strategic

transportation

& tourism

solutions

Session TE104Improving Air Access to Tourism Destinations

Paul Ouimet & Hans Mohrmann

48th ICCA Congress & Exhibition

November 10, 2009

2

Session Outline

1. Global Aviation Trends

2. Air Service DevelopmentStrategy

3. Financial Incentives& Negotiations

strategic

transportation

& tourism

solutions

Global Aviation Trends

4

Gulf Warand

Recession

Asian EconomicFlu

9/11,EconomicDownturn& SARSoutbreak

0

500

1,000

1,500

2,000

2,500

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009P

Global Air Traffic

Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA).

(Millions)

IATAforecasts3.3% increasein 2010

Financial CreditCrisis and

GlobalRecession H1N1

Outbreak

5

0

500

1,000

1,500

2,000

2,500

1990 1995 2000 2007 2008

Domestic International

Shift in Global Air Traffic

Passengers by Sector

Source: International Civil Aviation Organization (ICAO).

24%

76%

35%

65%

(Millions)

6

Slowing Traffic Growth

7

Operating Profit – Global Airlines

Source: Industry Financial Forecast Table (IATA Economics).

Operating Profit ($ billions)

-20

-15

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F

8

Volatile Fuel Prices

Crude Oil Spot Prices

January 2007 to November 2009

$-

$20

$40

$60

$80

$100

$120

$140

$160Jan-0

7

Mar-

07

May-0

7

Jul-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-

08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-

09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

U.S

.$

per

barr

el

Current$79

Source: Nymex.

Peak $147

9

Increasing Fuel Burden

Source: Air Transport Association.

2000

76%

24%

Fuel

Labour

Other

14%

34%52%

2008

Fuel

Labour

Other

29%

21%

50%

Air Carrier Expenses

10

Traffic and Capacity – U.S. Network Carriers

Notes: Includes American Airlines, Continental Airlines, Delta Air Lines/Northwest Airlines, United Airlines and U.S. Airways.

w14

Slide 10

w14 Will update to reflect Global carriersweatherillj, 11/2/2009

11

Industry-Wide Capacity Cuts

12

Consolidation: Mergers & Failures

EasyJetgodba

Ryanairbuzz

LufthansaSwiss

AustrianBrussels

US AirwaysAmerica West

Air CanadaCanadian

DeltaNorthwest

Air FranceKLM

GolVarig

KLMMartinair

AlohaSkyEurope

MyAirAviacsa

Centralwings

FlyLAL

Sterling

XL AirwaysZoom

Silverjet

EOS

MaxJet

Nationwide

ATA

Oasis Hong Kong

SkyBus

13

Airline Alliances and Passenger Share

American AirlinesBritish AirwaysCathay PacificFinnairIberia AirlinesJapan AirlinesLan AirlinesMalevQantas AirwaysRoyal JordanianAir NorstrumAmerican EagleBA CityflyerJapan Transocean Air

AeroflotAeromexicoAir France-KLMAlitaliaChina SouthernCSA Czech AirlinesDelta Air LinesKorean AirNorthwest AirlinesAir EuropaKenya Airways

Air CanadaAir ChinaAir New ZealandAll Nippon AirwaysAsiana AirlinesAustrian AirlinesbmiEgyptairLOT Polish AirlinesLuthansaScandinavian AirlinesShanghai AirlinesSingapore Airlines

South African AirwaysSpanairSwissTAP PortugalThai AirwaysTurkish AirlinesUnited AirlinesUS AirwaysAdria AirwaysBlue1Croatia AirlinesContinental Airlines

14% Share 16% Share 24% Share

14

Growth of Low Cost Carriers

15

Growth of Low Cost Carriers

LCC Capacity Share by Region (YTD Aug-2009)

16

Intercontinental LCCs

17

Market Shift to Low Cost Carriers

• In addition to network airlines, charter carriers are losing market share toLCCs – particularly on short haul leisure routes

Source: UK CAA.

