MITMIT Overview of Recent Trends in ICATICAT the Industry

Prof. R. John Hansman With the help of the Faculty and Students of the MIT Global Industry Study

Traffic Source: Sage Analysis courtesy Prof Ian Waitz [email protected] MITMIT World Population Distribution & ICATICAT 2002 Air Transportation Activity

North America 37% Pax 27% Pax 26% Cargo 28% Cargo ~160 ~200 Airlines Asia/ ~4100 Airports ~2400 Airports Pacific 26% Pax 36% Cargo Latin America/ ~80 Airlines Middle East Caribbean ~1800 Airports 4% Pax 5% Pax 2% Pax 5% Cargo 3% Cargo 2% Cargo ~20 Airlines ~50 Airlines ~20 Airlines ~230 Airports ~580 Airports ~300 Airports

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

Scheduled Revenue Passenger-Kilomters by Region 1400

1200

1000 Europe 800 Asia and Pacific 600 Latin America & Caribbean RPK (billion) Middle East 400 Africa

200

0 1970 1975 1980 1985 1990 1995 2000 2005

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

Freight Tonne-Kilomters by Region 45

40

35 North America 30 Europe

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

Africa 10

5

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO, scheduled services of commercial air carriers MITMIT Rapid Cargo Growth ICATICAT since Mid 90s

US Scheduled Pax Traffic vs. Cargo Traffic

500 Pax (RPM) Freight (FTM) 400

300

200

100 Normalized Traffic Index (1978=100) Index Traffic Normalized

0 1975 1980 1985 1990 1995 2000 2005

Source: Form41 data, all US carriers MITMIT Impact of September 11 ICATICAT US Domestic RPMs

Domestic Traffic -- RPMs (Billions) 50

45

40

35

30

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

Source: ATA Monthly Passenger Traffic Report Source: ATA, US member airlines, scheduled mainline service MITMIT Cargo Traffic Is Immunized ICATICAT (US Monthly Scheduled FTMs)

Scheduled Cargo Traffic -- FTMs (Billions) 3.0

2.5

2.0

1.5

2000 2001 2002 2003 2004 1.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: ATA Monthly Passenger Traffic Report Source: Form41, all US carriers, scheduled cargo traffic MITMIT US Airline Load Factors 2000-2003 ICATICAT

Monthly Load Factor -- System (Percent) 85

80

75

70

65

60

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

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

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

5

0

-5

-10

-15

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

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

Slow Recovery Quick Recovery $/ASM$/ASM

Security costs Insolvency

CASM RASM

9/11-9/13 TimeTime MITMIT All Major Carriers On “Slow Recovery” ICATICAT Trajectory Except Southwest

$800 9/11 Attacks $400

$0 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1

$(400)

$(800) Net Income (Loss) in millions Net Income (Loss) $(1,200) AA UA DL

NW CO WN $(1,600)

Source: Airline reports MITMIT Operating Performance of ICATICAT Major Pax and Cargo Carriers

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

$400

$0 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 $(400)

$(800) AA UA

Net Income (Loss) in millions Net Income (Loss) DL NW $(1,200) CO WN UPS FedEx $(1,600)

Source: companies’ annual reports MITMIT Market Cap: US Majors, 6/10/04 ICATICAT With Jet Blue

America ATA US Airways Alaska United 0.3% 0.7% 2.9% 0.6% West Continental 1.7% 3.4% Northwest Jet Blue 4.3% 13.8% Delta 3.6% American 9.4% Southwest 59.3%

Total Market Cap: $20.9 billion

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

25%

20% American United Delta 15%

Northwest 10% Continental Southwest US Airways

Monthly RPM Share 05/04 5% American West Alaska JetBlue ATA 0% 0% 10% 20% 30% 40% 50% 60% Relative Market Cap 06/04 Network vs. Cost Efficiency Questions

Source: Yahoo! Finance and airline traffic reports MITMIT Weak Carriers Vulnerable to ICATICAT LCC Attack

Southwest PHL Entry Service since May 9: Chicago (Midway) $ 79 one-way Las Vegas $ 99 one-way Orlando $ 79 one-way Providence $ 29 one-way

US Airways match many of Southwest's fares with its own new, less restricted "GoFares.“ Both airlines offer the lowest available fares on many competing routes.

