MIT
ICAT
Overview of Recent Forces &
Trends in the Airline Industry
Prof. R. John Hansman
With the help of the Faculty and Students of the MIT Global
Industry Study
Traffic Source: Sage Analysis courtesy Prof Ian Waitz
rjhans@mit.edu
MIT
ICAT
World Population Distribution &
2004 Air Transportation Activity
North America
36% Pax
26% Cargo
Europe
27% Pax
27% Cargo
~160 Airlines
~4100 Airports
~200 Airlines
~2400 Airports
Latin America/
Caribbean
4% Pax
3% Cargo
~50 Airlines
~580 Airports
Africa
2% Pax
2% Cargo
~20 Airlines
~300 Airports
Asia/
Pacific
27% Pax
36% Cargo
Middle East
4% Pax
6% Cargo
~20 Airlines
~230 Airports
Data source: Population:
[URL:http://www.ciesin.org/datasets/gpw/globldem.doc.html]
Air Transport: ICAO, R. Schild/Airbus
Passenger and freight traffic represent RPK and FTK share in 2004
~80 Airlines
~1800 Airports
MIT
ICAT
Relationship Between Economy
and Air Transportation
Direct / Indirect / Induced employment effects
Economy
Travel/Freight
Need
Financial Equity/
Debt Markets
Economic Enabling Effect
(Access to people / markets / ideas / capital)
Demand
Supply
Pricing & Schedule
Airlines
Revenue/Profitability
Air Transportation System
Vehicle Capability
NAS
Capability
Correlation Between US GDP
and Passenger Traffic
MIT
ICAT
30%
RPMs
25%
Annual Growth (%)
GDP
Deregulation
20%
Recessions
15%
10%
5%
0%
-5%
-10%
1965
1968
1971
1974
1977
1980
1983
1986
Data source: RPMs: Bureau of Transportation Statistics, (BTS)
GDP: US Bureau of Economic Analysis
Recession data: National Bureau of Economic Research
1989
1992
1995
1998
2001
2004
MIT
ICAT
Air Transportation Markets
2004 Data
MIT
ICAT

Travel Demand

Market Expectations

Competition

Equity Markets - Cyclic Industry

Capacity Limitations

Fuel

Labor

Regulatory

Environmental

Information Technology

Media

Equity Markets

Security Requirements
Key Forces
MIT
ICAT
Market Expectations
 Safety/Security
 Service