Charter Operator Market Share: UK to Short-haul Leisure Markets

0%

25%

50%

75%

100%

Canary Islands Cyprus Greece Malta Spain

(excluding

Canary Islands)

Total

1998 2008

• Many charter operators have increased their focus on longer-hauldestinations (Middle East, Asia, Caribbean), where competition fromLCCs is less intense

18

Cumulative World Aircraft Fleet Surplus

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Air

cra

ftF

lee

tS

urp

lus

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Su

rplu

sa

s%

of

To

talW

orl

dF

lee

t

Cumulative Surplus Surplus as % of Total Fleet

Source: The Airline Monitor, Jan/Feb 2009

World Fleet SurplusPeaks in 2011 inCurrent Cycle

19

New Generation Aircraft

• High capacity ‘consolidator’ aircraft

• Airbus A380 - Boeing 747-8550 - 850 seats 467 seats

15,000 km range 14,800 km range

• Regional jets/turboprops

• Bombardier CRJ 900 - Embraer 190

86 - 90 seats 94 – 106 seats

3,600 km range 4,100 km range

• Medium capacity ‘hub buster’ aircraft

• Boeing 787 - Airbus 350XWB

200 - 300 seats 250 – 350 seats

14,500 km range 16,300 km range

• Very light jets

• Citation Mustang

4 seats

2,100 km range

20

Policy Issues

• Air Policy

• Open Skies

• Infrastructure

• ATC

• Airports

• Rates & Charges

• Facilitation

• Costs

• Processing

• Security

strategic

transportation

& tourism

solutions

Air Service Development

22

Why an ASD Program?

• Airline planners require detailed, accurateinformation to make new route decisions

• But airlines do not have the resources to fullyevaluate every market

• A sound, well articulated business case, canconvince airlines to introduce new air services

• Airports/destinations can influence the airlineplanning process

23

Destination & Airline Objectives

• Air service development is a long term,strategic effort

• Airlines will add service in order of expectedprofitability

• Different airlines pursuedifferent strategies

• Destinations can move upthe priority board with:

• Solid research &analysis (always)

• Incentives(sometimes)

PRIORITY ROUTE123456789

10

100

24

Airline Perspective

• New routes are a huge investment & risk to an airline

Seats Per FlightAircraftType

Annual PassengerRequirements

Airbus A340 280 153,300

Boeing 767-300 220 120,450

Regional Jet 100 54,750

Boeing 747 400 219,000

Boeing 737-700 140 76,650

Note – Assumes 75% load factor.Source – InterVISTAS

AnnualOperating Cost:

~$50 million

25

Influencing Airline Decisions

• Airline questions for new routes:

• How much can I stimulate the market?

• How will the competition react?

• How much market share will I achieve?

• What will be the connectivity contribution?

• Will the new route be a financial success?

• Airports/destinations can answer these questionsand reduce uncertainty and risk

26

Market Assessment• Required to quantify the true size of the existing

air travel market on an O&D basis

ASD Strategy

Business Case

Evaluate and NegotiateAirline Incentives

The ASD Process

• Deficiency analysis and detailed route analysis

• Packaging & presenting the information toairlines

• An appropriate incentive, in certaincircumstances, helps airlinescommit to new air services

27

New Route Business Cases

• Business cases should include all information airlineplanners require:

•Catchment area profile: demographics, economy,tourism, etc.

•Airport profile: facilities, traffic

•Market profile: market sizes, top city pairs, trafficleakage, etc.

•Suggested service: frequency, schedule, aircraft, routing

•Route analysis: market share, load factor, stimulationpotential, self-diversion, etc.

•Strategic considerations

28

Tourism Stakeholder Involvement

Route DevelopmentSuccess

Provide Unique Data

Guest origins, occupancy rates, ADRs,group potential, etc.

Support route development efforts

Budget support, airline fam trips, etc.

Adapt product to match target airlinebusiness models, where appropriate

All inclusive, fly-drive, package tours, etc.

Contribute to incentive funding

Quantify incremental benefit and invest

strategic

transportation

& tourism

solutions

Financial Incentives

30

Incentive Background

• Destinations have become increasinglyaggressive in pursuing new services

•Portland-Tokyo: $3.5 million

•Pittsburgh-Paris: $5.0 million

•Baltimore-London: $5.5 million

• Airlines often demand risk sharing programs

• Incentives can be a good investment, if usedproperly

31

Best Practices - Incentives

• Not all new services are equal

• Will the new service provide incremental benefit forthe destination?

• Blanket approach may not accomplish goals

• Align incentives with ASD goals

• Consider impact on existing services

• How will incumbent airlines react?

