Tourism and Air Access: Can we survive the next 12 months?

strategictransportation

& tourismsolutions

Tourism & Air Access: Can we survive the next 12 months?

Presentation to TTRA Chapter Conference

17 October 2008

Prepared byInterVISTAS Consulting Inc.

Mike TrethewayExecutive Vice President & Chief Economist

InterVISTAS Consulting Inc.


& tourismsolutions

Economic Outlook

2

Real GDP Growth – U.S.

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Historical Data

Forecast Data

Sources:Historical Data: U.S.: U.S. Bureau of Economic AnalysisForecast Data: U.S.: Bank of Canada

rece

ssio

n

soft

land

ing

?

Revised 2009: +0.1%

denotes revised Oct ‘08 3

Real GDP Growth - Canada

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Historical Data

Forecast Data

Sources:Historical Data: Canada: Statistics CanadaForecast Data: Canada: Bank of Canada

no re

cess

ion

near

rece

ssio

n ? 2008 Q1: -0.8%

Q2: +0.3%

As of May 2008

4

Real GDP Growth - Canada

0%

1%

2%

3%

4%

5%

6%

7%

8%19

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Historical Data

Forecast Data

Sources:Historical Data: Canada: Statistics CanadaForecast Data: Canada: Bank of Canada

no re

cess

ion

near

rece

ssio

n ? RBC revision:

2008 +0.9%2009: +1.9%

5

Risk of U.S. Recession

Bellone IndexAn average lead of 8 months predicting the last six US recessions correctly predicted every past recessionpredicted 1967 recession which did not occur

1967 credit crunchhas always risen to 100% whenever it jumped to 25%

6

Risk of U.S. Recession recessionleading Index

As of May 2008

7

US Outlook as of May 2008

In first half of 2008it looked as if the US might avoid a recession

8

Revised Recession Risk

9

Current Recession Risk

It is highly likely that the US is in a recession

And that the recession may be long2nd half of 2008 to mid 2009

However, the signals are still mixedPrevious Credit Crises: no recession

19871967


& tourismsolutions

Fuel Prices

11

Oil Futures: up but loosing steam

Crude Oil Futures Prices

$20

$30

$40

$50

$60

$70

$80

Jan-

03

Apr-

03

Jul-0

3

Oct

-03

Jan-

04

Apr-

04

Jul-0

4

Oct

-04

Jan-

05

Apr-

05

Jul-0

5

Oct

-05

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Month of Delivery

US$

Per

Bar

rel

Crude OilFutures Prices - - - - -

May 2003

Apr 2005

Nov 2006

Dec 2005

Crude Oil Spot Prices

Jan 2006

May 2007One Year Ago

12

One Year Ago

The market was indicating that oil prices would stabilise around $70/bbl

13

Crude Oil Futures Prices

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-

03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Dec

-09

Dec

-12

Month of Delivery

US

$ p

er B

arre

Jun 2008

Mar 2008

Crude Oil Spot Prices

Crude OilFutures Prices

Nov 2007

Sep 2007

Nov 2006

Oct 2007

May 2008June 2008:

Significant Run-up, losing steam

14

Spot Price West Texas Intermediate, Nominal Prices

1947-2008

$0

$20

$40

$60

$80

$100

$120

$140

47 52 57 62 67 72 77 82 87 92 97 2 7

1947-2008

US$

/Bar

rel

Source: Spot West Texas Intermediate, 1947 to 2008

12

15

Spot Prices, West Texas Intermediate, Constant 2008 Dollars

1947-2008

$0

$20

$40

$60

$80

$100

$120

$140

47 52 57 62 67 72 77 82 87 92 97 2 7

1947-2008

2008

US$

/Bar

re

Source: Spot West Texas Intermediate, 1947 to 2008.

16


1947-2008

$0

$20

$40

$60

$80

$100

$120

$140

47 52 57 62 67 72 77 82 87 92 97 2 7

1947-2008

2008

US$

/Bar

re


As of June 2008

17


1947-2008

$0

$20

$40

$60

$80

$100

$120

$140

47 52 57 62 67 72 77 82 87 92 97 2 7

1947-2008

2008

US$

/Bar

re


5-7 years

5-7 years ?

