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Market and Security Briefing

Market and Security Briefing. Robert M. Peterson Project Director Boeing Commercial Airplanes April 2004. Agenda. Current Situation Market Outlook U.S. Aviation Security. Times Of Uncertainty. Terrorism, Iraq, SARS, oil prices, security and capital markets Cycle deeper and longer?

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Market and Security Briefing

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  1. Market and Security Briefing Robert M. Peterson Project Director Boeing Commercial Airplanes April 2004

  2. Agenda • Current Situation • Market Outlook • U.S. Aviation Security

  3. Times Of Uncertainty • Terrorism, Iraq, SARS, oil prices, securityand capital markets • Cycle deeper and longer? • Asia…SARS effect • Europe…sluggish economy • U.S…sluggish economy…bankruptcy risks remain • Industry restructuring • New business models • Reduced capacity to match demand • Simplification and consolidation

  4. Air Travel Decline is Unprecedented Air Travel Growth Index 1980=100 Frequency Growth Non-stop Markets Average Airplane Size

  5. 1970 1980 1990 2000 2010 2020 2003 Current Market Outlook

  6. Air Travel Growth Varies by Region Added traffic, 2003 - 2022 Annualgrowth % 2003-2022growth 2002 traffic 5.9% 4.1% 4.5% 5.0% 5.6% 5.3% 5.1% 5.6% 7.3% 5.1% 5.9% RPKs, billions

  7. GDP Forecast Is OptimisticMarch Euro – Area Purchasing Managers Index Is Expansionary 2004 4.7% 2.0% 3.4% Satisfactory Cautionary Major Concern G 5.5% Y 3.2% R 8.0% 3.9% 3.0% World Growth: 2003 2.7% 2004 3.9% 4.7% 3.6% Based on Monthly Global Insight Data (March Update — Annual Real GDP) 6.2% 6.0% 3.5% GDP, Billions U.S. Dollars

  8. U.S. Business Activity ExpansionaryMarch Readings Exceed Expectations Purchasing Managers’ Indices, % Contracting | Expanding 2003 2002 2004

  9. U.S. Domestic Traffic Slowly Recovering Billions RPKs 2000 2003 2002 2001 2004 February 2004 down 1.7% from February 2000 Domestic traffic of US ATA carriers

  10. Boeing Is Committed To The Success Of Commercial Aviation • To ensure long term success for our industry, in May 2003, Boeing initiated an industry – government partnership focused on ensuring industry vitality. • This group is now known as the US Commercial Aviation Partnership.

  11. Study Mission Overall Mission: • Promote confidence, convenience and vitality of the U.S. commercial aviation system • Enable industry/government cooperative action to develop an optimum, cost effective aviation security architecture Study Objectives: • Develop an aviation security evaluation methodology • Provide a credible economic and operational model of the U.S. Commercial Aviation System to evaluate impact of potential aviation system security actions • Identify and/or establish an aviation security industry-government consortium to use the methodology to guide evaluations and decisions about security related actions

  12. Working Together –Key Stakeholders of U.S. Commercial Aviation Transportation Air Transport Security Administration Assn (ATA) (TSA) American Assn Department of of Airport Executives Transportation Partnership to develop input for effective decision making (AAAE) (DOT) Airport Council Intl – North America (ACI - NA) Department of Homeland Security (DHS) Federal Aviation Boeing Administration (FAA) Provides operational and economic impact analysis

  13. Benefits of Partnership Government/Industry/Public • Affordable balance between Safety, Security, Efficiency, and Customer Satisfaction • Mechanism to facilitate stakeholder discussion and analysis of operational and economic impact/cost consequence of security initiatives • Define areas of consensus and disagreement • Methodology/Process for economic policy stakeholder engagement (OMB) Information to Decision MakersTo Achieve Balance Good Transportation Security Decisions Vitality - safe, secure and efficient Implementation Initiating Action • Plans • Measures • Feedback • Communication Threat Ability to Degrade System TSA/DHS Security Ability to Protect System TSA/DHS/OSTP Operational & Economic Impact of Threat on System TSA/DOT Operational & Economic Impact of Security Measure on System TSA/Partnership Performance Impact/Consequence Assessment Processes Inputs/Issues/Recommendations TSA/DHS/DOT/OSTP Congressional Direction orMandates Threat & Risk Stake- holders C O N G R E S S Intel