Schedule
Price
Frequent flyer / loyalty programs
Reliability
On-time performance
Service
MIT
ICAT
Trend Time Scales
 Long Term Macro Trends
 Since Deregulation (1978)
 Medium Term Trends
 Since September 11, 2001
MIT
ICAT
US Passenger Growth Trends
Effect of De-Regulation
Scheduled Revenue Passenger Miles in US
900
Revenue Pax Miles (billion)
800
Pre-deregulation
Post-deregulation
700
600
Linear (Prederegulation)
20.3
billion
20.3
billion
RPMsperper
RPMs
yearyear
Deregulation
500
400
300
8.35
8.35billion
billion
RPMs
per
RPMs peryear
year
200
100
0
1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Data source: Bureau of Transportation Statistics
MIT
ICAT
Passenger Traffic Trends (RPK)
by World Region
Data source: ICAO, scheduled services of commercial air carriers (through 2006), IATA annual traffic growth data for year 2007 (Jan-Oct)
MIT
ICAT
Freight Trends (FTK)
by World Region
Data source: ICAO, scheduled services of commercial air carriers (through 2006), IATA annual traffic growth data for year 2007 (Jan-Oct)
MIT
ICAT
Safety Trend
MIT
ICAT
MIT
ICAT
Comair Accident
27 - Aug - 2006
MIT
ICAT
Sao Paulo Runway Overrun
17 Jul 2007
Source: Intl Herald Tribune
MIT
ICAT
Trends in Aircraft Size
Data source: Form 41 Traffic data from Bureau of Transportation Statistics (US carriers)
U.S. Domestic Average
Load Factor
MIT
ICAT
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
Data source: ATA, US member airlines, scheduled mainline service
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
45.0%
U.S. Domestic ASMs and
RPMs
Billions
MIT
ICAT
700
ASMs
600
500
400
RPMs
300
200
100
Data source: ATA, US member airlines, scheduled mainline service
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
-
Systemwide Passenger Revenue as % of Nominal GDP*
MIT
ICAT
Spending on Air Travel Has Fallen as % of U.S.
Economy
Recent Quarters’ Modest Recovery Still $26B Short of Historical Norm
1.05%
1.00%
≅ $26B
0.95%
0.90%
0.85%
Historical Band
0.80%
0.75%
0.70%
0.65%
80 81 82
83 84 85 86
87 88 89 90
91 92 93 94
95 96 97 98
99 00 01 02
03 04 05 06
07
*Four-quarter rolling passenger revenue derived from government filings of passenger airlines whose annual operating revenues exceed $100 billion
Sources: ATA Airline Cost Index; Bureau of Economic Analysis; U.S. Department of Transportation
Data source: ATA.
Macro Scale Drivers
US Airline Net Profit
MIT
ICAT
Billions
Cyclic Industry with Exponential Growth In Volatility Since Deregulation
8
6
4
-4
-6
Deregulation
-8
-10
-12
Data source: ATA Annual Revenue and Earnings - Net Profit and Loss
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
-2
1950
0
1947
Net Profit ($)
2
MIT
ICAT
US Airlines Net Profit
Best Fit of Undamped Oscillation
Cycle Period = 11.3 yr
eFolding Time = 7.9 yr
ATA data
Airline Quarterly Financial Reports
2007 results from
(9 major airlines)*
Data source: ATA - available at: www.airlines.org & Airline Quarterly Reports
*Note: Airlines; American Airlines, United Air Lines, Delta Air Lines, Northwest Airlines, Continental Airlines, US Airways,
Southwest Airlines, JetBlue Airways, Alaska Airlines,
Excludes; Continental airlines 2007 Q4 results, Includes: Delta Airlines & Northwest Airlines Q2 2007 reorganization items.
September 11 Does not
Significantly Change Trend
MIT
ICAT
Analysis using only data before 2001
Billions
30
25
20
Estimates from 9 airlines*
for Q1 & Q2 2006 and projection** for full year
15
Net Profit ($)
10
5
0
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
-5
-10
-15
Data from ATA (www.airlines.org)
Data from airline financial quarterly reports
Projection
-20
* American Airlines, Delta Airlines, United Airlines, Northwest, Continental, Southwest, JetBlue, America West, Alaska.
** The projection for the full year is computed as 2 times the loss for Q1 & Q2 combined
10
12
World Airlines Net Profit
MIT
ICAT
historical data between 1978 to 2007 –
with projection to 2012
ICAO data
IATA data
Data source: ICAO data (1978 to 2006) and IATA (2007)
Note: IATA represents 250 airlines comprising 94% of the international scheduled air traffic
MIT
ICAT
Net Profit and Aircraft Deliveries
Hypothesize that instability driven by capacity
response phase lag
Data source: ICAO data (Profit) and SpeedNews data (Aircraft deliveries)
MIT
ICAT
Growth Limits
Constraints vs Damping
Upside: Capacity, Market
Downside: Financial
Data source: ATA - available at: www.airlines.org & Airline Quarterly Reports
Q1 & Q2 2007
(8 major airlines)
MIT
ICAT