18

16 Oct 2008Crude Oil Spot Prices

January 2003 to November 2008

$-

$20

$40

$60

$80

$100

$120

$140

$160

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

U.S

. $ p

er b

arre

l

19

The Future

View 1:This is a bubbleabout to burst

declining US demandloaded tankerswith unsold oiltransactions are paper purchases-- not real buyers

May 2008

20

The Future

View 2:Demand will continue to exceed supply

US had reduced its demand by 400,000 barrels per day by mid 2008But China and India were increasing theirs by 600,000 – in spite of high prices

driven by new investment in cars, electric production, …

21

The Future

While expectations are that the oil price bubble will burst…. There is a non-trivial probability of continuing high oil prices in the medium term

thus a high oil price scenario must be part of business planningwith corresponding contingency plans

22

Impact on Air Travel

Less than you might thinkair travel is thought of as ‘price elastic’

10% price increase typically reduces travel by 13%

but when price increase affects all routes, carriers, destinations and modes

air travel is observed to be price inelastic10% price increasereduces travel by only 6%


& tourismsolutions

North American Carrier near term Capacity

24

Impact of Fuel Price

As of May 2008NY-Los Angeles

$125 per pax fuel cost for NY-Los Angeles (A320)

one wayApril seat price: $149it was more economical for some airlines to park aircraft

25

American

for 4th quarter 2008mainline capacity: reduced 11-12%RJ capacity: reduced 10-11%

retire aircraft40-45 mainline (A300s, MD-80s)35-40 RJs35 Saab (entire fleet)

Oct 2008 – ordered 787sbut delivery after 2012, largely replacement, not suited to transborder

26

United

Plans to cut mainline capacity in 200917% cut in domestic

Retire 80 aircraft in 2008, 20 in 200994 737s6 747s

27

Continental

Cutting all service to 15 citiesCLE hub: loses 23 routesIAH hub: loses 12 routes

Retire 67 planesTotal US capacity: -11%

28

Southwest

Deferred delivery of aircraft But retaining some aircraft scheduled for retirement Has reduced capacity for 1st time in its historyPoised to restore capacity in 2009Code share with WestJet: 2009Q4

street’s expectation: WJ does the flyingSW adds it code

29

Canada

WJ: no reductions at this timeAC:

retire 4 767scut overall capacity 7%cut transborder 13%cut domestic 3%

30

Capacity Cuts

2008 is first anticipatory capacity cut by carriers

should induce load factor and yield increasesload factor increases will mitigate pax traffic losswill reduce GHGEscapacity restoration not assured

US carriers have inadequate replacement aircraft on orderRecovery of transborder market may take years

31

2008 vs 2001-03

By 2003, most major US network carriers were out of cash

restructured through bankruptcyIn 2008, most major US carriers have sufficient cash to weather at least a year

and there may be little to gain from a 2nd round of bankruptcy


& tourismsolutions

Scenarios

33

Future

Difficult to make predictions of the futureConsider and prepare for alternate scenarios

34

Scenario A: BleakFuel prices continue run upEconomy slips into recession

Consequencespax drops by 10% over 2 years

2000-02: -9.3% recovery 4 years1979-81: -9.8% recovery 4 years

some carriers read chapter 11 or 7

Hard Landing 35

Hard Landing

36

Scenario B: Rapid RecoveryFuel price bubble bursts

return to $80-100Economy avoids recessionCarriers cut domestic capacity 8%

yields riseseat management systems respond to reduced capacity and increase yieldscosts reduced (fuel, operations, capacity)some capacity restored

SOFT LANDING 37


& tourismsolutions

Will There Be a Eurasian Capacity Glut by 2011?

