Growth, Opportunities and the Changing Dynamics of the Commercial Aviation Industry

Daniel Friedenzohn, J.D., M.A. Assistant Professor, Aeronautical Science Department

Embry-Riddle Aeronautical University Daytona Beach, FL

May 9, 2014

Agenda

• Global view of air transport

• Impact of civil aviation on the U.S. and Connecticut economy

• The improved state of the U.S. airline industry

• Impact of regulatory changes on the airline industry and its pilots

CBIA

Aviation and Its Impact on the Global Economy

• Airlines transported 3.1 billion passengers in 2013 Source: Aviation Benefits Beyond Borders, Air Transport Action Group, citing Oxford Economic Analysis, available at

http://aviationbenefits.org/

• Civil aviation generates 3.4% of global GDP Source:

Aviation Benefits Beyond Borders, Air Transport Action Group, citing Oxford Economic Analysis, available at http://aviationbenefits.org/

• The air transport industry supports 58.1 million jobs worldwide Source: Aviation Benefits Beyond Borders, Air Transport Action

Group, citing Oxford Economic Analysis, available at http://aviationbenefits.org/

• Air transport carries 35% of world trade by value Source: Aviation Benefits Beyond Borders, Air Transport Action Group, citing Oxford Economic Analysis, available at

http://aviationbenefits.org/

CBIA

Economic Growth Will Have a Positive Impact on the Aviation Industry

2012

Passengers-2.97 billion

Jet aircraft-20,101

Jobs-58.1 million

Economic Impact-$2.4 trillion

2032

Passengers-6.63 billion

Jet aircraft in service-41,240

Jobs-103.1 million

Economic Impact-$5.8 trillion

CBIA

Source: Aviation Benefits Beyond Borders, Air Transport Action Group, citing Oxford Economic Analysis, available at http://aviationbenefits.org/

GDP Growth Benefits the Aircraft

Manufacturing Industry

CBIA

4.4%

7.5% 1.9%

5.2%

4.4%

Source: The Conference Board Global Economic Outlook 2014, February 2014 (1995-2014: actual GDP growth); map obtained from the Air Transport Association (2011)

3.0%

6.2%

2.0%

Other Factors Play a Role in the Growth of Air Transport

• Government support

• Geography

• In 2013, Asia was the largest region in terms of airline capacity (ASMs) – U.S. was the largest region in

2009 Source: Airline Economic Analysis 2013,

Oliver Wyman, available at http://www.oliverwyman.com/insights/publications/2013/nov/airline-economic-analysis-2013.html

Aircraft Orders for High Growth Carriers

Fleet On Order

Turkish Airlines 220 203

Emirates Airways 213 224

Etihad Airways 92 211

CBIA

Source: Flightglobal, Pro Database

Aviation and Its Impact on the U.S. Economy

• Civil aviation generates over $1 trillion in U.S. economic activity Source: Summary of Airlines for America President and CEO Nicholas E. Calio

testimony to U.S. Senate Subcommittee on Aviation Operations, Safety and Security, March 13, 2014, citing 2009 FAA Economic Impact Study

• Aviation supports 10 million U.S. jobs Source: Summary of

Airlines for America President and CEO Nicholas E. Calio testimony to U.S. Senate Subcommittee on Aviation Operations, Safety and Security, March 13, 2014, citing 2009 FAA Economic Impact Study

• U.S. civil aviation manufacturing industry continues to be the top U.S. net exporter Source: PwC

US and The Manufacturing Institute Report, page 5, ,U.S. Aviation Industry Poised to Enter Second Golden Age, December 2013

– The aircraft sector generated a trade surplus of $71.1 billion in 2012 Source: PwC US and The Manufacturing Institute Report, page 5, ,U.S. Aviation Industry Poised to Enter Second

Golden Age, December 2013

CBIA

Aviation Plays a Significant Role in Connecticut’s Economy

• Among the top five states in civil aerospace manufacturing Source: FAA Economic Impact of Civil Aviation on the U.S. Economy, 2009,

• Among the top seven states in aerospace and defense employment Source: The Aerospace and Defense Industry in the U.S, March 2012, available at

http://www.deloitte.com/view/en_US/us/Industries/Aerospace-Defense-Manufacturing/b4c8ae98118f5310VgnVCM3000001c56f00aRCRD.htm#

– Over 40,000 aerospace jobs Source: Hon. John B. Larson, The new manufacturing ecosystem,

JournalInquirer.com, April 14, 2014.

