The US Airline Industry: Taking A Higher Perspective

1
The US Airline IndustryTaking A Higher
Perspective
Regional Airline Association May 20, 2003
2
Washington The Circus Continues

• Almost zero long term policy on aviation.
• Security The pre-9/11 flaws continue.
• Mineta Vacuum-tube leadership.
• TSA is out of control -
• An embarrassment to America
• Costs and knee-jerk regulations are just
  starting.

3
The TSA Keystone Kops

• - Airport Director regarding the TSA
• Its like having an army of occupation take over
  your airport
• the French Army.

4
TSA A Threat To Aviation

• TSA The FAAs demon spawn --
• No accountability
• Politically-focused
• Financially irresponsible
• Functionally inept
• Security Problems
• Reactive predictable
• Stove-pipe, disparate systems
• Lack of anticipation
• No plan
• Except to hire thousands
• Costs are out of control threaten the aviation
  system...

Which is exactly what the terrorists wanted to
accomplish.
5
Traffic Fundamentally Different
6
Airlines A New Structure

• Three basic structures
• Network airline systems
• Low-fare cherry-pickers
• Small Jet Providers to network systems
• Out or Going Out
• Airlines-Within-Airlines
• Independent Commuter Carriers (w/ Exceptions)
• Anything with a propeller
• To fall out of favor...
• Commuter Cabin jets (37 - 86 Seats)

7
Regional Airline Industry Gone

• They are now Small Jet Providers (SJP)
• Give or take some turboprops for now
• Today, vendors of lift
• Not stand alone airlines
• Important part of the air transportation
  structure.
• Important now. Will evolve later in the decade.
• Third-tier independent regional airline system
  development Not likely.

8
Hub-And-Spoke - Alive Well
OD Traffic GenerationHubsites v Non-Hubsites

• More than half of all OD traffic is generated at
  airports where airlines have established
  connecting hubs.
• Theres lots of point to point service between
  these 29 hub-site airports
• Thats where most point to point volume will
  remain.

9
Continuous Hubbing

• An old idea with limited applications
• Material savings efficiencies, but..
• Only possible at a handful of hubsite airports.
• Needs enormous local OD.
• Tight rich catchment area
• Needs massive resources.
• Needs a wide fleet mix.

10
Eliminate Hubs. Go Point-To-Point

• The first destination will be the bankruptcy
  court.

11
Internal Low Fare Airlines

• A proven failure. But a trendy concept.
• United Shuttle failed in its first year was
  relegated back into hub role by 1996. Trying it
  again could be lethal.
• MetroJet - source of its route planning is a
  cosmic mystery
• Miss Cleo?
• Suicide Hot Line?
• Continental Lite Putting 737s where 19-seaters
  couldnt work
• Exception to rule Deltas Song
• Focuses on existing, demonstrable,
  price-sensitive DL traffic flows.JetBlue could
  find itself very blue. Maybe

12
Independent Low-Fare Airlines

• Lots of impact from a few players
• But
• Very limited potential for new entrants.
• Southwest No new cities in 2003 maybe 2004.
• Lot of other new entrants dont plan on it.
• The economics and the market just are not there

13
Effects of Low-Fare Carriers

• Cherry Pick Strong Traffic Flows
• Result Airport Catchment Areas Are NowAreas
  of Dominant Influence
• Result Major Change In Traffic Stratas At
  Smaller Airports.
• Fact Air Service Is Becoming Fundamentally
  Non-Economic At Rural Airports Within ADIs of
  Low-Fare Airports.

14
Example Air Service ADIs
ALB BUF WN ADI Covers Most of New York
Southern Tier BGM Emerging As Dominant Access
Point
Changing Economics Less RuralAir Service
15
Rural Air Service...

• Increasingly cut out of the system
• Forget independent turboprop airlines
• Rural areas cant generate the revenue needed
• Consumer preferences

Not likely in the lower 48
16
Aircraft Fleet Trends

• Major re-fleeting - Retirements Now. New
  Aircraft Later
• RJs lt51 seats Most orders are in
• Strongest demand lt126 seat airliners
• Embraer has giant step market lead with 170-190
• Turboprop Demand - Between None and Zero

17
Regional Jet Future...

• Strength Reduce Sector Costs. Match Premium
  Revenue to Capacity.
• Challenges
• Lots of Applications, But They Are Finite
• 50-seaters have high ASM costs.
• Small size. Limited ability to feed the hub
  beast.
• Comfort service compatibility issues.
• Competitive Issues
• The regional jet bubble coming to an end.

18
The New E-Jet Category

• lt51 seaters neither service-transparent nor
  comfort-compatible with mainline jets.

19
US Jet Fleet Forecast
2003 Fleet Size 5,370
2012 Fleet Size 8,377
Aircraft Segments By Seat Capacity
20
Predictions

• Airlines
• Network carriers will survive
• Low fare start-ups Impact mostly already
  registered
• Small Jet Providers Evolving into part of the
  supply chain.
• Traffic
• 2003 Decline _at_ 2.0 - 2.5
• 2004 -2007 slow growth lt2.7 annually
• Year 2000 passenger traffic not regained before
  2008.
• Rural air service Becoming economically
  impossible.
• Fleets
• Demand for commuter cabin RJs slows to trickle
• Most demand through 2012 70 - 125 seats
• Growth area E-Jets, 64 - 100 seats

21
Thank You
www.AviationPlanning.com
Regional Airline Association May 20, 2003