Medium Term Trends
 Trends since Sept 11
 Economic Down Cycle
 Recovering
 Fuel Costs
 IT Effects
 Low Cost Carrier Envy
 Bankruptcies
 Labor Reductions and Givebacks
MIT
ICAT
U.S. Domestic RPMs
Data source: ATA, US member airlines, scheduled mainline service
Billions
MIT
ICAT
U.S. Domestic ASMs
65
60
55
50
45
2000
2001
2002
2003
2004
2005
2006
2007
40
Jan
Feb
Mar
Apr
May
Jun
Jul
Data source: ATA, US member airlines, scheduled mainline service
Aug
Sep
Oct
Nov
Dec
MIT
ICAT
U.S. Domestic Load Factors
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
2000
2001
2002
2003
2004
2005
2006
2007
50.0%
Jan
Feb
Mar
Apr
May
Jun
Jul
Data source: ATA, US member airlines, scheduled mainline service
Aug
Sep
Oct
Nov
Dec
MIT
ICAT
U.S. Average Domestic Yield
16.00
15.00
Yield (cents/mile)
14.00
13.00
12.00
11.00
10.00
2000
2001
2002
2003
2004
2005
2006
Data source: ATA Monthly Passenger Revenue Report, 7 US major airlines excluding Southwest (WN).
2007
Historic Yield Trend
1995-2007
MIT
ICAT
16
Domestic
Latin
15
14
Yield (c/mile)
13
12
11
10
9
Atlantic
7
Data source: ATA Passenger Yield Report, 7 US major airlines excluding Southwest (WN).
Jan-08
2007
Jul-07
Jan-07
2006
Jul-06
Jan-06
2005
Jul-05
Jan-05
2004
Jul-04
Jan-04
2003
Jul-03
Jan-03
2002
Jul-02
Jan-02
2001
Jul-01
Jan-01
2000
Jul-00
Jan-00
1999
Jul-99
Jan-99
1998
Jul-98
1997
Jul-97
Jan-97
1996
Jul-96
1995
Jul-95
Jan-95
6
Jan-96
Pacific
Jan-98
8
Historic Yield Trend
1995-2007
MIT
ICAT
Domestic
Latin
16
15
14
Yield (c/mile)
13
12
11
10
9
8
Atlantic
7
Pacific
Data source: ATA Passenger Yield Report, 7 US major airlines excluding Southwest (WN).
Jan-08
2007
Jul-07
Jan-07
2006
Jul-06
Jan-06
2005
Jul-05
Jan-05
2004
Jul-04
Jan-04
2003
Jul-03
Jan-03
2002
Jul-02
Jan-02
2001
Jul-01
Jan-01
2000
Jul-00
Jan-00
1999
Jul-99
Jan-99
1998
Jul-98
Jan-98
1997
Jul-97
Jan-97
1996
Jul-96
Jan-96
1995
Jul-95
Jan-95
6
MIT
U.S.
Domestic
Yield
2000-2007
ICAT
16
Yield (c per mile)
15
14
13
12
11
10
2000
2001
2002
2003
2004
2005
2006
2007
9
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Data source: ATA Monthly Passenger Revenue Report, 7 US major airlines excluding Southwest (WN).
Dec
MIT
ICAT
Atlantic Yield 2000-2007
14
Yield (c per mile)
13
12
11
10
9
8
7
2000
2001
2002
2003
2004
2005
2006
2007
6
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Data source: ATA Monthly Passenger Revenue Report, 7 US major airlines excluding Southwest (WN).
Dec
MIT
ICAT
Latin Yield 2000-2007
15
Yield (c per mile)
14
13
12
11
2000
2001
2002
2003
2004
2005
2006
2007
10
Ja n
Fe b
Ma r
Apr
Ma y
Jun
Jul
Aug
Se p
Oct
Nov
Data source: ATA Monthly Passenger Revenue Report, 7 US major airlines excluding Southwest (WN).
De c
MIT
ICAT
Pacific Yield 2000-2007
14
13
Yield (c per mile)
12
11
10
9
8
2000
2004
7
2001
2005
2002
2006
2003
2007
6
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Data source: ATA Monthly Passenger Revenue Report, 7 US major airlines excluding Southwest (WN).
Dec
MIT
ICAT
Airline Profitability Impact
Quick Recovery
$/ASM
Slow Recovery
Insolvency
Security costs
CASM
RASM
9/11-9/13
Time
MIT
ICAT
Airline Profits
including
+23B reorganization
items
9/11 Attacks
-17B
including reorganization items
2000
2001
2002
2003
2004
2005
Data source: Airline quarterly reports, profits and losses including reorganization items
2006
2007
MIT
ICAT
Cargo Operations Profitable
$ 1,600
West Coast
Dock Strike
Net Income in Millions
$ 1,400
FedEx
$ 1,200
UPS
SARS
Iraq war
9/11 Attacks
$ 1,000
$ 800
$ 600
$ 400
$ 200
–
2000Q1
2001Q1
Data source: Companies’ annual reports
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
MIT
ICAT
Market Cap: US Majors
4-Sept-2007
Total Market Cap: $ 44.5 billion
Data source: Yahoo Finance.
MIT
ICAT
Market Cap: US Majors
26-Feb-2008
Total Market Cap: $ 35.2 billion
Data source: Yahoo Finance.
MIT
ICAT
RPM Share vs. Market Cap
(RPMs: May 2007 / Market Cap: Sept 4th
2007)
Source: Yahoo! Finance and Bureau of Transportation Statistics
MIT
ICAT
Southwest SWA Flights (8/7/02)
MIT
ICAT
American AAL Flights (8/7/02)
ORD 12%
DFW 18%
MIA 6%
MIT
Hub and Spoke vs Direct Networks
ICAT
Completely Connected Network = 2(N-1) Flights
(eg., 50 Airports, 98 Flights)
MIT
ICAT
Fully Connected Network
Completely Connected Network = N(N-1)
(eg., 50 Airports, 2450 Flights)
US Carrier CASM for the
First Quarter of 2006
MIT
ICAT
12
11.42
10.71
10.32
11.16
10.85
10.81
10
8.7
cents/ASM
8
7.82
8.03
7.48
7.69
7.82
7.97
6.43
6
4
2
0
DL
CO
UA
Mainline*
AA
NW
Mainline* Excluding Fuel Expenses
