jobs, expansion and transportation (jet) task force meeting · jobs, expansion and transportation...

Jobs, Expansion and Transportation (JET) Task Force Meeting September 26, 2014

Agenda

Topic:

I. Welcome and Introductory Remarks Dan Rosthenthal

II.

Current State of the Aviation Industry and Future Trends for the Industry Bill Swelbar

III. Break (Non-JET Task Force Members Welcome to Depart) 5 Minutes

IV. Working Group Updates - Air Services - Transportation - Economic Development

Geoff Chatas William Murdock Jean Carter Ryan

V. Economic Development Working Group Featured Presentation Jean Carter Ryan

VI. Announcements and Final Remarks

Agenda

Topic:

I. Welcome and Introductory Remarks Dan Rosenthal

II.







THE AIRLINE INDUSTRY: It’s Evolution Is Causing Airports to Adapt William S. Swelbar Executive Vice President

I really don't know one plane from the other. To me they are just marginal costs with wings.

— Alfred Kahn, 1977

No one expects Braniff to go broke. No major U.S. carrier ever has. — The Wall Street Journal, 30 July 1980

If we went into the funeral business, people would stop dying. — Martin R. Shugrue, Vice-chairman Pan Am

I can't imagine a set of circumstances that would produce Chapter 11 for Eastern. — Frank Lorenzo

I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to shareholders. It has historically been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy more equipment. — Michael Levine, Executive VP Northwest Airlines, 1996

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. — Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008

Should we see demand decrease, however, we will respond nimbly and appropriately by decreasing capacity and taking costs out to help ensure we remain profitable throughout the business cycle. — Jeffrey Smisek, United Airlines CEO

“This [the airline industry] Is No Longer a Hobby” — Richard Anderson, Delta Air Lines CEO speaking to analysts on 1Q 2012 earnings call

Capacity Growth Across the Business Cycles: Load Factor Increases 14 Points Over the Last Two As Growth Slows

Data Source: A4A Airline Cost Index Tables

82.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0.00

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1978:4 - 1982:4 1983:1 - 1991:1 1991:2 - 2001:4 2002:1 - 2009:3 2009:4 - Present

Average Load Factor Average Annual Available Seat Miles (000)

Average Load Factor (%)

10

Capacity Grows Faster Than Real GDP: An Industry That Grew Too Big

Note: SAAR, 2009 Chained Dollars Note: Business cycle 1 = 100

-

50.0

100.0

150.0

200.0

250.0

1978:4 - 1982:4 1983:1 - 1991:1 1991:2 - 2001:4 2002:1 - 2009:3 2009:4 - Present

Available Seat Mile Index Real GDP Index

11

Unit Revenue Does Not Keep Pace With Inflation: The Consumer Benefits In A Significant Way

Note: Consumer Price Index SAAR Note: Business cycle 1 = 100

0

50

100

150

200

250

300

1978:4 -1982:4

1983:1 -1991:1

1991:2 -2001:4

2002:1 -2009:3

2009:4 -Present

Consumer Price Index Passenger Yield (with Ancillaries) Passenger Unit Revenue (with Ancillaries)

12

This Cycle As Compared to the Last The Effect of Load Factor Increases and Ancillary Revenue On Sustained Profitability Cannot Be Underestimated

90.0

95.0

100.0

105.0

110.0

115.0

120.0

Passenger Yield (cents perRPM)

Passenger Yield withAncillaries (cents per RPM)

Passenger Unit Revenue (centsper ASM)

Passenger Unit Revenue withAncillaries (cents per ASM)

Consumer Price Index

13

The Industry had Little Choice but to Vigorously Cut and Manage Controllable Costs: Particularly Labor Costs

Note: Consumer Price Index SAAR Note: Business cycle 1 = 100

50.0

100.0

150.0

200.0

250.0

300.0

1978:4 -1982:4

1983:1 -1991:1

1991:2 -2001:4

2002:1 -2009:3

2009:4 -Present

Unit Non-Labor Cost (cents per ASM) Consumer Price Index

Unit Labor Cost (cents per ASM) Unit Fuel Cost (cents per ASM)

14

An Uncontrollable Cost: Fuel Was the Catalyst the Industry Needed to Change Its Game

Data Source: A4A Airline Cost Index Tables

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1978:4 - 1982:4 1983:1 - 1991:1 1991:2 - 2001:4 2002:1 - 2009:3 2009:4 - Present

