0 0 0 0 CVG Norfolk/Va.Bch/Wmbg VA 57 52 62 55 57 56 56 58 55 52 50 51 CVG Omaha NE 27 26 31 31 31 28 56 44 27 26 25 25 CVG Orlando(Intl) FL 89 81 93 90 84 87 93 87 82 80 83 87 CVG Paris(Charles De Gaulle) 29 27 31 30 30 30 31 31 30 30 29 30 CVG Philadelphia(Intl) PA 257 230 263 242 249 242 241 253 258 256 232 214 CVG Phoenix(Intl) AZ 31 28 31 30 31 30 31 31 30 26 25 25 CVG Pittsburgh(Intl) PA 111 100 120 107 88 83 87 89 84 77 73 75 CVG Punta Cana Dominican R 5 6 8 7 0 4 5 1 0 0 0 0 CVG Raleigh/Durham NC 88 80 89 85 88 86 88 89 85 77 74 75 CVG Richmond/Wmbg VA 59 52 62 55 57 59 57 58 55 52 50 50 CVG Salt Lake City UT 62 56 62 61 62 60 62 63 60 62 56 56 CVG San Diego(Intl) CA 2 0 26 21 21 25 25 27 25 26 22 11 CVG San Francisco(Intl) CA 29 24 45 47 48 53 56 58 55 51 48 36 CVG Seattle/Tacoma(Intl) WA 26 21 27 21 21 41 48 37 25 26 25 25 CVG South Bend(Regional) IN 57 52 58 55 57 37 31 31 6 0 0 0 CVG St. Louis(Intl) MO 80 74 93 86 83 85 87 89 85 78 73 75 CVG Syracuse NY 57 50 58 51 53 36 31 31 27 26 25 25 CVG Tampa(Intl) FL 62 56 62 60 53 57 62 46 30 31 49 42 CVG Toronto(Pearson Intl) CN 120 110 126 121 128 129 125 138 134 126 115 102 CVG Washington (Reagan Nat') 111 99 124 136 139 139 139 127 107 104 104 106 CVG Washington(Dulles Intl) VA 135 124 143 123 127 147 152 156 142 134 105 110 Source: OAG as of December 25, 2011, La Costa Consulting, 2011 International destinations highlighted in red
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For more than a decade, major carriers in the US have outsourced small jet capacity to regional operators. Table 3 - 6 breaks out service levels by sub-carrier for each major carrier. The legacy description of this was “mainline,” referring to jet flights operated by the major carrier - or “regional”, meaning any flights operated by the affiliate carrier. For purposes of capacity planning, airlines consider equipment less by specific operating entity and more as a diversified way for optimizing time-of-day demand patterns or competitive responses. Therefore, airlines employ a fluid mix of carriers and equipment over time to maximize loads and profitability.
Table 3 - 6: CVG Non-Stop Service by Operating Carrier, July 2011
Departures Carriers Average Group Regional Monday Tuesday Wednesday Thursday Friday Saturday Sunday Weekday Weekly
Air Canada Jazz 2 2 2 2 2 1 1 2 2
American Airlines American Eagle 16 16 16 16 16 14 15 Chautauqua Airlines 3 3 3 3 3 2 2 Total American Group 19 19 19 19 19 16 17 19.0 18.3
US Airways Air Wisconsin 3 3 3 3 3 2 2 Mesa Airlines 3 3 3 3 3 0 1 PSA 4 4 4 4 4 5 6 Republic Airlines 1 1 1 1 1 0 1 Total US Airways Group 11 11 11 11 11 7 10 11.0 10.3
Continental Airlines ExpressJet 8 8 8 8 8 3 8 CommutAir 3 3 3 3 3 2 1 Total Continental Group 11 11 11 11 11 5 9 11.0 9.9
Delta Air Lines Delta Air Lines 33 33 34 34 34 26 34 Atlantic Southeast Airlines 5 5 5 5 6 8 7 Comair Inc. 67 69 69 69 67 35 57 Compass Airlines 2 2 2 2 2 4 1 SkyWest Airlines 6 6 6 6 6 5 5 Chautauqua Airlines 13 13 13 13 13 8 13 Mesaba Airlines 3 2 2 2 3 2 4 Pinnacle Airlines 19 18 18 18 18 11 15 Shuttle America 0 0 0 0 0 1 1 Total Delta Group 148 148 149 149 149 100 137 148.6 140.0
United Airlines United Airlines 1 1 1 1 1 1 0 Atlantic Southeast Airlines 3 3 3 3 3 1 1 ExpressJet 2 2 2 2 2 4 4 GoJet Airlines 2 2 2 2 2 1 3 Skywest 3 3 3 3 3 1 0 Trans State 3 3 3 3 3 2 2 Total United Group 14 14 14 14 14 10 10 14.0 12.9
USA 3000 Mainline 1 0 0 1 2 3 1 0.8 1.1
Total Daily Departures 206 205 206 207 208 142 185 206.4 194.1 Effective Date: July 18, 2011 - July 24, 2011 Source: OAG as of December 25, 201, La Costa Consulting
3.2.1.7. Top Markets A. By Origin and Destination Table 3 - 7 shows that the top 45 markets served from CVG in 2010 make up 80% of O&D passengers at CVG. Orlando was the largest single airport destination for the year, with 85,850 annual O&D passengers. Of multiple-airport markets, New York (LGA/JFK/EWR) was the largest market with 152,590 O&D passengers (7.7%
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share), while Washington, D.C. (DCA/IAD) generated 56,590 O&D passengers (2.9% share). The top three ranked single-airport markets have all recently been the top-ranked CVG airport destinations.
Table 3 - 7: Top O&D Airports from CVG – 2010
Per Day Cumulative Rank Destination 2010 Each Way % of Total Total % Avg. Fare 1 Orlando(Intl) FL 85850 235.2 4.34% 4.34% $140 2 New York(Laguardia) NY 85170 233.3 4.31% 8.65% $226 3 Chicago(O'Hare) IL 80710 221.1 4.08% 13% $232 4 Los Angeles(Intl) CA 76220 208.8 3.86% 17% $245 5 Boston(Intl) MA 71710 196.5 3.63% 20% $241 6 Atlanta(Intl) GA 61830 169.4 3.13% 23% $194 7 Las Vegas(Intl) NV 60240 165.0 3.05% 26% $198 8 Tampa(Intl) FL 60230 165.0 3.05% 29% $143 9 Dallas/Ft. Worth(Intl) TX 59540 163.1 3.01% 32% $230 10 Ft. Lauderdale(Intl) FL 55160 151.1 2.79% 35% $159 11 San Francisco(Intl) CA 53610 146.9 2.71% 38% $250 12 Philadelphia(Intl) PA 51290 140.5 2.60% 41% $224 13 Ft. Myers FL 50110 137.3 2.54% 43% $158 14 Newark/New York NJ 49750 136.3 2.52% 46% $259 15 Denver(Intl) CO 44120 120.9 2.23% 48% $199 16 Washington, DC 41440 113.5 2.10% 50% $247 17 Minneapolis/St. Paul(Intl) MN 40450 110.8 2.05% 52% $272 18 Houston(G.Bush Intl) TX 38360 105.1 1.94% 54% $228 19 Phoenix(Intl) AZ 37340 102.3 1.89% 56% $218 20 Miami(Intl) FL 35970 98.5 1.82% 58% $168 21 Seattle/Tacoma(Intl) WA 35590 97.5 1.80% 59% $236 22 San Diego(Intl) CA 27670 75.8 1.40% 61% $222 23 Charlotte NC 27070 74.2 1.37% 62% $242 24 Salt Lake City UT 23530 64.5 1.19% 63% $266 25 Baltimore(Intl) MD 22230 60.9 1.12% 65% $178 26 Kansas City(Intl) MO 21310 58.4 1.08% 66% $203 27 St. Louis(Intl) MO 20790 57.0 1.05% 67% $185 28 Portland OR 20060 55.0 1.02% 68% $223 29 Jacksonville(Intl) FL 19580 53.6 0.99% 69% $155 30 Hartford , CT 19540 53.5 0.99% 70% $246 31 New Orleans(Intl) LA 18840 51.6 0.95% 71% $174 32 Milwaukee WI USA 17840 48.9 0.90% 72% $176 33 New York(Kennedy) NY 17670 48.4 0.89% 72% $197 34 Raleigh/Durham NC 17510 48.0 0.89% 73% $211 35 Austin(Bergstrom Intl) TX 15740 43.1 0.80% 74% $199 36 Washington(Dulles Intl) DC 15250 41.8 0.77% 75% $211 37 San Antonio TX 14750 40.4 0.75% 76% $207 38 Santa Ana(J.Wayne) CA 12500 34.2 0.63% 76% $228 39 Memphis TN 12460 34.1 0.63% 77% $242 40 Sarasota/Bradenton FL 11760 32.2 0.60% 77% $154 41 Richmond/Wmbg VA 10780 29.5 0.55% 78% $201 42 West Palm Beach(Intl) FL 10410 28.5 0.53% 79% $174 43 Detroit(Metro Wayne) MI 9810 26.9 0.50% 79% $300 44 Albuquerque NM 9700 26.6 0.49% 80% $178 45 Norfolk/Va.Bch/Wmbg VA 9100 24.9 0.46% 80% $187 Source: DOT/DB1B data, La Costa Consulting, December 2011
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B. By Segment Table 3 - 8shows the ranking by market of segment-based passengers from CVG in 2010. Note that seven of the top ten destinations are hub facilities, which carry both local and connecting passengers from CVG.
Table 3 - 8: Onboard Domestic Segment Rankings
Totaling By Segment onboard and daily average for 2010
By sgmnt Total Daily Average By sgmnt Total Daily Average 1 ATL 239,647 656.6 36 SDF 41,350 113.3 2 ORD 233,899 640.8 37 GRR 40,164 110.0 3 CLT 145,222 397.9 38 SAN 36,736 100.6 4 SLC 133,475 365.7 39 BNA 36,333 99.5 5 DFW 132,768 363.7 40 LEX 33,218 91.0 6 MCO 130,068 356.4 41 JAX 30,483 83.5 7 LAX 127,726 349.9 42 MDT 30,302 83.0 8 PHL 116,251 318.5 43 IND 29,939 82.0 9 LGA 116,210 318.4 44 SBN 29,283 80.2 10 MSP 103,754 284.3 45 RIC 29,063 79.6 11 BOS 100,076 274.2 46 ORF 28,128 77.1 12 DEN 96,281 263.8 47 CLE 25,679 70.4 13 EWR 93,838 257.1 48 FWA 23,887 65.4 14 LAS 90,489 247.9 49 EVV 23,019 63.1 15 DTW 90,190 247.1 50 MSY 22,890 62.7 16 IAH 87,286 239.1 51 TYS 21,306 58.4 17 FLL 84,669 232.0 52 GSO 19,533 53.5 18 SFO 75,536 206.9 53 OMA 18,232 50.0 19 RSW 70,044 191.9 54 XNA 17,231 47.2 20 TPA 68,144 186.7 55 HTS 15,816 43.3 21 DCA 66,493 182.2 56 BUF 15,627 42.8 22 MIA 58,560 160.4 57 ROC 15,253 41.8 23 JFK 53,537 146.7 58 SYR 14,307 39.2 24 SEA 52,745 144.5 59 MSN 12,978 35.6 25 BDL 50,540 138.5 60 ALB 12,291 33.7 26 PHX 46,796 128.2 61 GSP 11,413 31.3 27 STL 46,655 127.8 62 AUS 10,942 30.0 28 CMH 46,329 126.9 63 SRQ 9,413 25.8 29 MKE 46,167 126.5 64 CRW 8,717 23.9 30 BWI 45,587 124.9 65 SAT 7,331 20.1 31 MEM 44,680 122.4 66 LIT 6,843 18.7 32 IAD 43,908 120.3 67 PBI 5,417 14.8 33 RDU 43,120 118.1 68 SAV 5,304 14.5 34 MCI 42,975 117.7 69 DSM 3,792 10.4 35 PIT 42,070 115.3 70 Other 15,027 41.2
Total 3,772,982 10,337 Source: DOT/T-100 data, La Costa Consulting, August 2011
3.2.1.8. Relationship Between Fares and O&D Traffic CVG O&D traffic has generally been stable over time growing at .48% over the last twenty years. Figure 3 - 12 shows a large gap between CVG fares and national averages - as well as
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the demand elasticity when fare levels are reduced. This was exemplified in 2005, when Delta’s “Simplifares” program resulted in lower fares and increased traffic – and a short period in 2009, when fares were lowered to a lesser extent in response to the economic crisis. These two periods, along with extensive examination of LCC entries in other markets, are the underlying basis for the passenger projections when LCCs are introduced to the passenger forecasts.
Figure 3 - 12: CVG Local Fares and O&D Passengers – with National Average Fare
3,500 $600
3,000 $500 2,500 $400 2,000 O&D pax $300 Fare 1,500 $200 1,000
500 $100
0 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
O&D pax CVG fare National fare
Source: DOT OD1A data, La Costa Consulting, December 2011
3.2.1.9. O&D Traffic Ratio – CVG vs. Peer Airports To evaluate the potential decline (or improvement) of a downward-trending market, it is useful to benchmark activity against those of proxy competitors. Table 3 - 9 shows how CVG underperforms compared to similar airports in carrying O&D traffic. The ratio below represents the amount of O&D traffic generated as a percentage of population within each region. Much of CVG’s performance gap is driven by reduced levels of competition and higher O&D pricing vs. comparable markets. For purposes of regional comparison, IND is generating more than 50% more O&D traffic as CVG despite serving fewer nonstop destinations. CVG’s current underperformance in this metric forms one of the bases for the long-term growth projections in our Baseline scenario.