* Mainline CASM excluding special items, regional affiliates, UAFC
Data source: Company Press Releases
US
WN
Emergence of Secondary Airports
MIT
ICAT
“Southwest Effect”
MSP
MHT
DTW
ORD
BOS
PVD
MDW
OAK/
SJC
BWI
STL
SFO
PHL
ISP
LGA / JFK / EWR
IAD
CVG
DCA
BUR
ONT
LAX
SNA
LGB
PHX
DFW
DAL
ATL
IAH
HOU
Original Core airport
FLL
MIA
Emerged Core airport
Secondary airport
High Density Airport Systems
MIT
ICAT
Boston Region
Airports: Legend
Core
Manchester MHT
Secondary
Nashua ASH
Business Av. /
High density GA
Lawrence LWM
Fitchburg FIT
6B6
VLJ capable GA
non VLJ capable
GA
Beverly BVY
Bedford BED
Boston BOS
Worcester ORH
Norwood OWD
Marshfield 3B2
Mansfield 1B9
Pawtucket SFZ
Providence PVD
Taunton TAN
Plymouth PYM
New Bedford EWB
Provincetown PVC
Low-Cost Carrier Envy
MIT
ICAT
Emergence of LCCs
Europe (60, 3 in 2004)
Canada (7, 1 in 2004)
Aer Arann
Air 2000
Air Baltic
Air Berlin
Air Finland
USA (19, 4 in 2003/2004)
Air Luxor Lite
Air Polonia
AirTran
Spirit Airlines
Air Scotland
Song
Allegiant Air
Sun Country Airlines Air Southwest
American West
Air Wales
USA 3000 Airlines
ATA
Alpi Eagles
Vacation Express
Frontier Airlines
Azzurra Air
Ted
Interstate Jet
Hi Fly
Independence Air
JetBlue Airways
Virgin USA
Fly Me
Midwest Express
Pan American
Fly Nordic
Southeast Airlines
Air Service +
Southwest Airlines
Blue1
Inter continental LCCs Blue Air
Legend:
CanJet
HMY Airways
JetsGo Airlines
Tango Airlines
New in 2003 / 2004
New in 2005 / 2006
Westjet
Zip
Canada West
Air Madrid
Condor
East Jet
LTU
Martinair
Zoom Airlines
Baboo
Basiq Air
Bexx Air
BMI Baby
British European
BudgetAir
Corendon
Deutsche BA
EasyJet
Evolavia
Excel Airways
Fairline Austria
Monarch
My Air
Scand Jet
Transavia
Vueling
Inter Sky
Central Wings Jet 2
LTU
Dau Air
Iceland Express Meridiana
South America (3)
Bra
Gol
U Air
Source: http://www.etn.nl/lcostair.htm, airline news
Africa (2)
1Time
Kulula
Fare4U
German Wings
Germania Express
Globespan
Hapag Lloyd Express
Hellas Jet
Helvetic Airways
Iceland Express
Ryanair
Snalskjutsen
SnowFlake Airlines
Sterling
Sun Express
Swedline
ThomsonFly
V Bird
Virgin Express
VLM Airlines
VolareWeb
Windjet Vola
Smart Wings
Wizz Air
Hop
Asia/Pacific (20, 8 in 2004)
Air Arabia
ValuAir
Air Asia
Virgin Blue
Air Deccan
Air Blue
Athena Air Services
Air One
Citilink
BackpackersXpress
Freedom Air
Jetstar
Lion Airways
Nok Air
One-Two-Go
Pacific Blue
Skymark Airlines
SkyAsia
Skynet Asia Airways
Tiger Airways
Aero Asia Bangkok Air Spring
Awair
Origin Pacific Kingfisher
Jazeera Airways
Spice Jet
MIT
Low-Cost Carrier Envy (or not)
ICAT
Emergence of LCCs
Europe (60, 3 in 2004)
Canada (7, 1 in 2004)
Aer Arann
Air 2000
Air Baltic
Air Berlin
Air Finland
USA (19, 4 in 2003/2004)
Air Luxor Lite
Air Polonia
AirTran
Spirit Airlines
Air Scotland
Song
Allegiant Air
Sun Country Airlines Air Southwest
American West
Air Wales
USA 3000 Airlines
ATA
Alpi Eagles
Vacation Express
Frontier Airlines
Azzurra Air
Ted
Interstate Jet
Hi Fly
Independence Air
JetBlue Airways
Virgin USA
Fly Me
Midwest Express
Pan American
Fly Nordic
Southeast Airlines
Air Service +
Southwest Airlines
Blue1
Inter continental LCCs Blue Air
Legend:
CanJet
HMY Airways
JetsGo Airlines
Tango Airlines
New in 2003 / 2004
New in 2005 / 2006
Not Operating
Westjet
Zip
Canada West
Air Madrid
Condor
East Jet
LTU
Martinair
Zoom Airlines
Baboo
Basiq Air
Bexx Air
BMI Baby
British European
BudgetAir
Corendon
Deutsche BA
EasyJet
Evolavia
Excel Airways
Fairline Austria
Monarch
My Air
Scand Jet
Transavia
Vueling
Inter Sky
Central Wings Jet 2
LTU
Dau Air
Iceland Express Meridiana
South America (3)
Bra
Gol
U Air
Source: http://www.etn.nl/lcostair.htm, airline news
Africa (2)
1Time
Kulula
Fare4U
German Wings
Germania Express
Globespan
Hapag Lloyd Express
Hellas Jet
Helvetic Airways
Iceland Express
Ryanair
Snalskjutsen
SnowFlake Airlines
Sterling
Sun Express
Swedline
ThomsonFly
V Bird
Virgin Express
VLM Airlines
VolareWeb
Windjet Vola
Smart Wings
Wizz Air
Hop
Asia/Pacific (20, 8 in 2004)
Air Arabia
ValuAir
Air Asia
Virgin Blue
Air Deccan
Air Blue
Athena Air Services
Air One
Citilink
BackpackersXpress
Freedom Air
Jetstar
Lion Airways
Nok Air
One-Two-Go
Pacific Blue
Skymark Airlines
SkyAsia
Skynet Asia Airways
Tiger Airways
Aero Asia Bangkok Air Spring
Awair
Origin Pacific Kingfisher
Jazeera Airways
Spice Jet
MIT
ICAT
Competition
 Brutally Competitive Business
 Inter-Airline
 Automobile and other Surface Modes
 Historical Focus on high yield travelers shifted
 Gaming
 Schedule
 Performance Index Gaming
 Alliances