US Airways Network

Sources:http://www.southwest.com/cities/philadelphia.html, ETMS Data Analysis MITMIT Emergence of ICATICAT Low-Cost Carriers

Canada (7, 1 in 2004) Europe (60, 3 in 2004) CanJet Westjet Aer Arann Baboo Fare4U Sun Express HMY Airways Air 2000 Basiq Air German Wings Swedline Airlines West Air Baltic Bexx Air Germania Express Tango Airlines Air Berlin BMI Baby Globespan V Bird Air Finland British European Hapag Lloyd Express Virgin Express Air Luxor Lite BudgetAir Hellas Jet VLM Airlines USA (19, 4 in 2003/2004) Air Polonia Corendon Helvetic Airways VolareWeb AirTran Spirit Airlines Deutsche BA Iceland Express Windjet Vola Allegiant Air Song Air EasyJet Ryanair Smart Wings American West Sun Country Air Wales Snalskjutsen Wizz Air ATA USA 3000 Airlines Excel Airways SnowFlake Airlines Hop Frontier Airlines Vacation Express Fairline Austria Sterling Interstate Jet Ted JetBlue Airways Independence Asia/Pacific (20, 8 in 2004) Midwest Express Virgin USA ValuAir Pan American Africa (2) Air Asia Virgin Blue Southeast Airlines South America (3) 1Time Air Deccan Air Blue Southwest Airlines Bra Kulula Athena Air Services Gol Citilink BackpackersXpress Freedom Air Jetstar U Air Lion Airways Nok Air One-Two-Go Pacific Blue Skymark Airlines SkyAsia Skynet Asia Airways Tiger Airways

Source: http://www.etn.nl/lcostair.htm, airline news Total 111 LCCs, 16 started/to start in 2003/2004 MITMIT Macro Scale Drivers ICATICAT US Airline Net Profit

Cyclic Industry with Exponential Growth In Volatility Since Deregulation 6

4

2

0 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 -2

-4

-6 Deregulation Net Profit (2000 US$B) Net Profit (2000

-8

-10

-12

Source: ATA, Form41, US Airlines all services NB: 2001 data includes Air Trans Stabilization Act receipts MITMIT US Airlines Net Profit Model - 2002 Best Fit of Undamped Oscillation ICATICAT Cycle Period = 11.3 yr eFolding Time = 7.9 yr

40

30 Predictions 2003 ($14.3B) 2004 ($13.2B) 20 2005 ($ 7.0B)

10

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

Net US$B) Profit (2000 -10

-20 US US Fit -30

NB: Predictions are in constant 2000 dollars. MITMIT Net Profit and Aircraft Deliveries Hypothesize that instability driven by capacity ICATICAT response phase lag World Airlines Net Profits vs. Aircraft Deliveries 15 1200

10 1000

5 Net Profits 800

0

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

-15 200 1970 1975 1980 1985 1990 1995 2000 2005

Source: ICAO data MITMIT Simple Conceptual Model for ICATICAT Capacity Effects

Economy (GDP) Latent Latent Demand Price Traffic (RPM) Revenue Net Profit Demand Demand Target +- Model Elasticity LF Social Factors Load Revenue Yield Demand Factor Management

Capacity Variable + (ASM) Cost + Operating Expense VarCost/ASM

Tactical Utilization Delay (months) Rate (%) Scheduling Capacity

Potential Lift Fixed Cost (PASM) Net Fleet Delay (yrs) Orders Planning Retirement MITMIT Growth Limits ICATICAT Constraints vs Damping