• Avoid existing routes

32

Best Practices - Incentives

• Should only be used to help a new service grow tomaturity

• Service must be self-sustaining in medium term

• Limited to 1-2 year term

• Should not be used to “buy” air services

• Carriers will drop routes when incentive expires

• This causes more harm than good

33

Best Practices - Incentives

• Air service checklist - will the route be:

• Strategically important?

• Marginally (un)profitable?

• Self-sustaining in the short term?

• Service must meet all three criteria

• Qualifying services:

• New routes only?

• Increases on existing routes? Does thiswork?

• Service retention incentives?

34

Types of Incentives

• Common types of incentives:

• Airport fee concessions

• Start-up cost reimbursement

• Operating cost reimbursement

• Direct subsidy

• Revenue guarantees

• Marketing support

• Ticket trusts/travel banks

• Designed to impact either the supply of or demandfor air services

35

Choosing the Right Incentive

• Must be determined case-by-case

• Varies by route and type of service

• Depends on airline needs

• Network development strategy, fleet constraints,growth potential, philosophy

• Source of perceived risk

• Traffic stimulation potential

• Cost control

• Community’s ability & willingness to pay

36

Determining Incentive Level

• What amount is required?

• Too much would be wasted money

• Too little and the airline will walk away

• Rules of thumb:

• % discount on fees

• % of breakeven revenue (revenue guar.)

• Set amount per seat (airport start-up & marketing)

• The amount depends on the structure, and theanalysis

37

$0

$2

$4

$6

$8

$10

$12

Breakeven

Community:$1 million incentive10% risk

Airline:$10 million B/E revenue requirement90% risk

Airline:Opportunity Cost

Determining Incentive Level

• Put the risk into perspective

• Why a lot may not be enough:

38

Regulatory Considerations

• Governments are increasingly intervening in airlineincentives

•EC guidelines on state aid

•FAA restrictions on airport funding

• If incentives are restricted, new routes must be basedon profit potential

•Trial & error becomes more risky

•Route analysis will be critical

39

Limits of Incentives

• Most airlines will only start new services theybelieve will be viable in the long term withoutincentives

• Incentives will not overcome:

• A weak business case

• Product mismatch

• So focus on the fundamentals

40

Airport Fees as Incentives

• Airport fees and ground handling charges account for 20% of total costsfor both Ryanair and Aer Lingus

• But Ryanair’s are much lower in absolute terms

0

20

40

60

80

100

120

Aer Lingus Ryanair

Unit Cost/Passenger (EUR)

Other Costs(Incl. Fuel)

Airport Fees &Ground Handling

Ryanair’s average revenueper passenger is €49.

If they were paying thesame airport fees asAer Lingus, their businessmodel would not besustainable.

To attract Ryanair andsimilar airlines, airportsmust offer low fees.

41

The Challenge…and solution

• How can airports afford aggressive airline incentives/fee discounts and still fundroute development marketing in a difficult economy?

NewAir Services

AdditionalFlights &

Passengers

IncrementalAirport

Revenues

Investment inMarketing &

Fee DiscountsThe solution:

Develop and maximisenon-aeronautical revenue streams:

• Retail & duty free

• Food & beverage

• Parking

• Loyalty & premium programs

• Land development

42

InterVISTAS Health Check

1. Benchmark against best practices:

• Sales performance and

• Retail space data

2. Visual observation:

• Flow, quality, lay-out, customer behaviour, in-storecirculation, boarding calls & security processing

3. Interviews with key players:

• Airport

• Main retailer

4. Identify Quick Wins:

• Immediate elements to improve, including quick cash-generating/temporary retail additions

5. Air Service Diagnostic:

• Identify air service deficiencies, appropriate air servicelevels, priority routes and target airlines

43

Airport Revenue Recovery Program

Short-term Tactics

• Health check

• Leakage recapture

plan• External funding plan

Long-term Strategy

• Commercial revenue

development strategy

• Air service

development strategy

Move from

Short-termRevenue Recovery

to

Long-TermRevenue Growth

44

Questions

Paul OuimetExecutive Vice Presidentpaul.ouimet@intervistas.com

Hans MohrmannExecutive Vice Presidenthans.mohrmann@intervistas.com