Code Share Based
Network power
Virtual mergers to overcome international restrictions
Operating Benefits (not yet realized)
Varying Commitments
MIT
ICAT

On April 30, 2007 E.U. and U.S. signed a preliminary Open Skies
accord






EU-US Open Skies Agreement
Allows EU airlines to operate direct flights between U.S. and any EU country
(and some others)
Allows U.S. airlines reciprocal right, and ability to fly between EU city-pairs
Agreement will replace 22 bilateral air service agreements currently in place
between the U.S. and the Member States
Implications for Alliance Anti-Trust Immunity
In effect March 30, 2008
E.U. has made liberalized foreign control a prerequisite for a
permanent agreement
o
o
U.S. domestic market lucrative as standalone and hub-feeder
 Cabotage rights only granted to U.S. Incorporated airlines
 U.S. incorporation requires meeting ownership caps
 Without control, network composition cannot be shaped
Match EU’s 49% foreign control restriction
MIT
ICAT
The North Atlantic: Market for Low Cost
Carrier Expansion
 Proposed transatlantic route network by RyanAtlantic*
London Stansted (STN)
San Francisco
(SFO – OAK – SJC?)
Providence (PVD)
Islip Macarthur (ISP)
Baltimore (BWI)
Dallas (DFW?)
San Diego (SAN?)
Florida (MIA,FLL,MCO,…?)
 Development of international parallel networks
 Phenomenon observed within the United States and Europe with the
development on point-to-point parallel networks (between secondary
airports) by Southwest and Ryanair
* Data source: Article from USA today April 12 2007, http://blogs.usatoday.com/sky/2007/04/ryanair_ceo_tal.html,
MIT
ICAT
Airline Alliances
US DOT Antitrust Immunity
 Star Alliance
 Oneworld
 SkyTeam









































Adria Airways (JP)
Air Canada (AC)
Air New Zealand (NZ)
ANA (NH)
Asiana Airlines (OZ)
Austrian Airlines (OS)
Blue1 (KF)
bmi (BD)
Croatia Airlines (OU)
LOT Polish Airlines (LO)
Lufthansa (LH)
SAS (SK)
Singapore Airlines (SQ)
South African (SA)
Spanair (JK)
Swiss Intl Air Lines (LX)
TAP Portugal (TP)
Thai Airways Intl (TG)
Turkish Airlines (TK)
United (UA)
US Airways (US)
American Airlines (AA)
British Airways (BA)
Cathay Pacific (CX)
Finnair (AY)
Iberia (IB)
Japan Airlines (JL)
LAN (LA)
Malév (MA)
Qantas (QF)
Royal Jordanian (RJ)
Aeroflot (SU)
Aeroméxico (AM)
Air France (AF)
Alitalia (AZ)
Continental (CO)
Czech Airlines (OK)
Delta (DL)
KLM (KL)
Korean Air (KE)
Northwest (NW)
Existing Immunity
Immunity Application In Progress
Source: Wikipedia, BTN Online
MIT
ICAT
LCC Shift to Major Airports
Southwest
PHL Entry
Service since May 9, 2005:
Chicago (Midway)
Las Vegas
Orlando
Providence
US Airways match many of Southwest's
fares with its own new, less restricted
"GoFares.“
Both airlines offer the lowest available
fares on many competing routes.
US Airways
Network
Sources:http://www.southwest.com/cities/philadelphia.html, ETMS Data Analysis
$ 79
$ 99
$ 79
$ 29
one-way
one-way
one-way
one-way
MIT
Capacity Allocation Strategies
ICAT (Domestic vs. International ASMs – from 2005 to 2006)
30
20
10
0
-10
-20
-30
Domestic
-40
International
-50
Domestic
only
Domestic
focus
Scale up
capacity
in both
Data source: Bureau of Transportation Statistics segments
Shift from
domestic
to int.
Scale down
capacity in
both
segments
MIT
ICAT

