AAAE Presentation - Airport Policy Dilemmas & Choices in a Challenging Time

PRESENTATIONPRESENTATION

Airport Policy Dilemmas & Choices in a Challenging Time

AAAE Board of Directors and Policy Review Committee MeetingTucson ArizonaTucson, Arizona

Stephen Van Beek, Ph.DS t b 18 2011September 18, 2011

Airport Policy Dilemmas & Choices in a Challenging Time

It has been eight years since the last multi-year FAA reauthorization a time of fundamental change in the aviation reauthorization—a time of fundamental change in the aviation industry. As a result, today’s policy model no longer serves the industry. Short-term extensions and shutdowns are effects of that dysfunctional policyeffects of that dysfunctional policy.

Introduction1. Traffic Update: Steady, but Change is in the Air2. The Dynamic Industry Behind the Numbers3. The Sad State of Policy and its Potential Impacts . y p4. Stylized Strategic Choices for AAAE’s DiscussionDiscussion

2 Airport Policy Dilemmas & Choices in a Challenging TimeVan Beek, AAAE, Tucson, September 18, 2011

1. Traffic Update: Steady, But Change is in the Air


Aviation Traffic: Modest Growth and Future Uncertainty

Don’t Let These Steady Numbers Fool You !

2Q 2010 2Q 2011 Change

T t l P 349 6 illi 357 8 illi 2 3%

Don t Let These Steady Numbers Fool You … !

Total Passengers 349.6 million 357.8 million 2.3%

Domestic Passengers 305.4 million 312.0 million 2.2%

International ll llPassengers 44.2 million 45.7 million 3.5%

Flights (thousands) 4684.3 4695.5 0.2%

Available Seat Miles 473.9 billion 492.0 billion 3.8%Available Seat Miles 473.9 billion 492.0 billion 3.8%

Load Factor 81.0 percent 80.7 percent -0.3 pts.

Flight Stage Length 725.2 miles 743.7 miles 0.9%

Traffic increases, together with the industry holding the line on capacity, are improving airlines’ fortunes. The industry remains at an uncertain place however awaiting clear indications about the economy’s direction


place, however, awaiting clear indications about the economy’s direction.

The Lost Decade?The Lost Decade?

18% fewer domestic seats were available for U S passengers in 2010 than in 200018% fewer domestic seats were available for U.S. passengers in 2010 than in 2000

Several waves of capacity reductions as a result of:

F l i i– Fuel crisis– Recession and demand fall-off– Industry consolidation

The strength of the U S economic The strength of the U.S. economic recovery is uncertain Airports should expect, at best,

weak capacity growth in the near termterm

– Effects of United-Continental and Southwest-AirTran mergers not yet felt

– Fuel prices again volatile due to Change in Scheduled Domestic Seats

– Fuel prices again volatile due to Middle East crisis and dollar depreciation

Additional change is in the air

Source: Official Airline Guides accessed February 21, 2011.


Core Financial Operations Have Eroded for Many Airports Core Financial Operations Have Eroded for Many Airports

Median Debt Service Coverage and Safety Margins Fell to Historical Lows in FY 2009Median Debt Service Coverage and Safety Margins Fell to Historical Lows in FY 2009

2.50

25%

30%

1.50

2.00

15%

20%

25%

Debt servicesa

fety

mar

gin

0.50

1.00

5%

10%

15% e coverage

Deb

t ser

vice

0.000%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Fiscal years

“Highly rated airports are expected to maintainconsistently positive operating margins.”

Source: Moody’s Investors Service, “U.S. Airport Medians in FY 2009, December 2010. The fiscal year period varies by airport. Standard net revenue debt service coverage

l l ti h D bt i f t i i

yDebt service safety marginDebt service coverage


—Rating Criteria for Airports, Fitch Ratings, November 2010calculation shown. Debt service safety margin is calculated as net revenues less debt service, divided by gross revenues.