Labor Expense as a Percent of Total Op Expense Fuel Expense as a Percent of Total Op Expense

15

For The Industry: Deregulated Period Resulted in $36 Billion of Pre-Tax Losses

Note: Business cycle 1 = 100 Data Source: A4A Airline Cost Index Tables

0

20

40

60

80

100

120

140

160

180

200

-$70,000

-$60,000

-$50,000

-$40,000

-$30,000

-$20,000

-$10,000

$0

$10,000

$20,000

$30,000

1978:4 - 1982:4 1983:1 - 1991:1 1991:2 - 2001:4 2002:1 - 2009:3 2009:4 - Present

Pre-Tax Income ($Millions) Unit Revenue with Ancillaries (cents per ASM) Unit Cost excluding TR (cents per ASM)

CUMULATIVE PRE-TAX LOSS

$(35,883.1)

16

Commercial Air Service: Challenges and Opportunities

How Did We Get to 2014?

1. DL/NW entered bankruptcy on the same day and in effect exited as one carrier.

2. The emergence of the “New Delta”, with lower costs and the strength of fortress hubs, accelerated consolidation of carriers and airports - CVG, MEM.

3. US Airways forced UA/CO to combine by pursuing United.

4. Southwest acted as a legacy carrier and bought AirTran.

5. US Airways forced American to merge.

6. Three carriers plus Southwest now control 87% of the US domestic industry.

The internet becoming the ticket distribution vehicle, combined with growth by the LCCs, and perpetually rising fuel prices in the mid 2000’s, resulted in nearly all the legacy carriers entering bankruptcy. So what happened next?

18

Consolidation in the U.S. Makes Air Service Expansion Much More Difficult

19

Presenter

Presentation Notes

In addition to capacity control, mergers have had a profound impact on small communities.

The historic relationship of airline industry growth and GDP is broken. Is the break in the pattern the future?

What will cause the legacy carriers to grow?

Where will that growth be?

What is the future of LCCs? What happens as their costs increase—does WN return to growth?

What is the future of ULCCs?

WILL THERE BE A REGIONAL INDUSTRY?

What does all this mean for airports? Or for passengers?

20

Overview: A Challenging Era for Air Service

Airlines have restricted capacity growth over the last six years in a strategy known as “capacity discipline.”

Medium-sized and smaller airports have felt the brunt of capacity cuts through airline consolidation and the closure of duplicate hubs.

Like the rest of the country, Columbus has suffered some air service setbacks – but not to the extent most airports have.

Creativity and intelligent planning will be necessary to maintain and grow air service in Columbus.

21

Challenges Facing Air Service in the United States

In the wing oil in excess of

$100 per barrel

40,000 cycle decision

Prevalence of low cost

carriers in primary

catchment areas

Pilot shortage surely to impact regional sector of the business

Flight Time/Duty Time regulations

may cause staffing

challenges

Capacity discipline at

major carriers has reduced frequencies and seats

Smallest new production

aircraft likely to be at least

100 seats

No 50 seat and less replacement aircraft in the pipeline

Government-Induced

Economic Operational

Strategic

22

Smisek said he expects United Continental, a merger in 2010 of United Airlines and Continental Airlines, to shrink in the U.S.

We'll have the domestic [operations] sized solely to feed the international traffic

CERA Conference, Houston, TX. March 11, 2011

The National Picture:

How Has Capacity Discipline Affected Air Service?

The last nine years of domestic aviation can be divided into three time periods

25

-20%

-15%

-10%

-5%

0%

5%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

-ove

r-Ye

ar %

cha

nge

in a

vaila

ble

dom

estic

seat

s

AA

DL + NW

UA + CO

US + HP

WN + FLPost-recession

Pre-recession

Economic Recession

Source: InterVISTAS analysis of Innovata schedule data via Diio Mi

What are Schedule Rationalization and Capacity Discipline?

• Rationalization (2007-2009): an active reduction of available seat capacity as a result of macroeconomic shocks to the airline industry and a “new normal” of higher fuel prices.

• Capacity discipline (2010 – present): a restriction of seat capacity growth by network carriers (and Southwest) even as passenger enplanements have continued to increase.