Recent International Consolidation






Consolidation Trend
Air France and KLM
Air France and Alitalia ??
Lufthansa and Swiss
China Southern and China Northern and Xingiang
Cathy Pacific and Dragon
Recent US Consolidation
 USAir and America West

Merger Discussions
 Delta and Northwest
 Potential for Additional Reactionary Moves

International Strategic Investment
 Lufthansa and JetBlue
 Virgin and Virgin America
MIT
ICAT
Principal Airline Distribution
Channels
AIRLINE
RES SYSTEM
GDS/
CRS
AIRLINE
Phone Resv
TRAVEL
AGENCY
WEB BASED
Intermediary
TRAVEL
AGENCY
CONSUMER
CONSUMER
CONSUMER
CONSUMER
AIRLINE
WEB SITE
CONSUMER
Significant Growth In Web Booking
Change in Airline Scheduling (e.g. rolling hubs)
IATA Push for 100% electronic tickets
MIT
ICAT
Distribution
US Internet Sales by Catagory
9
USD
Sales
(Billion)
8
7
Airline
6
Hotel
5
Car Rental
4
Books
PC's
Software
3
Apparel
2
1
0
1998
1999
2000
Year

- Reduction in commissions to travel agents

- Shift to e-tickets (additional charges for paper tickets)

- Increased restrictions on low fares (USAir charges)
Source: 2000 US Statistical Abstract
MIT
ICAT

Airline Tickets #1 Web Product by Value



Browser 1st page effect on marketing
Increase in e-Tickets



Cost Savings
Charge for Paper Tickets
Interlining of e-Tickets

40% in 2005
IATA Target



Electronic Processing
70% in 2006
100% e-tickets by end of 2006
CAPPS II
MIT
ICAT
Productivity Improvements Driving Cost Relief
Network Restructuring, Work Rules, Human Capital,
Outsourcing, Technology
2,700
ASMs (000) per FTE
2,500
2,300
2,100
1,900
1,700
Source: ATA US Airline Cost Index: Major & National Passenger Carriers, Q3 2005
1Q2005
1Q2004
1Q2003
1Q2002
1Q2001
1Q2000
1Q1999
1Q1998
1Q1997
1Q1996
1Q1995
1Q1994
1Q1993
1Q1992
1Q1991
1Q1990
1,500
MIT
ICAT
Employees Full Time:
US Network Carriers 2001-2005
US Network Carrier Employees
120,000
Employees (Full Time)
100,000
American
80,000
United
Delta
60,000
Northwest
Continental
40,000
US Airways
Alaska
20,000
0
2001
Source: US DOT
2002
2003
2004
2005
Job cuts continue: United announced 1000 last
week 6/15/06
MIT
Positive Views of Employee Morale
ICAT
70%
60%
50%
40%
30%
20%
10%
0%
12/00
12/01
12/02
12/03
12/04
09/05
Source: The Wilson Center for Public Research, Inc. – based on 150,674 interviews conducted
with pilots or flight attendants from 1/1/2001 to 9/20/2005
Pension Obligations
at the end of year 2004
MIT
ICAT
16
Pension Obligation ($ Billions)
14
12
10
8
6
4
2
es
in
A
irl
ka
A
la
s
A
m
er
ic
a
Je
W
es
tB
lu
t
e
t
hw
ut
A
irw
S
U
So
ay
ta
en
tin
on
C
es
s
l
t
w
th
or
N
A
m
er
ic
es
an
ta
D
el
U
ni
te
d
0
Source: Airlines Annual Financial Reports (US airways (successor company) figure corresponds to year 2003)
MIT
ICAT
Trends in Fuel Price
Average Crude Oil and Jet Fuel Prices
290¢
$90
Jet Fuel (R)
$80
240¢
Crude Oil (L)
$70
$60
190¢
$50
$40
140¢
$30
$20
90¢
$10
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Jan-00
40¢
Jan-86
$0
Data source: ATA: Fuel Cost and Consumption (oil data through Feb 2008, jet fuel data through Dec 2007)
Jet Fuel: Price Paid per Gallon
Crude Oil: Spot Price per Barrel
$100
MIT
ICAT
Unit Costs for Labor and Fuel
Data source: ATA U.S. Airline Cost Index, through 4thjQuarter 2007
MIT
ICAT
Growth Limits
Constraints vs Damping
Upside: Capacity, Market
Downside: Financial
Data source: ATA - available at: www.airlines.org & Airline Quarterly Reports
Q1 & Q2 2007
(8 major airlines)
MIT
ICAT
Data source: FAA Operational Network (OPSNET)
US Flight Delays
from 1995 to 2007
Flight Cancellations
MIT
ICAT
2000
from 2000 to 2007 (by month)
2001
2002
2003
2004
2005
2006
Source: DOT, Air Travel Consumer Report, http://airconsumer.ost.dot.gov/ & BTS On Time Performance data
(top 11 airlines from 2000 to 2002, top 20 airlines from 2003 to 2007)
2007
MIT
ICAT
Source: FAA OPSNET data
US Flight Delays
from 2000 to 2008
MIT
ICAT
Capacity Limit Factors
 Airport Capacity




