Airline Industry Airline Industry Overview of Recent TrendsOverview of Recent Trends
Prof. R John HansmanWith help from the other Faculty and Students in the Global Airline Industry Study
CautionCaution
• The News is Bad
• Small Children and Investors may wish to leave the room
Long Term Macro TrendsLong Term Macro Trends
• Since Deregulation
Passenger Growth TrendsPassenger Growth Trends
-
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998
Rev
enue
Pas
seng
er M
iles
(in 0
00s)
post-deregpre-deregLinear (post-dereg)Linear (pre-dereg)
750 millionRPMs per year
1.8 billionRPMs per year
Deregulation
Source: BEA and BTS OAI data
Air Cargo Growth TrendsAir Cargo Growth Trends
0
10,000
20,000
30,000
40,000
50,000
60,000
1970 1975 1980 1985 1990 1995 2000 2005
* US carriers, source: BTS
Historical Demand Trends with EconomyGDP vs. RPMs: 1954-2001
Source: US BEA and BTS data; Recession data from National Bureau of Economic ResearchOriginal plot by Charlie Keegan, FAA
Correlation Between US GDP and RP�MCorrelation Between US GDP and RP�M
Source: US BEA and BTS data; Recession data from National Bureau of Economic Research
US Airline Net ProfitUS Airline Net Profit19471947--2001 (Annual)2001 (Annual)
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
DeregulationDeregulation
Cyclic Industry with Exponential Growth In Volatility Since DereCyclic Industry with Exponential Growth In Volatility Since Deregulationgulation
Source: ATA NB: 2001 data includes Air Trans Stabilization Act receipts
US Airlines Net Profit ModelUS Airlines Net Profit ModelBest Fit ofBest Fit of UndampedUndamped OscillationOscillation
Cycle Period = 11.3 yrCycle Period = 11.3 yr eFoldingeFolding Time = 6.3 yrTime = 6.3 yr
-30
-20
-10
0
10
20
30
40
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
-(ATA)Estimate
Predicted LossesPredicted Losses2003 $15.6 B2003 $15.6 B2004 $15.0 B2004 $15.0 B2005 $8.4 B 2005 $8.4 B
Growth LimitsGrowth LimitsConstraintsConstraints vsvs DampingDamping
-30
-20
-10
0
10
20
30
40
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Downside: FinancialDownside: Financial
Upside: Capacity, MarketUpside: Capacity, Market
Medium Term TrendsMedium Term Trends
• Trends since Sept 11• Economic Down Cycle• Capacity Reductions
– Rolling Hubs – Regional Jet Usage
• Web Effects• Low Cost Carrier Envy• Bankruptcies• Labor Reductions and Givebacks
Source: ATA data
US Airline Traffic 2000US Airline Traffic 2000--20032003DomesticDomestic RPMsRPMs
20
25
30
35
40
45
50
January April July October
Traf
fic (i
n bi
llion
s of
RPM
s)
2000 2001 2002 2003
Source: ATA Monthly Passenger Traffic Report
US Airline Capacity 2000US Airline Capacity 2000--20032003DomesticDomestic ASMsASMs
40
45
50
55
60
65
January April July October
Cap
acity
(in
billi
ons
of A
SMs)
2000 2001 2002 2003
Source: ATA Monthly Passenger Traffic Report
US Airline Load Factors 2000US Airline Load Factors 2000--20032003
Source: ATA data
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
January April July October
Ave
rage
Loa
d Fa
ctor
2000 2001 2002 2003
Source: ATA Monthly Passenger Traffic Report
Annual Change in Average Domestic FareAnnual Change in Average Domestic Fare
-25
-20
-15
-10
-5
0
5
10
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
% C
hang
e vs
Prio
r Yea
r
2000 2001 2002
Source: ATA Monthly Airfare Report; 1000mi domestic trip (all classes); excludes WN
US Air Cargo Revenue Ton MilesUS Air Cargo Revenue Ton Miles
Total Cargo Revenue Ton Miles
1,500
1,700
1,900
2,100
2,300
2,500
January February March April May June July August September October November December
Millions
2000 2001 2002
Source: ATA
Mail Air Cargo Revenue Ton MilesMail Air Cargo Revenue Ton Miles
Mail Revenue Ton Miles
50
100
150
200
250
300