• “[Yield growth between 2007-2012] would have been impossible without capacity discipline.” –John Gebo, SVP Financial Planning, United Airlines, August 2013

26

An upward shock to the price of fuel in 2008 caused airlines to quickly pull back capacity

27

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mill

ions

of D

omes

tic F

light

s

Scheduled Domestic Flights and Fuel Price per Gallon

Domestic Flights Fuel Price per Gallon

Sources: BTS Form 41 cost data (via MIT Airline Data Project) and Diio Mi schedule data

Fuel Prices and Capacity Rationalization

28

According to the MIT Airline Data Project, airline fuel prices have stabilized, yet scheduled domestic flights have not rebounded.

Source: Diio Mi and MIT Airline Data Project

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mill

ions

of D

omes

tic F

light

s

Domestic Flights Fuel Price per Gallon

Most Medium- and Large-Hub Airports Saw Negative or Minimal Growth in Departures 38 large and mid-sized airports saw decreases in departures from

2012-2013, whereas 24 airports saw departure growth.

29

0

5

10

15

20

25

< -10% -7.5% to -10% -5% to -7.5% -5% to -2.5% -2.5% to 0% 0% to 2.5% 2.5% to 5% 5% to 7.5% 10% +

# of

Lar

ge- a

nd M

ediu

m-H

ub A

irpor

ts

% Change in Departures from 2012 to 2013

From 2007-2012, U.S. Airlines Cut 1.4 million Domestic Flights from the National Airspace System

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

Mill

ions

of D

omes

tic D

epar

ture

s

Scheduled Domestic Departures from U.S. Airports

Large Hub Non-Large Hub

55.8%

44.2%

59.4%

40.6%

Source: InterVISTAS analysis of Innovata schedule data via Diio Mi 30

Growth in Domestic ASMs and RPMs has been Historically Tied Closely to GDP

Source: BTS T-100 via Diio Mi, BEA -8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% C

hang

e fr

om P

revi

ous

Year

YoY % Change GDP YoY % RPMs YoY % ASMs

GDP growth correlation with

RPM growth: 0108 ASM growth: 0.8259

31

Presenter

Presentation Notes

background

Domestic Seat Capacity has Remained Stagnant Despite Economic Growth

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year-over-year % Changes in U.S. GDP and Domestic Seat Departures YoY % Change GDP YoY % Change Domestic Seats

Source: BTS T-100 via Diio Mi, BEA

Represents a recent shift in airline strategy; typically, airlines grow capacity in times of domestic economic growth.

32

Capacity Discipline and Schedule Rationalization Wiped Out Nearly 100 million Domestic Seats Available domestic seats are at their lowest level since 1995

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

100

200

300

400

500

600

700

800

900

1,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mill

ions

of D

omes

tic S

eats

U.S. Average Load Factor and Available Domestic Seat Departures

Load Factor Domestic Seats

Source: BTS T-100 via Diio Mi, BEA 33

Rising Real Unit Costs Have Made It Harder for all Carriers to Justify Uneconomic Flying The unit cost gap between “low-cost” carriers and network carriers has

also shrunk, adjusting for inflation.

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CAS

M E

x-Tr

ansp

ort R

elat

ed C

osts

in

Con

stan

t 201

3 C

ents

NetworkLCC3.07 cents

1.51 cents

Source: MIT Airline Data Project, adjusted for inflation using BLS CPI 34

LCCs Now Lead Network Carriers in Cutting Capacity Ultra-Low Cost Carriers departures continue to grow (+10.4% from

2012-2013), but they only represent 1.4% of the total domestic capacity in the United States.

Network carriers (-0.8%) and Low Cost Carriers (-4.1%) continued to cut scheduled flights from 2012-2013.

0

1

2

3

4

5

6

7

2009 2010 2011 2012 2013

Mill

ions

of S

ched

uled

Dom

estic

Flig

hts

NetworkLCCULCC

-0.8%

-4.1%

+10.4%


520

540

560

580

600

620

640

2007 2008 2009 2010 2011 2012

Thou

sand

s of

Dep

artu

res

Southwest Airlines Departures from Smaller U.S. Airports

Is It Finally Time to Call Southwest a Legacy Carrier? Southwest cut flights from smaller airports by 10% since 2007 while increasing

its presence at large-hub airports (6% increase in flights).

Source: Diio Mi

-9.8%

36

Presenter

Presentation Notes

Low cost option not really headed toward smaller airports.

