MITMIT Overview of Recent Trends in ICATICAT the Airline Industry Prof. R. John Hansman MIT Department of Aeronautics and Astronautics Traffic Source: Sage Analysis courtesy Prof Ian Waitz [email protected] 617-253-2271 MITMIT World Population Distribution ICATICAT and Air Transportation Activity North America Europe 37% Pax 27% Pax 26% Cargo 28% Cargo ~40 Airlines ~80 Airlines Asia/ ~4100 Airports ~2400 Airports Pacific 26% Pax 36% Cargo Latin America/ ~60 Airlines Middle East Caribbean Africa ~1800 Airports 4% Pax 5% Pax 2% Pax 5% Cargo 3% Cargo 2% Cargo ~12 Airlines ~40 Airlines ~20 Airlines ~230 Airports ~580 Airports ~300 Airports Population Source:http://www.ciesin.org/datasets/gpw/globldem.doc.html Air Transport Source: ICAO, R. Schild/Airbus Passenger and freight traffic represent RPK and FTK share in 2002 MITMIT Conceptual Model ICATICAT Direct / Indirect / Induced employment effects Economy Economic Enabling Effect (Access to people / markets / ideas / capital) Pricing & Schedule Demand Supply NAS Travel/Freight Need Capability Airlines Financial Equity/ Revenue/Profitability Debt Markets Air Transportation System Vehicle Capability MITMIT Correlation Between US GDP and ICATICAT Scheduled Passenger Traffic 30% Sch. RPMs 25% GDP Deregulation 20% Recessions (%) 15% 10% Growth 5% Annual 0% -5% -10% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 Source: US BEA and BTS data; Recession data from National Bureau of Economic Research MITMIT Air Cargo and GDP ICATICAT (Mainland China) Relationship between carried air cargo and GDP 2500 02 2000 00 99 01 1500 98 97 96 95 1000 94 93 92 Carried Air Cargo (000 tonne) 500 91 90 0 500 1000 1500 2000 2500 3000 3500 GDP (1978 RMB Bn) MITMIT US Passenger Growth Trends ICATICAT Effect of De-Regulation Scheduled Revenue Passenger Miles in US 800 pre-dereg 19.4 billion 700 post-dereg RPMs per year 600 Linear (pre- dereg) Deregulation (billion) 500 Miles 400 8.35 billion Pax 300 RPMs per year 200 Revenue 100 0 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 Source: BTS data MITMIT European Passenger Growth Trends ICATICAT Effect of De-Regulation Scheduled Revenue Passenger-Kilometers in Europe 1000 Regulation Transition Deregulation 800 600 (billion) 400 RPK Gulf War 200 0 1970 1975 1980 1985 1990 1995 2000 2005 Source: ICAO data MITMIT Asian Passenger Growth ICATICAT Trends Scheduled Revenue Passenger-Kilometers in Asia 1000 800 600 (billion) 400 RPK 200 0 1970 1975 1980 1985 1990 1995 2000 2005 Source: ICAO data MITMIT RPK by Region ICATICAT Scheduled Revenue Passenger-Kilomters by Region 1400 1200 1000 North America Europe 800 Asia and Pacific (billion) 600 Latin America & Caribbean RPK Middle East 400 Africa 200 0 1970 1975 1980 1985 1990 1995 2000 2005 Source: ICAO, scheduled services of commercial air carriers MITMIT Freight Trends by Region ICATICAT Freight Tonne-Kilomters by Region 45 40 35 North America 30 Europe 25 Asia and Pacific (billion) 20 Latin America & Caribbean FTK 15 Middle East Africa 10 5 0 1970 1975 1980 1985 1990 1995 2000 2005 Source: ICAO, scheduled services of commercial air carriers MITMIT US Airlines Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 11.3 yr eFolding Time = 6.3 yr 40 30 Predicted Losses 2003 $15.6 B 20 2004 $15.0 B 2005 $8.4 B 10 0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 -10 -(ATA) -20 Estimate -30 MITMIT World Airline Net Profit Model Best Fit of Undamped Oscillation ICATICAT Cycle Period = 10.8 yr eFolding Time = 8 yr 50 40 Predicted Losses 2003 $21.5 B 30 2004 $18.1 B 2005 $ 6.7 B 20 10 0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Net Profit (Current US$B) -10 -20 World World Fit -30 MITMIT Net Profit and Aircraft Deliveries Hypothesize that instability driven by capacity ICATICAT response phase lag World Airlines Net Profits vs. Aircraft Deliveries 15 1200 10 1000 5 Net Profits 800 0 600 -5 Deliveries Aircraft Deliveries (unit) Net Profit (Current US$ Bn) 400 -10 -15 200 1970 1975 1980 1985 1990 1995 2000 2005 Source: ICAO data MITMIT Growth Limits ICATICAT Constraints vs Damping 40 30 20 Upside: Capacity, Market 10 0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 -1 0 Downside: Financial -2 0 -3 0 MITMIT Medium Term Trends ICATICAT • Trends since Sept 11 • Economic Down Cycle • Capacity Reductions Rolling Hubs Regional Jet Usage • Web Effects • Low Cost Carrier Envy • Bankruptcies • Labor Reductions and Givebacks MITMIT US Domestic RPMs ICATICAT Domestic Traffic -- RPMs (Billions) 50 45 40 35 30 25 2000 2001 2002 2003 2004 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: ATA Monthly Passenger Traffic Report Source: ATA, US member airlines, scheduled mainline service MITMIT US Airline Load Factors 2000-2003 ICATICAT