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Table 3 - 9: O&D Traffic Ratio by Comparable CVG Markets
Annual origin and destination Passengers for 2010 Combined Metropolitan Statistical Areas Annual Passengers Population 2010 2010 Pax per Pop. St. Louis 5,201,935 2,828,990 1.84 Charlotte 5,086,927 2,402,074 2.12 Kansas City 4,592,528 2,104,853 2.18 Indianapolis 3,709,502 1,756,241 2.11 Pittsburgh 3,542,759 2,356,285 1.50 Cleveland 3,080,005 2,077,968 1.48 Columbus 3,025,901 1,836,536 1.65 Louisville 1,581,230 1,283,566 1.23 Dayton 1,302,640 841,502 1.55 Lexington 574,170 472,099 1.22 Cincinnati 2,199,620 2,130,151 1.03
Sources: U.S. Dept. of Transport OU.S. Dept. of Transport OD1B Database United States Office of Management and Budgets & Census 2010 Source: U.S. DOT DB1A and U.S. Census; DB1A; La Costa Consulting, August 2011. Data may differ from internal CVG data presented elsewhere
3.2.1.10. Domestic Itinerary Fares CVG customers consistently pay higher fares than comparable airports. As of the 1Q 2011, passengers from CVG pay 40% higher itinerary fares than from peer group airports while having similar lengths of trips flow (see note on stage length), and 31% higher fares than the national average. Table 3 - 10 shows the CVG Domestic Fares versus Peer and National Airports. Table 3 - 10: CVG Domestic Fares vs. Peer and National Airports
Market 2q 2000 2q 2007 2q 2008 2q 2009 2q 2010 3q 2010 4q 2010 1q 2011 CVG $452 $562 $593 $364 $426 $437 $438 $466 U.S. avg. $339 $325 $346 $301 $341 $339 $340 $356 SDF $290 $329 $340 $309 $353 $350 $372 $347 DAY $356 $337 $322 $314 $330 $327 $316 $342 IND $310 $306 $312 $277 $317 $314 $315 $332 CMH $307 $299 $325 $275 $315 $314 $314 $334 PIT $418 $299 $314 $272 $315 $308 $310 $323 RDU $304 $309 $316 $272 $314 $306 $308 $325
CV G vs . US avg 33.3% 72.9% 71.4% 20.9% 24.9% 28.9% 28.8% 30.9% CVG vs. peers 36.6% 79.5% 84.4% 27.1% 31.5% 36.6% 35.8% 39.6% Source: Table 8 US DOT RITA fares data base, La Costa Consulting, August 2011
Note: Average stage lengths: CLE 497 mi, CMH 501 mi, CVG 537 mi, IND 557 mi, PIT 549 mi, SDF 485 mi, DAY 412 mi
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3.2.1.11. Background (CVG) - Summary Over the past decade, the Greater Cincinnati market has generated steady population growth, experienced a similar economic growth pattern to the U.S in total, and maintained a disproportionately strong corporate profile. Despite this, CVG has seen total passenger enplanements decrease by more than 50% from 2000-10, due primarily to a large scale loss of connecting passengers - and driven by a continuous decline in flights and available seat capacity. While O&D traffic has remained more stable and tended to fluctuate with overall macroeconomic conditions, CVG O&D totals continue to underperform peer group facilities – driven primarily by local pricing nearly 40% above similar airports and, subsequently, heavy passenger leakage to neighboring facilities.
3.2.2. Industry Outlook and Trends Projected long-term macroeconomic growth in the U.S. (and world) economy drives a generally favorable outlook for U.S. aviation demand through 2035, despite the multi-year declines in US aviation activity following the financial crisis. In its 2011 forecast, the FAA projects average growth rates of 3.7% over the next five years - followed by 2.5% growth through 2035. Over the next ten years total passengers flow in the United States are expected to top 1 billion annually (FAA year 2020). Recent passenger growth has taken place in a controlled capacity environment, as revenue passenger miles (RPMs) have increased 16% since 2000 on only a 6.4% decrease in capacity More recently, 2010 system RPMs increased 2.2% on a 1.2% increase in enplanements.
As with all of its forecasts, the FAA cites risks that could impair this growth scenario - including highly volatile oil prices, unit costs and/or economic conditions, as well as geopolitical turmoil/terror threats.
3.2.2.1. U.S. Capacity and Demand Trends Figure 3 - 13 highlights U.S. domestic scheduled operations annually for the period 2000-2010, while Figure 3 - 14 illustrates monthly US scheduled departures for the period 2006-2010. Operations have been on a general decline since 2005, driven by a number of macroeconomic and industry factors. These factors plus the U.S. financial/credit crisis in 2008, caused increased strain on airlines balance sheets resulting in reduced capacity levels across the industry. Highly volatile oil prices, which peaked as high as $145/barrel in July 2008, drove carriers to reevaluate their use of less fuel-efficient aircraft and more to using large aircraft per departure. According to U.S. Energy Information Administration Forecast the near term forecast (2012-2015) for oil is around current levels. The cost of fuel is the single largest cost for airlines and has increased 267% since 2000 (A4A-Airlines for America). Finally, a historic wave of consolidation continues to drive a further rationalization of capacity as newly combined networks streamline service patterns. Of the three major recent combinations - the Delta network (with Northwest) is primarily integrated, United’s network (with Continental) is still evolving, and Southwest (with AirTran) is still in the initial phases of the integration process. As these combined networks continue to evolve, they will continue to impact capacity trends through the near-term. Additionally with American Airlines’ bankruptcy more capacity rationalization is probable.
The results of the issues discussed above are very evident at CVG. These evolving industry dynamics have resulted in fewer destinations and frequencies with fewer connecting passengers being routed through the airport en route to other destinations. Top destinations
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continue to command larger aircraft and sufficient capacity while smaller communities lose flights.
Figure 3 - 13: Total U.S. Domestic Departures: 2000-10
Source: DOT T-100, La Costa Consulting, December 2011
Figure 3 - 14: Monthly U.S. Schedule Domestic Departures: 2006-10
Source: DOT T-100, La Costa Consulting, December 2011
As depicted in Figure 3 - 15, despite the severe post-9/11 industry shock, U.S. domestic traffic (as measured by Revenue Passenger Miles or RPMs) grew by 31% over the ten year period ending in 2007 – before the economic downturn. Airline capacity reductions and high fuel prices drove a decline phase through 2008-2009. US traffic levels stabilized in 2010 and started growing again in 2011 as domestic passengers increased 1.8% in total and international travel grew by 4% through September 2011 (DOT –RITA site). Final 2011 US traffic totals are expected to approach 2008 totals (near 800 million passengers).
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Critical to the discussion about growth over time is to look how the industry rebounds from “events”. The commercial aviation industry is highly sensitive to national and global events. Events regarding geopolitical activity, particularly in the regions that are oil producers, viral (SARS 2003), terrorism, economic (multiple financial crisis in the US and around the world), government policies, and environmental have all negatively impacted levels on passengers enplanements only to see the industry rebound and grow again. The most notable example of this is industry growth post 9/11. Even though the industry was used as tool for terrorism, the rebound testified to the industry criticality to the commercial and retail passenger. These long term events, while they can’t be predicted are accounted for in the robustness of this forecast.
Figure 3 - 15: U.S. Domestic RPMSs, 1998-2010
-9.0%
-6.0%
10 years~31% growth
Source: Bureau of Transportation Statistics, T-100 Market and Segment Source : Dot T-100, La Costa Consulting, December 2011
3.2.2.2. Service Trends at Top U.S. Airports Figure 3 - 16 shows a comparison of activity levels at the top 35 airports in the United States between 2005 and 2010. Of the 35 airports, 31 show a decline in operations over the period, highlighting the previously discussed US capacity reduction trends. Note that of the group 35, CVG shows the single biggest drop over the period.
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Figure 3 - 16: 2010 vs. 2005 Departure Levels: Top 35 U.S. Airports
Source: FAA Aerospace Forecast 2011
3.2.2.3. U.S. Fleet Mix Trends A recent and accelerating trend among U.S. carriers has been less dependence on regional aircraft – including the removal of 50-seat aircraft from regional fleets.
Recent volatility in oil prices has resulted in unit costs for 50-seat aircraft – which were already challenging - increasing to near unsustainable levels. As an example, a Delta 50-seat CRJ-200 made by Bombardier requires 19 gallons (72 liters) of fuel to fly each passenger 500 miles (805 kilometers). However fuel usage drops to just 7.5 gallons (28 liters) per passenger on Delta’s 160-seat MD-90s over the same distance. In addition, improvements in revenue management and distribution technology have made it easier for carriers to generate higher load factors on larger gauge aircraft, resulting in larger regional jets becoming viable alternatives in many smaller markets. Finally, customers have shown a clear preference for larger regional jets (more than 50 seats) – as they are typically more likely to accommodate standard sized carry- on luggage and offer more onboard amenities.
Over the first eight months of 2010, more than 40 50-seat aircraft were removed from North American fleets – with an additional 600+ aircraft forecast to come out by 2015, according to the Boeing Market Forecast of 2011. It is projected that by 2030 less than 10% of global commercial aircraft will operate with fewer than 60 seats – including only 2% of 2011-30 deliveries. (See Figure 3 - 17.) Note that only 11% of 2011-30 North American deliveries are projected to fall into the regional jet category (per Boeing), and this includes larger capacity RJ (75-100 seat) aircraft.
Bombardier Commercial Aircraft forecasts that over 50% of the regional aircraft deliveries over the next twenty years will consist of aircraft over 100 seats, as shown in Table 3 - 11.
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Table 3 - 11: Projected North American Fleet by Aircraft Size, 2030 vs. 2010
Segments Fleet 2010 Deliveries Retirements Fleet 2030
20 to 59 seats 3,600 300 2,500 1,400
60 to99 seats 2,200 5,800 1,200 6,800
100 to 149 seats 5,200 7,000 3,000 9,200
Total 20 to149 seats 11,000 13,100 6,700 17,400
Source: Bombardier Aerospace – Forecast, 2011
Figure 3 - 17: Boeing North American Fleet Outlook, 2011
Source: Boeing Current Market Outlook – http://active.boeing.com/commercial/forecast_data/index.cfm
Despite this trend towards larger gauged regional jets (and aircraft in general), U.S. carriers continue to generate higher load factors, as can be seen in Figure 3 - 18 – due in large part to the aforementioned advancements in revenue management and distribution technology. Aggregate U.S. domestic load factor is up more than ten points in less than ten years (and all of the CVG forecasts are consistent in projecting this high load factor trend to continue). This is one of the key operating strategies airlines have to counter the aggressive escalating cost of oil, as larger aircraft with higher load factors result in lower unit costs. That represents a key reason
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why Boeing forecast that regional jets will constitute only 5% of the total fleet by the end of the forecast period. Figure 3 - 18: U.S. Carriers System Load Factors: 2000-10
80.0%
75.0% 77.9% 75.9% 74.8% 75.5% 75.0% 70.0% 72.5% 70.5% 68.7% 65.0% 67.5% 65.7% 66.4% 60.0%
55.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: DOT T-100, La Costa Consulting, December 2011
3.2.2.4. FAA U.S. Short-Term Outlook U.S. airline passenger demand is forecast by the FAA to grow steadily over the next twenty years, with an average annual growth rate of just under 3%, as depicted in Figure 3 - 19. Boeing’s US forecast over the next twenty years is in line with the FAA, calling for 2.9% traffic growth. This growth is forecast to be front loaded towards the first few years of the forecast period, resulting in more robust near-term opportunity with load factors continuing to average above 80%.
In addition, the recent wave of carrier consolidations and projected gradual improvement in the U.S. economy has improved financial outlooks for domestic carriers. Fitch expected ratings for most U.S. airlines to improve in 2011 – which they did and remained stable through early 2012 – reflecting a modest strengthening of industry operating fundamentals and steady progress toward debt reduction and balance sheet deleveraging (source: Fitch 2011 outlook). As U.S. carriers look to unwind the lingering effects of historically weak returns, insufficient cash flow generation, and constrained liquidity, using cash to repay debt will be essential if the ratings momentum witnessed in 2010 is to continue for another year.
Consolidation represents a later stage for a mature industry that is seeking ways to address its financial volatility. Longer-term consolidation should improve industry stability while partially mitigating volatility and consequently lowering carriers’ cost of capital, strengthening their networks and broadening their global reach. However, it may also result in further capacity cuts in some markets specifically service to smaller markets.
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Figure 3 - 19: 2010 FAA Enplanements Forecast, 2010 - 2031
Source: FAA Aerospace Forecast, 2011
3.2.2.5. Industry Outlook – Summary
The airline industry turned around in 2010, recording $16 billion in profits after losing $16 billion in 2008. 2011 earnings continued as the mergers started to realize their potential and the industry operated more efficiently as airlines maintained capacity discipline. The key drivers in the industry have been consolidation, global events and higher fuel prices. Going forward fuel pricing will be critical to the direction of growth as it will account for 35% to 40% of the industry costs this year compared with 13% a decade ago. The recent wave of consolidation has removed three major airlines, Northwest, Continental and Airtran and delivered lower cost strengthening their balance sheets. While total domestic departures are still up significantly from pre-9/11 levels, they declined steadily during the 2007-2010 economic crisis. Domestic RPMs displayed a similar pattern, as a 31% increase from 1998-2007 was offset partially by a 9% drop from 2007-09 (before leveling out in 2010-11). U.S. carrier load factors are up over ten points since 2000 – and have held relatively constant through the recent recession (up three points from 2006-10). Capacity expansion is now being generated by LCCs as the major legacy airlines have held capacity flat. American’s bankruptcy has yet to define how it will shape the industry structure or competitive balance. In summary – the trends highlighted above display the resiliency of the domestic airline industry. Various industry forecasts project annual growth in the 3% range over the next twenty years. In addition – 50-seat aircraft types are projected to decline by over 60% through 2030, which will have a direct impact on the service profile at CVG.
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3.3. PASSENGER FORECAST - DISCUSSION The CVG passenger forecasts are developed as unconstrained - in that facilities, infrastructure, resources, and development funding are assumed to be available as needed for the forecast period. Our forecast baseline year was 2010, as this was the most recent full year of data available when the forecast work commenced. Research began with collection of historical data from the staff at CVG – as well as DOT survey databases T-100 (onboard passenger survey), OD1B (origin and destination survey), the Census Bureau, TSA surveys of passenger flows, FAA, Department of Commerce and interview with key stakeholders. Note that while the data sets are examined for a twenty year period, much of our historical research and data analysis concentrates on the recent period from 2002 given the fundamental transformation of the U.S. aviation industry post-9/11. The forecast assumes unconstrained aviation demand.
Despite Cincinnati’s growing population base and relatively robust corporate economy, CVG has recently experienced a steep decline in non-stop service. The primary reason for the decline is Delta Airlines’ post-merger strategy to significantly downsize its CVG hub operation. While local enplanements have remained relatively consistent throughout the period, indicating stability in the local travel market – they have not grown as would have been expected under a normal industry pricing and service profile.
