April 2016

AIR SERVICE CHALLENGES Airports Of All Sizes: We Are Reaching An Inflection Point

1

So Many Questions……So Few Immediate Answers

• We are entering a different period that will require a different mindset regarding the subject of air service

• It is time for economic development agencies and airports to work together like never before • The days of air service because you have enough of a market to

support a marginal air service market are nearing their end

• Often to no fault of the community.

• But……taking air service for granted as we have for the past three decades are quickly coming to an end due to operational, strategic, economic and government induced actions

• WE ARE RAPIDLY APPROACHING AN INFLECTION POINT

SOME AIRLINE AND AIRPORT FACTS

Section 1

3

Airline Thinking Across The Current Business Cycle

• It has been established that this business cycle has not experienced the same rate of economic growth as have others

• The strategy the airlines employ of capacity discipline grows seats at less than the rate of growth in GDP • We are starting to see growth in excess of GDP at the 60+ largest

airports in the US – but not at the smallest airports

• As airlines continue to re-invest in the product, more seats are finding their way into the domestic marketplace primarily as a result of using larger aircraft – but not always at the smallest airports

• The significance of the regional carriers is being marginalized

– This contributes to capacity cutting at the smallest US airports

4

This Business Cycle Defines Capacity Discipline: Domestic seat growth that is less than growth in GDP

Source: US DOT T-100 database, via Diio online portal. BEA

-8%

-6%

-4%

-2%

0%

2%

4%

6%Year-over-year % Changes in U.S. GDP and Domestic Seat Departures

YOY % Chg GDP YOY % Chg Domestic Seats

5

For The First Time In This Business Cycle: Seats Are Growing Capacity discipline and schedule rationalization removed nearly 100 million seats

Source: US DOT T-100 database, via Diio online portal.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

100

200

300

400

500

600

700

800

900

1,000

Load Factor D

omes

tic S

eats

- M

illion

s

U.S. Average Load Factor and Available Domestic Seat Departures

Load Factor Domestic Seats

6

The Mix Of Capacity Growth Is Changing Prior to the run up in jet fuel, it was the regionals. Not today.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%Monthly Change YOY

Regional ASM % Chg Mainline ASM % Chg

Source: US DOT, Form 41, via Diio online portal.

7

Smaller Airports Are Still Seeing Cuts In Service – Albeit Less Large and medium hub airports showing growth -

Airport Type

% change in domestic

flights (‘14-’15)

% change in domestic

seats (‘14-’15)

Large Hub 0.3% 4.0%

Medium Hub 1.0% 4.4%

Small Hub -2.7% -0.1%

Non-Hub and EAS -2.2% -0.3%

All Smaller Airports -2.5% -0.2%

All Airports -0.2% 3.5% 0

1

2

3

4

5

6

7

8

9

2009 2010 2011 2012 2013 2014 2015

Milli

ons

Scheduled Domestic Departures Large Medium Small Nonhub

Source: InterVISTAS analysis of Innovata schedules, via Diio online portal.

8

A Hard Fact: The 37:97 Proposition 37 percent of mainland airports produce 97% of demand

Source: US DOT, DB1B database, YE3q 2015, via Diio online portal.

Top 150 Airports

Airports #151-427

3%

97%

Percent of Domestic Demand

WHERE ARE THOSE NEW SEATS GOING?

Section 2

10

Where Are Those New Seats Going? • In order to provide perspective on this idea, we analyzed the 427

mainland airports for changes in the number of frequencies and the change in the number of seats they receive

• Every airport wants to be in the upper right hand quadrant where an increase in both frequencies and seats is being realized. No airport wants to be in the lower left quadrant.

• In 2016 v. 2015: • 211 of 427 airports will realize an increase in both frequencies and

seats, or 49%. On the other hand 169 will realize both a decrease in frequencies and seats.

• Of the 64 small hub airports, 31, or 42% will receive an increase in frequencies and seats. 19, or 30%, will see a decrease in both

• Of the 194 non hub airports, 88, or 48% will receive an increase in frequencies and seats. 82, or 45%, will see a decrease in both.

11

All Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

70 128

203 27

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

19 211

169 28

2016 v. 2015

12

Large Hub Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

11 16

2 0

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

4 23

1 1

2016 v. 2015

13

Medium Hub Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

11 16

2 0

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

1 23

4 0

2016 v. 2015

14

Small Hub Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

18 15

28 3

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

8 31

19 6

2016 v. 2015

15

Non Hub Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

22 58

107 7

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

6 82

88 18

2016 v. 2015

16

Essential Air Service Airports All Carriers

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

8 23

64 17

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

0 52

57 3

2016 v. 2015

WHICH CARRIERS ARE ADDING SEATS?

Section 3

18

Which Carrier Are Adding Seats?

• For the small hub and non-hub cities reliant on the network carriers, it is Delta that is increasing the most airports with an increase in the number of frequencies and seats when comparing 2016 to 2015. They are followed by American and United. • In the same vein it is United that is reducing frequencies and seats in

the largest number of airports and Delta the least

• Southwest and jetBlue are nearly split 50:50 in the number of airports where they are adding frequencies and seats and reducing the number of frequencies and seats

• Among the ULCCs, Allegiant shows a demonstrated move toward reducing the number of frequencies and seats to airports within its respective network.

19

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

119 237

276 18

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

53 376

174 47

2016 v. 2015

All Airports Within Carrier Network Network Carriers

20

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

5 52

31 0

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

4 47

34 3

2016 v. 2015

All Airports Within Carrier Network

21

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

1 50

65 0

2016 v. 2013

Frequencies / Seats

2016 v. 2013

+/+ -/+

+/- -/-

0 17

99 0

2016 v. 2015

All Airports Within Carrier Network

22

At the End of the Day……

• Airports do facilitate economic activity for communities of all sizes • Assuming a community is looking to expand service or to simply

retain what they have……and they are being asked for some sort of financial support • The simple question must be asked: does a perceived return on investment

exceed the cost of making that investment? Opportunity Cost!

• Said another way: there just might not be sufficient funds in community coffers to pay for air service

• The highway is already the first access point to the air transportation grid for many….. • Tomorrow it will be for more

• A very tough political question: should we be thinking regionally?

InterVISTAS Consulting Inc. 1150 Connecticut Avenue, NW

Suite 601 Washington, DC 20036

P +1-202-688-2243 | C +1-703-625-1130 Email: william.swelbar@intervistas.com

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William S. “Bill” Swelbar Executive Vice President

Albert Zhong Senior Consultant