Capacity Discipline is the “New Normal” for Airports of All Sizes

Rationalization (2007-2009): an active reduction of available seat capacity as a result of macroeconomic shocks to the airline industry and a “new normal” of higher fuel prices.

Capacity Discipline (2010 – present): a restriction of seat capacity growth by network carriers (and Southwest) even as passenger enplanements have continued to increase.

Capacity discipline started as early as 2010 as carriers held seat capacity at lower, “rationalized” levels despite an economic recovery.

Capacity discipline has “locked-in” lower levels of available seats and departures at smaller airports.

37

Capacity Discipline Has Not Been Applied Evenly Smaller airports saw a disproportionate share of the cuts in flights

and available seats as a result of capacity discipline.

Airport Type % change in domestic flights (07- 12)

Large Hub -8.8%

Medium Hub -26.2%

Small Hub -18.2%

Non-Hub -15.4%

EAS -5.0%

All Smaller Airports All Airports

-21.3% -14.3%

Source: Diio Mi

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2007 2008 2009 2010 2011 2012

Mill

ions

of D

epar

ture

s

Scheduled Domestic Departures at Smaller U.S. Airports

Medium Hub Small Hub Non Hub EAS

38

Smaller Airports Are Still Seeing the Largest Cuts In Service

Although all airport types saw net decreases in domestic flights from 2012-2013, once again, smaller airports saw larger decreases in flights than large-hub airports. Large-hub and medium-hubs saw seat growth of 1.0% and 0.3%, respectively.

0123456789

2009 2010 2011 2012 2013

Mill

ions

of S

ched

uled

Dom

estic

Flig

hts

Large Hub Medium Hub Small Hub Non-Hub

Airport Type % change in

domestic flights (‘12-’13)

% change in domestic

seats (‘12-’13)

Large Hub -0.2% 1.0%

Medium Hub -2.2% 0.3%

Small Hub -3.0% -1.4%

Non-Hub and EAS -4.2% -2.5%

All Smaller Airports

All Airports

-2.9% -1.1%

0.6% 0.4%


For How Long Will Capacity Discipline Remain the Status Quo? The short-term future will depend on how long airlines

continue to practice capacity discipline.

Is capacity discipline a stable equilibrium?

Prisoner’s dilemma: there appears to be an incentive for airlines to break with capacity discipline and gain more market share, but if all airlines do so, there will be too much capacity in the market.

Which airline will be the first to break with capacity discipline, and when will that break occur?

Expansion opportunities are limited so long as capacity discipline is in effect.

40

Presenter

Presentation Notes

I added a point, even though it is self-evident. You can remove if you want.

3 Guiding Principles in the “New Normal” of Air Service Development

Retain It:

Airline mergers and capacity discipline have been relatively kind to CMH

CMH service has been stable since 2009, not true of all airports

Expand It:

Capacity Discipline continues

It’s a Zero Sum Game

Consolidations and growth of airline hubs serving CMH increases connectivity to the world

Enhance It:

Upguaging of aircraft brings better passenger comfort 41

The Columbus Market:

Better connected than most

Columbus’ Population Has Grown Faster than the U.S. Average over the Last 12 Years

43

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Pittsburgh

Milwaukee

U.S. average

Louisville

Kansas City

Columbus

Indianapolis

Nashville

% Change in Metropolitan Population, 2000-2012

Source: Columbus 2020

15.6%

11.3%

The Recovery from Capacity Discipline Has Begun at CMH

CMH’s growth in available domestic seats from 2012-2013 ranked above 19 other Medium Hub airports and the Medium Hub average.

44

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

MSY

HOU

BNA

SJC

AUS

ANC

PDX

PIT

RSW

BDL

MCI STL

SNA

CMH

DAL

RDU

SAT

BUF

OGG OAK IN

D

CLE

OM

A

SMF

SJU

JAX

PBI

BUR

CVG

ABQ

ON

T

MKE

MEM

% Change in Available Domestic Seats at Medium Hub Airports, 2012 - 2013

1.0%

Medium Hub Average:

0.2%

Source: Innovata SRS via Diio Mi

CMH is Very Well Connected for its Size

CMH was ranked 10th out of 33 Medium Hub airports by an MIT study for the quality of its connections to the global air transportation network.

45 Source: Wittman, M. and Swelbar, W. Measuring Connectivity at US Airports. MIT Int’l Center for Air Transportation Report No. ICAT-2013-05.

