Economic and Industry Update

strategictransportation

& tourismsolutions

Economic and Industry UpdateDr. Michael W Tretheway

Chief Economist, InterVISTAS Consulting GroupACI-NA Marketing Conference

7 June 2010

1

InterVISTAS Consulting Group

Washington DC, Vancouver, London, the Hague • 85 employees• 8 offices in US, Canada, Europe, Caribbean• Specialities

• Air Service Development• Forecasting, Economic and regulatory analysis• Privatisation & Finance • Aviation marketing• Security and Borders Facilitation• Climate Change Strategy and inventories

2

Outline

• Industry Developments

• Economic Update

• Fuel Outlook

• Climate Change


& tourismsolutions

Industry Developments

4

IATA 2010

• Today, changed forecast from loss of $3b to profit of $2.5 billion• N America profit expected to be $1.9 billion

• Better than rest of worlddue to greater capacity cuts

• Pax: +7.1%

• Cargo: +18.5%

5

IATA Projections for 2010

6

IATA Projections & History

7

IATA Premium Passengers

8

Slower Growth?

2010 Hamburg Aviation Conference

• Growth in coming decade likely to be • less than historic

• Less than previously forecast• Climate change

• Recovery of personal liquidity

• Markets maturing

• Perhaps 3.5% vs. 5%

9

Unbundling: credit card fees

• Credit card cost to carriers• Airline Business reports

typical cost of airline accepting credit card is $7-10

• Holdback squeeze• Frontier, Globespan

claims it was a factor in their bankruptcies

• What’s next?• Surcharges for use of card (KLM/AF)• AFOP – Alternative Forms of Payment (10%)

10

Unbundling #2

Ryanair

• 2009: approximately $1b in ancillary revenues

• 20% of total revenues

• And growing !

11

World Aircraft Orders: 1995-2008

0

500

1,000

1,500

2,000

2,500

3,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Tota

l Airc

raft

Ord

ers Airbus Boeing

Source: Airbus and Boeing websites

12

World Aircraft Deliveries: 1995-2015

0

200

400

600

800

1,000

1,200

1,400

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Tota

l Airc

raft

Del

iver

ies Airbus Boeing

Source: Airbus and Boeing websitesThe Airline Monitor, Jan/Feb 2009

Projected

13

Aircraft Delivery

• In spite of recession, globally we will see record aircraft deliveries in coming years

• Much of the capacity will be delivered to Asia, Europe, Middle East

• These markets will be hotly contested• Especially Europe-Asia/Australia NZ

• Carriers may see trans-Atlantic/trans-Pacificas attractive opportunities • US carriers do not have major order books

and most on order is replacement

14

IATA’s Agenda for Freedom

• Industry is seeking enabler of deeper alliances / consolidation• “I won’t change my foreign ownership laws

• But I won’t contest yoursand will accept your foreign owned carrier”

• US & EU signed

15

Alliances/Mergers

• UA-CO will be the last airline merger in the U.S.

• Air New Zealand – Virgin Blue will be the last airline alliance in the world

• Reality• We are likely to see a new wave of alliances

• Low cost carrier – Legacy carrier alliances may become a trend

16

LCC/Legacy Alliances

• Proposed Air New Zealand – Virgin/Pacific Blue• DJ new CEO is ex Qantas

• Branding as New World Carrier, not LCC• Is indicating it will pursue greater domestic share

focussing on penetrating business travel

• WestJet – SW alliance never materialised• WJ new CEO is ex Canadian, ex Alaska

• Has invested in CRS/IT to enable alliances

• Is seeking a range of alliance partners• Not seeking to join a global alliance

17

Alliances

Consequences for Airports

• Potential new services• International airline QSI shares may increase

dramatically with a domestic LCC partner

• Potential service rationalisation

• Switch in carriers assigned routes

• Another round of co-location requests

18

Aircraft

• 787 first route announced• Continental: IAH to AKL

a good example of the type of route this aircraft will eventually enable

• First delivery: ANA November 2010

• First flight: March 2011


& tourismsolutions

Economic Update

20

If there is a recovery, will it be?

