CHAPTER III

**COMMERCIAL AIR CARRIERS**

This year the FAA has revised the classification of carriers that are
forecast to better reflect the nature of the carriers. Unlike prior
forecasts in which the total Form 41 carriers were included in
commercial air carriers, this year's forecast for commercial air
carriers excludes those regional carriers who operate a majority of
their flight using aircraft having 70 seats or less. The FAA historical
database has been revised to incorporate these changes. In 2002, a total
of 10 "regional" carriers reported for all, or a part of the year, on
DOT Form 41.[^1] In the discussion that follows, only large commercial
carriers are included. In fiscal year 2002 there were 68 large U.S.
commercial airlines (both scheduled and nonscheduled) reporting traffic
and financial data to the Bureau of Transportation Statistics (BTS),
U.S. Department of Transportation (DOT), on Form 41. There were 42
passenger airlines (operating aircraft with over 70 seats) and 26
all-cargo carriers.

Twenty-eight of the airlines provided scheduled passenger service and
constitute the focus of the air carrier forecasts (both domestic and
international) discussed in this chapter. Twenty-seven of the carriers
provided scheduled domestic service (within the 50 States, the District
of Columbia, Puerto Rico, and the U.S. Virgin Islands), while 15 of the
carriers provided scheduled international service. Of the carriers
providing scheduled international service, 8 served Atlantic routes, 10
served Latin American routes, and 7 served Pacific routes.

Air carrier traffic forecasts and assumptions discussed here are
presented in Chapter X (Tables 6 through 23). FAA air carrier work­load
forecasts are discussed in Chapter VII and presented in Chapter X
(Tables 34 through 47).

It should be noted that all specified years in the remainder of this
chapter are fiscal years (October 1 through September 30), and specified
quarters are fiscal year quarters, unless designated otherwise.

**REVIEW OF 2002**

FINANCIAL RESULTS

For the 2^nd^ consecutive year, operating expenses for large U.S.
commercial airlines

exceeded operating revenues. The poor financial performance in 2002 was
driven by a reduction in traffic following the September 11^th^ attacks,
declining yields, escalating costs for security and insurance, and
relatively high fuel prices.

The operating loss for the large U.S. commercial airlines was \$10.5
billion in 2002, the largest in history. The industry posted operating
losses in every quarter. For the year operating revenues decreased
16.3 percent, while operating expenses decreased 11.2 percent.

![](media/image1.wmf){width="3.2472222222222222in"
height="2.6277777777777778in"}

The decrease in operating expenses in 2002 was largely due to decreases
in fuel and labor costs. After increasing 13.3 percent in 2001, fuel
prices fell by an estimated 18.1 percent in 2002, reducing operating
expenses by \$3.0 billion. Industry labor costs, accounting for more
than one-third of total operating expenses, fell 6 percent to \$40.0
billion.

Domestic nominal yield for the large air carriers fell 12.1 percent,
while yield, adjusted for inflation decreased 13.4 percent. Yield was
down throughout the year as the decline in demand following the
September 11^th^ attacks led carriers to deeply discount fares in order
to boost demand. Competition in the industry is intense as low fare
carriers continue to expand their market share, and are expected to
continue to increase their share in domestic markets throughout the
forecast period.

![](media/image2.wmf){width="3.2472222222222222in"
height="2.5388888888888888in"}

Nominal international yield decreased in all markets with the largest
decline occurring in Latin markets. In Latin markets real yield declined
9.8 percent while in Atlantic and Pacific markets real yield decreased
6.0 and 9.0 percent, respectively. The falling yield in all of the
international markets can be attributed to weak demand following the
September 11^th^ attacks and intense discounting by carriers.

![](media/image3.wmf){width="3.2416666666666667in"
height="2.490972222222222in"}

During 2002, four major passenger carriers reduced their real unit costs
(estimated without fuel and oil expenses). United had the largest
decline\--down 7.6 percent, followed by Southwest with unit costs
declining 2.7 percent. US Airways showed the largest increase, with unit
costs up 12.6 percent.

![](media/image4.wmf){width="3.2416666666666667in"
height="2.490972222222222in"}

System average real operating cost per available seat mile (excluding
fuel and oil) for the major passenger carriers was 9.4 cents in 2002,
down 0.6 percent from 2001. System real unit costs (including fuel and
oil) decreased 3.7 percent. In 2002, Southwest had the lowest operating
cost (excluding fuel and oil) per available seat mile (6.15 cents). The
highest unit cost among the major network carriers was US Airways with
13.53 cents.[^2]

![](media/image5.wmf){width="3.2472222222222222in"
height="2.4208333333333334in"}

In 2002, U.S. large commercial airlines posted a net loss of
\$9.8 billion, a deterioration of \$5.4 billion versus a net loss of
\$4.4 billion recorded in 2001. The next two graphs show operating and
net profit and loss for the 10 major passenger air carriers.[^3] Of the
10 carriers, 9 had operating losses in 2002. Only Southwest reported
operating profits while American recorded the largest operating and net
losses of any of the major passenger carriers.