3.3.1. Low Reliability of Traditional Trendline Methodology Typically in a Master Plan Update forecasts would be produced from historical trends in passenger enplanements, operations, and landed weights (correlated to econometric data). However, CVG’s activity shows no linkage to econometric data. DL’s continued drawdown of service had resulted in a steady decline of connecting passengers. CVG’s comparably higher fares and lack of carrier diversity resulted in O&D traffic leaking to lower cost service offerings in nearby markets. The result is that overall passenger enplanement levels have been in steady decline since 2005 and O&D traffic has remained flat. As discussed previously, CVG O&D passenger levels are tangibly low when compared to similar or peer group airports. Initially, an analysis was completed to determine whether future traffic projections could be based on a forecast using 20 years of historic originating enplanements, and completing the passenger forecast by building connecting traffic onto the local base. Figure 3 - 20 depicts a trend line regression analysis of originating enplanements (O&D) at CVG from 1991 to 2010. Because of the fluctuations in traffic over the period, the coefficient of correlation is extremely low at 0.0942 (typically, values higher than 0.85 are seen as very good correlations and less than .5 as weak and this low correlation indicates very little confidence in use of this trend line as a projection of future originating passenger activity). According to the US Census Department, the MSA population steady rate of 0.83% average annual growth during the period from 1991 to 2009 and therefore would also be expected to produce a relatively similar correlation of originating enplanement activity.
The 2025 Master Plan utilized a “traditional” regression analysis based on population, employment, and per capita income through 2003 to forecast passenger enplanements. At the time that forecast was prepared, CVG had experienced 20 years of nearly continuous growth, and the regression methodology forecast a continued growth. Although later adjusted downward based declining activity, the regression returned a forecast that correlated to the continued rise in the econometric variables used, but did not predict the historically low growth in O&D traffic. That forecast did not foresee the continued erosion in connecting passenger traffic nor the continued sluggishness of O&D activity. Given this and the results of our
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analyses with historical data – we concluded that many forms of traditional regression analysis would likely not be effective for this exercise.
Figure 3 - 20: Regression Analysis of CVG Originating Enplanements – 1991-2011
3,300 3,100 2,900 y = 15.78x - 29294 2,700 R² = 0.0942 2,500 2,300 2,100 1,900 1,700 1,500 1990 1995 2000 2005 2010 2015 Originating Passengers (thousands) Passengers Originating Year
Total O&D Linear (Total O&D)
Source: La Costa Consulting, from Airport Records, December 2011.
3.3.2. Alternate Forecasting Methods Due to this combination of factors, it was necessary to model future levels of enplanements and operations using methods other than the traditional trending of historical traffic and/or econometric data. Therefore three forecasts have been constructed, utilizing a combination of analytical techniques. First, a “Baseline” forecast was developed, utilizing traditional econometric modeling, traffic trends, and benchmarking of long-term CVG passenger levels to those of peer airports. This technique is used to project CVG O&D levels over a 25 year period. During this transformational period the Cincinnati catchment area’s price, service and seat capacity are expected to move to a state of equilibrium with its peer group.
Second, two scenarios were constructed that simulate passenger and service growth utilizing a more fundamental, airline activity-based approach. This activity included analyzing and applying the results of LCC entry at other airports, elasticity analysis, activity modeling, and a range of regression analytics. These two scenarios include one with a continued DL small hub presence with the addition of nominal LCC service (the “Dominant + LCC” case) – and a more transformative scenario, in which DL further pulls down service and LCCs expand into a more robust profile (the “Multi-Carrier” case).
Note that both the Dominant + LCC and Multi-Carrier scenarios assume that CVG will acquire some level of LCC service within the next five years. The absence of this competitive component has created pricing, service, and demand distortions – including average itinerary fares which have ranged over the past five years from 40% to 88% higher than those at regional competitor airports. Of the 50 largest cities in the nation, Cincinnati is the largest and the only without LCC carriers included in its service mix. As the service levels at the DL hub are drawn
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down and concentration levels subside, this distortion is expected to dissipate over time, resulting in CVG pricing that is more comparable with other airports in the region. (The effect of LCC entry on pricing in comparable markets is analyzed later in this section). Each scenario also upgauges 50-seat regional jet (RJ) capacity to 70+ seat aircraft in later years, as unit volumes grow in response to industry cost pressures.
Also in the Dominant + LCC and Multi-Carrier scenarios, average seats per departure grow throughout the forecast period, as LCCs enter CVG operating mainline aircraft of between 120 and 172 seats (seatguru.com). Load factors increase slightly throughout the period, as structural pricing shifts drive incremental traffic on lower capacity aircraft. CVG’s load factor is already operating at an annualized rate of 77% (T-100) versus the industry average of over 80%.
3.3.2.1. Benchmarking Activity to Peer Airports (O&D traffic levels) The Baseline scenario implicitly incorporates these same fundamental factors, but does so at a more macro level by bringing CVG O&D traffic levels to par with the performance of comparable airports (albeit at a steadier, more consistent pace). As previously discussed, CVG’s MSA- adjusted local traffic performance is currently substantially lower than that of its peer facilities – likely the result of higher local pricing. This, coupled with the fact that CVG is currently the only Top 30 MSA primary airport without LCC service, we feel it highly likely that CVG will reach a near-equilibrium state with these peer facilities within the span of our forecast period.
Figure 3 - 21 represents an O&D projection for CVG O&D passenger levels and baseline through 2035. The methodology utilizes twenty-years of O&D passenger and economic data from the peer group of airports/MSA’s to project the unconstrained demand at CVG based on the economics of the region. Peer group airports were defined as those which have similar economic or regional characteristics. This technique applied multiple regression, geometric mean and trend analysis. A time series of ratios were created using the historic O&Ds and economic data that included three variables for the airports MSAs; population, per capita income and personal income. The source for the data used in the analysis is from the Department of Commerce Bureau of Economic Analysis. The weighted averages in the time series were applied to the economics of Cincinnati MSA creating CVG O&D levels for 2012 through 2035 (represented in the graph blue with red dots with R2 = .987). The green time series trends O&D levels over the same 25 years of the forecast for aggregate demand of the peer group airports. The ratios used in this time series are then used to create the comparable O&Ds that will be generated at CVG. The high R2 value for peer airport =.9883 indicates level of fit for this analysis is very high. The CVG Baseline fit is also high, R2=.987. Using only the historic CVG O&D (dotted black line) as a predictor for future levels offers a very low R2=.0875.
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Figure 3 - 21: CVG Peer Group Airport Local O&D Trends, 1990-2035
7,000,000
6,000,000 y = 51695x - 1E+08 R² = 0.9883 5,000,000
4,000,000 y = 122969x - 2E+08 R² = 0.9876 Baseline 3,000,000
2,000,000 y = 13792x - 3E+07 R² = 0.0875 1,000,000
0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Weighted geometric mean on 3 variables of comparable airports Historic Local O&D Traffic CVG Baseline Local traffic CVG O&D "Applied Time Series of Comparable Airports" Linear (Weighted geometric mean on 3 variables of comparable airports) Linear (Historic Local O&D Traffic CVG) Linear (Baseline Local traffic CVG O&D "Applied Time Series of Comparable Airports")
Source: La Costa Consulting, December 2011
Note that the airports utilized in the “peer group” analysis above carried in aggregate nearly 26 million O&D passengers in 2010, resulting in a substantive sample size from which to formulate conclusions. In summary, the analyses rationalize industry and macroeconomic data as to why CVG O&D enplanements will reach equilibrium with the defined peer group of airports over our forecast time horizon. Long term enplanement projections are developed by combining this O&D level and forecasted connection passengers’ projections for CVG.
3.3.2.2. Impact of LCC Entry at Large Airports Over the next section, we further detail how pricing at CVG compares to it peer airports and impacts local demand – as well as provide case studies detailing the effect LCC entry had on pricing and traffic in comparable markets. This analysis provides support for the forecast growth profiles.
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Figure 3 - 22 examines CVG quarterly air fares from the period 2002-2010 compared with peer airports CMH and IND (the U.S. domestic average is also included). Note that while CVG fares are significantly higher than all of the comparisons, fares at CMH and IND were generally lower than the national average.
Figure 3 - 22: CVG Fares vs. Peer Airport, 2002 - 2011
$700
$600
Cincinnati, OH $500
Columbus, OH $400
Indianapolis, IN $300
Average Fares U.S Dom Avg Fare $200
$100
$0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: DOT/BTS table of average fares, La Costa Consulting, August 2011
The comparison is expanded to six other medium to large hub airports, some of which are DL hubs, as shown in Figure 3 - 23. Again, CVG exhibits high fares and volatility – with several of the peer facilities experiencing lower than average fare levels.
Figure 3 - 23: CVG Fares vs. Expanded Peer Airport Group, 2002 - 2011
$700 Hopkins International (CLE) $600 Detroit Metropolitan Wayne (DTW) $500 Memphis International (MEM) $400 Lambert-St. Louis Int. (STL)
$300 Minneapolis - St. Paul Intl. Average Fares (MSP) $200 Salt Lake City Intl. (SLC)
$100 US Average $0 Cincinnati/Northern KY 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (CVG)
Source: DOT/BTS table of average fares, La Costa Consulting, August 2011
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Note that in both of the graphs above, the effects of DL’s Simplifares program (2005) and the recent economic crisis (2009) can be seen in temporary periods of lower CVG fares. It is also beneficial to note that fares at CVG did not follow trends seen in the peer group.
To simulate the effects of introducing low fare flights at CVG, a multiple regression analysis and price elasticity model were developed utilizing data from comparable airports. IND, CMH, SDF, DAY and PIT were used for segment level pricing regression and CVG, PHL and PIT were used for price elasticity modeling. The regression analysis incorporated passenger fares, mileage (with stage length adjustments), and passengers. This was utilized in combination with a fare elasticity analysis, to develop constrained passenger demand estimates for CVG. Implicit in this analysis is the continued diversity of non-stop service in the CVG market that, along with lower fares, drives passenger activity.
The initial output in
Figure 3 - 24 shows average O&D fares matched with associated annual O&D passenger numbers for CVG. Unit elasticity lines have been included for explanatory purposes. The reduced fares in 2005 and 2009 clearly show the resulting resulted in increased O&D traffic levels.
Figure 3 - 24: Elasticity Calculations: CVG Fares vs. O&D Passengers, 2002 - 2011
Source: DOT- BTS table of average fares, OD1B survey data, La Costa Consulting, August 2011
Starting from a base of $452 in 2003, average fares dropped to $415 in late 2004 and then immediately to $374 with Delta’s introduction of SimpliFares – resulting in a price elasticity measure of -1.374 and driving higher overall revenue and passengers. This reduced fare structure continued in 2005 with fares averaging $381, increasing the 2005 O&D passenger count at CVG to over 3.1 million. However, average fares have since rebounded to as high as $570 in 2008, resulting in annual O&D passenger counts dropping to as low 1.9 million.
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Following a drop in 2009, fares once again rebounded in 2010 – with the average fare of $425 representing approximately a 45% higher over comparable regional airports.
A number of case studies were performed to measure the effect of new LCC service in a market with an existing legacy carrier hub. Upon the 2004 entrance of Southwest Airlines (WN) at PHL (as depicted in Figure 3 - 25), average annual O&D fares dropped from $208 to $174. A shift along the “Unit elasticity 2003” line represents the projected change in demand driven by the shift in pricing. As expected, the drop in fares resulted in a significant increase in O&D passenger counts. Also note that these increased passenger counts held as average O&D fares gradual returned to pre-WN levels.
Figure 3 - 25: Elasticity Impact of LCC Entry at PHL
$265
$245
$225 PHIPHL 2008 2003 Unit Elasticity 2003 $205 PHI 2007 Unit Elasticity lines 2006 $185 2004 2005 Average Yearly Fares Yearly Average $165
$145
$125 6,000 7,000 8,000 9,000 10,000 11,000 12,000 Passengers in Thousands
Source: DOT- BTS table of average fares, OD1B survey data, La Costa Consulting, August 2011
The strategy of entering a market with low fares only to gradually increase them later for purposes of revenue maximization creates a curve that looks like a “fish hook”. This phenomenon is also commonly known as the “Southwest effect”, but is not limited to introduction of airline service. It is common with introduction of new products into a wide variety of markets. We anticipate that the CVG catchment area would respond similarly to the introduction of LCC service and resulting lower fares - and have projected as such in the two scenarios.
The increase in O&D traffic results from:
• Recapture of market leakage – passengers who had traveled to other markets for lower fares can now find reasonable fares at the local airport • Stimulation of new traffic due to low prices – passengers who decided to take a trip because fares were affordable
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• Increase in travel by passengers who already travel • Travel due to mode shift – passengers who decide to fly rather than drive
A second example of this same phenomenon can be seen below in Figure 3 - 26 from PIT – which also experienced the introduction of LCC service (WN) – in May, 2005.
Figure 3 - 26: Elasticity Impact of LCC Entry at PIT
$265
$245
$225 PIT 2008 $205 2004 Unit Elasticity 2006 2004 PIT $185 Unit Elasticity 2005 2007 lines $165
Average Yearly Fares Yearly Average $145
$125 3,000 3,500 4,000 4,500 Passengers in Thousands
DOT- BTS table of average fares, OD1B survey data, La Costa Consulting, August 2011
The aggregated graph of Figure 3 - 27 represents a consolidated view – with the CVG price elasticity curves plotted together with the tests performed above from PHL and PIT. Note the green circle with the blue center, which represents a CVG forecast at levels similar to IND and CMH - and falls along the price elasticity line created using 2005 levels and current segment pricing of major markets. The assumed price falls below the US weighted average fare line (orange line) but sits slightly higher than levels at CMH and IND. With a larger catchment area and higher concentration of Fortune 500 companies near CVG, this result was anticipated and generates a high R-squared factor. It represents the simulated passenger demand assuming an average fare falling between the average U.S. fare and those of the comparable proxy regions.
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Figure 3 - 27: Multiple Airport LCC Entry/Elasticity Profile
$675 Philadelphia PHI
$625
$575 Unit Elasticity 2003 PHI $525
Pittsburgh PIT $475
$425
Unit Elasticity 2004 $375 PIT
$325 Average Yearly Fares Yearly Average Cincinnati CVG $275
$225 CVG - $175 unconstrained O&D levels at $125 fares similar to the regions average -3,000 2,000 7,000 12,000 fares Yearly Passengers in Thousands
DOT- BTS table of average fares, OD1B survey data, T-100, La Costa Consulting, August 2011
Note above that the sensitivity of traffic at different fare levels is observable in the variety of unit elasticity lines, and that total O&D traffic could shift based on different industry fare structures. The output from the analysis also projects that CVG will command slightly higher fares than other regional airports).
3.3.2.3. Discussion – Summary The methods included were utilized to adapt to an airport going through a structural transformation - with a hub carrier making major reductions.