Runways
Gates
Landside Limits (including Security)
Weather
 Airspace Capacity
 Airspace Design
 Controller Workload
 Balkanization
 Demand
 Peak Demand
 Hub & Spoke Networks
 Environmental Limits
 Noise (relates to Airport)
 Emissions (local, Ozone, NOX, CO2)
MIT
ICAT
MIT
ICAT

Runways

Weather
Airport System
Capacity Limit Factors
 Capacity Variability
 Convective Weather

Landside Limits
 Gates
 Terminals & Security
 Road Access

Downstream Constraints

Controller Workload

Environmental
 Community Noise
 Emissions

Safety
MIT
ICAT
Flight Delays*
(9 US airports)
from 1995 to 2007
* Note: 12 month moving average
ORD
ATL
LGA
EWR
PHL
IAD
BOS
DEN
Data source: FAA Operational Network (OPSNET)
JFK
MIT
ICAT
New York Airport Flight
Delays*
from 1995 to 2007
* Note: 12 month moving average
EWR
LGA
JFK
ISP
Data source: FAA Operational Network (OPSNET)
MIT
Key Terminal System Flows
ICAT (adaptive system - impedance matching)
Add’
Add’l Pax
Screen
Gate
Boarding
Security
Check
Passengers
Check-In
Ckd Bag
Screen
Bags/Cargo
Ground
Transport
Gates
Bag Claim
Security
Point
Airside
Drop-off
Parking
Landside
Pick-up
Parking
MIT
ICAT
500 Bags/hr
CTX 9000 Explosive Detector
MIT
Aviation Remains Perceived Target
Expanding Security Burden
ICAT
NO LIQUIDS OR GELS OF ANY
KIND WILL BE PERMITTED IN
CARRY-ON BAGGAGE. THESE
ITEMS MUST BE IN CHECKED
BAGGAGE. This includes all
beverages, shampoo, suntan
lotion, creams, tooth paste,
hair gel, and other items of
similar consistency. Read our
Permitted and Prohibited Items list
for more information.
MIT
ICAT
Mishandled Baggage
from 1997 to 2007*
Note: 2007 data point for January to June 2007
Data source: DOT Aviation Consumer Protection Division, available at: http://airconsumer.ost.dot.gov/
MIT
ICAT
Denied Boardings (DB’s)
from 1996 to 2007*
Note: 2007 data point represents average denied boarding (per 10,000 enplanements) for January to June 2007
Data source: DOT Aviation Consumer Protection Division, available at: http://airconsumer.ost.dot.gov/
MIT
ICAT
Consumer Complaints
from 1997 to 2007*
Note: 2007 data point represents average consumer complaints (per 100,000 enplanements) for January to March 2007
Data source: DOT Aviation Consumer Protection Division, available at: http://airconsumer.ost.dot.gov/
MIT
ICAT
Other Threats
Portable SAMs
SAM-7 Fired at Arkia Airlines B757-300 Mombassa Kenya, Nov 2002
MIT
ICAT
Air Traffic Controller Staffing
ATO Hiring Forecast vs. Losses
Time to CPC (Certified Professional Controller)
Terminal; 8 - 24 months
Enroute: 36 - 60
Source: Air Traffic Controller Workforce Plan - 2004
MIT
ICAT
Projected % Developmental
Controllers
From: ATCS Workforce Plan Briefing
MIT
ICAT
Source: ASDI data
Congestion Driven
Schedule Creep
MIT
ICAT
Historical Evolution of
Scheduled Block Time
(Month of April / from 1996 to 2006)
NY La Guardia – Chicago O’Hare
Data source: Department of Transportation, Bureau of Transportation Statistics
Houston – Dallas
MIT
ICAT
Annual Growth Rate of
Scheduled Block Time
(top 1950 OD routes)
- Analysis based on top 3000 OD routes (US Domestic – by US carriers)
- Filtered down to 1950 OD routes with uninterrupted service between 1996 and 2006 (April)
- OD routes covering 76% of total passengers in the U.S. in 2006
Change in Scheduled Block Time
-
+
Mean: +0.5%
Mode: +0.4%
Data source: Department of Transportation, Bureau of Transportation Statistics
Average Number of Seats per Departure
MIT
ICAT
Trends in Aircraft Size
220
Domestic
200
180
International
Total
160
140
120
100
80
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Data source: Form 41 Traffic data from Bureau of Transportation Statistics (includes Regional Jets and Turboprops)
MIT
ICAT
Most Common Regional Jets
ERJ 145 (50 seats)
CRJ 200 (50 seats)
CRJ 200
Production on
hold
About 400 aircraft in national fleet
About 2000 daily flights in January 2003
About 400 aircraft in national fleet
About 1500 daily flights in January 2003
MIT
ICAT
U.S. Regional Jet Growth
1800
1600
1400
CRJ900
CRJ700
1200
CRJ200
CRJ100
1000
800
EMB135
EMB145
600
BAE145
400
Source: FAA registration data from 1995 until the present
2005Q3
2004Q3
2003Q3
2002Q3
2001Q3
2000Q3
1999Q3
1998Q3
1997Q3
1996Q3
1995Q2
1994Q2
1990Q1
1987Q4
0
1986Q1
200
MIT
ICAT
RJ-NB Boundary Blurred
Regional Jets
2400
New Aircraft
2200
B735/6
Range (nm)
ERJ170
Narrow-body
B737
ERJ190
2000
MD-90
1800
CRJ700
CRJ900
A319
CRJ200
1600
ERJ145
A31
8
B717
1400
1200
MD-80
DC-9
1000
20
40
60
80
100
120
A/C Seats
Source: based on manufactures’ a/c specifications. Full pax range of standard version
140
160
MIT
ICAT
EMB 190 Jet Blue Delivery
(10/05)
MIT
ICAT
A-380

