Northwest Regional Air Service Initiative

Steering Committee MeetingMarket Analysis/Strategies

June 6, 2007

Report topics

• Northwest Regional Air Service Initiative (NWRASI) background

• Market analysis– True market estimates

– Pro forma forecasts

• Discussion/input

Issues

Goals

Project scope

NWRASI Background

Air service issues

• Service in secondary markets is deteriorating

• Regional airline relationships and fleet trends are increasing small community service issues

• Industry trends making future service improvements difficult

• Many leaders in small communities have little understanding of the issues and/or how to address them

Goals

• Improve air service to the OR and WA traveling community

• Provide better access from secondary markets in OR and WA to the national air transportation system

• Engage smaller communities in OR and WA in finding solutions to regional air service issues

Project scope

• Phase I: Small community air service development tool kit– Mentor Program – Air service DVD – Small Community Air Service Handbook

• Phase II: Small community air service market analysis– True market estimates– Pro forma analyses

• Phase III: Small community air service strategy– Potential air service markets– Service provider options– Service strategies– Recommendations

Educate

Analyze

Strategize

NWRASI airports

Community Airport AirportCode

Astoria, OR Astoria Regional Airport ASTKlamath Falls, OR Klamath Falls Airport LMT

Moses Lake, WA Grant County International Airport MWH

Newport, OR Newport Municipal Airport ONP

Pendleton, OR Eastern Oregon Regional Airport PDT

Port Angeles, WA William R. Fairchild International Airport CLM

Pullman, WA Pullman-Moscow Regional Airport PUW

Redmond, OR Redmond Municipal Airport RDM

Roseburg, OR Roseburg Regional Airport RBG

Salem, OR Salem Municipal Airport SLE

Wenatchee, WA Pangborn Memorial Airport EAT

Yakima, WA Yakima Air Terminal YKM

12 Oregon and Washington communities

participated in the NWRASI

True market estimates

Pro forma forecasts

Market Analysis

Market analysis - questions

1. Where are air travelers traveling to/from today?

2. How many by origin and destination market?

3. Does it make economic sense to serve these communities?

Market analysis - steps

• Identification of airport catchment areas (ACA)

• Collection of air travel data (MIDT)

• Model air travel markets where data does not exist

• Analyze and summarize market information (total passenger volume by destination)

• Complete pro forma analyses on potential markets

Phase III – Small community air service strategies

Estimating air service demand (true market)

• Methodology– Each NWRASI airport has its own

unique air service market

– ACA population defined for each market by zip code

– Economics and demographics considered for proxy markets

– Competing (alternate) airport service considered

• Data sources– YE 10/2006 MIDT for zip codes included in each catchment area

– Airports with existing service combined MIDT and DOT airline data by destination

– Airports without existing service estimated using travel factors based on several factors including proximity to larger airports

Example – true market estimate w/ air service

• Like many NWRASI communities, isolated from large population centers

• Current scheduled air service

• Airport catchment area population of ~78,368

• True market estimate of 119,334 origin and destination passengers annually

• Portland is the #1 market

Klamath Falls:Catchment population 78,368

Travel factor 1.52Travel factor proxy N/ADomestic true market 109,964International true market 9,370

Total true market 119,334Methodology LMT DOT/MIDT

Example – true market estimate w/o air service

• No current scheduled air service

• Airport catchment area population of ~96,724

• Used travel factor proxy (Wenatchee) to estimate the true market

• True market estimate of 114,371 origin and destination passengers annually

• Seattle is the #1 market

Moses Lake:Catchment population 96,724

Travel factor 1.18Travel factor proxy EATDomestic true market 100,328International true market 14,043Total true market 114,371

Methodology EAT travel factor and market distribution

True market estimates

Passenger estimates form baseline for pro forma forecasts

Airport Travelfactor

ACApopulatio

n

Truemarket

Travel factorestimate

Passengerdistributio

nAST 1.39 90,739 126,213 Proxy: OTH Proxy: OTHLMT 1.52 78,368 119,334 MIDT/DOT MIDT/DOTMWH 1.18 96,724 114,371 Proxy: EAT Proxy: EATONP 1.39 62,293 86,646 Proxy: OTH Proxy: OTHPDT 0.95 116,942 111,044 MIDT/DOT MIDT/DOTCLM 1.89 68,656 129,855 Prior study Proxy: SEAPUW 2.43 71,320 173,657 MIDT/DOT MIDT/DOTRDM 3.14 192,256 603,389 MIDT/DOT MIDT/DOTRBG 2.06 93,341 191,816 Proxy: EUG Proxy: EUGSLE 4.13 594,398 2,451,941 Proxy: PDX MIDTEAT 1.18 144,021 170,450 MIDT/DOT MIDT/DOTYKM 0.91 259,546 237,250 MIDT/DOT MIDT/DOT