  14. USCAP Provides Comprehensive Industry Model Government DOT DHS Local FAA TSA Government Suppliers Airlines Airports Customers Factors: Network Int’l Carrier • GDP Hub Pax • Geopolitical Low Fare tension Domestic Carrier Hub Freight • Cost • Time Commuter Large • Fear O - D Mail • Hassle Freighter Small O - D Airline Airport Travel GDS Suppliers Suppliers Industry

  15. USCAP Provides Comprehensive Industry Model(20 year projections) Government DOT DHS Local FAA TSA Government Taxes and Fees ~ $480 billion Suppliers Fees ~ $ tbd billion Airlines Airports Customers Factors: Network Int’l Carrier • GDP Hub Pax • Geopolitical • Pax ~14 billion O/D • Freight • Mail Low Fare tension Revenue ~ $3.8 trillion Domestic Revenue ~$580 billion Carrier Hub Freight • Cost • Time Commuter Large • Fear O - D Mail • Hassle Freighter Small O - D • Fuel $368 billion • Wages ~$600 billion • Airplanes ~ $400 billion • ~ $ tbd billion • ~ $ tbd billion Airline Airport Travel GDS Suppliers Suppliers Industry

  16. USCAP Model Development USCAP Project Mission: Promote the Vitality of the U.S. Commercial Aviation Industry. Purpose: Promote working together cooperation between affected key stakeholders that enables informed decision making and affordable balance between safety, security and efficiency. Model Objective: Create a operational and economic model of issues and possible alternatives affecting the U.S. Commercial Aviation Industry’s vitality, security and efficiency. Boeing initiates prototype model development Prototype transitioned to a “working together” environment Initial study question identified Preliminary [external] analysis completed 2004 March April May June July August Sept Oct Nov Dec Jan Feb 2003 Underlying research for initial question completed Model construction complete Validation completed Model results published

  17. Airport “perimeter” Airline Ops Center Freight Forwarders GA GA, “Secure area”: Contractors, Passenger All others access area of Passenger terminal Terminal Screening area General Public Airport “perimeter” Airline Ops Center Freight Wave - through/ Forwarders Spot check screening area GA “Secure area”: GA, Contractors, All area within AOA employ . “Airport Critical Operations Area” Passenger Terminal Roving spot check Screening area General Public Test Case – Scenario Examples Primary Assumption Set Scenario 0 – “As Is” Baseline Scenario I – Secure Terminal with Credentials Scenario II – Secure Terminal with Credential Equivalency and Physical Screening Scenario III – AOA Physical Screening with Random Spot Checks

  18. Model Results Represent Two Assumption Sets • Primary Assumption Set: • Credentials: @ $ 300 • : @ $2,500 • Screened Employees – 85% of target employees already screened • (supported by a detailed buildup) • > March 19 Review – Updated Assumptions: • Credentials: @ $ 100 (new data) • Screened Employees: – 95% of target employees already screened • (parametric estimate)

  19. Incremental Security Costs Primary Assumption Set ( $1.1B - $90.7B)March 19 input – Updated assumptions ($0.2B - $76.5B) Scenario: +AOA Screening +Physical Screening “As-Is” +Credential Equivalency Note: Costs shown exclude current “sunk costs” (Data as of 03/27/04)

  20. Scenario I Results – Secure Terminals with Credentials • March 19 input – Updated assumptions • Estimated incremental security costs (vs.. “As-Is”) = $0.2B Incremental Security Costs ($2003 -Millions) (1, 5, 10, and 20 year cumulative costs) Airlines Airports TSA Operations TSA Capital Other • Includes: • Credentials (@$100) for approximately 960,000 employees in 2004, plus ongoing credentialing costs for new hires and attrition less construction screening • Average growth = approx 3.9% per year • Average attrition= approx 11% per year (Data as of 03/27/04)