– Second-highest number of aerospace and advanced manufacturing jobs per capita Source: Hon. John B. Larson, The new manufacturing ecosystem,

JournalInquirer.com, April 14, 2014

• Among top ten states with highest number of indirect and induced effect employees Source: The Aerospace and Defense

Industry in the U.S, March 2012, available at http://www.deloitte.com/view/en_US/us/Industries/Aerospace-Defense-Manufacturing/b4c8ae98118f5310VgnVCM3000001c56f00aRCRD.htm#

CBIA

Pratt & Whitney’s Share in the Commercial Aircraft Engine Market Will Increase Significantly During the Next 10 Years

2014 Share of Total Number of Engines Delivered

2024 Share of Total Number of Engines Delivered

CBIA

P&W, 1.0%

GE , 22.5%

Rolls Royce, 11.5%

CFM Int'l, 44.9%

IAE, 15.8%

Other, 4.3%

Source: Airline Monitor, February 2014

P&W, 24.3%

GE , 19.7%

Rolls Royce, 15.3%

CFM Int'l, 37.2%

Other, 3.5%

Pratt & Whitney’s Geared Turbofan Engine is Driving Its Growth in the Commercial Aircraft Market

• PurePower Engines will be used in five different aircraft programs – Airbus A320neo – Mitsubishi Regional Jet (MRJ) – Bombardier Cseries – Irkut MS-21 – Embraer E-Jet E2

• Improvements in fuel consumption, noise, environmental emissions and operating costs

• Airbus A320neo (New Engine Option) – Expected to generate a 15% fuel-burn improvement over

current engines Source: AINonline,, Pratt & Whitney, CFM Dispute Heat Claims Ahead of A320neo First Flight, Thierry Dubois,

February 21, 2014,

– Will enter service in mid-to-late 2015

CBIA

The U.S. Airline Industry is Doing Well

• U.S. scheduled carriers reported a net profit of $12.7 billion in 2013 Source: BTS

22-14 4th Quarter and Annual 2013 Financial Data, May 5, 2014

• Total operating expenses were $187.3 billion

– $50.1 billion for fuel (26.7% of total)

– $45 billion for labor (24% of total)

Source: BTS 22-14 4th Quarter and Annual 2013 Financial Data, May 5, 2014

CBIA

2013 * 2014 * Change

Enplaned Passengers

(million)

643 646 0.50%

Departures (000)

8,863 8,707 -1.80%

Freight/Mail (million lbs.)

19,807 19,947 0.70%

Load Factor (%)

83.4 83.6 0.2 points

Source: transtats.bts.gov, 12 months ending January of 2013 versus 2014

In Real Terms, the Cost of Air Travel in the U.S. Decreased Between 2000 and 2013

CBIA

Source: Airlines for America Presentation, U.S. Airlines and the Quest to Reinvest, May 5, 2014

Product 2000 2013 Change (%)

Gasoline (gallon, unleaded) $1.51 $3.53 133.8

Cable TV (Monthly) $31.22 $65.07 108.4

Prescription Drugs (BLS Index) $285.40 $442.58 55.1

Movie Ticket $5.39 $8.13 50.8

Consumer Price Index 35.3

Round Trip Domestic Ticket + Ancillary $316.96 $387.53 22.3

Round Trip Domestic Ticket Only $314.46 $361.55 15

Bradley International Airport is Growing

• Average domestic fares dropped 6.5% between 2012 and 2013 Source: BTS, Ranked by 4th Quarter

2013 Average Domestic Fare (2013$)

• 1% year-over-year increase in passengers in 2013 Source: Connecticut Airport Authority, Bradley International Airport Passenger Traffic Shows Five Consecutive Months of Growth, March 14, 2014 Press Release

CBIA

Southwest, 27.69%

Delta, 15.39%

JetBlue, 11.08%

US Airways, 9.83%

American, 7.29%

Other, 28.72%

Passenger Share

Source: BTS, Airport Snapshot, available at http://transtats.bts.gov

Airline Pilot Trends: Supply and Demand

Supply Trends

• 2000-2009, active pilot certificates in the U.S. dropped by 9% Source: FAA

• The number of FAA issued ATP certificates decreased by almost 60% from 1999 to 2009 (7,173 to 2,895) Source:

American Eagle Airlines, Impact and Consequences of the “1,500 Hour Rule” and NPRM, available at http://www.whitehouse.gov/omb/2120_meeting_10122011