• V-shaped• A rapid recovery back to previous level

• Most recessions are V-shaped

• U-shaped• A period of stagnation, with a slow recovery

• L-shaped• An extended period of stagnation

• Japan 1990s. Great Depression

• W-shaped• A V-shaped recovery, followed by another recession

• US, 1970s

Econo-geek Vocabulary

21

US Real GDP- recent

-8

-6

-4

-2

0

2

4

620

07Q

1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Rea

l GD

P G

row

th (%

)

Source: NBER 27May2010

Recession begins

Recession has ended

22

Real GDP Growth – U.S.

-4%

-2%

0%

2%

4%

6%

8%19

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Historical Data Forecast

Data

Sources:

Historical Data: U.S.: U.S. Bureau of Economic AnalysisForecast Data: U.S.: International Monetary Fund

23

Real GDP Growth – U.S.

-4%

-2%

0%

2%

4%

6%

8%19

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

15

Historical Data Forecast

Data

Sources:

Historical Data: U.S.: U.S. Bureau of Economic AnalysisForecast Data: U.S.: International Monetary Fund

Recession

Recession

24

US Real GDP Growth (Quarterly)

0.9%

2.8% 2.9%

-0.2%

-5.7%-6.3%

1.7%

0.4%

-1.5%-0.5%

2.2%

-8%

-6%

-4%

-2%

0%

2%

4%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

Q1-

2010

Q2-

2010

Forecast

Sources: Historical – Bureau of Economic Analysis; Forecast – Federal Reserve Second Quarter 2009 Survey of Professional Forecasters (May 15, 2009);

Ann

ualiz

ed Q

/Q G

row

th R

ate

Lehman Brothers Collapse

Mid 2008 GDP growth obscured onset of recession

25

US Real GDP• Most forecasters have V-shaped recovery

• delayed but strong impact of stimulus • Restored liquidity• Return of Money Velocity

• But some risk recovery could be W-shaped• Managing contraction of Fed Assets

• Without 2nd recession• Without inflation

• will be a challenge

26

US Real GDP Growth (Historical)

-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

Sources: Historical – Bureau of Economic Analysis; Recessions as defined by the National Bureau of Economic Research

27


-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007


W WW

28


-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007


W WW V V

29

US Real GDP (Historical)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,00019

46

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

U.S

. Rea

l GD

P (b

illio

ns o

f 20

00 d

olla

rs)

Sources: Historical – Bureau of Economic Analysis;

Recessions are wiggles in a steadily growing economy

30

Real GDP Growth - Canada

-4%

-2%

0%

2%

4%

6%

8%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Historical Data

Forecast Data

Sources:

Historical Data: Canada: Statistics CanadaForecast Data: Canada: International Monetary Fund

Recession

No Recession

31

Canada

• Canada is definitely in a strong V-shaped recovery• Has already started to increase interest rates

• Canada’s banking sector has no bailout costs to recover• Is pushing G-8 to avoid a bank tax

32

Canada Real GDP Growth

1.1%0.3% 0.4%

2.4%

3.5%

4.6%5.0%

4.5%

-0.7%-3.7%

-5.4%

-3.0% -1.0%

-6%

-4%

-2%

0%

2%

4%

6%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

H1-

2010

H2-

2010

H1-

2011

H2-

2011

Forecast

Sources: Historical – Statistics Canada; Forecast – Bank of Canada Monetary Policy Report (April 2009. Q3 from 31Aug 2009

Ann

ualiz

ed Q

/Q G

row

th R

ate

33


1.1%0.3% 0.4%

2.4%

3.5%

4.6%5.0%

4.5%

-0.7%-3.7%

-5.4%

-3.0% -1.0%

-6%

-4%

-2%

0%

2%

4%

6%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

H1-

2010

H2-

2010

H1-

2011

H2-

2011

Forecast


Ann

ualiz

ed Q

/Q G

row

th R

ate

2009: -2.4%

34


1.1%0.3% 0.4%

2.4%

3.5%

4.6%5.0%

4.5%

-0.7%-3.7%

-5.4%

-3.0% -1.0%

-6%

-4%

-2%

0%

2%

4%

6%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

H1-

2010

H2-

2010

H1-

2011

H2-

2011

Forecast


Ann

ualiz

ed Q

/Q G

row

th R

ate

c

2009: -2.4%c

2010 revised: +3.0%

35

Canada Real GDP Growth (Sub-Annual)