![](media/image6.wmf){width="3.2472222222222222in"
height="2.4208333333333334in"}

![](media/image7.wmf){width="3.2472222222222222in"
height="2.4208333333333334in"}

During the next few years, cost control will be key to the industry's
ability to return to sustained profitability. Revenue will remain at low
levels due to continued weak demand and increased competition from low
fare carriers. Insurance costs, security enhancements, and fuel costs
are expected to increase and further widen the gap between revenues and
costs. In the long run, revenues rise through a combination of higher
yields and economic growth expanding activity.

![](media/image8.wmf){width="6.997916666666667in"
height="9.054166666666667in"}

Costs will increase with higher outlays for security enhancements and
infrastructure improvements. The industry will need to lower its
non-security and infrastructure related costs in order to return and
sustain profitability throughout the forecast period.

SCHEDULED PASSENGER

TRAFFIC AND CAPACITY

In 2002, total (domestic plus international) scheduled U.S. large
carrier revenue passenger miles (RPMs) declined an unprecedented
9.7 percent. Enplanements also decreased, falling 10.5 percent. Since
2000, system RPMs have decreased by 10.4 percent, despite a
2.3% increase in real U.S. Gross Domestic Product (GDP).

![](media/image9.wmf){width="3.2416666666666667in"
height="2.4743055555555555in"}

System available seat miles (ASMs) decreased 9.8 percent in 2002, the
largest decrease ever. System load factor remained constant at
71.2 percent.

Domestic Passenger

Traffic and Capacity

In 2002 the fall in demand following the September 11^th^ attacks,
coupled with a soft economy, resulted in RPMs falling 8.3 percent and
enplanements 10.5 percent. Traffic declines were largest in the first
quarter and then diminished throughout the balance of the year. Despite
capacity shrinking by 8.4 percent, the load factor remained steady at
70.0 percent.

![](media/image10.wmf){width="3.265277777777778in"
height="2.4743055555555555in"}

![](media/image11.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image12.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image13.wmf){width="6.997916666666667in"
height="9.300694444444444in"}

U.S. Large Air Carriers'

International Passenger

Traffic and Capacity

A steep decline in demand following the September 11^th^ attacks coupled
with weak world and U.S. economic growth resulted in total U.S. large
carrier international traffic falling an unprecedented amount in 2002.

In 2002, total international RPMs decreased 13.5 percent, with RPMs
recording their lowest level since 1996. Enplanements also decreased,
though less than RPMs, down 10.1 percent. The decline in both RPMs and
enplanements was more pronounced in the first half of the year as the
immediate impacts of the September 11^th^ attack and capacity reductions
were felt. The second half of 2002 saw year-over-year declines of about
11 percent until September.

Total international ASMs fell 13.7 percent in 2002. The decline was
sharpest in the first half of the year and diminished thereafter.
Through the first 6 months of the year, capacity was down 17.7 percent,
then decreased 14.4 percent in the 3^rd^ quarter and fell 5.5 percent
during the 4^th^ quarter, which included the impacts of the September
11^th^ attacks in 2001. Relative to 2000, international capacity was
down 11.1 percent. Capacity declines in the Atlantic, Asia/Pacific, and
Latin American markets were 13.9, 20.0, and 3.8 percent, respectively.

![](media/image14.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image15.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image16.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image17.wmf){width="7.006944444444445in"
height="9.340277777777779in"}

Atlantic Routes

Transatlantic RPMs in 2002 declined for a 2^nd^ consecutive year, the
first time since 1974-1975. RPMs were down 13.2 percent from
86.2 billion to 74.8 billion. Enplanements fell slightly less, down
12.3 percent. Traffic decreases were greatest in October and November,
immediately following the September 11^th^ attacks. Compared to the same
periods in 2001, traffic was down 15 percent from December through
April, down 10 percent from May through August, before turning positive
in September.

Capacity in Atlantic markets followed a similar pattern to traffic. The
largest decreases were in the months immediately after the attacks,
followed by a gradual return of flying throughout the winter and summer
seasons. Capacity declined 13.9 percent for the year and the load factor
increased 0.6 points to 77.0 percent.

Immigration and Naturalization Service (INS) data, which is compiled by
the U.S. Department of Commerce, showed that in CY 2001 U.S. flag
carriers' market share in the region increased for a 2^nd^ consecutive
year to 40.0 percent. This marks the first time since 1987-88 that U.S.
flag carrier's market share has increased in consecutive years. U.S.
flag carriers' market share peaked in 1988 at 48.5 percent.