Pro forma market screening

• Each pro forma is stand alone

• Frequency: Minimum service in a new market is 2 roundtrips to be viable

• Aircraft size: 19-, 30-, or 37-seat turboprop aircraft (74-seat if demand permits) and 50-seat regional jets

• Appropriate destinations and connecting hubs

• Codeshares with dominant hub carrier: PDX=AS/QX, SLC=DL, DEN/SFO=UA, PHX=US, BOI/GEG=universal codeshare

• Best case scenario for NWRASI participants

Markets selected for pro forma analyses

• Highlighted markets form core for strategies

• 25 pro forma analyses completed

HubNWRASI airport

AST CLM EAT LMT MWH ONP PD

T PUW RBG RDM SLE YKM

Boise                        

Denver                        

Phoenix                        

Portland                        

Salt Lake City                        

San Francisco                        

Seattle                        

Spokane                        

Key pro forma forecast elements

• Passengers forecast based on connecting opportunities and stimulation

• Average fares based on reported fares where service exists and reported fares in proxy market where no service exists

• Segment revenue determined by pro-rating connecting market revenue based on square root of the miles

• Estimated operating costs based on Form 41 carrier costs reported to the US DOT and manufacturer cost curves

SLC

PUW

Segment 1

Beyond

Segment profit/ loss a key

consideration by airlines

Results - Boise

Statistical category MWH PDT PUW

Seats per aircraft 19 19 19 Roundtrips 2 2 2

Onboard passengers 8,921 8,763 14,662 Load factor 32.2% 31.6% 52.9%Local fare $150 $130 $124

Connect fare $159 $211 $199 Average fare $157 $210 $186

Segment revenue $757,646 $676,989 $1,238,528 System revenue $1,398,821 $1,841,187 $2,734,066

Segment cost $2,455,414 $1,829,020 $2,022,579 System cost $2,705,473 $2,283,057 $2,605,839

Segment profit/(loss) ($1,697,768) ($1,152,031) ($784,051)System profit/(loss) ($1,306,652) ($441,870) $128,227

System margin -93.4% -24.0% 4.7%

Only one market, PUW, was

profitable on a system basis

though marginal

Results – Denver/Phoenix

Only one market, RDM, was

analyzed for Denver and

Phoenix service

Although segment negative, both

Denver and Phoenix would provide ample system profits

Statistical category RDM-DEN RDM-PHXSeats per aircraft 50 50

Roundtrips 2 2 Unconstrained

passengers $79,724 $63,442

Onboard passengers $58,400 $58,400 Load factor 80.0% 80.0%Local fare $191 $180

Connect fare  $247 $234 Average fare $231 $212

Segment revenue $8,379,814 $8,187,023 System revenue $13,479,203 $12,379,057

Segment cost $8,900,990 $8,841,584 System cost $10,889,752 $10,476,477

Segment profit/(loss) ($521,176) ($654,561)System profit/(loss) $2,589,452 $1,902,580

System margin 19.2% 15.4%

Note: Load factor capped at 80 percent.

Results - Portland

All six were positive on a system basis; negative segment basis

Statisticalcategory CLM EAT MWH PUW RBG YKM

Seats/aircraft 19 19 19 19 19 19 Roundtrips 3 2 3 2 2 2

Unconstrained pax $28,653 $21,536 $26,259 $21,993 $25,512 $17,729 Onboard pax $27,047 $18,031 $26,259 $18,031 $18,031 $17,729 Load factor 65.0% 65.0% 63.1% 65.0% 65.0% 63.9%Local fare $125 $113 $125 $161 $108 $96

Connect fare $171 $185 $173 $191 $168 $197 Average fare $169 $157 $167 $184 $165 $176

Segment revenue $1,533,559 $1,457,991 $1,750,969 $1,701,181 $1,027,254 $1,135,729 System revenue $4,581,147 $2,824,234 $4,384,193 $3,313,384 $2,967,099 $3,128,712 Segment cost $2,632,665 $1,665,668 $2,747,458 $2,335,847 $1,645,956 $1,299,231 System cost $3,821,224 $2,198,502 $3,774,416 $2,964,606 $2,402,496 $2,076,494

Segment loss ($1,099,106) ($207,676) ($996,489) ($634,665) ($618,702) ($163,502)System profit $759,923 $625,732 $609,777 $348,779 $564,604 $1,052,218

System margin 16.6% 22.2% 13.9% 10.5% 19.0% 33.6%

Note: Load factor capped at 65 percent.