40

30

20 Upside: Capacity, Market

10

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

Net US$B) Profit (2000 -10 Downside: Financial -20

-30 MITMIT US Airline Performance Cycling Up ICATICAT Faster Than Predicted

40

30 Prediction 2003 ($15.3B) Actual 20 2003 ($3.6B)

10

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

Net US$B) Profit (2000 -10

-20 US US Fit -30

NB: predictions are in current dollars. MITMIT Profitability Improvement ICATICAT Factors

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

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

Source: ATA data; U.S. major, national, large regional passenger and cargo airlines; all services MITMIT ICATICAT 2004 Fuel Hedge Levels

• Reduce the risk of high fuel prices by hedging future fuel contracts • Many U.S. major carriers lack credit lines or cash to buy hedges

100% 90% 80% 80% 72%

60% 57%

41% 40% 34%

22% 20% 20% 15% 9% 0% 0% 0% 0% AirTran American Continental JetBlue Northwest EasyJet Alaska American Delta Southwest West

Source: Lehman Brothers, MSNBC news, Goldman Sachs, airline news MITMIT Growth Limits ICATICAT Constraints vs Damping

40

30

20 Upside: Capacity, Market

10

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

Net US$B) Profit (2000 -10 Downside: Financial -20

-30 MITMIT Flight Delays Reemerging ICATICAT

OPSNET National Delays 60000

50000

40000 2004 2003 30000 2002 Total Delays 20000 2001 2000 10000

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

Source: FAA OPSNET data MITMIT Total Delays at ICATICAT Chicago O’Hare Intl

ORD: Total Delays 14000

12000

10000 2004

8000 2003

6000 2002 Total Delays 2001 4000 2000 2000

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

Source: FAA OPSNET data MITMIT Airport System ICATICAT Capacity Limit Factors

• Runways • Weather † Capacity Variability † Convective Weather • Landside Limits † Gates † Terminals & Security † Road Access • Downstream Constraints • Controller Workload • Environmental † Community Noise † Emissions • Safety MITMIT Emergence of Secondary Airports ICATICAT

MSP MHT DTW ORD ORH BOS PVD MDW OAK/ PHL ISP SJC LGA / JFK / EWR STL BLV BWI SFO CVG DCA

BUR ONT

LAX SNA PHX ATL LGB DFW

IAH Congested major airport Secondary airport FLL (Traffic above 5% MAS M.S.) MIA Secondary airport (Traffic below 5% MAS M.S.)

Constrained secondary airport Failed secondary airport MITMIT Additional Capacity at Region Level ICATICAT

18

16

14

12

10 Runways at surrounding airports (50miles)

8 Core airports runways

6

Number of usable runways runways usable Number of 4 (at any time and longer than 5000 and than ft) longer any time (at 2

0 Boston Chicago New York Washington Miami region Los Angeles San region region region region region Fransisco region MITMIT Identification of Secondary Airports ICATICAT Case study of the Boston Metropolitan Area

PSM

MHT

ASH LWM

BVY BED BOS Logan International Airport ORH 50 miles

SFZ

PVD EWB

Core airport Secondary airport

Surrounding airports (with runways length greater than 5000 ft) MITMIT Density of Population ICATICAT

Population density

MHT

BOS Logan International Airport

50 miles

PVD Factors Influencing the Emergence of Sec. Airports MITMIT ICAT Population: Distribution of Population around Core and ICAT Secondary Airports

Distribution of population 300 Primary Basin Core airport 250 200 of Population Boston Logan (BOS) Thousands 150 100 Population within 20 miles: 50 0

2.6 millions 0 4 8 2 2 8 1 16 20 24 28 3 36 40 44 4 Distance (in miles) from BOS airport Distribution of population 300 250 200

Secondary airports Thousands 150 Secondary Basin 100 of Population Manchester (MHT) 50 0

0 4 8 4 4 Population within 20 miles: 12 16 20 2 28 32 36 40 4 48 Distance (in miles) from MHT airport

