Airport

1
Airport Airline Economics Jeff Borowiec,
Ph.D. Texas Transportation Institute jborowiec_at_tam
u.edu
If you want to be a millionaire, start with a
billion dollars and open an airline. Soon enough
you will be a millionaire. Sir Richard Branson,
Founder Virgin Atlantic Airlines
2
Outline

• Air Transportation Industry
• Background
• Significance
• Structure
• Cost/revenue framework
• Airports
• Where do airports get their money
• Who pays to operate/improve them
• How/where do they spend it
• Airlines
• Varied and complicated beasts
• Legacy vs. Low Cost Carriers
• Airspace
• Its impacts on airport and airlines and their
  economics
• Questions

3
State of the IndustryAirline Bankruptcies
4
State of the IndustryMergers and Acquisitions
5
The Airport System Airside vs. Landside
6
Airport DesignPrimary Design Elements Drive
Economics

• Runways
• Taxiways
• Terminal Area/Apron
• Pavements
• Airport Site Selection
• Navigational Aids
• Airspace
• Primary Design Guidance AC 150-5300-13 Change

• Passenger Terminals
• Landside Access
• Cargo Terminals
• Security
• Emergency Services

7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10

• l

11
(No Transcript)
12
(No Transcript)
13
National Economic Benefits

• Civil aviation contributed over 900 billion and
  11 million jobs to the U.S. economy in 2000, at
  least 9 percent of the total U.S. GDP
• Of this, one dollar in nine is contributed by
  general aviation

14
Importance of the Texas Airport System

• Link to national transportation system
• Connects rural urban populations
• Provides 784,000 jobs
• Generates 49 billion annually

15
Current Status of Industry

• New Large Aircraft
• Very Light Jets Increased Mobility/Air Taxi
  services
• SATS Small Aircraft Transportation System
• Recovering Economy
• Growth in Air Cargo
• Dependent on Air Transportation System
• Fractional Ownership

16
Current Status of Industry

• Industry consolidation
• Lower margins
• Increased Break-Even Load Factors
• Emerging Aircraft with better costs per seat
• (Larger RJs and Mainline aircraft)
• Fewer Small Communities with Air Service

17
Current Status of Industry

• Half of U.S. airports depend on only one or two
  destinations to connect them with the air
  transportation system
• 44 percent of U.S. airports with at least 5
  weekly departures are served by one carrier
• 39 percent of U.S. airports are served
  exclusively by turboprop aircraft which are in
  sharp decline

18
(No Transcript)
19
Air Transportation Network

• AIRports
• AIRplanes
• AIRways
• AIR Transportation Network
• Air traffic management is important because of
  the costs associated with delay

20
Air Transportation Network

• Airports are usually locally owned
• Airlines are publicly held
• Airplanes are privately owned
• Airways are controlled by the federal government

21
Aviation Legislation

• Federal Governments Role Dates to 1933 and the
  Civil Works Administration
• Federal Airport Act of 1946
• Airport and Airway Development Act of 1970
• Airport Development Aid Program
• Airport and Airway Improvement Act of 1982
• Airport Improvement Program
• NPIAS airports only
• Airway Safety and Capacity Expansion Act of 1990
• Passenger Facility Charges (PFCs)

22
Aviation Legislation

• U.S. Airline Deregulation Act of 1978
• Fly where they want (route choice)
• Charge what they want (pricing)
• Resulted in
• Hub and spoke network
• New entrants
• Increased competition
• Discount fares
• Growth in air travel
• Loyalty programs

Certificate of public convenience and
necessity/US DOT FAR Part 121 Operating
certificate/FAA
23
Regulated

• International Aviation
• Open Skies agreements
• Essential Air Service
• DOT/Subsidies to carriers serving domestic
  locations that are economically challenging
• Safety
• FAA

24
Air Transportation Network

• Governmental Entities
• FAA
• Primarily a SAFETY agency
• Airport Improvement Program
• Air Traffic Management
• NTSB
• Accident Investigation
• State Aviation Agencies
• Block Grant Program

25
Airports

• Commercial Service
• Reliever
• General Aviation

26
Airports

• Commercial Service
• Primary gt10,000 enplaned passengers
• Non-primary 2500-gt10,000 enplaned passengers
• Hub classification
• Large hub 1 or more of total national
  enplanements
• Medium hub 0.25 to 0.99
• Small hub 0.05 to 0.24
• Non-hub less than 0.05
• 2007National Enplanements 750 million

27
Airports

• General Aviation
• Everything that is not scheduled passenger
  service or military
• Relievers
• Metropolitan airports that reduce congestion at
  commercial service airports in the area
• General aviation airports
• Airport role
• Functional class
• Design standard

28
Airport Ownership

• Local Governments
• Cities
• Counties
• Airport Authorities
• Private Corporations
• State Governments

29
Airport Finance

• Who Pays?
• FAA
• Airport Improvement Program
• Must meet eligibility requirements
• Aviation user taxes (i.e., passenger ticket
  taxes)
• Commercial Airports
• Passenger Facility Charges (reduces AIP )
• Revenue from advertising, parking, concessions,
  access fees
• State Aviation Agencies
• Airport Sponsors (owners)
• Local governments

30
Who PaysYou Do!
31
Airport Finance

• Airport funding comes from several sources
• Airport bonds 59
• AIP grants 21
• Passenger Facility Charge 13
• State and local funding 4
• Airport revenue 4
• Source ASCE/FAA

32
NPIAS

• The plan identifies 3,356 existing and 55
  proposed public-use airports that are significant
  to national air transportation and therefore,
  eligible to receive grants under the Federal
  Aviation Administration Airport Improvement
  Program (AIP).
• The report estimates that over the next 5 years,
  there will be 49.7 billion of AIP eligible
  infrastructure development for all segments of
  civil aviation.