Results – Salt Lake City

Both Wenatchee and Pullman are profitable on a system basis

Statistical category EAT PUWSeats per aircraft 50 50

Roundtrips 2 2 Onboard passengers 39,348 40,891

Load factor 53.9% 56.0%Local fare $212 $167

Connect fare $229 $221 Average fare $226 $214

Segment revenue $4,649,189 $4,253,753 System revenue $8,907,199 $8,759,756

Segment cost $6,802,743 $5,927,505 System cost $8,463,367 $7,684,846

Segment profit/(loss) ($2,153,554) ($1,673,752)System profit/(loss) $443,832 $1,074,910

System margin 5.0% 12.3%

Results – San Francisco

Only Klamath Falls is positive on a segment basis; 2 airports are negative on a system

basis, Pullman and Yakima

Statistical category LMT PUW RBG RDM SLE YKM

Seats/aircraft 30 50 30 50 50 50 Roundtrips 3 2 3 3 3 2

Unconstrained pax $41,673 $26,220 $63,121 $79,145 $273,199 $26,907 Onboard pax $41,673 $26,220 $45,990 $79,145 $87,600 $26,907 Load factor 63.4% 35.9% 70.0% 72.3% 80.0% 36.9%Local fare $186 $192 $142 $148 $130 $175

Connect fare $248 $214 $182 $201 $164 $222 Average fare $235 $211 $177 $189 $158 $215

Segment revenue $4,592,794 $3,129,934 $3,663,338 $7,941,328 $7,395,448 $3,192,976 System revenue $9,785,693 $5,534,403 $8,118,372 $14,997,442 $13,877,823 $5,792,846

Segment cost $3,858,676 $7,299,230 $4,501,612 $8,608,730 $9,106,608 $6,910,819 System cost $5,883,906 $8,236,973 $6,239,075 $11,360,615 $11,634,734 $7,924,768

Segment profit/(loss) $734,118 ($4,169,296

) ($838,273) ($667,402) ($1,711,160) ($3,717,843)

System profit/(loss) $3,901,787 ($2,702,570) $1,879,297 $3,636,828 $2,243,089 ($2,131,922

)System margin 39.9% -48.8% 23.1% 24.2% 16.2% -36.8%

Note: Load factor capped at a 70 percent load factor for 30-seat aircraft and 80 percent for 50-seat aircraft.

Results – Seattle

All 6 pro formas were negative on a segment basis but positive on a system basis

Note: Load factor capped at a 65 percent load factor for 19-seat aircraft and 70 percent for 37-seat aircraft.

Statistical category AST CLM MWH ONP PDT SLE

Seats/aircraft 19 19 19 19 19 37 Roundtrips 3 3 3 3 3 3

Unconstrained pax $44,481 $40,931 $46,685 $25,585 $32,144 $233,324

Onboard pax $27,047 $27,047 $27,047 $25,585 $27,047 $56,721 Load factor 65.0% 65.0% 65.0% 61.5% 65.0% 70.0%Local fare $125 N/A $97 $125 $127 $125

Connect fare $183 $183 $187 $184 $234 $184 Average fare $172 $183 $166 $182 $223 $181

Segment revenue $1,625,404 $1,017,614 $1,656,074 $1,461,138 $2,041,059 $3,011,956 System revenue $4,664,156 $4,946,130 $4,483,814 $4,664,473 $6,033,140 $10,249,633

Segment cost $1,883,884 $1,383,216 $2,220,663 $2,974,050 $2,869,509 $4,325,540 System cost $3,068,998 $2,915,338 $3,323,482 $4,223,351 $4,426,420 $7,148,234

Segment loss ($258,480) ($365,603) ($564,589) ($1,512,912) ($828,450) ($1,313,583)

System profit $1,595,158 $2,030,792 $1,160,332 $441,122 $1,606,720 $3,101,399 System margin 34.2% 41.1% 25.9% 9.5% 26.6% 30.3%