Distribution of population 0.6 million 300 250 200

Thousands 150 100 Secondary Basin Providence (PVD) 50 0 of Population

0 4 8 Population within 20 miles: 12 16 20 24 28 32 36 40 44 48 Distance (in miles) from PVD airport 1.2 million Factors Influencing the Emergence of Sec. Airports MITMIT ICATICAT Population: Evolution in the Secondary Airport Location Relative to Primary Basin of Population

50 PV D ISP 40 ? MHT

30 BWI

20 OAK FLL EWR 10 MDW

the secondary airport IA D Distance (miles) from the

primary basin of population to of population basin primary 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Year of Emergence Factors Influencing the Emergence of Sec. Airports MITMIT ICAT Low Cost Carriers: Secondary Airport Emergence is ICAT correlated with Low Cost Carrier entry. Case : Boston Region

Enplanements at airports within 50 miles of BOS 16

Millions 14 BOS 12

10

8 Southwest entry 6 Enplanements 4 Southwest entry PVD 2 MHT 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 ASH BED BOS BVY EWB LWM MHT ORH PSM PVD SFZ

Data source: Historical data from FAA Terminal Area Forecasts MITMIT FAA Air Traffic Responses ICATICAT

• Air Traffic Organization Stood Up † Russ Chew COO † Performance Based Organization † In Transition • Schedule Reductions at ORD † “Voluntary” reduction* ‹ United and American to reduce flights by 5 percent between March and October 2004 ‹ United cancelled 50 daily flights, American cancelled 27 † Collaborative Decision Making ‹ Pilot Case • “Express Lanes” from Congested Core Systems † Delay “peripheral” airports

Source: Subcommittee on Aviation; Hearing on Avoiding Summer Delays And A Review Of The FAA’s Air Traffic Organization; May 13, 2004; http://www.house.gov/transportation/aviation/05-13-04/05-13-04memo.html MITMIT New York Center Airspace ICATICAT With Primary EWR Departure Fixes/Jet-routes

MSP, SEA YMQ PDX, SLC BVT SFO

J95 ZBW ZNY ELM, MKE BOS ORD J36 GREKI Europe GAYEL MERIT ZOB ZNY COATE PIT, CLE TEB J60 ELIOT LGA IND, MCI J64 PARKE LANNA JKF DEN, PHX BIGGYEWR 0 J8 ZNY LAS, LAX WHITE 8 ZDC J4 HNL J6

IAD, BNA

DFW, SAN 9 5 0 7 J 2 MEX J ATL, MSY, IAH BWI, DCA, RIC, ORF, CHS, MCO, PBI, MIA GSO, CLT, TPA Central and South America

Based on Lincoln Laboratory ITWS Map MITMIT Trends in Aircraft Size ICATICAT

220 210 Domestic International Total 200 190 180 170 160 150 140 130 120 110 100 90 Average seats per departure seats per Average 80

0 1 3 5 7 9 1 3 199 199 1992 199 1994 199 1996 199 1998 199 2000 200 2002 200

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

Total 17,995 Jet Aircraft 2500

Boeing Airbus Bombardier Embraer BAe Dornier Fokker Other 2558

2000 1918

1500

1222 1108 1129 1019 966 1000 856 863 764 716

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

Source: Airclaims, published by ATW, July 2003 Others include L-1011, Fokker 100, Russia/Ukraine a/c MITMIT U.S. Regional Jet Growth ICATICAT

1400

1200

1000 CRJ900 CRJ700 800 CRJ200 CRJ100 600 EMB135 EMB145 BAE145 400

200

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

Source: FAA registration data from 1995 until the present MITMIT Most Common Regional Jets ICATICAT

ERJ 145 (50 seats) CRJ 200 (50 seats)

About 400 aircraft in national fleet About 2000 daily flights in January 2003 About 400 aircraft in national fleet About 1500 daily flights in January 2003 MITMIT Regional Jet Density Growth ICATICAT

n r l t n r l t n r l t n r l t n r n a p u c a p u c a p u c a p u c a p a J A J O J A J O J A J O J A J O J A J ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 MITMIT Significant Regional Jet Growth ICATICAT at Hub Airports