2. The Dynamic Industry Behind the Numbers


Industry Consolidation ContinuesIndustry Consolidation Continues

The Full Impacts of Mergers are Yet to be Felt

•The primary benefits from mergers are increased

Delta-Northwest (3 years after merger announced)

The Full Impacts of Mergers are Yet to be Felt

increased revenues from an optimized network

•Mergers are not additive

d l

–Operations fully integrated

–Merged airline has expanded service to Asia, but has drastically reduced capacity at its Cincinnati hub (75% fewer departing seats there in 2010 than in 2005)

and result in reduced service focused on 1/2 hub airports

•Complete

–Largely non-union following elections in 2010

United-Continental(1 year+ after merger announced)

–Still operating separately•Complete

integration of operations can take 5 years or more; 5 years after the US Airways–

–Airport branding unified on “Customer Day One”

–Single operating certificate expected from FAA by end of year

Southwest-AirTran(1 i d)US Airways

America West merger the airline is still operating with 2 separate pilot groups

(1 year since merger announced)

–Merged airline to adopt Southwest’s service policies, such as no first class, assigned seats, or checked bag fees

–Full integration not expected until late 2013 ?


p g p g p

Network Airlines Increasingly Focused on Global Alliances & JVs

Growing global alliances will continue to fuel international and domestic network changes

•International service is generally

Growing global alliances will continue to fuel international and domestic network changes

generally more profitable due to less competition

•Alliances •Alliances allow airlines to expand networks at minimal risk and cost as well as ease well as ease passenger travel

•Under joint ventures, airline groups airline groups operate as a single airline, sharing revenues and costs


The Changing Southwest Business ModelThe Changing Southwest Business Model

Redefining the “Southwest Effect”

•Southwest’s strategies will continue

Continues to expand in non-traditional markets

–Busy urban airports: New service to Atlanta, Newark, Washington National; additional service to New York LaGuardia

Redefining the Southwest Effect

will continue to evolve; its moves and reactions to them will help shape the industry

–Surrounding markets: Southern California an example of Southwest entering multiple airports within the same regional market; results in more pricing power

–Longer-haul markets: Will likely begin Hawaii and international service in 2012

–Denver focus: 5 years after beginning service, DEN is now the 5th busiest in the system with nonstop service to 42 airports coast-to-coastthe industry

•Mature Southwest markets will not be a priority for

nonstop service to 42 airports coast to coast

“Southwest’s business has become

more complicated than the simple

model that served

“Their approach is to search out weak companies and contest them out of business. It’s no different than Wal-

Mart plunking a big-box store near a local family-owned grocery store; you either

“They ran out of places where they

could keep it simple. They’ve become such a priority for

the airline for the foreseeable future

•Southwest

model that served them so well for 39

years. They are at an inflection point. They are not a young and nimble corporation

anymore. This is now ”

family-owned grocery store; you either respond to the competition, or you get

out.”

-Bryan Bedford, CEO, Republic Airways Holdings (parent of Frontier Airlines)

become such a widespread, far-flung airline and served just about

every city that met that simple

requirement. They fig d it ti •Southwest-

AirTranmerger may lead to new service and reduced fares i i di id l

a mature company.” –William Swelbar,

Industry analyst, MIT“Southwest got two big pluses from AirTran — 37 more destinations and

taking out the lowest-cost carrier in the business.”

figured it was time to go beyond that.”-David Swierenga, Industry analyst,

AeroEcon


in individual markets

-Robert Herbst, Independent industry analyst

Mon Mon DieuDieu! The Ultra Low! The Ultra Low--Cost Airlines Cost Airlines SontSont ArriveésArriveés!!

European-style “Backpacker Airlines” Are Here

•Service from the ultra low-cost airlines

Ultra low-cost airlines are the fastest-growing airline type in the U.S.

–Airlines serve vacation markets such as Las Vegas and Orlando, often from secondary markets with poor air service such as Fort Collins or Shreveport

European-style Backpacker Airlines Are Here

cost airlines does not always have a large effect on incumbents, as traffic is

–Fully Unbundled Product

–Airlines negotiate preferential hotel, rental car, & other product rates to “subsidize” airfares

–Vision Airlines began service in January from Fort Walton Beach (Destin)?