100

105

110

115

120

125

130

135

140

145

150

Columbus Austin San Antonio Medium Hub Average

ACQ

I Sco

re (2

012)

MIT Airport Connectivity Quality Index (ACQI) Score for Selected Medium-Hub Airports

Air Service Accessibility in Columbus Is Among the Best in the Country In a recent MIT study, the Columbus region ranked 31st among all

U.S. metro areas for access to well-connected air service—above Indianapolis, Austin, Memphis, New Orleans, and San Antonio.

46

75

85

95

105

115

125

135

Columbus Indianapolis Austin Memphis New Orleans San Antonio Louisville

Air S

ervi

ce A

cces

sibi

lity

Scor

e (2

012)

Air Service Accessibility Score for Selected Medium-Sized U.S. Regions

Source: Wittman, M. Air Service Accessibility in U.S. Metropolitan Regions. MIT Int’l Center for Air Transportation Report No. ICAT-2014-02.

Foreign Firms in 27 Countries Have Operations within 50 Miles of Columbus

47

Locations of Foreign Firms with Operations in the Columbus Area

Country # of Firms Japan 44

Canada 36 England UK 31

Germany 26 Switzerland 12

France 10 Netherlands 7

Source: Uniworld

CMH

The Incentive Conundrum

To Play or Not to Play?

The Incentive Conundrum Columbus embarks on a strategic approach to air service development

“Carpet Bombing” is not the way to target markets

CMH is not desperate and desperate markets carpet bomb

Consider incentives only on markets being realistically evaluated

The strategic approach employed has prioritized domestic and international markets But CMH is not the only community targeting these markets

Incentives can differentiate CMH from other competitors in this “zero sum game” air service environment

Just like it is Net Present Value decision for the airline to fly or not, it is a Net Present Value proposition for the community to invest or not CMH is a “have market”

Any investment should incrementally improve CMH’s place on the air service grid

49

Presenter

Presentation Notes

I added a point, even though it is self-evident. You can remove if you want.

QUESTIONS AND DISCUSSION William “Bill” Swelbar Executive Vice President InterVISTAS Consulting LLC +1 202.688.2243 [email protected]

Agenda

Topic:


II.







Columbus-Franklin County Finance Authority

Jobs, Economy & Transportation Taskforce for

Port Columbus Economic Development

Committee Update


GOAL Leverage and partner with community stakeholders to grow the economic wealth of our region by creating joint economic development strategies to coordinate future land use planning, infrastructure investment, service delivery, development incentives and marketing efforts for the entire area around Port Columbus.


Economic Development Committee Members Jean Carter Ryan, Finance Authority Michael Johnson, East Columbus Civic Michael Dalby, Columbus Chamber Mark Barbash, Finance Fund Drew Vennemeyer, Quandel Bob White, Daimler Irene Alvarez, Columbus 2020 Elaine Roberts, CRAA

Steve Campbell, Columbus Jonathan Pittman, Columbus Mark Lundine, Columbus Anthony Jones, Gahanna Zach Woodruff, Whitehall Tory Richardson, CRAA Alex Beres, Franklin County Randy Bowman, Columbus


“There are no shortcuts to any place worth going.” -Beverly Sills


Strategy to Develop Recommendations Review 2008 Report Gather Information


“What I am looking for is a blessing that is not in disguise.”

- Kitty O’Neil Collins


2008 Recommendations Establish business sector priorities for

recruitment Joint business retention and expansion Protect/Invest in economic (land) and

infrastructure assets Support airport operations through compatible

development


2008 Recommendations Joint marketing Establish higher development standards

and environmental enhancements Improve connectivity with larger region


Information Gathered Business Input – NetJets, Daimler, Fortner Data on business type/sector in Port Columbus

foot print Data on business needing to be proximate to

airport Columbus Region Defense effort


Information Gathered (Cont.) Available sites Infrastructure needs & plans Rail line information Incentives available CRAA airport functions & relationships


Issues Facing Study Area Land and site availability Look and feel of area Infrastructure needs BRAC Coordination of limited governmental resources


Potential Recommendations Topics Joint marketing of sites and area Targeted marketing for growth sectors Transit/transportation Code enforcement Infrastructure improvements Aviation industry – related thoughts


“Stopping on 3rd base adds no more to the score than striking out.”

- E. Joseph Cossman

Agenda

Topic:


II.







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