Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute jborowiec@tamu

1. Airport & Airline Economics Jeff Borowiec, Ph.D. Texas Transportation Institute jborowiec@tamu.edu If you want to be a millionaire, start with a billion dollars and open an airline. Soon enough you will be a millionaire. – Sir Richard Branson, Founder Virgin Atlantic Airlines

2. Outline • Air Transportation Industry • Background • Significance • Structure • Cost/revenue framework • Airports • Where do airports get their money • Who pays to operate/improve them • How/where do they spend it • Airlines • Varied and complicated beasts • Legacy vs. Low Cost Carriers • Economic Characteristics • Airspace (time permitting) • Its impacts on airport and airlines and their economics • Questions

3. State of the IndustryAirline Bankruptcies

4. State of the IndustryMergers and Acquisitions

5. State of the IndustryNew Fees

6. The Airport System Airside vs. Landside

7. Runways Taxiways Terminal Area/Apron Pavements Airport Site Selection Navigational Aids Airspace Primary Design Guidance: AC 150-5300-13 Change 15 Passenger Terminals Landside Access Cargo Terminals Security Emergency Services Airport DesignPrimary Design Elements Drive Economics

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14. National Economic Benefits • Civil aviation contributed over $1.315 Trillion • 11.5 million jobs • $400 Billion in earnings. • 5.6 percent of the total U.S. GDP • Source FAA/The Economic Impact of Civil Aviation on the U.S. Economy December 2009

15. Importance of the Texas Airport System • Link to national transportation system • Connects rural & urban populations • Provides 784,000 jobs • Generates $49 billion annually

16. Current Status of Industry • New Large Aircraft • Very Light Jets – Increased Mobility/Air Taxi services • SATS – Small Aircraft Transportation System • Recovering Economy • Growth in Air Cargo • Dependent on Air Transportation System • Fractional Ownership

17. Current Status of Industry • Industry consolidation • Lower margins • Increased Break-Even Load Factors • Emerging Aircraft with better costs per seat (Larger RJs and Mainline aircraft) • Fewer Small Communities with Air Service

18. Current Status of Industry • Half of U.S. airports depend on only one or two destinations to connect them with the air transportation system • 44 percent of U.S. airports with at least 5 weekly departures are served by one carrier • 39 percent of U.S. airports are served exclusively by turboprop aircraft which are in sharp decline

20. Air Transportation Network • AIRports + • AIRplanes + • AIRways = • AIR Transportation Network • Air traffic management is important because of the costs associated with delay

21. Air Transportation Network • Airports are usually locally owned • Airlines are publicly held • Airplanes are privately owned • Airways are controlled by the federal government

22. Aviation Legislation • Federal Government’s Role Dates to 1933 and the Civil Works Administration • Federal Airport Act of 1946 • Airport and Airway Development Act of 1970 • Airport Development Aid Program • Airport and Airway Improvement Act of 1982 • Airport Improvement Program • NPIAS airports only • Airway Safety and Capacity Expansion Act of 1990 • Passenger Facility Charges (PFCs)

23. Aviation Legislation • U.S. Airline Deregulation Act of 1978 • Fly where they want (route choice) • Charge what they want (pricing) Resulted in: • Hub and spoke network • New entrants • Increased competition • Discount fares • Growth in air travel • Loyalty programs Certificate of public convenience and necessity/US DOT FAR Part 121 Operating certificate/FAA

24. Regulated…… • International Aviation • Open Skies agreements • Essential Air Service • DOT/Subsidies to carriers serving domestic locations that are economically challenging • Safety • FAA

25. Air Transportation Network • Governmental Entities • FAA • Primarily a SAFETY agency • Airport Improvement Program • Air Traffic Management • NTSB • Accident Investigation • State Aviation Agencies • Block Grant Program

26. Airports • Commercial Service • Reliever • General Aviation

27. Airports • Commercial Service • Primary: >10,000 enplaned passengers • Non-primary: 2500->10,000 enplaned passengers • Hub classification: • Large hub: 1% or more of total national enplanements • Medium hub: 0.25% to 0.99% • Small hub: 0.05% to 0.24% • Non-hub: less than 0.05% • 2009 National Enplanements = 700 million

28. Airports • General Aviation • Everything that is not scheduled passenger service or military • Relievers • Metropolitan airports that reduce congestion at commercial service airports in the area • General aviation airports • Airport role • Functional class • Design standard

29. Airport Ownership • Local Governments • Cities • Counties • Airport Authorities • Private Corporations • State Governments

30. NPIASNational Plan of Integrated Airport Systems • The plan identifies 3,332 existing and 48 proposed public-use airports that are significant to national air transportation and therefore, eligible to receive grants under the Federal Aviation Administration Airport Improvement Program (AIP). • The report estimates that over the next 5 years, there will be $52.2 billion of AIP eligible infrastructure development for all segments of civil aviation.

31. NPIAS

32. Airport Finance – Revenues

33. Airport Finance - Expenses • NPIAS Cost by Type of Development – 2011-2015 • $49.7 B

34. Airport Finance - Expenses • NPIAS Cost by Airport Type - 2011-2015

35. Airport Finance:Revenue and Expenses

38. Major U.S. Airport Concentration

39. Texas is BIG!

40. What is the Texas Airport System? • 300 Airports & 3 Heliports • 26 Primary Commercial Service • 1 Non-Primary Commercial Service • 25 Relievers • 248 General Aviation Non-Relievers • 3 Heliports

41. TexasAirport System

42. Airport Finance • Who Pays? • FAA • Airport Improvement Program • Must meet eligibility requirements • Aviation user taxes (i.e., passenger ticket taxes) • Commercial Airports • Passenger Facility Charges (reduces AIP $) • Revenue from advertising, parking, concessions, access fees • State Aviation Agencies • Airport Sponsors (owners) • Local governments

43. Who Pays…You Do!

44. Ticket Tax Example

45. Airport Finance • Airport funding comes from several sources: • Airport bonds 59% • AIP grants 21% • Passenger Facility Charge 13% • State and local funding 4% • Airport revenue 4% • Source: ASCE/FAA

46. Airline Economics • Characteristics • Activity • Metrics • Impacts of Rising Fuel Prices

47. Airline Economics • Industry Characteristics • Service Industry • Capital-Intensive • Labor-Intensive

48. Airline Structure • Operations and Maintenance • Sales and Marketing • Reservations and Ticketing • Management and Administrative Staff

49. Airline Metrics • available seat mile (ASM) One seat transported one mile; the most common measure of airline seating capacity or supply. For example, an aircraft with 100 passenger seats, flown a distance of 100 miles, produces 10,000 ASMs. Sometimes measured in available seat kilometers (ASKs). • revenue passenger mile (RPM) One fare-paying passenger transported one mile; the most common measure of demand for air travel. Sometimes measured in revenue passenger kilometers (RPKs).

50. Airline Metrics • unit revenue The average amount of revenue received by the airline per unit of capacity available for sale. Most often used to measure the effectiveness with which revenue management activity balances price and volume to generate passenger revenue per ASM, known as PRASM or RASM. • yield The average amount of revenue received per revenue passenger mile (RPM) or revenue ton mile (RTM), net of taxes.