In 2002 the U.S. passenger carriers had an operating loss of
\$771.8 million on routes in the market*,* a \$467.4 million
deterioration from the \$304.5 million operating loss recorded in 2001.
After recording 5 consecutive years of profits, U.S. passenger carriers
have recorded losses the past 2 years. Weak demand associated with the
September 11^th^ terrorist attacks, was the primary factor behind the
operating losses.

![](media/image18.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image19.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image20.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image21.wmf){width="7.006944444444445in"
height="9.256944444444445in"}

Latin American Routes

Traffic demand to Latin America (destinations in South America, Central
America, Mexico, and the Caribbean) fell in 2002, although less than
other international markets. In 2002, RPMs and passenger enplanements
were down 7.5 and 3.6 percent, respectively.

After declining an average of 20 percent in October and November,
traffic on a year over year basis was down an average of 6.6 percent
between December and August and then was up 18.8 percent in September.
Capacity decreases were slightly less than traffic decreases until April
and then were considerably less than traffic decreases, resulting in
load factor decreasing to 66.5 percent---down 2.7 points from the 69.2
percent achieved in 2001.

Reversing a decade long trend, the average trip length decreased
4.1 percent (68.7 miles) in 2002, as carriers pulled back from the deep
South American (Argentina, Brazil, Chile) markets and expanded into
Caribbean markets. Despite the fall in trip length in 2002, since 1991
the average trip length has increased by 27.2 percent, or 346.6 miles,
rising from 1,272.6 to 1,619.2 miles.

The U.S. passenger carriers had an operating loss of \$448.7 million in
Latin markets in 2002, a \$489.6 million swing from the \$40.9 million
operating profit in 2001.

The events of September 11^th^ are having major impacts on carriers in
the region. Latin American carriers, like their U.S. counterparts, are
focused on survival. As regional demand recovers to more normal levels,
efforts to privatize and restructure Latin American carriers will
accelerate. Clearly, these industry changes, along with the move towards
open-skies agreements, will pose additional challenges for the U.S.
carriers over the next several years*.*

![](media/image22.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image23.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image24.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image25.wmf){width="7.006944444444445in"
height="9.256944444444445in"}

Pacific Routes

Traffic in Asia/Pacific markets decreased sharply in 2002, with RPMs
down 17.6 percent compared to 2001. Following declines of 42 and 33
percent in October and November respectively, traffic declines ranged
between 14 and 19 percent for the balance of the year until September.
Enplanements also declined sharply, down 18.7 percent.

U.S. flag carrier ASMs decreased by 20 percent as carriers cut capacity
to the region following the September 11^th^ attacks. ASMs were down in
every month of the year. The load factor for the region was up 2.3
percentage points to 77.5 percent. Load factor was down in October and
November and was up for most months thereafter.

Large declines in both traffic and yields resulted in large operating
losses for U.S. passenger carriers in the Pacific market. Following an
operating loss of \$661.8 million in 2001, U.S. passenger carriers
recorded an operating loss of \$735.5 million in 2002 in the market*.*

In the near-term, restructuring of the Pacific market, prompted by the
September 11^th^ attacks continues as carriers consolidate routes,
rationalize fleets, and even merge. Over the long-term the survivors of
the market changes should benefit from open-skies agreements reached
with Malaysia, New Zealand, Taiwan, Singapore, Brunei, and Korea, as
well as liberal bilateral agreements with Japan and China. These
agreements will stimulate aviation growth by providing travelers with
service to more cities and lower fares.

![](media/image26.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image27.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image28.wmf){width="3.2472222222222222in" height="2.56875in"}

![](media/image29.wmf){width="7.006944444444445in"
height="9.256944444444445in"}

NONSCHEDULED

TRAFFIC AND CAPACITY

The number of nonscheduled (charter) passengers flying on U.S.
commercial air carriers fell an estimated 9.2 percent in 2002, to a
total of 8.3 million. Domestic enplanements declined 11.3 percent, while
international enplanements decreased 6.8 percent. Nonscheduled RPMs
declined 2.7 percent while ASMs increased 6.2 percent, which resulted in
a decline in the load factor from 68.3 to 62.5 percent.

AIR CARGO TRAFFIC

U.S. air carriers flew 27.3 billion revenue ton miles (RTMs) in 2002,
down 4.0 percent from 2001. Domestic cargo RTMs (13.1 billion) were down
5.9 percent, while international RTMs (14.2 billion) decreased
2.2 percent. These declines reflect the slow domestic and worldwide
economic growth in 2002.