  21. Scenario II Results – Secure Terminal with Credential Equivalency & Physical Screening • March 19 input – Updated assumptions • Estimated incremental security costs (vs.. “As-Is”) = $0.9B Incremental Security Costs ($2003 -Millions) (1, 5, 10, and 20 year cumulative costs) Airlines Airports TSA Operations TSA Capital Other • Includes: $0.2B from Scenario I, Plus: • Additional TSA Operations Cost = $161M (screening staff, training, lane equip. maintenance) • Additional TSA Capital Cost = $72M (lane equipment) (Data as of 03/27/04)

  22. Scenario III – AOA Physical Screening with Random Roving Spot Checks • March 19 input – Updated assumptions • Estimated incremental security costs (vs.. “As-Is”) = $76.5B Incremental Security Costs ($2003 -Millions) TSA Capital Airlines Airports TSA Operations Other (1, 5, 10, and 20 year cumulative costs) • Includes: $1.0B from Scenario II, Plus • Additional TSA Operations Cost = $30.2 B (roving patrol LEOs, screening staff, training, lane/portal maintenance) • Additional TSA Capital Costs = $16.8 B (AOA portals, roving patrol vehicles), (Data as of 03/27/04)

  23. Scenario II Results– Secure Terminal with Credentials & Screening Equivalency Primary Assumption Set Estimated incremental security costs (vs.. “As-Is”) = $3.3B 20 Year Total Security Costs ($2003 -Millions) Fuel Suppliers Airlines Airports Ground Transport Car Rentals Construction Comps TSA Capital Caterers MR&O Retailers Parking TSA Operations • Includes: $1.1B from Scenario I, Plus • Additional TSA Operations Cost = $483M (screening staff, training, lane equip. maintenance) • Additional TSA Capital Cost = $216M (lane equipment) (Data as of 03/11/04)

  24. Scenario III Results– AOA Screening with Random Roving Spot Checks • Primary Assumption Set • Estimated incremental security costs (vs. “As-Is”) = $90.7B 20 Year Total Security Costs ($2003 -Millions) Fuel Suppliers Airlines Airports Ground Transport Car Rentals Construction Comps TSA Capital Caterers MR&O Retailers Parking TSA Operations • Includes: $3.3B from Scenario II, Plus • Additional TSA Operations Cost = $30.5 B (roving patrol LEOs, screening staff, training, lane/portal maintenance) • Additional TSA Capital Costs = $16.9 B (AOA portals, roving patrol vehicles) (Data as of 03/11/04)

  25. Enplanement Results – Scenario IIIPrimary Assumption Set Scenario III could cause the loss of nearly 140M Enplanements (Data as of 03/15/04)

  26. Departure Results –Scenario IIIPrimary Assumption Set Scenario III could cause the loss of nearly 2 M Departures (Data as of 03/1704)

  27. Industry Worker Results – Scenario III Primary Assumption Set Scenario III could cause the loss of nearly 210,000 worker-years. Most are in the airline sector. Assumes incremental security costs are born completely by increased passenger fees. Includes direct aviation related jobs only, does not include job losses at airplane manufacturers, engine manufacturers, or indirect job loss. (Data as of 03/15/04)

  28. TSA Staffing Results – Scenario IIIPrimary Assumption Set Scenario III requires hiring of approximately 15,000 new screening employees Note: Staffing requirements include new employee screening lanes, plus staffing for AOA “Portals” (Data as of 03/15/04)

  29. Airline Results – Scenario III Primary Assumption Set Scenario III could cause the loss of $8B in Operating Profit (Data as of 03/15/04)

  30. Airplane Production Results – Scenario IIIPrimary Assumption Set Scenario III defers delivery of airplanes Reaches 175 units in 2011 ~ $ 10B direct impact to U.S.

  31. Working Together Stakeholder Additions Transportation Air Transport Security Administration Assn (ATA) (TSA) American Assn Department of of Airport Executives Transportation (DOT) Partnership to develop input for effective decision making (AAAE) Full Future Participation Airport Council Department of International – North America (ACI - NA) Homeland Security (DHS) Federal Aviation Boeing Administration (FAA) Provides operational and economic impact analysis

  32. Next Analyses • Passenger Screening • Relate variables that affect wait times and staffing levels to system performance MANPADS • Pre-emptive & other • Airplane Based • Land Based CAPPS II • Impact and timing thereof to check-in and screening process Cargo Screening • Analyze impact of various levels, locations and methods of cargo screening

  33. Perspectives on Aviation Security

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