January February March April May June July August September October November December
Millions
2000 2001 2002
Schedule Changes Schedule Changes American ExampleAmerican Example
DFW 18%DFW 18%
(8/7/02)
AA Schedule Changes: DFWAA Schedule Changes: DFW
AA DFW Shift to Rolling BanksAA DFW Shift to Rolling Banks
Reduced Market Penalty for Time: Web Listings by Price, SecurityReduced Market Penalty for Time: Web Listings by Price, Security, Robustness , Robustness
Regional Jet GrowthRegional Jet Growth
0
100
200300
400500600
700800900
1000
93-3 94-3 95-3 96-3 97-3 98-3 99-3 00-3 01-3 02-3
Sum
med
Reg
istr
atio
ns
BAE-146ERJ-135ERJ-145CRJ-700CRJ-200CRJ-100
Based FAA registration data
Regional Jet DeploymentsRegional Jet Deployments
July 2000May 1998
August 2002 August 2002
Source: OAG and ETMS data, 1998-2002.
Stage Length HistogramStage Length Histogram
Flight Delays Temporarily ImprovedFlight Delays Temporarily Improved
OPSNET National Delay
0
10000
20000
30000
40000
50000
60000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecMonth
2002200120001999
Passenger Hassle Increased Delays VariablePassenger Hassle Increased Delays Variable(Key Terminal System Flows)(Key Terminal System Flows)
GatesGates
Add’l PaxAdd’l PaxScreenScreen
CkdCkd BagBagScreenScreen
CheckCheck
AirsideAirside LandsideLandside
PassengersPassengers
Bags/CargoBags/Cargo
SecuritySecurityCheckCheck
GateGateBoardingBoarding
Bag ClaimBag Claim
SecuritySecurityPointPoint
--InInDropDrop--offoffParkingParking
GroundGroundTransportTransport
PickPick--upupParkingParking
Items Confiscated at Passenger CheckpointsItems Confiscated at Passenger Checkpoints8 Months8 Months
Source:TSASource:TSA
Items Confiscated at Passenger CheckpointsItems Confiscated at Passenger Checkpoints8 Months8 Months
Since February 2002, TSA screeners confiscated 4.8 Million items 1.4 million knives, 2.4 million sharp objects, 1,101 guns, 15,666 clubs, more than 125,000 incendiary items and nearly 40,000 box cutters.
Sources:TSA, CNNSources:TSA, CNN
CTX 9000 Explosive DetectorCTX 9000 Explosive Detector
500 Bags/hr
Example EDS Before Ticketing Example EDS Before Ticketing Check InCheck In
Source: Transsolutions Website
Other ThreatsOther ThreatsPortablePortable SAMs SAMs
SAM-7 Fired at Arkia Airlines B757-300 Mombassa Kenya, Nov 2002
Airline Profitability ImpactAirline Profitability Impact
RASMRASM
Security costsSecurity costs InsolvencyInsolvency
Quick Recovery Slow RecoveryQuick Recovery Slow Recovery$/ASM$/ASM
CASMCASM
9/119/11--9/139/13 TimeTime
Air Transportation Stabilization ActAir Transportation Stabilization Act
RASMRASMAviation Aviation Disaster Disaster ReliefRelief
Quick RecoveryQuick Recovery
InsolvencyInsolvency
Slow RecoverySlow Recovery$/ASM$/ASM
CASMCASM
TimeTime9/119/11--9/139/13 12/3112/31
All Major Carriers On “Slow Recovery” All Major Carriers On “Slow Recovery” Trajectory Except SouthwestTrajectory Except Southwest
$(1,000)
$(800)
$(600)
$(400)
$(200)
$-
$200
$400
$600
00-1Q 00-2Q 00-3Q 00-4Q 01-1Q 01-2Q 01-3Q 01-4Q 02-1Q 02-2Q
Qua
rter
ly P
rofit
(Los
s) in
mill
ions
AA UADL WN
9/11 Attacks
Source: Airline reports
Market Cap: US Majors, 3/18/03Market Cap: US Majors, 3/18/03With Jet BlueWith Jet Blue
Southwest69.9%
Delta6.9%
United0.4% Continental
2.2%
Northwest4.3%
Alaska2.9%
US Airways0.0%ATA
0.3%America West0.4%
American1.7%
Jet Blue11.2%
Total Market: $15.7 billionTotal Market: $15.7 billion
Source: Yahoo! Finance. Includes ATASource: Yahoo! Finance. Includes ATA
Current Market Cap vs. RPM ShareCurrent Market Cap vs. RPM ShareUS Majors and ATAUS Majors and ATA
Source: Yahoo! Finance and airline traffic reportsSource: Yahoo! Finance and airline traffic reports
Short Term TrendsShort Term Trends
• Trends Since Iraq War– Demand Reductions– Service Cutbacks
• SARS• Potential Government Intervention?