In summary, an LCC entry drives substantive growth in each of these scenarios, and assumes the following drivers to generate the network infrastructure for a long-term, normalized growth pattern:
• Market share gains (organic growth plus leakage recapture) • Capacity introductions from new entrant carriers • Latent demand in current environment • Competitive environment and peer group sizing
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Fundamentally, it is consistent with previously discussed trends (macroeconomic, industry, CVG service, etc…) in a deregulated industry that competition of an alternative cost delivery system (LCC) would enter CVG once a highly concentrated condition has dissipated (e.g. the DL hub). Therefore, all of the scenarios reflect a state of traffic equilibrium with the overall industry and region averages. As mentioned previously, metro Cincinnati is the only MSA of the top 30 U.S. markets currently to not offer LCC service – so reaching this equilibrium state is likely a short-to- medium term prospect.
Additionally, the following economic and airport metrics are incorporated:
A. Economic assumptions • Continued economic growth of the region (Gross Regional Product) • Continued population growth of the region B. Airport-specific assumptions • Low-cost carrier entry • Extensive capacity availability • Continued diversity of non-stop markets (although possibly less than today)
Additional forecasting techniques utilized – explicitly or implicitly - include trend line analysis, linear regression, travel spending and propensity based analysis, airline schedule analysis, and the MPU team’s judgment based on extensive experience at multiple international and domestic airports and airlines.
3.3.3. Passenger Forecast – Approach and Results The Master Plan Update Team developed passenger forecasts for CVG for total enplaned passengers and total aircraft operations. Within these major categories are other derivative forecasts - including the segmentation of traffic for originating and connecting enplanements, domestic and international enplanements, and others. The aircraft operations category includes forecasts by equipment type for total operations.
Three passenger scenarios were developed:
A. Dominant Carrier + LCC case: Delta hub remains approximately at current levels, service levels from other airlines currently operating at CVG remain approximately constant, and minimal Low Cost Carrier (LCC) service arrives in the relative near-term. B. Multi-carrier case: Delta reduces service to spoke/focus city levels; current OA carriers increase service slightly, and focus city-level LCC service develops over time. C. Baseline forecast: Long-term O&D traffic levels achieve equilibrium with peer markets, utilizing a relatively steady growth trend; connecting traffic percentages also assumed to achieve equilibrium levels with peer facilities
3.3.3.1. Dominant Carrier + LCC Scenario The Dominant Carrier + LCC scenario assumes DL maintains its current competitive structure at CVG, and adds a limited LCC presence that begins in 2013 and grows modestly through 2016. This LCC presence drives a transformation to sustainable, market-driven local pricing – growing enplanement totals to levels more indicative of the population, the business community profile of the greater Cincinnati region, and in alignment with comparable airports that serve similar regions.
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3.1.1.1. Enplanements - Summary Figure 3 - 28 depicts this scenario. It projects the total number of enplaned passengers to grow to 6.3 million, a CAGR of 1.9% per year between 2010 and 2035.
The most significant growth occurs in the first ten years as 2010 to 2020 grows at a CAGR of 2.7% with the 2011-16 period growing at a 6.6% CAGR. By 2017, this growth is driven by 22 LCC departures to 12 destinations.
Figure 3 - 28: Dominant Carrier + LCC Scenario Enplanements
7,000
6,500
6,000
5,500
5,000
4,500
4,000
Enplanements (thousands) Enplanements 3,500
3,000
2,500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Dom. + LCC
Source: La Costa Consulting, December 2011
A. Forecast Development Capacity and service patterns assumed in this scenario are described in the following sections.
1. Delta Airlines The current Delta schedule (4q 2011) produces 110 Daily Departures Each Way (DDEW) to 51 non-stop destinations, as shown in Figure 3 - 29. This activity level remains relatively intact, with capacity additions limited to levels necessary to compete with the new LCC entrants. These assumptions are consistent with Delta’s existing strategy to maintain local market share in larger O&D markets with limited investment. If Delta alters this approach and reduces capacity, other airlines have indicated a willingness to increase capacity to their hubs. In addition 50-seat aircraft are primarily phased out throughout the period and replaced with larger gauge regional aircraft.
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Figure 3 - 29: DL non-stop destinations from CVG – 4Q 2011
Destination DDEW Destination DDEW Minneapolis-St. Paul - MSP 7 Norfolk - ORF 2 Atlanta - ATL 6 Pittsburgh - PIT 2 Detroit - DTW 6 Raleigh-Durham - RDU 2 New York Laguardia - LGA 4 Richmond - RIC 2 Chicago O'Hare - ORD 4 Salt Lake City - SLC 2 Hartford - BDL 3 St. Louis - STL 2 Boston - BOS 3 Toronto - YYZ 2 Baltimore - BWI 3 Paris - CDG 1 Washington Reagan - DCA 3 Cleveland - CLE 1 Newark - EWR 3 Denver - DEN 1 Orlando - MCO 3 Greensboro - GSO 1 Memphis - MEM 3 Greenville-Spartanburg - GSP 1 Philadelphia - PHL 3 Jacksonville - JAX 1 Nashville - BNA 2 Miami - MIA 1 Cha rl otte - CLT 2 Madis on - MSN 1 Dallas/Fort Worth - DFW 2 New Orleans - MSY 1 Fort Lauderdale - FLL 2 Omaha - OMA 1 Grand Rapids - GRR 2 Phoenix - PHX 1 Houston Hobby - HOU 2 Fort Myers - RSW 1 Washington Dulles - IAD 2 San Diego - SAN 1 New York Kennedy - JFK 2 Seattle - SEA 1 Las Vegas - LAS 2 San Francisco - SFO 1 Los Angelees - LAX 2 Syracuse - SYR 1 Kansas City - MCI 2 Tampa-St. Petersburg - TPA 1 Harrisburg - MDT 2 Northwest Arkansas - XNA 1 Milwaukee - MKE 2 Source: OAG, La Costa Consulting, December 2011; note that DDEW data has been rounded to the nearest whole number
2. Other Airlines (non-LCC) The current other airline (OA) schedule (4q 2011), with 47 DDEW to 13 non-stop destinations (see Figure 3 - 30), provides the baseline for the OA plan, with primarily minor incremental changes to existing OA hubs through the first few years. As with the DL schedule, 50-seat aircraft are primarily phased out throughout the period and replaced with larger gauge regional aircraft.
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Figure 3 - 30: OAG Non-Stop Destinations from CVG – 4q 2011
Destination DDEW Chicago O'Hare - ORD 14 Cha rl otte - CLT 6 Dallas/Fort Worth - DFW 6 Philadelphia - PHL 4 Newark - EWR 3 Houston Intercontinental - IAH 3 Cleveland - CLE 2 Washington Dulles - IAD 2 New York Kennedy - JFK 2 Miami - MIA 2 Toronto - YYZ 2 Denver - DEN 1 Cancun - CUN <1 Source: OAG, La Costa Consulting, December 2011; note that DDEW data has been rounded to the nearest whole number
B. Low Cost Carriers This scenario initially incorporates a small LCC operation – 12 DDEWs to 5 non-stop destinations launched by the end of 2013, growing to a 22 DDEW/12 destination pattern by the end of 2016. Note that as this scenario maintains the existing DL hub presence, the assumed LCC entry is limited.
3.1.1.2. Summary of Dominant Carrier + LCC Scenario The Dominant Carrier + LCC case essentially represents an extension of the competitive status quo, with the added introduction of LCC service in 2013 – as CVG remains a small-to-mid sized DL hub. Continuation of a small-to-mid-sized hub was the indication given in personal interviews conducted with DL in mid-2011. OA service grows slightly, but continues to operate flights only to existing hubs/focus cities. The entry of LCCs to the CVG market in 2013 (incorporated into both scenarios) will create disproportionate enplanement growth throughout the initial years of the forecast period, as shown in Table 3 - 12.
Table 3 - 12: Departure Information by Carrier Type (Dominant + LCC)
2011 2015 2020 2035 DDEW DL 129 119 127 144 OA 48 56 58 66 LCC 0 18 22 25 Total 177 193 207 234
Seats/departure 73 80 86 92 Source: La Costa Consulting, December 2011
As shown in Table 3 - 13, the enplanements forecast in this scenario increases at a 1.9% CAGR from 2010-35, growing from approximately 4.0 million to approximately 6.3 million. Growth is
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front loaded into the initial years, with a robust 6% CAGR from 2011-17 new entrant LCCs introduce incremental service into the market. CVG’s share of originating passengers is expected to increase from approximately 60% in 2010 to between 75%-80% by 2035. Load factors are assumed to reach just over 80% by the end of the forecast period. The split of departure activity between carrier groups is presented in Table 3 - 14, and graphically in Figure 3 - 31.
Table 3 - 13: Dominant Carrier + LCC Scenario Enplanements
Dominant Carrier + LCC Scenario 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Enplanements 3,975 3,490 3,134 3,525 4,003 4,421 4,811 4,950 5,063 5,131 5,199 5,267 5,335
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Enplanements 5,404 5,475 5,546 5,620 5,694 5,769 5,844 5,921 6,000 6,081 6,163 6,247 6,334
Source: La Costa Consulting, December 2011
Table 3 - 14: Dominant Carrier + LCC Scenario Departures
Dominant Carrier + LCC Scenario Departures - annual 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
DL 46,976 39,878 43,179 43,747 43,531 45,105 45,079 45,755 46,121 46,490 46,862 47,237 OA 17,632 18,139 18,980 19,633 20,277 20,500 20,609 20,918 21,085 21,254 21,424 21,595 LCC 0 0 2,257 5,333 6,723 7,505 7,755 7,871 7,934 7,997 8,061 8,126 Total 76,389 64,608 58,017 64,416 68,713 70,530 73,111 73,442 74,544 75,140 75,741 76,347 76,958 YOY (15.4%) (10.2%) 11.0% 6.7% 2.6% 3.7% 0.5% 1.5% 0.8% 0.8% 0.8% 0.8%
Departures - annual 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
DL 47,615 47,996 48,379 48,767 49,157 49,550 49,946 50,346 50,749 51,155 51,564 51,976 52,392 OA 21,768 21,942 22,118 22,295 22,473 22,653 22,834 23,017 23,201 23,386 23,574 23,762 23,952 LCC 8,191 8,256 8,322 8,389 8,456 8,524 8,592 8,661 8,730 8,800 8,870 8,941 9,013 Total 77,573 78,194 78,820 79,450 80,086 80,726 81,372 82,023 82,679 83,341 84,008 84,680 85,357 YOY 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
Source: La Costa Consulting, December 2011
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Figure 3 - 31: Dominant Carrier + LCC Scenario Carrier Mix of Departures
90,000
80,000
70,000
60,000
50,000
40,000 Departures 30,000
20,000
10,000
0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
DL OA LCC
Source: La Costa Consulting, December 2011
3.3.3.2. Multi-Carrier Scenario The Multi-Carrier Scenario reflects a significant shift from the current competitive balance at CVG. In this scenario, Delta reduces its presence from its current hub operation to a small focus city, operating to its hubs and a few large non-hub markets. Other non-LCC airlines (OA) increase capacity primarily to their hubs to accommodate demand spilled by Delta’s reduction. While this nominal increase in OA service is relatively consistent with activity in the first scenario, the key difference is the large reduction in DL operations and markets at the beginning of 2013. This dynamic is responsible for the large drop off in 2013 enplanements shown in Figures 3-40 and 3-41. The large transformation is driven by the development of a LCC entry over a four-year period, beginning in 2Q 2013. As with in the Dominant Carrier + LCC scenario, LCC presence is assumed to drive more sustainable, market-driven local pricing - allowing enplanements to grow to a level more indicative of the population and corporate profile of greater Cincinnati.
3.3.3.3. Forecast Development Capacity and service patterns assumed in this scenario are described in the following sections.
A. Delta Airlines As with the previous scenario, the current DL schedule (4q 2011) produces 110 Daily Departures Each Way (DDEW) to 51 non-stop destinations. However, in this scenario DL reduces service levels to 60 DDEW in 2013.
• Non-stop destinations drop from 51 to 21; service remains to existing Delta hubs as well as to key business destinations.
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• Frequency is added by DL to other large hubs to better accommodate the increased flow traffic from CVG through their network. • Gauge increases occur across regional jet markets, as most 50-seat aircraft are up gauged between 2013 and 2018.
B. Other Airlines (non-LCC) The current OA profile of 50 departures and 13 destinations is consistent with the Dominant Carrier + LCC Plan. However, in this case, OA supplements its current schedule with new service to hubs which are not currently served non-stop from CVG, primarily the addition or reinstatement of four additional OA longer-haul destinations (to the western U.S.). Gauge increases across regional jet markets are expected, with 50-seat aircraft upgraded to larger sized equipment in several markets.
C. Low Cost Carriers LCCs capitalize on the pull down by DL by introducing 20 DDEW to eight non-stop destinations by the end 2013 (launch in 2q 2013). This service level grows rapidly, evolving into a robust 52 DDEW profile by the end of 2016, with service to 27 non-stop destinations. Aircraft size and market selection are consistent with the current operating profile of existing major low-cost carriers.
3.1.1.3. Summary of Multi-Carrier Scenario The Multi-Carrier Scenario represents a transformation of the competitive situation at CVG. While the pull down of the Delta hub would initially drive an overall decrease in daily departures and non-stop destinations, the introduction of LCC service would result in greater diversity in product offering and pricing – and eventually increases in O&D passengers and total enplanements.
As with the Dominant Carrier + LCC Scenario, LCC service is assumed to bring fares in line with those of competing regional airports. This will allow for disproportionate O&D enplanement growth throughout the period, as local passenger leakage to other facilities gradually transitions into a more equilibrium state. By 2017, DL, OA, and LCCs average similar daily departure levels. Table 3 - 15 presents the modeled market and departure level in this scenario.
Table 3 - 15: Departure Information by Carrier Type (Multi-Carrier)
2011 2015 2020 2035 DDEW DL 129 59 61 69 OA 48 59 62 71 LCC 0 39 53 60 Total 177 158 177 200
Seats/departure 73 97 104 111 Source: La Costa Consulting, December 2011
The Base enplanements forecast in this scenario increases at a 2.0% CAGR from 2010-35, growing from approximately 4.0 million to approximately 6.6 million. This scenario contains an
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intense period of growth in the years following DL’s hub pull down, as LCC service grows to focus city-type levels. By 2017, LCCs are generating more enplanements than DL.