A380 Baseline
 Shrink
 Stretch
 ER Variants

555 passengers (3 class)

14,800km/8,000nm range

Payload: 330,000lbs over
10,400km/5,600nm

Rolls-Royce Trent 900
engines or GP7200 engines
•http://www.airbus.com/
MIT
ICAT
A-380
MIT
ICAT
-300 (290-330 pax) (3000-3500 nm)
-800 (210-250 pax) (8000-8500 nm)
-900 (250-290 pax) (8600-8800 nm)
B-787
MIT
ICAT
“All New” A350
Not your fathers A330
250-300 Seats
7500-8800 nm Range
Source: http://www.airbus.com
13 Orders Prior to Paris Air Show
MIT
ICAT
High Fuel Price Favoring
Turboprops
ATR 72
Backlog (firm orders)
DHC-8 Q400
ATR42/72*
179
* as of Aug 2nd 2007
** as of April 30th 2007
Data source: Aircraft manufacturers website – ATR aircraft & Bombardier
Bombardier Q series**
100
Very Light Jets
MIT
ICAT
Small turbofan aircraft
Aircraft characteristics*
Eclipse500
Mustang
Adam700
Eclipse Aviation
Cessna
Adam Aircraft
Phenom-100
ProJet
D-Jet
Embraer
Avocet Aircraft
Diamond Aircraft
Epic LT
HondaJet
Safire26
Epic
Honda
Safire Aircraft
Excel Sport Jet
Spectrum 33
Eviation EV-20
 Passengers:
4 to 8
 Acquisition price:
$m 1.4 to 3.6
 Cruise speed:
340 to 390 kts
 Operating ceiling:
41,000ft to 45,000ft
 Range:
1100 to 1750 NM
 Take off field length:
2200ft to 3400ft
Orders
 Eclipse: 2300
 Adam: 75
 Mustang: 330+
* for twin-engine VLJs (excludes D-Jet)
MIT
ICAT
Regulatory Factors

De-Regulation (Re-Regulation)

FAA Reauthorization

Open Skies

Airport Demand Management (LGA-ORD)

Operating Regulations

Security

Performance Monitoring
 Data Quality Concerns

Passenger Bill of Rights

Anti-Trust Considerations Changing
 Mergers (AA-TWA, UAL-US, Am West-US))
 E-Commerce (Orbitz)
MIT
ICAT
FAA Reauthorization ‘07

FAA Reauthorization bill: deadline Sept. 30, 2007

Funding Modernization (NGATS)

Contributions from the general fund? (18% > 50%)

The “battle” over user fees:
 Airlines vs Business Aviation
MIT
ICAT
U.S. Air Transportation
Networks
Data source: FAA ETMS Sept. 30th 2004 to Oct. 1st 2005
MIT
ICAT
Environmental Issues
Noise
Emissions
Intergovernmental Panel on Climate Change
Stage 4 (Equipment)
Airports (Capacity)
MIT
ICAT

Media
Drives Public Perception
 Risk
 Delays
 Expectations

Drives Public Policy
 Congress - FAA - NTSB

Shorter Reaction Timescale
 CNN, Web
 Proliferation of Digital Cameras and Distribution
 eg Concorde Photographs
MIT
ICAT
Concorde Accident
MIT
ICAT