1.1%0.3% 0.4%

2.4%

3.5%

4.6%5.0%

4.5%

-0.7%-3.7%

-5.4%

-3.0% -1.0%

-6%

-4%

-2%

0%

2%

4%

6%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

H1-

2010

H2-

2010

H1-

2011

H2-

2011

Forecast


Ann

ualiz

ed Q

/Q G

row

th R

ate

c

2009: -2.4%c

2011 revised: +3.3%

c

36

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%19

9719

98

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Historical Data

Forecast Data

Real GDP Growth - Mexico

Sources:

Historical Data: Mexico: International Monetary FundForecast Data: Mexico: International Monetary Fund

2 Recessions


& tourismsolutions

Fuel Prices

38

Fuel Prices

Crude Oil Spot PricesJanuary 2003 to June 2010

$-

$20

$40

$60

$80

$100

$120

$140

$160

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-

06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

U.S

. $ p

er b

arre

l

39

Consensus Economics Oil Price Forecast

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

US$

Oil Price Forecast

40

Consensus Economics Oil Price Forecast

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

US$

Oil Price Forecast

•Its not down•Its not back to $145

41

2 Sigma Range of ForecastsForecast 95% ranges

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

42


$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

•Everyone seems to agree

43


$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

•Everyone seems to agree

Note the scale

44

If History Repeats ….Oil Price with Full Historical Range

$-

$50

$100

$150

$200

$250

$300

2010 2011 2012 2013 2014 2015 2016

Upper range

Base price forecast

Lower range

Note the scale

45

Forecasting Lesson

• Airport forecasting with consensus macro trends• Can conceal what is possible

• Risk based forecasting should be used

Probability Based Forecast: Year 10

0%

2%

4%

6%

8%

10%

12%

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

Passenger Traffic (Millions)

Prob

abili

ty

Mean Value: 22.3 million passengers

10th Percentile 90th Percentile

Forecast Probability Range

0

5

10

15

20

25

30

35

40

45

50

Year 0 Year 5 Year 10 Year 15 Year 20

Ann

ual P

asse

nger

s (M

illio

ns)

Average

25th / 75th Percentile Range10th / 90th Percentile Range

5th / 95th Percentile Range

46

Oil Price Outlook

• Demand from developing world is increasing• Annually increasing demand by

800,000 barrels per day • 1% of total consumption

• US decrease of past few years was recession related

• Supply issues• Deep water drilling was the hoped offset to potential

decline in production in Middle East

• Greenland deep water (half the size of North Sea)

• But post BP-Gulf, will deep water proceed?

47

Pluggable Revenue Opportunity?

• PHEV (Pluggable hybrid electric vehicle)

• Equivalent to selling a few litres of fuel • Many airports purchase electric power

at favourable rates

• Passengers, rental car outlets, employees

• This is not the same as engine block heaters!


& tourismsolutions

Climate Change

49

Is Aviation a Culprit or Victim?"Making selfish choices such as flying on

holiday or buying a large car are a symptom of sin.”• "Sin is not just a restricted list of moral mistakes. It is

living a life turned in on itself where people ignore the consequences of their actions."

• Richard ChartresBishop of London

50

Community Response/Backlash

http://euronews.net/images_news/1308-soir-uk.jpg

51

Sophisticated Messaging on Roads & Rail Routes to LHR

52

Coming Soon to North America

Climate Change issue is not confined to Europe• North American attitudes are

shifting rapidly

• Aviation will be targeted

http://commons.wikimedia.org/wiki/Image:AlGoreGlobalWarmingTalk.jpg

53

Government Regulation• It will not take long for the government to step in

and impose changes

• This will most likely come in the form of carbon taxes and/or carbon trading schemes

• Obama administration promising to bring in new regulatory framework on climate change in its top 15 priorities • Waxman-Markey passed House

• Likey final bill will tax energy at source

• Airports need to anticipate and adjust to regulatory changes


& tourismsolutions

Thank Youwww.InterVISTAS.com

Documents

Economic and Industry Update