Allegiant has been profitable for 32 consecutive quartersas traffic is often generated by those who would otherwise d

Allegiant has been profitable for 32 consecutive quarters

–“Integrated” travel product

–Most routes are served only 2-4 times per week

–$35 per passenger is generated from ancillary fees, the highest in the industry

drive or not travel at all

•Attracting an ultra low-cost airline

i h

Allegiant’s bases are located in vacation markets

Average daily departing flights

19

15

20

25

requires the involvement and support of the community; can provide a

Average daily departing flights from base airports, 2010 8 7 7

5 54

0

5

10


pbig boost

The Three Models in A New Airline IndustryThe Three Models in A New Airline Industry

New Business Models Require Tailored Air Service Development Strategies

Business model

Example Service pattern Implications

Network Maximizes breadth of network by using regional Growth would come from connecting

New Business Models Require Tailored Air Service Development Strategies

airlines airline affiliates, alliances, and code-share agreements

Focus on (1) serving local passengers in hub markets; and (2) connecting spokes to international markets

Lower desire to provide domestic connecting service

airports to new international gateways

Risk of further capacity cuts, especially to domestic-oriented hubs (e.g., UA to DEN or DL to MSP)

Least sensitive to airport costs

Nationalairlines

Primarily domestic-oriented networks; any international service focused on serving leisure and other price-sensitive passengers

Growth in mature markets would come from new entrant airlines (e.g., Alaska and JetBlue)

Serves dense domestic markets with transparent pricing schemes

Increasing share of business traffic

Sensitive to airport costs

Enticing new airline service can be accomplished by supplying common-use facilities with volume-based pricing to minimize cost of entry

G fUltra low-cost airlines

Establishes bases at high-density vacation markets (e.g., Orlando and Las Vegas)

Heaviest focus on ancillary revenues by partnering with hotels and other travel companies to provide package deals

Growth would come from new entrant airlines

Airline would either serve vacation markets or use airport as a base


Most sensitive to airport costs; actively pursues subsidies

3. The Sad State of Policy and its Potential Impacts


The Four Airport Pillars of the “Trust Fund and PFC Era”

These four have been critical enablers of airport and aviation growth

1. Airport and Airway Trust Fund: provides multiyear capital for aviation system infrastructure such as F&E and AIP. Helped fuel

These four have been critical enablers of airport and aviation growth

y ppredictable growth in aviation infrastructure; with user money, kept reliance on taxpayers to a minimum.

2 AIP: Together with F&E AIP capital program has status of contract2. AIP: Together with F&E, AIP capital program has status of contractauthority and prioritization of AATF revenues. Federal funding support and leadership critical for airport and ATC investments.

3 PFCs: Source of local capital independent of use and lease 3. PFCs: Source of local capital independent of use and lease agreements, key instrument to promote competition and capacity. Vital tool to build airport infrastructure and leverage capital.

4 T E t D bt I t t h t l b d 4. Tax-Exempt Debt: Instruments such as governmental bonds, private activity bonds and Build America Bonds promote capitalinvestment by state and local governments. Provided cost of capital advantage to public airports Deterred privatization


advantage to public airports. Deterred privatization.

Changes and Threats to the AATF Era and Airports

Each of the four airport funding pillars faces erosion and/or attack

Assumption/Issue Consequences Source

1 AATF: lack of (1) Less support for capital Industry financials

Each of the four airport funding pillars faces erosion and/or attack

1. AATF: lack of revenues to support FAA and industry agendas

(1) Less support for capital programs such as F&E, NextGen and AIP; (2) reduced future growth

Industry financials, airline and anti-tax group opposition (POTUS, USCong)

2. AIP: real decline in support, proposals to cut AIP by up to 30%

(1) Few if any post-2011 LOIs; (2) cuts funding and

l li k

Lack of support of trust funds due to deficit (DC, CBO, POTUS, USC )regulatory link USCong)

3. PFCs: inability to raise $4.50 ceiling, l f l

(1) Fewer capital options; (2) loss of airport i d d

Anti-”tax” campaign (USCong, airlines)

loss of value independence

4. Tax-Exempt Debt: attacks on bonds as revenue reducers

Raise the cost of capital, eliminating advantage of public airports

Long-term debt and budget deficits(DC some in USCong)


revenue reducers public airports (DC, some in USCong)