Key strategy considerations

• No point-to-point service

• With one exception, short-haul service does not pay for itself

• All service will require either cross-subsidy or direct subsidy

• All markets require codeshare at the hub to survive

• Service provided by multiple airlines are required to meet NWRASI hub and aircraft requirements

Issues

Short-term strategies

Long-term strategies

Discussion/input

Issues

1. Short-haul air service operating economics

2. Source and availability of appropriate aircraft

3. Airfares that are acceptable to the market

Issue – Short-haul service operating economics

Cost of operating short-haul NWRASI flights does not pay for itself on a segment basis

Flightsegment

Segment profit/(loss)

Systemprofit/(loss)

50-seat regional jetEAT-SLC ($2,153,554) $443,832 PUW-SFO ($4,169,296) ($2,702,570)PUW-SLC ($1,673,752) $1,074,910 RDM-DEN ($521,176) $2,589,452 RDM-PHX ($654,561) $1,902,580 RDM-SFO ($667,402) $3,636,828 SLE-SFO ($1,711,160) $2,243,089 YKM-SFO ($3,717,843) ($2,131,922)

37-seat turbopropSLE-SEA ($1,313,583) $3,101,399

30-seat turbopropLMT-SFO $734,118 $3,901,787 RBG-SFO ($838,273) $1,879,297

Flightsegment

Segmentprofit/(loss)

Systemprofit/(loss)

19-seat turbopropAST-SEA ($258,480) $1,595,158 CLM-PDX ($1,099,106) $759,923 CLM-SEA ($365,603) $2,030,792 EAT-PDX ($207,676) $625,752 MWH-BOI ($1,697,768) ($1,306,652)MWH-PDX ($996,489) $609,777 MWH-SEA ($564,589) $1,160,332 ONP-SEA ($1,512,912) $441,122 PDT-BOI ($1,152,031) ($441,870)PDT-SEA ($828,450) $1,606,720 PUW-BOI ($784,051) $128,227 PUW-PDX ($634,665) $348,779 RBG-PDX ($618,702) $564,604 YKM-PDX ($163,502) $1,052,218

Issue – Sources of appropriate aircraft

Airlines operating 19-, 30-, and 37-seat aircraft in the western US

Airline 19-seatB1900

30-seatEMB 120

37-seatDash 8-200 Remarks

SkyWest   X   Possible available aircraft

Horizon     X Phase out by 2009

Big Sky X     Short-term focus on Boston/Delta

Great Lakes X X   Focus on EAS in Midwest

Mesa/Air Midwest X     Focus on Kansas City operations - phase out of 19-seat aircraft

Kenmore       May be future possibility

• 19-seat B-1900s getting very old

• No new technology short-haul aircraft

Issue – Acceptable short-haul market airfares

• Must be low enough to limit passenger diversion to larger airports and low-fare carriers

• Requires codeshare to allow publishing of through fares rather than two local fares

• Low fares require some type of subsidy– Cross subsidy by carrier (pro-rate

adjustment)

– “Seat-buy” by carrier

– Non-airline direct subsidy

Strategy - discussion

• Narrow the scope of the NWRASI initial program by focusing on high utility hubs that can be served with the same aircraft type

• PDX and SEA service with 19- or 30-seat aircraft offer the greatest utility to the largest number of NWRASI airports

Economically viable NWRASI new service opportunities:Hub AST ONP CLM LMT RDM EAT YKM MWH PDT PUW RBG SLEBOI                   X    DEN         X              PHX         X              PDX     X     X X X   X X  SLC           X       X    SFO       X X           X XSEA X X X         X X     XGEG                        

Strategy - steps

Step 1: Engage Alaska Airlines/Horizon Air in high level discussions about NWRASI code-share needs at SEA and PDX

Step 2: Issue RFP seeking expressions of interest on operating 19-37 seat aircraft in designated Portland and Seattle markets• RFP sponsors: State Economic Development Agency/State

DOTs

Step 3: Solicit proposals for respondents in Step 2 (offer a payment to offset the cost of preparing a proposal)• Will provide insight into potential subsidy needed

Step 4: A. Investigate/lobby for sources of needed subsidy dollars (federal, state, local)B. If no response to RFP, make presentations to potential service providers

Step 5: Develop a plan to address individual NWRASI service needs at DEN, SFO, PHX, and SLC

Thank you

Questions & discussion