Table 3 - 16: Multi-Carrier Scenario Enplanements
Multi-carrier Scenario 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Enplanements 3,975 3,490 3,134 2,886 3,551 4,249 4,727 5,144 5,247 5,317 5,388 5,458 5,529
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Enplanements 5,601 5,673 5,748 5,824 5,900 5,978 6,056 6,136 6,218 6,301 6,387 6,474 6,563
Source: La Costa Consulting, December 2011
Table 3 - 17: Multi-Carrier Scenario Departures
Departures - annual 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 DL 46,976 39,878 21,985 21,195 21,649 21,660 21,728 22,054 22,230 22,408 22,587 22,768 OA 17,632 18,139 19,832 21,144 21,711 22,015 22,146 22,478 22,658 22,839 23,022 23,206 LCC 0 0 4,040 11,182 14,218 16,737 18,915 19,199 19,352 19,507 19,663 19,820 Total 76,389 64,608 58,017 45,857 53,520 57,578 60,412 62,789 63,731 64,241 64,754 65,272 65,795 YOY (15.4%) (10.2%) (21.0%) 16.7% 7.6% 4.9% 3.9% 1.5% 0.8% 0.8% 0.8% 0.8%
Departures - annual 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 DL 22,950 23,134 23,319 23,505 23,693 23,883 24,074 24,267 24,461 24,657 24,854 25,053 25,253 OA 23,392 23,579 23,768 23,958 24,149 24,343 24,537 24,734 24,932 25,131 25,332 25,535 25,739 LCC 19,979 20,139 20,300 20,462 20,626 20,791 20,957 21,125 21,294 21,464 21,636 21,809 21,984 Total 66,321 66,852 67,386 67,926 68,469 69,017 69,569 70,125 70,686 71,252 71,822 72,396 72,976 YOY 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
Source: La Costa Consulting, December 2011
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Figure 3 - 32: Multi-Carrier Scenario Enplanements
7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 Enplanements (thousands) Enplanements 3,000 2,500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Multi-carrier
Source: La Costa Consulting, December 2011
Figure 3 - 33: Multi-Carrier Scenario Carrier Mix (Departures)
80,000
70,000
60,000
50,000
40,000
Departures 30,000
20,000
10,000
0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
DL OA LCC
Source: La Costa Consulting, December 2011
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3.3.3.4. Scenario Comparison Figure 3 - 34 plots enplanements across the forecast period for both scenarios. Figure 3 - 35 plots departures for both through 2035. The Multi-Carrier scenario produces a steep drop in the near-term as DL pulls down its hub structure. However, this situation stabilizes by 2016 as a more robust LCC profile allows enplanements to converge between the two scenarios. The Multi-Carrier scenario produces higher load factors and seats-per-departure, as the heavier mix of LCC service results in a higher percentage of mainline aircraft.
Figure 3 - 34: Enplanements: Dominant Carrier + LCC Scenario vs. Multi-Carrier Scenario
7,000
6,500
6,000
5,500
5,000
4,500
4,000
Enplanements (000s) 3,500
3,000
2,500
2,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Dom. + LCC Multi-carrier
Source: La Costa Consulting, December 2011
Commercial departures remain significantly lower in the Multi-Carrier scenario after DL draws down its current hub structure. While enhanced LCC service fills much of this vacuum in generating seats and enplanements, their assumed use of larger, mainline aircraft drives a lower number of departures.
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Figure 3 - 35: Commercial Passenger Departures: Dominant Carrier + LCC Scenario vs. Multi-Carrier Scenario
90,000
80,000
70,000
60,000 Departures 50,000
40,000
30,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Dom. + LCC Multi-carrier
Source: La Costa Consulting, December 2011
3.3.4. Baseline Scenario The foundation of the Baseline Scenario forecast is a 2035 CVG (O&D) point-estimate traffic projection, driven by the existing relationship between O&D traffic and a number of econometric variables from a portfolio of peer airports. From this long-term point-estimate forecast, a series of additional analyses are performed to produce the complete Baseline forecast.
3.3.4.1. Forecast Development O&D traffic is converted to total enplanements by assuming annual ratios of local vs. connecting traffic; as with other projections, this relationship is expected to gravitate towards peer group equilibrium by the end of the forecast period. The point-estimate traffic forecast was converted into annual figures by assuming “straight-line” growth from 2012 projections.
Enplanements are used to derive commercial operations based on a combination of output from our case-based analysis and our assumption of straight-line growth throughout the forecast period.
A. Enplanements Baseline Scenario enplanements grow steadily before reaching a 2035 total of 5.8 million, with 4.9 million of these local O&D passengers. Figure 3 - 36 and Table 3 - 18 present the steady growth profile under the Baseline Scenario through the forecast period. Figure 3 - 37 presents a plot of all enplanements under all scenarios over the planning period.
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Figure 3 - 36: Baseline Scenario Enplanements and O&D Traffic: 2011-35
Source: La Costa Consulting, February 2012. Note: Percentages represent the percentage of local traffic at five- year increments
Table 3 - 18: Baseline Scenario Enplanements and Departures
Baseline Scenario 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Enplanements (mm) 3,975 3,490 3,134 3,276 3,415 3,551 3,684 3,815 3,943 4,068 4,190 4,311 4,429 Departures 76,389 64,608 58,017 59,674 61,226 62,678 64,036 65,307 66,495 67,606 68,643 69,612 70,517
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Enplanements (mm) 4,544 4,657 4,769 4,878 4,985 5,090 5,193 5,294 5,394 5,492 5,588 5,682 5,774 Departures 71,360 72,146 72,878 73,559 74,192 74,780 75,324 75,828 76,294 76,723 77,118 77,481 77,822
Source: La Costa Consulting, February 2012
Figure 3 - 37: Enplanements – All Scenarios
7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000
Enplanements (000s) 2,500 2,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Dom + LCC Multi-Carrier Baseline
Source: La Costa Consulting, February 2012
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3.3.4.2. Comparison to Terminal Area Forecast While the Multi-Carrier and Dominant +LCC scenarios serve to model the activity that could be anticipated under varying market conditions, the Baseline Forecast is much more conservative. The Baseline Forecast compares favorably with the 2011 FAA Terminal Area Forecast (TAF) for CVG, as shown in Table 3 - 19.
Table 3 - 19: 2011 FAA CVG TAF (top) vs. Baseline Forecast (bottom)
2011 TAF Enplanements Operations Air Air taxi/ Air Air taxi/ (Local) (Local) (Local) Total Tracon Year carrier commuter Total carrier commuter GA Military Total Civil Military Total Opns Opns 2010 1,518,402 2,577,446 4,095,848 67,112 116,176 4,618 158 188,064 0 0 0 188,064 286,945 2011 1,433,236 2,203,431 3,636,667 72,276 89,885 4,956 139 167,256 0 0 0 167,256 262,713 2012 1,255,891 1,804,688 3,060,579 65,031 75,422 4,851 139 145,443 0 0 0 145,443 237,254 2013 1,324,617 1,892,349 3,216,966 68,338 78,474 4,851 139 151,802 0 0 0 151,802 244,947 2014 1,406,089 1,995,804 3,401,893 72,279 82,125 4,851 139 159,394 0 0 0 159,394 254,085 2015 1,488,371 2,099,915 3,588,286 76,233 85,741 4,851 139 166,964 0 0 0 166,964 263,220 2016 1,570,598 2,203,452 3,774,050 80,154 89,273 4,851 139 174,417 0 0 0 174,417 272,222 2017 1,606,639 2,243,643 3,850,282 81,643 90,199 4,851 139 176,832 0 0 0 176,832 275,958 2018 1,643,571 2,284,568 3,928,139 83,162 91,135 4,851 139 179,287 0 0 0 179,287 279,760 2019 1,681,417 2,326,240 4,007,657 84,712 92,080 4,851 139 181,782 0 0 0 181,782 283,620 2020 1,720,205 2,368,671 4,088,876 86,294 93,035 4,851 139 184,319 0 0 0 184,319 287,549 2021 1,759,959 2,411,876 4,171,835 87,908 93,999 4,851 139 186,897 0 0 0 186,897 291,550 2022 1,800,706 2,455,870 4,256,576 89,555 94,974 4,851 139 189,519 0 0 0 189,519 295,618 2023 1,842,470 2,500,667 4,343,137 91,236 95,959 4,851 139 192,185 0 0 0 192,185 299,759 2024 1,885,285 2,546,281 4,431,566 92,952 96,954 4,851 139 194,896 0 0 0 194,896 303,976 2025 1,929,178 2,592,727 4,521,905 94,704 97,960 4,851 139 197,654 0 0 0 197,654 308,274 2026 1,974,183 2,640,020 4,614,203 96,492 98,976 4,851 139 200,458 0 0 0 200,458 312,649 2027 2,020,329 2,688,176 4,708,505 98,318 100,003 4,851 139 203,311 0 0 0 203,311 317,106 2028 2,067,645 2,737,210 4,804,855 100,182 101,041 4,851 139 206,213 0 0 0 206,213 321,646 2029 2,116,168 2,787,138 4,903,306 102,086 102,088 4,851 139 209,164 0 0 0 209,164 326,268 2030 2,165,933 2,837,977 5,003,910 104,029 103,147 4,851 139 212,166 0 0 0 212,166 330,978 2031 2,216,976 2,889,743 5,106,719 106,014 104,216 4,851 139 215,220 0 0 0 215,220 335,776 2032 2,269,333 2,942,453 5,211,786 108,041 105,297 4,851 139 218,328 0 0 0 218,328 340,665 2033 2,323,042 2,996,124 5,319,166 110,112 106,389 4,851 139 221,491 0 0 0 221,491 345,648 2034 2,378,142 3,050,775 5,428,917 112,226 107,493 4,851 139 224,709 0 0 0 224,709 350,728 2035 2,434,674 3,106,422 5,541,096 114,386 108,608 4,851 139 227,984 0 0 0 227,984 355,904
CVG Forecast (Baseline) - CALENDAR YEAR (COMMERCIAL ONLY) Enplanements Operations Air Air taxi/ Air Air taxi/ (Local) (Local) (Local) Total Tracon Year carrier commuter Total carrier commuter GA Military Total Civil Military Total Opns Opns 2010 1,518,402 2,577,446 4,095,848 67,112 116,176 4,618 158 188,064 0 0 0 188,064 286,945 2011 1,433,236 2,203,431 3,636,667 64,995 85,004 4,956 139 155,094 0 0 0 155,094 250,551 2012 1,693,418 1,440,948 3,134,367 64,017 73,412 4,851 139 142,419 0 0 0 142,419 234,230 2013 1,855,032 1,421,273 3,276,305 68,798 72,507 4,851 139 146,295 0 0 0 146,295 239,440 2014 2,019,011 1,396,213 3,415,224 73,537 71,311 4,851 139 149,838 0 0 0 149,838 244,529 2015 2,185,000 1,366,218 3,551,218 78,384 69,848 4,851 139 153,222 0 0 0 153,222 249,478 2016 2,351,233 1,333,146 3,684,379 83,064 68,140 4,851 139 156,194 0 0 0 156,194 253,999 2017 2,518,846 1,295,949 3,814,794 87,798 66,206 4,851 139 158,994 0 0 0 158,994 258,120 2018 2,687,608 1,254,940 3,942,548 92,578 64,064 4,851 139 161,632 0 0 0 161,632 262,105 2019 2,857,317 1,210,404 4,067,721 97,395 61,732 4,851 139 164,118 0 0 0 164,118 265,956 2020 3,027,792 1,162,598 4,190,390 103,685 59,226 4,851 139 167,901 0 0 0 167,901 271,131 2021 3,196,489 1,114,141 4,310,630 109,538 56,559 4,851 139 171,087 0 0 0 171,087 275,740 2022 3,365,738 1,062,775 4,428,513 114,944 53,745 4,851 139 173,679 0 0 0 173,679 279,778 2023 3,535,456 1,008,650 4,544,107 119,892 50,797 4,851 139 175,679 0 0 0 175,679 283,253 2024 3,705,575 951,902 4,657,477 124,851 47,726 4,851 139 177,567 0 0 0 177,567 286,647 2025 3,879,911 888,778 4,768,689 129,818 44,543 4,851 139 179,352 0 0 0 179,352 289,972 2026 4,049,878 827,924 4,877,802 134,790 41,258 4,851 139 181,038 0 0 0 181,038 293,229 2027 4,227,084 757,791 4,984,875 139,762 37,880 4,851 139 182,632 0 0 0 182,632 296,427 2028 4,397,257 692,709 5,089,966 144,732 34,417 4,851 139 184,138 0 0 0 184,138 299,571 2029 4,573,563 619,565 5,193,128 149,696 30,877 4,851 139 185,563 0 0 0 185,563 302,667 2030 4,743,734 550,680 5,294,414 154,653 27,268 4,851 139 186,911 0 0 0 186,911 305,723 2031 4,918,795 475,081 5,393,876 159,600 23,596 4,851 139 188,186 0 0 0 188,186 308,742 2032 5,088,815 402,746 5,491,562 164,535 19,868 4,851 139 189,393 0 0 0 189,393 311,730 2033 5,262,349 325,169 5,587,518 169,456 16,090 4,851 139 190,536 0 0 0 190,536 314,693 2034 5,432,117 249,674 5,681,791 174,361 12,267 4,851 139 191,618 0 0 0 191,618 317,637 2035 5,605,873 168,552 5,774,425 179,265 8,405 4,851 139 192,660 0 0 0 192,660 320,580 Source: Federal Aviation Administration, Terminal Area Forecast for Cincinnati/Northern Kentucky International Airport, La Costa Consulting, February 2012
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3.3.5. Peak Period Activity Peak period data, which is used for facility planning, is detailed in the following sections. Peak factors were developed by creating peak day schedules based on the scenarios and historical schedules. All data is generated from the Multi-Carrier scenario unless otherwise noted. The following details historical peak times and months.
Peak Seats: Friday in July Peak Hour Departures: 0900 Peak Hour for Arrivals: 0800 Peak Day Traffic and Operations: Friday Peak Month Enplanements: June (daily average) Peak Month O & D Traffic: June Peak Hour for Originating Traffic: 0600-0800 Monday and Friday Peak Hour Arrival Traffic: 1800-2000 Friday Fleet Mix: Dominated by 50 seat RJs – 68% Source: La Costa Consulting from OAG, August 2011
Table 3 - 20 and Table 3 - 21 chart monthly averages over five years ending in the base year of 2010, and reflect average daily values for each measurement (e.g. average DDEW). The five- year average shows peak months of April, June, July and August, while 2010 departures and seats peaked in March.