33
NPIAS
34
Airport Finance Revenues
35
Airport Finance - Expenses

• NPIAS Cost by Type of Development 2009-2013
• 49.7 B

36
Airport Finance - Expenses

• NPIAS Cost by Airport Type - 2009-2013

37
Airport FinanceRevenue and Expenses
38
(No Transcript)
39
(No Transcript)
40
Major U.S. Airport Concentration
41
Texas is BIG!
42
What is the Texas Airport System?

• 300 Airports 3 Heliports
• 26 Primary Commercial Service
• 1 Non-Primary Commercial Service
• 25 Relievers
• 248 General Aviation Non-Relievers
• 3 Heliports

43
Texas Airport System
44
Airline Economics

• Characteristics
• Activity
• Metrics
• Costs
• Load Factors
• Low Cost Carriers
• Impacts of Rising Fuel Prices

45
Airlines

• Majors
• revenue gt 1B
• Nationals
• revenue between 100M and 1B
• Regionals
• limited service/specific markets/city-pairs
• fastest growing since deregulation

46
Airlines by Category
47
Airline Structure

• Operations
• Sales and Marketing
• Reservations and Ticketing
• Management and Administrative Staff

48
Determinants of Demand

• Demand Revenue Passenger Miles (RPMs)
• Ticket price
• Competitors ticket price
• Passenger income
• State of the economy
• Availability of other modes
• Customer loyalty
• In-flight amenities
• Frequency of service
• Safety
• Random factors SARS, 9/11, terrorism threat

49
Characteristic of Demand

• Constant fluctuation
• Cyclicality
• Seasonality and peaking
• Directional flow
• Perishability
• Schedule wait time
• Airport access time
• Flight time
• Hub connection time
• Denied boarding time

50
Factors Affecting Supply

• Supply available seat miles (ASMs)
• Ticket price
• Price of resources aircraft, fuel, labor,
  maintenance
• Technological improvements
• Behavior of the competition
• Random factors
• Government regulation

51
Characteristics of Supply

• Two characteristics that shape the industry are
• Seasonality
• Pull existing capacity off of other routes
• Have excess/idle capacity somewhere in system
• Rigidity
• Can be difficult to reduce/increase supply
  dramatically
• Schedules are created six months in advance

52
Airline MarketsMarket Continuum
53
Evolution of U.S. Airline Industry
54
Major U.S. Airline Concentration
55
Airline Costs
56
Airline Cost Trends
57
Airline Cost Index 2000-2008
58
Airlines Keeping Pace?
59
Airline Load Factors
60
Airline Costs by Function
61
Airline Costs by Category
62
(No Transcript)
63
U.S. Air Carrier Traffic Statistics Through
December 2008
64
(No Transcript)
65
(No Transcript)
66
(No Transcript)
67
(No Transcript)
68
Low Cost Carriers

• Carry 1/3 of all US Passengers
• LCC Presence in Largest 1,000 Domestic City Pairs
  Has Increased by More Than 30 Since 2000
• Low Cost Carriers Compete In Markets Accounting
  For 80 Of All Domestic Air Travelers
• Legacy Carrier Operating Costs Have Gone Down and
  LCC Costs Have Gone Up

69
Fuel Price Impact
70
Cyclical?
71
(No Transcript)
72
Top 25 Airlines
73
TopU.S. City Pairs
74
(No Transcript)
75
Texas Aviation Activity
76
Texas Aviation Activity
77
Growth Going Forward

• U.S. Commercial Air Carriers 2009-2025
• Supply (Domestic ASMs annual percentage growth)
• Mainline 3.0
• Regionals 5.2
• Demand (Domestic RPMs annual percentage growth)
• Mainline 3.1
• Regionals 5.2
• Profitability tied to operating costs ? OIL

78
Air Traffic Management

• Air Traffic Control
• VFR / IFR
• Instrument Approaches
• Landing
• Non-precision approach/Precision approach
• Terminal Airspace

79
Delay Costs
80
Air Traffic Management

• Phases of Flight
• ATC Tower
• TRACON
• ARTCC
• RVSM
• Area of greatest potential for efficiency gains

81
Instrument Approaches
82
Air Traffic Management
83
Air Traffic Management
84
GPS and WAAS

• The Global Positioning System (GPS) is a system
  of 24 satellites operated by the Department of
  Defense (DOD) under joint DOD/Department of
  Transportation (DOT) management.
• Wide Area Augmentation System uses a series of
  ground stations to augment or enhance the GPS
  signal increasing its accuracy.

Allowed for new instrument approaches and reduced
minimums.
85
Glass Cockpits B-777 Garmin 1000 Cirrus S-22 G550
86
Air Traffic Management
87
FAA Part 77 Imaginary Surfaces

• Physical Obstacles
• Ensure and preserve safety of operations in the
  airspace in the immediate vicinity of airports
• Surfaces protect approaches to runways, takeoffs,
  and missed approaches from obstructions
• Objects can be man-made or natural
• They impact height-hazard zoning restrictions and
  could affect construction costs/airport viability

88
FAA Part 77 Imaginary Surfaces
89
(No Transcript)
90
Compelling Issues Affecting Air Transportation

• Future of airline industry
• Future funding/authorization
• User fees
• Alternative fuels
• Workforce development
• Land use/development/encroachment
• Privatization efficiency, capital infusion,
  conversion to tax paying entity
• NextGen advanced technologies/air space
  management

91
Jeff Borowiec 845-5200 jborowiec_at_tamu.edu
http//ttiresearch.tamu.edu/j-borowiec/