The AATF is Providing Insufficient Capital for FAA ObligationsThe AATF is Providing Insufficient Capital for FAA Obligations

The Uncommitted Balance has less than a month of funding

$8

Uncommitted Balance of AATF (in billions) Political & Financial Pressures on the AATF

The Uncommitted Balance has less than a month of funding

$5

$6

$7

$8Revenues: AATF balance reflects reduced traffic (passengers and segments) and fares. Exacerbated by unbundling of airfares and FAA shutdown

$1

$2

$3

$4Spending: Operations spending increasing above CPI in recent years

Policy: Little support to fix the AATF problem. no appetite to tax ancillary fees

Source: “Airport and Airway Trust Fund: Declining Balance Raises

$0

$1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

no appetite to tax ancillary fees the exclusion of previously agreed to fuel tax increases on general aviation the appalling willingness of policymakers to use the FAA as a political bargaining chip to the d t i t f th t

A solution to this problem will eventually have to involve revenue and cost components.

Source: “Airport and Airway Trust Fund: Declining Balance Raises Concerns over Ability to Meet Future Demands,” Government Accountability Office, February 3, 2011. AATF=Airport and Airway Trust Fund.

detriment of the system


The Historic and Future Role of Taxpayers in Funding the FAA

Between 2000 and 2010 FAA spending up 60% but AATF Receipts up 12%

80%

Between 2000 and 2010, FAA spending up 60%, but AATF Receipts up 12%.

Taxpayer Share of FAA Budget (1974-2011)

• Large budget deficit and national debt

Pressures on Taxpayer Spending 2012 - ?

50%

60%

70%

g g

• Politics right now favoring “shared sacrifice” or across-the-board cuts

• PAYGO (Senate) and CUTGO (House) rules enforce discipline and pressure spending

30%

40%

50% enforce discipline and pressure spending

• Super Committee meeting to reduce $1.2 trillion in spending

• With Trust Fund financial issues, infrastructure spending now

0%

10%

20%infrastructure spending now widely perceived as “discretionary”

• Transportation priorities of high-speed rail, intermodal discretionary grants, livability and Amtrak all lack dedicated revenues,

Short term airports are in a defensive position; in the medium to long term

1974

19

76

1978

19

80

1982

19

84

1986

19

88

1990

19

92

1994

19

96

1998

20

00

2002

20

04

2006

20

08

2010

,requiring taxpayer funding if they are to be continued


Short-term airports are in a defensive position; in the medium- to long-term fundamental reform of the nation’s aviation policy is required

FAA Budget: Major Program Functions 2001-2011

Continuing Pressures are Besetting the FAA’s Capital Accounts

$

Ops F&E NextGen

Continuing Pressures are Besetting the FAA s Capital Accounts

$10$12$14$16$18$20

llion

s)

$0$2$4$6$8

$10

(in b

il

Over the decade FAA’s budget has increased considerably; the vast majority of Over the decade, FAA s budget has increased considerably; the vast majority of that increase in the Operations program. With slower growth in the overall FAA budget expected, future constraints appear to threaten FAA capital programs (airway and airport accounts).


The Future of NextGen is Endangered by the AATF’s Financial Issues

NextGen Funding: The FAA F&E Account is Key to Investments

F&E Ne tGen

The Future of NextGen is Endangered by the AATF s Financial Issues

• NextGen vital for future it

$2,942 $2,936$2,736

$3,120

$)

F&E NextGen capacity

• Benefits will potentially save the industry $ billions

• Its funding must grow at a

$637 $788 $812$1,135

(in m

illio

ns $ time that the AATF is under

strain

• FAA requested nearly $400 million more for FY 2012

2009 2010 2011 2012

• NextGen could be a driver for FAA funding and reform

• Air carriers have divided views on its value

NextGen is starting to ramp up. Between 2009 and the 2012 budget request, the FAA has requested over a 78% increase


FAA has requested over a 78% increase.

The Relative Impact and Importance of AIPThe Relative Impact and Importance of AIP

The Airport Industry Should Not be Cavalier about the AIP’s Importance

$6.00

Average CPE Impact of AIP Grants BUT, Other Points to Remember about AIP:

• AATF monies are not really “discretionary”

The Airport Industry Should Not be Cavalier about the AIP s Importance.