Table 3 - 20: Average Daily Departures from CVG, 2006-10
2006 2007 2008 2009 2010 5 yr avg 2010% January 425 407 386 281 229 8.6% 9.0% February 420 386 302 290 217 8.1% 8.5% March 430 420 291 294 228 8.3% 8.9% April 428 413 390 293 220 8.7% 8.6% May 431 403 371 279 203 8.4% 8.0% June 439 419 378 283 219 8.7% 8.6% July 432 416 381 287 216 8.7% 8.5% August 434 425 371 285 219 8.7% 8.6% September 423 404 314 257 205 8.0% 8.0% October 419 408 315 258 204 8.0% 8.0% November 419 416 305 254 197 8.0% 7.7% December 406 398 305 252 194 7.8% 7.6% Source: Airport Records, La Costa Consulting, August 2011
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Table 3 - 21: Average Daily Seats from CVG, 2006-10
2006 2007 2008 2009 2010 5 yr avg 2010% January 28,190 26,922 25,193 18,884 14,158 8.6% 8.7% February 27,591 25,732 21,821 19,473 13,401 8.2% 8.3% March 28,170 27,804 21,196 19,754 14,042 8.5% 8.7% April 28,019 27,305 25,418 19,610 13,686 8.7% 8.5% May 28,354 26,456 24,723 18,693 13,139 8.5% 8.1% June 28,590 27,630 25,089 18,980 14,159 8.7% 8.7% July 28,153 27,413 25,268 19,228 14,075 8.7% 8.7% August 28,296 27,929 24,764 18,234 14,060 8.6% 8.7% September 27,745 26,465 21,109 15,743 13,148 7.9% 8.1% October 27,520 26,731 21,134 15,720 12,990 7.9% 8.0% November 27,447 27,172 20,425 15,597 12,580 7.9% 7.8% December 26,836 26,041 20,338 15,715 12,490 7.7% 7.7%
Source: OAG, La Costa Consulting, August 2011
Four different months have been identified as peak over the last five years, with summer months driving the highest volume of enplanements. July is forecast as the peak month for total traffic – with June is identified as the peak for O&D traffic.
Figure 3 - 38: CVG Enplanements by Month, 2006 - 2010
Source: DOT T100, La Costa Consulting, August 2011
July has been the peak seat capacity month over three of the last five years – a proxy for the month carriers feel has the greatest potential for passenger enplanements. Summer peaks continue despite the steep decline in seats over the last five years.
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Figure 3 - 39: CVG Departure Seats by Month, 2006 - 2010
Source: DOT T100, La Costa Consulting, August 2011
June has been the peak month for O&D passengers. Peaking for local passengers drives a different subset of facility requirements, primarily those for landside elements.
Figure 3 - 40: CVG Originating Passengers by Month, 2007 - 2010
Source: CVG Finance, DOT T100, OD1B, La Costa Consulting, August 2011
While July has generally been the peak month for total passengers, June represented the 2010 peak when adjusted for the number of days in each month. Note that March and June represented secondary peak periods.
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Figure 3 - 41: CVG Monthly Enplanements, 2010
Source: CVG Finance, DOT T100, OD1B, La Costa Consulting, August 2011
Figure 3 - 42: CVG Originating Passengers by Hour, June 2010
Source: OD1B and TSA survey at security points, La Costa Consulting, August 2011
Friday represents the peak day in the graphs below, which depict seat capacity and departures by day of the week in July 2011.
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Figure 3 - 43: CVG Seat Capacity by Day of Week, July 2011
Source: OAG, La Costa Consulting, August 2011
Figure 3 - 44: CVG Departures by Day of Week, July 2011
Source: DOT T100, La Costa Consulting, August 2011
Figure 3 - 45 depicts an hourly operations profile on an average day in a peak month (July) for 2011 – followed by projections for similar average day/peak month periods in 2015 and 2035.
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Figure 3 - 45: CVG Aircraft Operations by Hour, July 2011
Source: OAG, La Costa Consulting, August 2011
Figure 3 - 46: Average Day/Peak Month Operations, 2015 (Multi-Carrier)
Source: La Costa Consulting, August 2011
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Figure 3 - 47: Average Day/Peak Month Operations, 2035 (Multi-Carrier)
Source: La Costa Consulting, August 2011
Table 3 - 22: Multi-Year Summary: Average Day/Peak Month Operations (Multi- Carrier)
0h 1h 2h 3h 4h 5h 6h 7h 8h 9h 10h 11h 12h 13h 14h 15h 16h 17h 18h 19h 20h 21h 22h 23h 2015 Arrivals 0 0 0 0 0 0 2 4 21 10 5 7 9 6 11 11 10 11 11 6 10 15 14 5 2015 Departures 0 0 0 0 0 0 20 27 13 10 7 7 10 10 10 10 10 10 10 7 3 3 0 0
2020 Arrivals 0 0 0 0 0 0 2 5 24 11 6 8 10 6 12 12 11 12 12 7 12 17 16 5 2020 Departures 0 0 0 0 0 0 23 30 15 11 8 8 11 11 11 11 11 11 11 8 4 4 0 0
2025 Arrivals 0 0 0 0 0 0 2 5 25 12 6 9 11 7 13 13 11 13 13 7 12 18 16 5 2025 Departures 0 0 0 0 0 0 24 31 16 12 8 8 12 12 12 12 12 12 12 8 4 4 0 0
2030 Arrivals 0 0 0 0 0 0 2 5 26 12 6 9 11 7 13 13 12 13 13 8 13 18 17 6 2030 Departures 0 0 0 0 0 0 24 33 16 12 8 8 12 12 12 12 12 12 12 8 4 4 0 0
2035 Arrivals 0 0 0 0 0 0 2 6 27 13 6 9 11 7 14 14 12 14 14 8 13 19 18 6 2035 Departures 0 0 0 0 0 0 25 34 17 13 8 8 13 13 13 13 13 13 13 8 4 4 0 0
Source: La Costa Consulting, August 2011
The fleet mix forecast below in Figure 3 - 48 through Figure 3 - 52 reflects a continued decline phase for the 50-seat regional aircraft – the dominant fleet type at CVG as of 2010.
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Figure 3 - 48: Commercial Operations Fleet Mix: 2010
Source: OAG, La Costa Consulting, August 2011
Figure 3 - 49: Commercial Operations Fleet Mix: 2015 (Multi-Carrier)
35,000 60% 53.2%
30,000 50%
O 25,000 p 40% e r 20,000 a 27.2% 30% t i 15,000 o 18.4% 20% n 10,000 s
10% 5,000 1.2% 0.0% 0 0% Wide Narrow RJ-50 RJ-75/95 Prop
Source: La Costa Consulting, December 2011
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Figure 3 - 50: Commercial Operations Fleet Mix: 2020 (Multi-Carrier)
45,000 70%
40,000 59.3% 60%
O 35,000 p 50% e 30,000 r 25,000 40% a t 20,000 30% i 22.4%
o 15,000 17.2% n 20% s 10,000 10% 5,000 1.1% 0.0% 0 0% Wide Narrow RJ-50 RJ-75/95 Prop
Source: La Costa Consulting, December 2011
Figure 3 - 51: Commercial Operations Fleet Mix: 2025 (Multi-Carrier)
45,000 70%
40,000 59.3% 60% O 35,000 p 50% e 30,000 r 25,000 40% a 30.5% t 20,000 30% i 15,000 o 20% n 10,000 9.2% s 10% 5,000 1.0% 0.0% 0 0% Wide Narrow RJ-50 RJ-75/95 Prop
Source: La Costa Consulting, December 2011
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Figure 3 - 52: Commercial Operations Fleet Mix: 2035 (Multi-Carrier)
50,000 70% 61.3% 45,000 60% O 40,000 p 50% e 35,000 r 30,000 40% a 34.5% 25,000 t 30% i 20,000
o 15,000 20% n 10,000 s 3.2% 10% 5,000 1.0% 0.0% 0 0% Wide Narrow RJ-50 RJ-75/95 Prop
Source: La Costa Consulting, December 2011
3.3.6. Military / General Aviation Military and general aviation operations make up a very small part of the CVG traffic. Therefore, specific forecasts for these categories of activity were not prepared as part of the 2035 Master Plan Update. Instead, the FAA TAF projections for these categories have been included in the overall projections. Military operations are expected to remain constant at 139 annually throughout the forecast period.
The number of general aviation aircraft based at CVG has historically been low. Tax laws are more favorable to aircraft owners in Ohio, and therefore the majority of general aviation aircraft in the CVG region are based at nearby Ohio airports. The FAA projects general aviation operations to remain steady at 4,851 annually from 2012 through the remainder of the forecast period. Based GA aircraft are projected to increase from 11 in 2011 to 19 in 2035.
3.3.7. Air Cargo
3.3.7.1. CVG Air Cargo Overview There are two integrated air cargo carriers at CVG—DHL and FedEx. DHL describes itself as the global market leader in the logistics industry, hence its tagline “The Logistics Company for the World.” DHL’s expertise is in international express, air and ocean freight, road and rail transportation, contract logistics, and international mail services. With a global network of more than 220 countries and territories and approximately 300,000 employees worldwide, DHL offers customers global logistics for handling of cargo requirements. DHL is part of Deutsche Post DHL, which generated revenue of more than 46 billion Euros in 2009. FedEx describes itself as the world’s largest express transportation company, providing fast and reliable delivery to every U.S. address and to more than 220 countries and territories. FedEx uses a global air-and- ground network to speed delivery of time-sensitive shipments, usually in one to two business
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days guaranteed. FedEx has more than 142,000 employees and had 2010 revenues of $21.6 billion.
Because DHL comprises approximately 95% of cargo volumes at CVG, the impact of any forecast is almost wholly contingent on DHL volumes – which are impacted in great measure by global macroeconomic events. Local activity is also affected to a lesser extent by facility and cost issues. Note that UPS represents approximately 98% of cargo volumes at Louisville International Airport, while FedEx represents over 96% of cargo volumes at Memphis International Airport.
For CVG, cargo activity is extremely complimentary - as its time patterns are very different from those of passenger operations. The vast majority of arrivals and departures occur between 10:00 p.m. and 5:00 a.m., generating almost no overlap or conflict with passenger operations.
DHL’s entry/exit/reentry into Cincinnati can be seen in Figure 3 - 53.
Figure 3 - 53: CVG Cargo Landed Weight Summary, 2003 - 2010
2,500,000 2,248,041
2,000,000 1,824,224 1,785,618
1,500,000 1,207,447 962,990 1,000,000
500,000 140,020 145,245 142,181 133,490 154,072 176,821 154,663 156,562 0 2003 2004 2005 2006 2007 2008 2009 2010
DHL FedEx
Source: CVG Records, La Costa Consulting, August 2011
In 2005, as part of the merger and acquisition of Airborne Express, DHL expanded its services - adding U.S. ground and domestic air express delivery to its international air cargo service. DHL moved all operations to the Wilmington, Ohio, airport facility (which was wholly owned by Airborne Express) and shut down operations at CVG.
In 2009, DHL returned to CVG, having made a strategic decision to abandon its domestic service to focus on its core business - international air freight. In October 2010, DHL announced a $12.5 million project to upgrade existing hardware and software applications running its auto sort system, in an effort to improve the speed and reliability of shipment scanning and sorting. In March 2011, DHL began construction to expand its existing aircraft parking apron on 19 acres of land leased from CVG – with construction expected to continue through November 2011. This expansion creates parking gates for nine additional wide-body
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aircraft that will connect the U.S. to points in Asia, Europe, and the Americas. All new aircraft gates will include a hydrant jet refueling system for a more efficient refueling operation, as well as the capability to de-ice aircraft directly at the gate.
Land usage and availability and scheduling windows were the two major components of issues discussions with DHL personnel.
DHL exercised three parcel options south of its existing position in January, and was using one of them to add ramp and nine additional pad positions. This expansion was slated to be complete by September 2011, but had been delayed somewhat due to weather conditions, and was complete by November 2011. The reasons for this expansion are a) growth and b) to relieve some suboptimal operational issues, as there is currently ramp congestion which this expansion is projected to help alleviate. DHL also plans to bring up to two spare aircraft to this site (from an off-airport facility), as well as to incorporate five to six wide-body aircraft of over the next couple of years (with a fleet mix of 80% 767 gauge and 20% 747/777 gauge). The completion of these pads will provide impetus for additional aircraft to be landed at CVG through 2015, as well as to improve current operational effectiveness - as older less efficient aircraft are swapped out for higher-capacity, more fuel-efficient aircraft. Current growth plans for 2016- 2020 would hinge upon further exercised land options and additional construction.
The five-to-ten year growth phase would likely consist of additional ramp expansion currently under way, which could add an additional ten aircraft in a similar fleet mix as above. Other future possibilities include creating other land options which would prevent the facility from becoming “landlocked” – with short-term expected usage of employee and trailer parking.
The one scenario – however unlikely - in which DHL withdraws from CVG in the near future centers on a lack of availability of additional land parcels for expansion - to avoid being “land locked” by other commercial ventures. Should this scenario occur, the exit of DHL would likely be similar to the 2004-2006 departure, in which DHL would move the entire operation to another location, and would leave FedEx as the major cargo player at CVG – limited to local operations funneling cargo to their hubs.
DHL aircraft scheduling timeframes are developed, set, and coordinated worldwide to maximize aircraft utilization and to meet very specific time schedules. It is therefore of little surprise that there is a high concentration of aircraft arrival and departures within a small time window each day—78% of arrivals are within a three-hour time window from midnight to 3 a.m., while 75% of departures occur within a three-hour time window from 4 a.m. to 6 a.m.
Because of the need to coordinate aircraft landing and departure schedules worldwide, as air cargo volumes continue to grow at CVG the arrival/departure time windows at CVG will likely remain in the current narrow time window.
FedEx currently operates two daily MEM-CVG flights to service local operations, primarily operated with A300 and A310 aircraft. The largest constraint to FedEx’s CVG operation is facility size, which both limits and interferes with operations. They work from a separate regional sort facility several miles from the airport, trucking air shipping containers to and from CVG from that facility. FedEx has indicated a strong desire to work with CVG to develop a build-to-suit facility, which would allow them to consolidate local off-site operations and thereby improve efficiency. They are also considering taking over part of a multi-tenant cargo building which would allow expansion into six to eight more bays. This forecast assumes that facility or other needs will not constrain activity.
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3.3.7.2. Issues/Risk Factors/Demand Drivers A. Facility and landing costs at CVG – The geographic location and availability of additional land to facilitate growth opportunities is an enormous advantage in retaining DHL at CVG. Note that this is not necessarily true of the other cargo hub airports in the area. During the DHL departure from Wilmington, DHL was economically responsible for the maintenance and upkeep of that facility - which became a liability. In contrast, CVG presents a variable cost model which DHL will find attractive in helping combat future worldwide economic downturns, perhaps reducing arrivals for a time while not closing down entirely. This is a competitive advantage for CVG.