Monthly Load Factor -- System (Percent) 85 80 75 70 65 60 55 2000 2001 2002 2003 2004 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: ATA Monthly Passenger Traffic Report Source: ATA, US member airlines, scheduled mainline service MITMIT Annual Change in Average ICATICAT Domestic Fare (2000-2004) Average Domestic Air Fare (Percent Change from Previous Year) 10 5 0 -5 -10 -15 -20 2000 2001 2002 2003 2004 -25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: ATA Monthly Airfare Report; eight US major airlines excluding Southwest (WN) MITMIT Airline Profitability Impact of ICATICAT Sept 11 Slow Recovery Quick Recovery $/ASM Security costs Insolvency CASM RASM 9/11-9/13 Time MITMIT Air Transportation Stabilization Act ICATICAT Internationally Seen as Bailout for US Airlines Slow Recovery Quick Recovery $/ASM Aviation Insolvency Disaster CASM Relief RASM 9/11-9/13 12/31 Time MITMIT All Major Carriers On “Slow Recovery” ICATICAT Trajectory Except Southwest and Cargo $1,600 West Coast Dock Strike $1,200 SARS Iraq War 9/11 Attacks $800 millions $400 in $0 (Loss) 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 $(400) Income $(800) AA UA Net DL NW $(1,200) CO WN UPS FedEx $(1,600) Source: companies’ annual reports MITMIT Market Cap: US Majors, 4/7/04 ICATICAT With Jet Blue ATA US Airways Alaska United America 0.5% West 1.1% 3.4% 0.8% 1.7% Continental 4.2% Northwest Jet Blue 4.4% 13.1% Delta 4.9% American Southwest 10.4% 55.6% Total Market Cap: $21.3 billion Source: Yahoo! Finance. Includes ATA MITMIT Current Market Cap vs. RPM Share ICATICAT US Majors and ATA 25% 20% American United Delta 15% Northwest 10% Southwest Continental RPM Share 01/04 US Airways 5% American West Alaska JetBlue ATA 0% 0% 10% 20% 30% 40% 50% 60% Relative Market Cap 02/04 Network vs Cost Efficiency Questions Source: Yahoo! Finance and airline traffic reports MITMIT Hub and Spoke vs Direct ICATICAT Networks Completely Connected Network = 2(N-1) Flights (eg., 50 Airports, 98 Flights) MITMIT Fully Connected Network ICATICAT Completely Connected Network = N(N-1) (eg., 50 Airports, 2450 Flights) MITMIT Global Emergence of ICATICAT Low-Cost Carriers Canada (5) Europe (58, 2 in 2004) CanJet Westjet Aer Arann Baboo Fairline Austria Sun Express HMY Airways Zip Air 2000 Basiq Air German Wings Swedline JetsGo Airlines Air Baltic Bexx Air Germania Express ThomsonFly Air Berlin BMI Baby Globespan V Bird Air Finland British European Hapag Lloyd Express Virgin Express USA (19, 4 in 2003/2004) Air Luxor Lite BudgetAir Hellas Jet VLM Airlines AirTran Spirit Airlines Air Polonia Corendon Helvetic Airways VolareWeb Allegiant Air Song Air Scotland Deutsche BA Iceland Express Windjet Vola American West Sun Country Airlines Air Southwest Duo Snalskjutsen Smart Wings ATA USA 3000 Airlines Air Wales EasyJet SnowFlake Airlines Wizz Air Frontier Airlines Vacation Express Alpi Eagles Evolavia Sterling Interstate Jet Ted Azzurra Air Excel Airways JetBlue Airways Independence Air Asia/Pacific (20, 9 in 2004) Midwest Express Virgin USA Air Arabia Virgin Blue Pan American Africa (2) Air Asia Air One Southeast Airlines South America (3) 1Time Air Deccan BackpackersXpress Southwest Airlines Athena Air Services Jetstar Bra Kulula Gol Citilink New LCC by Qantas U Air Freedom Air Nok Air Lion Airways Pacific Blue One-Two-Go SkyAsia Skymark Airlines Tiger Airways Skynet Asia Airways ValuAir Source: http://www.etn.nl/lcostair.htm, airline news Total 107 LCCs, 15 in 2003/2004 MITMIT US Airline Performance Cycling Up ICATICAT Faster Than Predicted 40 30 Prediction 2003 ($15.5B) Actual 20 2003 ($1.8) US$B) 10 (Current 0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Profit Net -10 -20 US US Fit -30 MITMIT Profitability Improvement ICATICAT Factors • Cargo Airlines Profitable • Yields Turned the Corner • Wage Concessions US: $1 billion UA: $2.56 billion AA: $2 billion • Distribution Costs $1 billion • Operating Efficiencies $4 billion • Debt Restructuring & Chapter 11 • Pensions (Pension Benefit Guaranty Corporation (PBGC)) • Security Costs and Insurance? • Fuel MITMIT Trends in Fuel Price ICATICAT Historical: Average Jet Fuel and Crude Oil Prices 130 45 System (L) Crude Oil: Dollars per Barrel 120 Crude Oil (R) 40 110 35 100 30 90 25 80 20 70 15 60 10 Jet Fuel: Cents per Gallon 50 5 40 0 Jan-98 Jan-03 Jan-96 Jan-04 Jan-97 Jan-02 Jan-95 Jan-00 Jan-93 Jan-01 Jan-94 Jan-99 Jan-92 Jan-90 Jan-89 Jan-88 Jan-91 Jan-87 Jan-86 Source: ATA data; All US Majors, Nationals, Large Regional – All Services MITMIT Capacity and Delays ICATICAT US Air Traffic Density (11/14/02) MITMIT Flight Delays Reemerging ICATICAT OPSNET National Delays 60000 50000 40000 2004 2003 2002 30000 2001 2000 Total Delays 20000 10000 0 Jan Feb Mar Apr