39

The 2011 Eurasian Capacity Glut

new capacity may exceedreplacement needsconsumer demand

main impact will be on Asia-Europe

may result in Euro and Asian carriers redeploying capacity to N America

40

Aircraft Orders: 1995-2007

0

500

1,000

1,500

2,000

2,500

3,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Tota

l Airc

raft

Ord

ers

Airbus BoeingSource: Airbus and Boeing websites 41

Aircraft Orders: 1995-2008

0

500

1,000

1,500

2,000

2,500

3,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Tota

l Airc

raft

Ord

ers

Airbus BoeingSource: Airbus and Boeing websites

2008 may be another strong year for aircraft orders

2008

?

42

Aircraft Deliveries: 1995-2015

0

200

400

600

800

1,000

1,200

1,400

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Tota

l Airc

raft

Del

iver

ies

Airbus BoeingSource: Airbus and Boeing websites

The Airline Monitor, July 2007

Projected

Aircraft deliveries increasing, large to Middle East, Asia, Europe

43

Conclusions

Increased capacity in M East, Europe, Asia

will exceed demandwill put downward pressure on yields

European and Asia/Pacific carriers may need to shift focus to NA,

where resident carriers have been slow to renew/modernize their fleet

44

But …Canadian Policy is an Obstacle

The increased capacity of Asian carriers is an opportunity for Canada

ButCanada’s implementation of air transport policy is an obstacle

45

The IssueThe ChallengeAir transport delivers Canada’s highest spending touristsAir Access to Canada from some key markets is impeded by

federal policyborder and other regulations costs

46

Key Issues

Example:YVR has viable routes and additional frequencies that are blocked by policy

This blocked capacity is the equivalent of 8 daily 747 flights, reducing 2008 tourism spend by $100 million per annum. By 2015 this may represent over $225 million in foregone tourism revenueYVR will be primary gateway to 2010 Olympics/Paralympics

Korea, Taiwan,

Singapore,

Manila, Paris,

Chile, France

Hong Kong

47

Key Issues

Canada’s 2006 Blue Sky policyis an excellent policybut is not being implemented

Fast enoughWith the right priorities Without using loopholes

Most treaties since 2006 have been restrictive !

48

New Singapore ‘Treaty’

Canada concluded treaty with Singapore in Oct 2007

Restrictive: not Blue Sky or Open SkySingapore still confined to 3x weekly service via SeoulSingapore cannot serve via Japan or Taipei

note that no Canadian carrier serves TaipeiThe only positive element:

SQ now has a treaty, no longer needs annual exemption

49

New Singapore ‘Treaty’

The Singapore agreement was a critical test case

would Canada place the interests of tourism, communities and shippers on equal par with carrier interest?The Singapore outcome manifests a hollow policy

50

Other Issues: Milking Air Transport

Canada is not cost competitive for air carriers

Airport rents, PILT have no equivalent in USVarious taxes higher in CanadaUS airports receive subsidies and interest rate advantages

51$-

$100

$200

$300

$400

$500

$600

$700

Montréal Vancouver Toronto U.S. airports

$mill

ion

Costs to operate Mirabel

Higher Canadian SafetyStandardsEAS and SCASDP Subsidies

NAV CANADA Asset Purchase

Must pay GILT/PILT

Due to Terminal 3 Purchase –InterestGST paid by leisurepassengersOther US Aviation subsidies(non-AIP)Airline Fuel Tax not reinvested

Excess Interest due to deferredspendingNo Provision for Tax-FreeBondsNo AIP Funding (subsidyportion only)Must pay Ground Rent

Annual Costs Imposed on Canadian Air TransportThat are not imposed on US airports

$40 per originating YVR pax

Source: InterVISTAS study for gateway airports and ATAC

52

State of the Airline Industry

Not so Goodstrategic

transportation& tourismsolutions

Thank Youwww.InterVISTAS.com

54

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Historical Data

Forecast Data

Real GDP Growth - Mexico

Sources:Historical Data: Mexico: OECD StatisticsForecast Data: Mexico: The Economist website

2008 +2.3%2009: +1.6%

denotes revised Oct ‘08

Tourism and Air Access: Can we survive the next 12 months?

Documents

Transcript of Tourism and Air Access: Can we survive the next 12 months?