B. Fuel costs – Fuel costs are passed along to DHL customers through a variable fuel surcharge. There are two scenarios for future fuel costs … a) long periods of relatively low oil prices, allowing for air freight and overall economic growth, which would be a positive trend, and b) sustained periods of high oil prices, likely caused by economic and/or geopolitical shocks – which would affect global economies and likely cause a slowdown or pullback by DHL at CVG. However, due to the variability of landing costs, volumes would likely return as the situation stabilized.
C. Changes to “Just in Time” manufacturing processes - A recent McKinsey report suggests that by 2025 China will become the world’s third largest consumer market, as it transitions from a “Made in China” to a “Sold in China” society. This could have implications for DHL’s presence at CVG if there is a change in “Just in Time” manufacturing methodology. However, a more likely scenario would be that another country would take up the mantle of low-cost manufacturing and export to the U.S., leaving DHL at CVG in a similar position to today.
D. Product life cycle changes - For many manufacturing companies, decreasing product cycles for high value or high tech goods have made faster delivery-to-market essential. Air cargo is an integral part of many manufacturers’ and retailers’ global supply chains, allowing companies to operate in lean inventory environments. This is a trend that is projected to continue and is a component in the global growth forecasts previously discussed.
E. Exports from CVG – The U.S. is a net importing country – and, in general, inbound cargo aircraft are more fully laden than outbound. Therefore, any export activity out of CVG will be an inducement for retaining or drawing air cargo companies and should be used as part of land use strategy. Perishable commodities - such as foodstuffs, edibles, fresh seafood or flowers - are examples of products that can be delivered into markets across the globe in perfect condition. Other examples include biomedical, electronic manufacturing, and/or assembly-type goods.
3.3.7.3. Methodology The cargo forecast is “unconstrained” - in that facilities, infrastructure, resources, and development funding are assumed to be available as needed. Research for the forecast began with collection of historical data from CVG. As historical data was somewhat limited due to DHL’s absence between 2004 and 2009, 2010 was used as the baseline year for forecasting. A series of interviews was undertaken with CVG staff and local citizen groups to identify key
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participants, operational and facilities impact, types of competition, and integrated cargo carriers at CVG.
Information gathered from personal interviews supported the historical data collected from CVG - confirming that integrated carriers continue to dominate the CVG market, with 98% of cargo flights at CVG. Together, DHL and FedEx represent 99.9% of total landed cargo weight into CVG – with DHL by far the market leader, representing over 94% of the total cargo business. Baseline data was therefore based primarily on DHL, while also taking into account both FedEx and other lesser carriers.
Further in-depth interviews with DHL employees supplemented data collected from the initial discovery process and provided more detailed information with which to develop the two scenarios. This research confirmed that DHL is focused on international air cargo at CVG, with very limited domestic activity - setting DHL apart from its main competitors, UPS and FedEx, which concentrate primarily on domestic deliveries. For this reason, our forecasts prioritize the use of global macroeconomic data rather than U.S. gross domestic product (GDP) data.
A. Forecast assumptions include: 1. CVG’s optimal geography and low cost of operations/infrastructure development continue to make it a preferred cargo airport 2. DHL’s strategy is driven by global macroeconomic conditions and geography 3. FAA global industry growth rates are utilized in volume projections 4. No significant industry structural changes occur during the forecast period, and the industry continues its trend towards larger capacity, more fuel-efficient aircraft. 5. Base levels are affected by periodic economic downturns, but typically return to (or exceed) pre-downturn conditions.
3.1.1.4. Forecast Scenarios Two forecast scenarios were created – with one projecting continued robust cargo growth, and the second projecting a DHL withdrawal after a short period. The latter was developed due primarily to the precedent set by DHL’s prior departure from CVG. However, we consider a DHL withdrawal highly unlikely – as multiple factors indicate that DHL is likely to continue utilizing (and growing) CVG as its long-term hub for U.S. operations.
DHL projects two primary concerns going forward: a) becoming “landlocked” and thus unable to expand facilities as needed, and b) being unable to land and depart an increasing number of aircraft within their required time windows. Both issues will be addressed as part of the 2035 Master Plan Update.
In developing our base model, the initial 2011-15 buildup – which is the same for both scenarios – was developed at a monthly level based on historical data, current budgets, detailed interview responses, and current DHL strategy. Additionally, the forecast incorporates industry trends and DHL’s stated desire to move to more fuel-efficient aircraft. For projections for 2016-35, we incorporated historical data trends utilized by FedEx as well as general industry forecasts. Volume forecasts are also impacted by facility and cost issues.
A. DHL growth scenario: 1. The base growth case utilizes current DHL corporate strategy and investment plans, which are set through 2015 2. DHL’s corporate strategy may include joint ventures with other businesses, facilitating an aggressive upside growth scenario
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3. The impact of negative global macroeconomic conditions can drive slower growth; this scenario is presented as a downside.
B. DHL withdrawal scenario: 1. DHL retrenches from CVG growth strategy after five years (in 2015) 2. Of existing DHL volume, only 10% to 20% remains at CVG - consisting of domestic activity 3. Other cargo carriers (operating from other airports) fill the vacuum from DHL’s downsizing
Table 3 - 23 presents the cargo arrivals forecast for the planning period. The two scenarios are depicted graphically in Figure 3 - 54 and Figure 3 - 55.
Table 3 - 23: Cargo Forecast Summary
5 year 5 year 5 year 5 year 5 year 2010 2015 i/(d) 2020 i/(d) 2025 i/(d) 2030 i/(d) 2035 i/(d) DHL grows Arrivals - Base 9,972 11,438 13.1% 12,812 13.6% 14,403 13.2% 15,133 7.3% 16,696 7.3% Upside 14,048 40.9% 16,144 14.9% 18,510 14.7% 20,348 9.9% 22,377 10.0% Downside 10,714 7.4% 11,842 10.5% 13,033 10.1% 13,529 3.8% 14,044 3.8%
Landed weight - Base (mm) 2,432.2 3,418.6 40.6% 4,767.8 39.5% 6,510.1 36.5% 8,277.3 27.1% 10,529.1 27.2% Upside 4,148.1 70.5% 5,698.9 37.4% 7,698.4 35.1% 9,793.9 27.2% 12,464.8 27.3% Downside 3,247.7 33.5% 4,195.0 29.2% 5,286.3 26.0% 6,128.2 15.9% 7,104.3 15.9%
DHL withdraws Arrivals - Base 9,972 11,278 13.1% 3,334 (70.4%) 3,758 12.7% 4,283 14.0% 4,938 15.3% Upside 11,278 13.1% 5,553 (50.8%) 6,043 8.8% 6,638 9.8% 7,365 11.0% Downside 11,278 13.1% 1,310 (88.4%) 1,672 27.6% 2,134 27.6% 2,724 27.6%
Landed weight - Base (mm) 2,432.2 3,418.6 40.6% 1,303.4 (61.9%) 1,536.5 17.9% 1,821.8 18.6% 2,172.6 19.3% Upside 3,257.1 33.9% 1,999.9 (38.6%) 2,380.8 19.0% 2,841.5 19.4% 3,399.8 19.6% Downside 3,257.1 33.9% 633.4 (80.6%) 796.7 25.8% 1,005.0 26.1% 1,270.8 26.4%
Notes: i/(d) = increase/(decrease); mm = millions
Source: La Costa Consulting, August 2011
The projections in the DHL growth scenario are quite robust. Base case annual arrivals are projected to grow from 2010 levels of just under 10,000 to 16,696 by 2035, an overall increase of 67% - or 2.7% average per year. The upside forecast projects 2035 arrivals at 22,237, with the downside 2035 projection at 14,044.
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Figure 3 - 54: Cargo Forecast by Arrivals – DHL Grows Scenario
CVG Cargo Forecast by Arrivals DHL Grows scenario 25,000
20,000
15,000
10,000
5,000
-
Total DHL Grows Base Total DHL Grows Upside Total DHL Grows Downside
Source: La Costa Consulting, August 2011
Figure 3 - 55: Cargo Forecast by Arrivals – DHL Withdraws Scenario
CVG Cargo Forecast by Arrivals DHL Withdraws scenario 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 DHL Withdraws - Base DHL Withdraws- Upside DHL Withdraws- Downside
Source: La Costa Consulting, August 2011
As previously discussed, landed weight totals are expected to increase greater than arrivals, as DHL and others are expected to move toward larger and more fuel-efficient aircraft. DHL has
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specific plans for a 2012 fleet swap out, as well as general plans conforming with industry trends in future years. Landed weights (Base case) are projected to grow from 2.4 billion pounds in 2010 to over 10.5 billion by 2035 - an overall increase of 333%, or 13.3% annually. The upside forecast projects landed weight at 12.5 billion annually by 2035, with the downside projection at 7.1 billion. All DHL growth scenarios represent substantial incremental revenue opportunities for CVG – as landed weight (rather than arrival counts) is utilized for invoicing air cargo carriers.
As mentioned, the drivers for these growth rates include the current DHL corporate strategy and investment plans at CVG, which include a commitment to current leases and land options to develop additional aircraft pads for future growth. Additional aircraft pads were completed in November 2011 and are also projected for the 2015/2016 and 2020/2021 timeframes.
Graphic depictions of the cargo forecast for landed weight in the DHL growth and DHL withdrawals scenario are presented Figure 3 - 56 and Figure 3 - 57, respectively.
Figure 3 - 56: Cargo Forecast by Landed Weight – DHL Grows Scenario
CVG CargoCargo Forecast Forecast by by Landed Landed Weight Weight in Pounds (000) DHL Grows DHLscenario Growth Scenario 14,000,000
12,000,000 Thousands 10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
Total DHL Grows - Base Total DHL Grows - Upside Total DHL Grows - Downside
Source: La Costa Consulting, August 2011
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Figure 3 - 57: Cargo Forecast by Landed Weight – DHL Withdraws Scenario
CVGCargo Cargo Forecast Forecast by Landed by Landed Weight Weight in Pounds (000) DHL Withdraws scenario 4,000,000 DHL Growth Scenario 3,500,000
Thousands 3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0 2019 2020 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 DHL Withdraws- Base DHL Withdraws- Upside DHL Withdraws- Downside
Source: La Costa Consulting. August 2011
3.1.1.5. Cargo Operational Peaking The forecast arrivals/departures schedule is developed as to synchronize with other DHL cargo flights worldwide – including for peak periods. Monthly variances are generally due to the number of total days and total of Wednesdays/Thursdays in a given month. The FedEx schedule is static per interviews and grows gauge incrementally with the growth of the region’s economy.
Figure 3 - 58 presents 2011 CVG cargo peaking in arrivals by month. Figure 3 - 59 graphs cargo arrivals and departures by hour for June 2011. Forecasts of monthly and peak month hourly cargo arrivals are presented in Figure 3 - 60 and Figure 3 - 61 for 2012, Figure 3 - 62 and Figure 3 - 63 for 2015, and Figure 3 - 64 and Figure 3 - 65 for 2020.
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Figure 3 - 58: Cargo Arrivals by Month, 2011
CVG Cargo Arrivals by Month, 2011 880 30.0
29.5 860 29.0 840 28.5 820 28.0
800 27.5
27.0 780 26.5 760 26.0 740 25.5
720 25.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Arrivals by Month Daily Average
Source: OAG and DHL, La Costa Consulting, August 2011
Figure 3 - 59: Hourly Cargo Arrivals and Departures: June 2011
Cargo Arrivals and Departures by Hour at CVG June 1, 2011 to June 30, 2011 450 400 0 350 300 250 442 200 0 12 358 150 100 172 170 44 168 32 4 50 4 24 18 8 0 4 4 0 0 8 12 36 28 0 0 36 44 28 48 0 8 0 0 8 4 12 8 8 8 4 0 4 0 4 0 0 0 0 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00
Arrivals Departures
Source: OAG, DHL, La Costa Consulting, August 2011
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Figure 3 - 60: Monthly CVG Forecast Cargo Arrivals: 2012
CVG Forecast Cargo Arrivals by Month, 2012 940 31.0
920 30.5 30.0 900 29.5 880 29.0 860 28.5
840 28.0 27.5 820 27.0 800 26.5 780 26.0 760 25.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Arrivals Monthly avg.
Source: La Costa Consulting, August 2011
Figure 3 - 61: Hourly Daily Cargo Arrivals and Departures: June 2012
Forecast Daily Cargo Arrivals and Departures by Hour at CVG June 1, 2012 to June 30, 2012 500
450
400 0 350
300
250
200 0 12 449 363 150 173 100 175 171 45 32 50 4 4 24 18 8 0 4 4 0 0 8 12 37 28 0 0 37 45 28 49 0 8 0 0 8 4 12 8 8 8 4 0 4 0 4 0 0 0 0 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00
Arrivals Departures
Source: La Costa Consulting, August 2011
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Figure 3 - 62: Monthly CVG Forecast Cargo Arrivals: 2015
CVG Forecast Cargo Arrivals by Month, 2015 1000 33.0
980 32.0 960
940 31.0
920 30.0 900
880 29.0
860 28.0 840
820 27.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Arrivals by month Daily Avg.
Source: La Costa Consulting, August 2011
Figure 3 - 63: Hourly Daily Cargo Arrivals and Departures: June 2015
Forecast Daily Cargo Arrivals and Departures by Hour at CVG June 1, 2015 to June 30, 2015 600
500
0 400
300
0 13 477 200 387
184 100 186 181 48 35 4 26 19 9 4 0 4 4 0 9 39 48 0 13 30 0 0 39 52 0 9 0 0 9 4 13 9 9 9 4 0 4 0 30 4 0 0 0 0
Arrivals Departures
Source: La Costa Consulting, August 2011
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Figure 3 - 64: Monthly CVG Forecast Cargo Arrivals: 2020
CVG Forecast Cargo Arrivals by Month, 2020
1120 38.0 1100 37.0 1080 1060 36.0 1040 35.0 1020 34.0 1000
980 33.0 960 32.0 940 920 31.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Arrivals by month Daily Avg.