Weekly Traffic Growth RatesWeekly Traffic Growth RatesSource: ATA, December 15Source: ATA, December 15--PresentPresent
Mar 15 Mar 15 -- WHO SARS WHO SARS Travel AdvisoryTravel Advisory
Weekly data adjusted for day of week; Includes HP, AA, CO, DL, NW, UA, US
Daily Traffic Growth RatesDaily Traffic Growth RatesSource: ATA, March 12Source: ATA, March 12--PresentPresent
Mar 15 Mar 15 -- WHO SARS WHO SARS Travel AdvisoryTravel Advisory
Daily data adjusted for day of week; Includes HP, AA, CO, DL, NW, UA, US
Announced Recent Schedule Announced Recent Schedule CutbacksCutbacks
•Bookings Down (ATA)– Domestic >20%, Atlantic >40%, Latin >15%, Pacific >30%
•US Airways -4%•United -5%•American -6%, -7% int’l•Delta -12%•Northwest -12%•Continental -2%
•Air Canada -15%•BA -4%, -6% int’l•Qantas -20%•JAL -8%•KLM -20%•Virgin -3%•Cathay Pacific -14%•Singapore -13.6%
Source: Airline press releases, ATA
Recent Labor AnnouncementsRecent Labor Announcements
• Wage concessions in exchange for equity, board seats, and profit-sharing plans
USAirways:– X% wage cuts + 5% wage deferral last month– PBGC Trustee of Pension Plan for Pilots ($3.7B liab, $1.2B assets)
United:– Filed motion to terminate labor contracts– Tentative agreement with Pilots, 30% wage cuts
American:– Tentative agreements reached will all labor groups 6.6% to 19% – Pilot wages cut 20% in first year, 15% in subsequent years
Delta, Northwest, Continental waiting to see “benchmarks”– Northwest and Continental agreed with pilots in 2002 to postpone
contract talks until sometime this year
Other Recent AnnouncementsOther Recent Announcements
• Chapter 11– Hawaiian in– AMR threatens– USAirways emerges
• Internal Low Cost Carrier Plans – “Song”– “Starfish”
• Potential Governmental Aid– House $3.2 B, Senate $3.5 B– Liability Insurance, Unemployment, Security Fees
Sources: Reuters, APSources: Reuters, AP
Key QuestionsKey Questions
• How will the major network carriers emerge?– Significant fraction of national lift capacity at risk
• What are the new revenue/operating paradigms?– Market segmentation assumptions are failing– Is the LCC model broadly applicable?
• Can labor and management collaborate to reduce operating costs to competitive levels?
• What will be the impact on small markets?– “Cherry picking” competition for high-value routes
• Will government intervene?– How can the system be stabilized
Macro Economic Effects of Loss of Macro Economic Effects of Loss of Air Service UnknownAir Service Unknown
The EconomyDomestic,International Macro Economic
Impact Loop
AIRLINESTravel Need
Air Travel Demand
Profitability LoopPricing &Scheduling