100%

80%

60% Non-Hub, Non-Hub Hub, Non-Hub 40% Hub, Hub

20%

0% 1998 1999 2000 2001 2002 2003

• About 90% of regional jet flights depart from or arrive at a hub airport MITMIT Form 41 Averages by Aircraft Type ICATICAT

Average Pilot Total Aircraft Aircraft Total Aircraft Trip Cost/Block Operating Type Operating Cost/Trip Length Hour Cost/ASM

B737 663 430 0.05 4505 B757 1236 547 0.05 10326 A320 1094 411 0.04 6836 A319 931 460 0.05 5359 CRJ200 459 287 0.13 2838 CRJ700 542 215 0.06 2214 EMB135 351 181 0.10 1341 EMB145 354 169 0.09 1572 EMB140 386 187 0.08 1412 MITMIT Total Operating Cost per ASM when Pilot Cost/Block ICATICAT Hour is Normalized to $450

0.16 0.14

0.12($) Base Line 0.1 0.08 Pilot Cost/Block 0.06

Cost/ASM Hour = 450 0.04 0.02 0

7 7 0 9 0 3 5 7 7 140 B B A32 A31 B CRJ20CRJ700EMB135EMB145EM MITMIT Total Operating Cost per Trip when Pilot Cost/Block ICATICAT Hour is Normalized to $450

12000 10000 ($) 8000 Base Line 6000 Pilot Cost/Block

Cost/Trip 4000 Hour = 450 2000 0 B737 B757 A320 A319 CRJ200 CRJ700 EMB135 EMB145 EMB140 MITMIT RJ-NB Boundary Blurred ICATICAT

Regional Jets Narrow-body 2400 New Aircraft

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

1400 B717 MD-80

1200 DC-9

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

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

• March Deliveries † Lot † † US Airways • Orders † US Airways ‹ 85 MITMIT ICATICAT EMB 190

• First Flight † 3/12/04 • Orders † Jet Blue ‹ 100 † ‹ 45 MITMIT ICATICAT A-380

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

• 14,800km/8,000nm range

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

• Rolls-Royce Trent 900 engines or GP7200 engines

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

•200 pax, 7800 nm range •50 firm orders by (ANA)

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

Eclipse Jet Cessna Mustang 2100 orders 330+ orders

Adam 700 HondaJet 75 orders MITMIT ICATICAT Security? MITMIT Passenger Delays Variable ICATICAT Airport as an Adaptive System

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

Ckd Bag Bags/Cargo Screen Ground Gates Gates Transport

Pick-up Bag Claim Parking Security Point

AirsideAirside LandsideLandside MITMIT Declining Airport Screener ICATICAT Workforce

Workforce of Federal Screeners 60000 56,000 55,600 55000

50000 48,300 45,300 43,800 45000 Congressional Cap 40000

35000

30000 Dec-02 May-03 Sep-03 Jan-04 May-04

• Deployed at 451 commercial airports • Allocation revised to cover busier airports this summer

Source: Committee on Transportation and Infrastructure – Aviation, Hearing on Aviation Security: Progress And Problems In Passenger And Baggage Screening, Feb 12 2004; http://www.house.gov/transportation/aviation/02-12-04/02-12-04memo.html TSA press releases; Washingtonpost (http://www.washingtonpost.com/wp-dyn/articles/A34892-2004May17.html) MITMIT ICATICAT Immigration

• US-VISIT System † Photo, Fingerprinting, Biometrics

† Countries in the Visa Waiver Program: Andorra, Australia, Austria, Belgium, Brunei, Denmark, Finland, France, Germany, Iceland, Ireland, , Japan, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand, Norway, , San Marino, Singapore, Slovenia, Spain, Sweden, Switzerland and the • Parity Programs † Brazil, China MITMIT ICATICAT Safety Trend

Source: Boeing Statistical Abstract