Socioeconomic Drivers for Transformation of the Nation’s Air Transportation System 30 th Annual FAA Aviation Forecast C

1. Socioeconomic Drivers for Transformation of the Nation’s Air Transportation System 30th Annual FAA Aviation Forecast Conference Industry Restructuring and the Future of Global Aviation National Airspace Systems Planning—Government Panel March 18, 2005 Richard Golaszewski GRA, Incorporated 115 West Avenue • Jenkintown, PA 19046 • USA ' 215-884-7500 •7 215-884-1385 * richg@gra-inc.com

2. Overview • Policy framework • Air travel and the economy • Economics of production/consumption • SEDF evaluation framework • Measurement • Results • Implications

3. Specific Policy Questions • How does JPDO interact with airport and ATM infrastructure policies? • Status quo • Potential changes • Time horizons (short/medium term vs. longer term) • Will private sector accomplish transformation alone? • Why should government be involved? • How should government role be structured? • Incentives for private sector participation • OMB/OSTP assessment criteria • Public goods and services • Evaluation and Analysis Division (EAD) of JPDO conducting multidimensional assessment • What are costs if transformation does not take place?

4. Air Travel and the Economy

5. Air Transportation and Travel Sectors Air-Based Travel and Tourism Factors of Production • Labor • Capital • Other Travel Services • Hotels • Meals • Local Transportation • Entertainment International Trade/ Trade Balance Air Transportation Air Operators Airports Air Traffic Management Aircraft and Aerospace Manufacturing Source: John Cavolowsky and Lee Olson, Socio Economic Demand Forecast Study, presented to Joint Planning and Development Office (JPDO) January 2004.

6. Broad Measures of Air Transport’s Share in National Economy • Air transportation represents around one percent of total GDP • Revenues to U.S. air carriers total just under $100 billion annually • Air transport services contribute positively to net exports • Less than one percent of merchandise, but 40 percent of U.S. merchandise imports and exports by value shipped by air • The Economic Impact of Civil Aviation on the U.S. Economy* • $172 billion direct impact from civil aviation • $514 billion total GDP impact (5% of GDP) • 11.5 million jobs supported by U.S. civil aviation *Conducted for FAA in 2002 using year 2000 data

7. Some Fundamentals • Air transportation integral to our way of life • Business (e.g., day trip WAS-ATL-WAS, two career families, etc.) • Leisure (Las Vegas, Orlando and rest of world) • Family and friends • Growth fueled by increased productivity, safety, accessibility, environmental compatibility • Economic impact measures resources consumed • Reduced impact per unit of output is good • Economic value measures well-being • Resources to consume other goods and services • Changes in quality of life (free time, security, environment, health and safety, among others)

8. As Real Prices Fall, The Market Expands Time 1978 Market Phase Industry Structure Deregulation Large A/C Low Frequency Fares Lower More Frequency Retain Older Aircraft Consolidation Fares Lower Smaller A/C More Frequency LCC Entry Fares Lower—LCCs Growing Large Networks/Alliances Regional Carrier Growth Smaller A/C More Frequency Point-to-Point Consolidation Restructure Fares Lower End State? LCCs Set Pricing

9. Commercial Aviation Growth is Linked to Economic Growth Enpl RPMs RTMs Real GDP

10. Real Domestic Passenger Yields and Costs Have Fallen Steadily

11. Domestic Revenue Enplanements Per Capita

12. Economics of Production and Consumption

13. Airline Production/Demand Frequency Distance ASM CASM Production Aircraft Size Load Factor RASM Travel Time Yield (Fare/RPM) Fare RPM Demand Schedule

14. Travel Choices Underlie Demand Airport A Origin Airport C Hub Airport D Destination Passenger Destination Passenger Origin Auto Airport B Origin Example Choice Set 2 Origin airports Non-stop air Connect air Auto Choice Variables Fares and access cost Travel time • Access • Intercity Service frequency/schedule On vehicle and other amenities Flexibility and reliability

15. Economic Analysis Methods

16. Socioeconomic Demand Framework Value of Air Transportation • Derived demand • Location specific • Imperfect substitutes Start Future Air Transportation Demand • Economic growth • Population growth • Airfares • Service quality Stop Capacity/Demand Assessment • Social costs • Willingness to pay • Productivity

17. The Shortfall: What Happens if Supply Doesn’t Keep Up with Demand • Decreased real wealth of travelers and shippers leaving fewer resources that can be spent on other goods and services • Reverse trends of lower cost travel and increased mobility made possible by deregulation, innovation and technological advances: • Some who rely on affordable air transportation may be priced out of the market when average fares rise (higher prices) • Travelers forced to less desirable times or locations because flights are added in less attractive time blocks (reduced product quality) • Increased transportation and shipping costs • Economy less competitive in global markets

18. Capacity Shortfalls Have Real Economic Costs Economic Value of Air Transport ($) “The Wedge” Cumulative loss in economic value if capacity is unable to serve growing demand over time ($144 billion for baseline demand) Annual loss in economic value for 2015 ($6.5 billion for baseline demand) Annual loss in economic value for 2025 ($19.6 billion for baseline demand) SEDF Study, op cit.

19. Notional Depiction of NAS Delay/Throughput Tradeoff

20. Valuing Capacity Shortfall Tolerable Delays? Demand Served at Expected Yields Unconstrained Demand Y N Shed Demand Price Changes Quality Changes • Schedules • Delays Price Increase to Clear Market Loss of Consumer Surplus Increased Costs Move Up Demand Curve

21. Prior Results Values are in constant, undiscounted 2002 dollars SEDF Study, op cit.

22. Implications

23. The Value Proposition for NAS Transformation • An ATM system capable of meeting projected demands for NAS capacity has value for the nation in terms of: • Improved safety and security • Enhanced quality of life • Contribution to the economy • Aviation has substantial impacts on national life in the areas of: • Mobility and Accessibility • The Environment • Safety, Security and National Defense • Post-transformation service attributes and prices represent “economic cost” • Consumer costs • Service quality (delays, schedules, travel time, airport access, etc.

24. Implications • A system unable to accommodate expected growth in demand, while maintaining quality, will impose tangible costs on those who rely on the NAS • Increased air fares • Decreased passenger trips • Commercial aviation • General aviation • Less productive use of time • Less frequent service • Increased time in and around airport • Increased costs for goods that are moved by air • EAD developing multiple measures using NAS stimulators and related models • Safety and environment • Security

25. Questions? Slides available at:www.GRA-INC.comRich Golaszewski: richg@GRA-INC.com 215-884-7500