$5.20

$4.00

$5.00

$

• AIP entitlements AND discretionary provide the multi-year support for Letters of Intent

• LOIs provide a key mechanism and pressure point for the FAA to help nationally

$1.10 $1 00

$2.00

$3.00

p p ysignificant airports complete needed capacity projects

• The tie between the “PFC takedown” and AIP’s Small Airports Fund provides key

$0.40 $0.20

$0.00

$1.00

Nonhub Small Medium Large

Source: LeighFisher estimates Assumes FFY 2009 average AIP grants for each

funding for small airports’ discretionary needs

• The cross-subsidized program has been a key component of knitting together the l g d ll i t liti l liti f Source: LeighFisher estimates. Assumes FFY 2009 average AIP grants for each

hub size would be bond financed using standard assumptions, with allocable debt service recovered in full from the airlines. CPE=Cost per enplaned passenger.

large and small airport political coalition of the last 25 years

The AATF and its surface counterpart, the Highway Trust Fund, have been


The AATF and its surface counterpart, the Highway Trust Fund, have been enormously successful in providing billions of dollars for public infrastructure

The Relative Impact and Importance of PFCsThe Relative Impact and Importance of PFCs

Legislators Are Focused on Not Increasing Taxes and/or User FeesLegislators Are Focused on Not Increasing Taxes and/or User Fees

Small hub Nonhub

Airport Improvement Fees (AIFs) at 5 Busiest Canadian Airports

AIF

Share of New Funding Capacity from $1.50 Increase in PFC Rate

Small hub7%

Nonhub3% Airport

AIF per passenger

Toronto YYZ (originating) $25.00

Toronto YYZMedium hub

19%

Toronto YYZ (connecting) $8.00

Vancouver (outside province) $15.00

Vancouver $5 00(within province) $5.00

Montreal $25.00

Calgary $25.00

Edmonton $20.00

As PFCs provide local funds policymakers may revisit the question of raising the ceiling

Large hub71%

$Source: Air Canada website, accessed February 21, 2011.

Source: LeighFisher estimates.


As PFCs provide local funds, policymakers may revisit the question of raising the ceiling and/or loosening restrictions on use (i.e., tie eligibility to airport revenue)

The “Other PFC” (and CPE)The “Other PFC” (and CPE)

Each passenger generated more than $7 00 in nonairline revenues in 2009Each passenger generated more than $7.00 in nonairline revenues in 2009

$12.00

Average Nonairline Revenues per Passenger, 2009

$9.80 $9.30

$8.90

$7.40 $8.00

$10.00

$4.00

$6.00

$0.00

$2.00

Medium hubs Small hubs Nonhubs Large hubs

In a closed system, costs not paid by passengers (largely variable) will have to be

Parking Rental car Terminal concessions

Source: Nonairline revenues as reported by airports to FAA on Form 127. Enplaned passengers as reported by airlines to FAA on ACAIS reports.


y , p y p g ( g y )paid by airlines (largely fixed).

Aviation and Programs: Options for Future Funding

The Dummy’s Guide to Federal Funding Choices and Decision-Making

Rev • Increase AATF taxes

The Dummy s Guide to Federal Funding Choices and Decision Making

venues • Institute user fees either in addition to taxes or as a new source of revenue better aligned

ith ( i i l f B h FAA P l)

?with use (principle of Bush-era FAA Proposal)

• Prioritize and cut projected programs?• Take advantage of local and state options (e.g., state fuel taxes, PFCs)

Cost

s

• Privatize or Greater Use of PPPs

• Adopt some combination


• Adopt some combination

Airports’ Position Today in the Aviation System

The End of the Trust Fund and PFC Era Endangers Airport Priorities

1. Diminished trust-fund based, federal capital resources 2 Increased reliance on taxpayer dollars to fund FAA priorities at a

The End of the Trust Fund and PFC Era Endangers Airport Priorities

2. Increased reliance on taxpayer dollars to fund FAA priorities at a time of significant downward pressure on federal spending

3. Reduced PFCs; lack of local independent capital4 Continued Federal economic regulations limit airport management 4. Continued Federal economic regulations limit airport management

options (e.g., optimizing use of infrastructure and promoting air service)

5. Strengthened airlines enhanced by consolidation, global airline g y , galliances and reduced competition

6. Unfunded NextGen, creating risk that National Airspace System will not accommodate future demand for air travel

Without significant policy and industry change, airports face a constrained future; one where it is harder to meet community goals.