• Fewer military pilots are joining the airline industry

Demand Trends

• FAA forecast indicates that the global aviation market will grow

• High-growth regions: Asia and the Middle East – Emirates, Etihad and Qatar Airways

Expansion

• Migratory effect of international airlines recruiting U.S. trained pilots – Incentives used by carriers to hire pilots

– Constraints on incentives by U.S. carriers

CBIA

A Number of Factors Affect Fleet Growth and Pilot Demand

CBIA

GDP Growth

Regulatory changes

PILOT DEMAND

The Regulatory Environment has Resulted in Higher Demand For Pilots

• Airline Safety and Federal Aviation Administration Extension Act of 2010

– FAA’s Pilot Certification and Qualification Requirements for Air Carrier Operations Rule

• Changes to crew duty and rest times

– The average U.S. carrier will hire 9.6% more pilots in order to comply with the rule

Source: American Eagle Airlines, Impact and Consequences of the “1,500 Hour Rule” and NPRM, available at http://www.whitehouse.gov/omb/2120_meeting_10122011

• Pilot retirement rates are increasing

CBIA

Many Pilots Flying for Mainline Carriers Will be Retiring at a High Rate Over the Next 10 Years

CBIA

Source: American Eagle Airlines, Impact and Consequences of the “1,500 Hour Rule” and NPRM, available at http://www.whitehouse.gov/omb/2120_meeting_10122011

49% of all pilots with an ATP certificate are 50 or older.

A Recent Analysis by ICF SH&E Concludes that the Global Airline Industry Will Require Over 600,000 Pilots by 2023

CBIA

Source: ALTA Industry Insights, ICF SH&E, Fourth Quarter 2013, page 6

The Pilot Supply Issue Affects Mainline and Regional Carriers in Different Ways

• Pilots flying for the larger U.S. carriers tend to be older than regional airline pilots

• Regional airline sector is important

• Regional airlines operate more than 50% of all flights at many large U.S. Airports

Rank Top U.S. Airports for

Regional Flights Regional

Departures Total

Departures

Regional Departures

% Share

1 Chicago-O'Hare 23,149 35,083 66.00%

2 Charlotte-Douglas 12,880 21,564 59.70%

3 Detroit 11,508 17,916 64.20%

4 Atlanta 11,051 36,411 30.40%

5 Denver 10,389 24,604 42.20%

6 Dallas/Fort Worth 10,037 26,398 38.00%

7 Houston-Intercontinental 9,820 17,072 57.50%

8 Minneapolis/St. Paul 9,477 17,462 54.30%

9 Philadelphia 9,465 16,162 58.60%

10 New York-La Guardia 7,805 14,672 53.20%

11 Newark 6,701 13,106 51.10%

12 Washington-National 6,672 12,026 55.50%

13 Los Angeles 6,640 21,673 30.60%

14 Washington-Dulles 6,214 9,645 64.40%

15 Salt Lake City 5,606 10,444 53.70%

16 Cleveland 5,478 7,040 77.80%

17 San Francisco 4,448 15,564 28.60%

18 Boston 4,041 14,105 28.60%

19 Cincinnati 3,757 4,503 83.40%

20 Phoenix 3,575 15,673 22.80%

Source: Regional Airline Association 2013, Annual Report, pg. 31. Airports ranked by number of regional departures.

CBIA

In Order to Support International Expansion, U.S. Carriers Rely On a Well-Developed Domestic Network

• In 2012, regional airlines operated about 12% of the U.S. scheduled airline capacity Source: RAA 2013

Annual Report, page 14

– Average passenger trip length of 469 miles Source: RAA

2013 Annual Report, page 13

– Average seating capacity of 56 seats Source: RAA 2013 Annual

Report, page 13

• 623 U.S. airports have regional service Source: RAA 2013

Annual Report, page 15

• 436 U.S. airports only have regional service Source:

RAA 2013 Annual Report, page 15

CBIA

An Insufficient Number of Qualified Airline Pilots Will Hurt the Airline Industry and Smaller Cities with Limited Air Service

• Larger airlines may experience a reduction in service from their regional airline partners – Network implications especially for international

routes

• Regional airlines will face various challenges – Hiring for growth and replacement

– Performing contract obligations

• United Airlines

• Great Lakes Aviation

CBIA

Thank you

Daniel Friedenzohn, J.D., M.A. Assistant Professor, Aeronautical Science Department

Embry-Riddle Aeronautical University

friedend@erau.edu

(386) 226-6857

CBIA