Source: La Costa Consulting, August 2011
Figure 3 - 65: Hourly Daily Cargo Arrivals and Departures: June 2020
Forecast Daily Cargo Arrivals and Departures by Hour at CVG June 1, 2020 to June 30, 2020 600
500 0
400
300
0 15 539 437 200
207 100 210 205 54 39 5 5 29 22 10 0 5 5 0 0 10 15 44 34 0 0 44 54 34 59 0 10 0 0 10 5 15 10 10 10 5 0 5 0 5 0 0 0 0 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00
Arrivals Departures
Source: La Costa Consulting, August 2011
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Figure 3 - 66 depicts CVG peak hour aircraft by percent in 2011, 2012, 2015, and 2020. The 2011 aircraft mix will change over time with continued movement towards larger and more fuel- efficient aircraft - consistent with global industry trends. For example, in 2012, DHL will replace DC8s with 747 and 767 gauge aircraft. At present, it is undetermined when and at what pace the B76F aircraft (the bulk of the DHL fleet) will be replaced with more fuel-efficient aircraft, and therefore this forecast assumes a constant fleet mix throughout the forecast period. Figure 3 - 66: Peak Hour Aircraft Percentages
CVG Peak Hour Aircraft Percentages by Aircraft Model/Size
100% 3% 3% 3% 3%
90% 0% 0% 0% 13% 80%
70% 44% 44% 44%
60% 44%
50%
9% 9% 9% 40%
3% 30% 22% 22% 22% 16% 20%
10% 13% 13% 13% 13%
0% 3% 3% 3% 3% 2011 2012 2015 2020
B1900 B72A B7474 B763 B76F DC87 EMB12 S227L SH360
Source: La Costa Consulting, August 2011
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3.4. SUMMARY OF KEY FORECAST ELEMENTS The Baseline forecast was approved by the FAA, but the more aggressive Multi-Carrier Scenario was utilized for facility planning to ensure that if demand were to be realized, the requirements to support that demand were clearly defined. Planning Activity Levels were derived from the Multi-Carrier Scenario to define passenger and operations levels used to determine demand and associated requirements. Table 3 - 24Error! Reference source not found. depicts the various components that comprise the Baseline and Planning Forecast from which the Planning Activity Levels were derived. The Baseline forecast is presented in Table 3 - 24.
Table 3 - 24: Forecast Components
Passenger Cargo Military and GA Component Component Components Baseline approved by FAA Baseline Forecast DHL Grows FAA 2011 TAF for CVG Planning Forecast for PALs Multi-Carrier Scenario DHL Grows FAA 2011 TAF for CVG Source: Jacobs Engineering Inc., February 2012 Planning activity levels were defined for key years, as shown in Table 3 - 25.
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Table 3 - 25: Key Forecast Metrics by Planning Activity Level
2010 PAL 1 PAL 2 PAL 3 PAL 4 PAL 5 Year Met under Multi-Carrier Scenario 2015 2020 2025 2030 2035
Million Annual Enplanements 3.49M 4.25M 4.82 5.75M 6.14M 6.56M
Million Annual Originations 2.24M 3.61M 4.10M 4.89M 5.22M 5.58M
Annual Departures Passenger Aircraft 64,608 57,578 64,754 67,386 70,125 72,976 All Departures 94,032 71,511 80,061 84,184 87,753 92,167
Peak Hour Factors - Average Day, Peak Month
All Passengers Enplaned (incl. connections) 1,770 1,317 1,665 1,781 1,896 2,028 Originating 966 1,119 1,415 1,514 1,612 1,724 Deplaned 2,042 1,542 1,950 2,086 2,221 2,376 Terminating 1,154 1,311 1,658 1,773 1,888 2,019
International Passengers Enplaned 204 219 401 420 429 603 Deplaned 204 208 401 420 429 603
Passenger Aircraft Operations Departures 33 25 28 30 31 32 Arrivals 26 20 22 23 24 25
All Aircraft Operations Departures 35 34 Arrivals 28 28
Peak Hour Operations 37 44 Source: Jacobs Engineering from La Costa Consulting forecasts, February 2012
3.5. OTHER SUPPORTING INFORMATION
3.5.1. FAA 2011 Terminal Area Forecast for CVG Forecasts for general aviation (GA) operations, based aircraft, and military operations are based on the FAA’s 2011Terminal Area Forecast (TAF) for CVG, which is shown in Table 3 - 26.
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Table 3 - 26: FAA 2011 Terminal Area Forecast for CVG
2011 TAF Enplanements Operations Air Air taxi/ Air Air taxi/ (Local) (Local) (Local) Total Tracon Year carrier commuter Total carrier commuter GA Military Total Civil Military Total Opns Opns 2010 1,518,402 2,577,446 4,095,848 67,112 116,176 4,618 158 188,064 0 0 0 188,064 286,945 2011 1,433,236 2,203,431 3,636,667 72,276 89,885 4,956 139 167,256 0 0 0 167,256 262,713 2012 1,255,891 1,804,688 3,060,579 65,031 75,422 4,851 139 145,443 0 0 0 145,443 237,254 2013 1,324,617 1,892,349 3,216,966 68,338 78,474 4,851 139 151,802 0 0 0 151,802 244,947 2014 1,406,089 1,995,804 3,401,893 72,279 82,125 4,851 139 159,394 0 0 0 159,394 254,085 2015 1,488,371 2,099,915 3,588,286 76,233 85,741 4,851 139 166,964 0 0 0 166,964 263,220 2016 1,570,598 2,203,452 3,774,050 80,154 89,273 4,851 139 174,417 0 0 0 174,417 272,222 2017 1,606,639 2,243,643 3,850,282 81,643 90,199 4,851 139 176,832 0 0 0 176,832 275,958 2018 1,643,571 2,284,568 3,928,139 83,162 91,135 4,851 139 179,287 0 0 0 179,287 279,760 2019 1,681,417 2,326,240 4,007,657 84,712 92,080 4,851 139 181,782 0 0 0 181,782 283,620 2020 1,720,205 2,368,671 4,088,876 86,294 93,035 4,851 139 184,319 0 0 0 184,319 287,549 2021 1,759,959 2,411,876 4,171,835 87,908 93,999 4,851 139 186,897 0 0 0 186,897 291,550 2022 1,800,706 2,455,870 4,256,576 89,555 94,974 4,851 139 189,519 0 0 0 189,519 295,618 2023 1,842,470 2,500,667 4,343,137 91,236 95,959 4,851 139 192,185 0 0 0 192,185 299,759 2024 1,885,285 2,546,281 4,431,566 92,952 96,954 4,851 139 194,896 0 0 0 194,896 303,976 2025 1,929,178 2,592,727 4,521,905 94,704 97,960 4,851 139 197,654 0 0 0 197,654 308,274 2026 1,974,183 2,640,020 4,614,203 96,492 98,976 4,851 139 200,458 0 0 0 200,458 312,649 2027 2,020,329 2,688,176 4,708,505 98,318 100,003 4,851 139 203,311 0 0 0 203,311 317,106 2028 2,067,645 2,737,210 4,804,855 100,182 101,041 4,851 139 206,213 0 0 0 206,213 321,646 2029 2,116,168 2,787,138 4,903,306 102,086 102,088 4,851 139 209,164 0 0 0 209,164 326,268 2030 2,165,933 2,837,977 5,003,910 104,029 103,147 4,851 139 212,166 0 0 0 212,166 330,978 2031 2,216,976 2,889,743 5,106,719 106,014 104,216 4,851 139 215,220 0 0 0 215,220 335,776 2032 2,269,333 2,942,453 5,211,786 108,041 105,297 4,851 139 218,328 0 0 0 218,328 340,665 2033 2,323,042 2,996,124 5,319,166 110,112 106,389 4,851 139 221,491 0 0 0 221,491 345,648 2034 2,378,142 3,050,775 5,428,917 112,226 107,493 4,851 139 224,709 0 0 0 224,709 350,728 2035 2,434,674 3,106,422 5,541,096 114,386 108,608 4,851 139 227,984 0 0 0 227,984 355,904 Source: Federal Aviation Administration, February 2011
3.5.2. Cargo Industry Overview Four major air freight integrators account for the bulk of the global air cargo traffic: DHL, FedEx, TNT, and UPS. Each has a hub-and-spoke network organization with hubs clustered around the world’s three major zones of economic activity—North America, Europe and Pacific Asia. The choice of the main consolidation hub is typically based upon an airport that is well located and has good infrastructure, but that does not necessarily service a very large local passenger market - to best minimize conflicts with runways and air traffic control. Typically, the integrator is the airport’s main customer and gets privileged access to the facility’s runways. Louisville (SDF) is the major air hub for UPS, while Memphis (MEM) is the major air hub for FedEx.
As seen in Figure 3 - 67, there are a number of DHL/UPS/Fed Ex hubs concentrated in the Eastern part of the United States. Other North American hubs are regionally focused (with Toronto and Hamilton servicing the Canadian market for FedEx/UPS respectively), with the exception of except Miami – which three integrators utilize as a North American hub. In Europe, DHL, and TNT have followed a similar strategy by selecting smaller airports as their main hub facilities (Leipzig and Liege respectively). Hubs have also been established at intermediate locations - such as Anchorage, Dubai, and Bahrain. Although these were initial established for purposes of refueling, they have become hubs in their own right.
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Figure 3 - 67: Current Cargo Hub Facilities
Source: Boeing World Air Cargo Forecast, 2011
While CVG’s location is geographically favorable for a main consolidation hub, the close proximity of FedEx and UPS hubs explains why no other integrated carrier attempted to backfill DHL during its absence from CVG. It is reasonable to assume that there would be limited options to entice another cargo carrier of similar scope to quickly replace DHL in the event of another exit from CVG.
International air cargo industry growth volumes can be impacted by many events at a global or regional level. Worldwide economic recession, the threat of terrorism and increased security requirements, and regional military or political unrest are just a few of the items which can drive short-term reductions in air cargo volume. However, long-term trends are typically resilient, as evidenced by long term global growth forecasts of 5% or greater.
Figure 3 - 68 shows how global air cargo traffic volumes have recently recovered to their 2007 peak levels, as presented by Boeing’s World Air Cargo Forecast.
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Figure 3 - 68: Air Cargo Traffic Timeline
Source: The Boeing Company, 2011
3.5.2.1. Independent Cargo Industry Forecasts World air cargo traffic is expected to continue improving through 2011. U.S. retail inventories are at an all-time low, meaning lower inventory carriage rates are pushing many firms to ship smaller batches of goods more frequently than before the 2008/2009 downturn. Air cargo industry fundamentals are seen as sound. Companies require reliability and speed in shipping globally. They expect integrated cargo carriers to provide continued innovation to support just- in-time manufacturing processes.
In addition to the preceding review of overall industry conditions, independent forecasts prepared by the FAA, Airbus, Boeing, and OAG Cargo reflect growth. Those forecasts are summarized in Table 3 - 27.
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Table 3 - 27: Independent Air Cargo Growth Forecasts –Revenue Ton Kilometers
Forecast Annual Period Growth Rate Airbus 2009-29 5.9% Boeing 2010-29 5.9% FAA 2007-25 5.3% OAG 2010-19 5.3% CVG Cargo Study 2010-35 5.0%
Source: La Costa Consulting, August 2011
Several of DHL’s main competitors produce their own forecasts, which are regarded by industry insiders as valid expert forecasts. This information is incorporated in this document as relevant input into the forecast process. FedEx Chief Economist Gene Huang stated in a May 2011 article published in DC Velocity that Global GDP is forecast to grow 3.3% on average from 2010 to 2015. In an April 2011 article published in Market Watch, Scott Davis, CEO of UPS, noted that UPS has updated its near-term U.S. GDP forecast to 2.9% and global GDP forecast to 3.5%.
3.5.2.2. Air Cargo Segments and Demand Drivers As might be expected, consumer products are the primary product segment in intercontinental air freight. According to various studies, 68% of intercontinental air freight is driven by the top 15 consumer product segments, as illustrated in Table 3 - 28.
Table 3 - 28: Top 15 Consumer Product Segments
Rk Category % of total Cumulative % 1 Apparel/household goods - cotton 7.1% 7.1% 2 Fish and shellfish 7.1% 14.2% 3 Computer accessories 6.5% 20.7% 4 Computers 6.5% 27.2% 5 Nursery stock, etc.. 6.4% 33.6% 6 Industrial machines, other 4.8% 38.4% 7 Vegetables 4.4% 42.8% 8 Other household goods 4.3% 47.1% 9 Telecommunications equipment 3.9% 51.0% 10 Electric apparatus 3.5% 54.5% 11 Apparel, textiles, non-wool/cotton 3.5% 58.0% 12 Other parts/accessories of vehicles 3.0% 61.0% 13 Medicinal equipment 2.8% 63.8% 14 Pharmaceutical preparations 2.3% 66.1% 15 U.S. goods returns (and reimports) 2.2% 68.3% Source: IMF World Economic Output, Bureau of Economic Analysis, Eurostat, The Economist, Logistics Capital and Strategy analysis and estimates, La Costa Consulting, August 2011
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These products can be further summarized into the following segmentations shown in the following Table 3 - 29.
Table 3 - 29: Air Cargo Market Segmentation Air Cargo Market Segmentation Primary Air Cargo Demand Drivers Characteristic High Value Density Physically Perishable Production Process Service Process Marketing Process Product Product Impairment Impairment Impairment Definition of usage High value products Low value products that Medium or low value Equipment or parts Products that are sold driver use air cargo minimize have limited physical component or part that used to deliver a high in very narrow time inventory carrying shelf life is tied to a larger value service will use windows for costs, risk of damage production process and air cargo to avoid promotional reasons and theft cost of impairing the service disruption and and final demand is process is substantial associated economic often unknown costs
Cell phones, laptops, Cut flowers, seafood, Components feeding Aircraft On Ground Printed materials for semiconductors, fruit, vegetables, certainautomotive production (AOG) parts, major advertising campaign, Product examples pharmaceuticals, life science products plant infrastructure project, oilatest designer jeans & gas exploration and footwear, toys , platform consumer electronics North America air imports (air weight %) 31% 21% 22% 6% 21%
Europe air imports (air weight %) 27% 25% 26% 4% 18%
Source: Strategic analysis LCG, La Costa Consulting, August 2011
The preceding descriptions of air cargo segments and demand drivers provide substantive support of why worldwide air cargo volumes are projected by more than 5% per year for the next twenty-plus years. This outlook factored into the cargo demand projection for CVG.
3.6. SOURCES US Department of Commerce, BEA, Census, AAPA, AEA ATA DOT surveys-OD1B and T-100 Boeing World cargo Forecast 2010/2011 Airbus 2011 Global Market Forecast FAA Aerospace forecast 2008- 2025 OAG Cargo Global Cargo Forecast 2010 - 2019 DHL USA website FedEx USA website UPS USA website CVG Finance Group, website Stats and News USA Today newspaper May 2011 DC Velocity May 2011 edition
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Market watch April 2011 edition Air Integrators, Dr. Rodriguez, Dept. of Global Studies and Geography, Hofstra University Research and Innovation technology Administration, Bureau of Transportation Statistics Interviews with DHL Network and Operations personnel Interviews with FedEx Operations personnel Kenton County Airport Board, Cincinnati/Northern Kentucky International Airport personnel
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