4. Stylized Strategic Choices for AAAE’s Discussion


Airports Role in Developing a National Aviation Policy

Preparing for the “Next” ReauthorizationPreparing for the Next Reauthorization

AirlinesPolicy-Making Cycle1. Determine interests2 S i i i

U.S. Aviation Policy

FAAAirports

2. Set priorities3. Generate

“airport consensus”4 Reach out to stake- Policy4. Reach out to stake-

holders & FAA5. Develop FAA

reauthorization plan6 General

Aviation6. Begin advocacy


1. Strategic Choice: Status Quo Plus

Closest to airport industry agenda today but a political lift

1. Increase dollars to AATF, strengthen firewalls protecting user $2. Fight for higher FAA authorization and annual appropriations

Closest to airport industry agenda today, but a political lift

2. Fight for higher FAA authorization and annual appropriations dedicated to airports

3. Obtain increase in the PFC ceiling and/or de-federalize the PFC4. Seek continued tax-exempt status for airport debt, including

“AMT tax holiday” and Build America Bonds programAMT-tax holiday and Build America Bonds program.5. As recommended by the FAAC, carefully cost-allocate industry

(user) and taxpayer (nonuser) shares of funding and address inequities through legislation.

6 I tit t FAA it l b d t d/ d i th d f li bl 6. Institute FAA capital budget and/or devise method for reliable multiyear taxpayer contribution

Advantages: keeps airport AIP-PFC coalition intact, promotes idea that g p p , paviation and airport systems provide public benefits.

Disadvantages: politically unrealistic, does not differentiate between needs of larger and smaller airports


2. Strategic Choice: Mixed Public/Commercial System

A Logical Follow-on to POTUS and USCong Proposals

1. Reform and prioritize AATF and taxpayer dollars to FAA Operations, FAA capital equipment and smaller airports. Retain grant obligations

A Logical Follow on to POTUS and USCong Proposals

2. Eliminate AIP entitlement and/or discretionary grants for larger airports and shift to a more light-handed economic regulatory structure without most grant obligations

3 P h f i i h PFC ili $7 003. Push for an increase in the PFC ceiling to $7.004. Expand APPP consistent with USCong (T&I) proposal

(i.e., eliminate air carrier consent requirement and expand to 10 the number of airports permitted to apply without regard to hub size)number of airports permitted to apply without regard to hub-size)

5. Target tax-exempt debt to public airports

Advantages: recognizes the different challenges of larger and smaller Advantages: recognizes the different challenges of larger and smaller airports; makes federal regulation commensurate with funding; a less dramatic departure from today’s system than some options

Disadvantages: tough to get political agreement on the liberalizing


Disadvantages: tough to get political agreement on the liberalizing components for larger airports; potentially frays airport coalition

3. Strategic Choice: Commercial Model

Rely on the private sector and the market to provide services

1. Use the AATF to fund FAA capital and operating expenses only2. Eliminate AIP and the grant obligations regulating airports

Rely on the private sector and the market to provide services

2. Eliminate AIP and the grant obligations regulating airports3. Repeal the anti-head tax and the need for PFCs4. Curtail tax-exempt debt for airports5 Devise a new airport privatization program that includes standard 5. Devise a new airport privatization program that includes standard

concession guidelines for state and local governments and devises a standard policy for federal recovery of previous past capital grants and gifts of federal land g

6. Shift to light-handed regulation and limit federal involvement to arbitrating airline-airport disputes

Advantages: uses the market to depoliticize aviation and government decision-making

Disadvantages: severely challenges the public parts of the system,


especially small community air service and smaller airports

Questions and Comments:

Stephen D Van BeekStephen D. Van BeekChief of Policy and Strategy

LeighFisher [email protected]

(703) 796-6220


AAAE Presentation - Airport Policy Dilemmas & Choices in a Challenging Time

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