Air cargo RTMs flown by all-cargo carriers were 63.4 percent of total
RTMs in 2002; passenger carriers flew the remainder, or 36.6 percent of
the total. Total RTMs flown by all-cargo carriers decreased 0.2 percent
in 2002, from 17.4 billion to 17.3 billion. Total RTMs flown by
passenger carriers were 10.0 billion in 2002 (down 10.0 percent). The
larger decline by passenger carriers relative to all-cargo carriers is
due to the reduction in schedules of the passenger carriers as well as
the new FAA security directive.

**INDUSTRY STRUCTURE AND RISK**

The present forecasts (2003 to 2014) are based upon a set of assumptions
concerning changes in the economy, structural changes in the air carrier
industry, and changes in the market for air transportation. The
probability of achieving these forecasts depends on realizing the
economic projections discussed in Chapter II and industry assumptions
discussed in the following section.

STRUCTURAL CHANGES

Significant structural changes in both domestic and international
markets were underway well before the September 11^th^ attacks. These
have intensified competition and moved carriers to increase efficiency
and productivity, reduce operating costs, and lower fares. The events of
September 11^th^ accelerated the pace of these changes. In addition,
with approximately 25 percent of industry capacity mired in bankruptcy,
the potential for significant structural change is as high as it has
been since deregulation of the industry.

Encouraged by the financial success of Southwest Airlines, large profit
margins on many routes, and the weakened financial condition of many of
the larger network carriers, low-cost carriers are expanding rapidly in
the domestic market. The benefits to the American consumer brought about
by low-cost, low-fare airlines have been substantial and are well
documented. Low cost, low-fare carriers such as Southwest, JetBlue,
Airtran, and Frontier have added routes and planes, even while the
larger network carriers have been cutting routes and shrinking their
fleets. In FY 2002, Jet Blue initiated service at Washington-Dulles and
Long Beach, while Airtran launched service out of

Baltimore. The expansion of these low-cost, low-fare carriers will help
to ensure that competitive forces remain strong in the industry.

With net losses approaching \$10 billion in FY 2002, network carriers
are under intense pressure to reduce their unit costs. These carriers
have responded by reducing employees and employee wages, eliminating
unprofitable routes or transferring those routes to aligned commuter
carriers, seeking work rule changes, deferring aircraft deliveries, and
adjusting schedules at key hubs to smooth out the flow of departures and
arrivals. In the aftermath of the terrorist attacks on September 11^th^,
U.S. carriers announced employee reductions totaling more than
91,000 and the retirement of more than 400 aircraft by April 2002.
Despite these measures, losses have continued and two carriers, United
and US Airways, are operating in Chapter 11 bankruptcy. In addition,
Delta has recently announced the relaunching of a low fare subsidiary
airline in order to stem the increase in market share by the low fare
carriers. Delta expects the unit costs of the subsidiary to be
competitive with the low fare carriers primarily through higher
utilization and flexibility in work rules. Other carriers such as
American, are struggling with ways to reduce their costs in order to
stay competitive. In addition, almost all of the major carriers have
negotiated or are negotiating with aircraft manufacturers to modify
delivery schedules in 2003-04.

While network carriers seek ways to reduce their unit costs, many
obstacles exist which will make their task more difficult. Labor costs,
which constitute the largest share of operating expenses, will be a
prime target for airline management cost reduction plans. Organized
labor is reluctant to give up gains in pay and benefits it has achieved
in the past few years. The United pilots' agreement, reached in August
2000, after months of difficult negotiations, became the catalyst for
higher wage demands and/or renewed labor unrest. Shortly after the
United pilots' agreement was reached, pilots at Delta and mechanics at
Northwest received contracts that contained significant wage increases.
In FY 2002, United reached an agreement with its mechanics that provided
for a significant increase in wages. Many analysts are waiting to see if
the bankruptcy filings of US Airways and United will set the stage for a
round of labor cost reductions throughout the industry. US Airways has
been successful in negotiating sizeable wage concessions with its
employee groups and it is assumed that United will realize similar labor
cost reductions, setting the stage for their emergence from bankruptcy
as lower cost competitors. Their success in achieving labor cost
reductions will increase the pressure on the other major network
carriers (American, Continental, Delta, and Northwest) to reduce their
labor costs in order to stay competitive. However, it to be seen if the
current financial turmoil will serve as a catalyst for an industry-wide
moderation in wage and benefit growth or even industry-wide wage
reductions.

Another obstacle that carriers are facing is union resistance to their
plans to accelerate the transfer of routes from network carriers to
their regional affiliates. The reduction in demand following September
11^th^ has spurred efforts by the network carriers to make these changes
and has weakened resistance of labor groups (particularly pilots) to
such plans. However many of the labor contracts that network carriers
have negotiated place limits on the number of regional aircraft that can
be substituted for mainline aircraft. With the rapid transfer of routes
from network carriers to regional affiliates, many network carriers are
bumping up against these limits. In addition, once demand recovers, it
remains to be seen if the network carriers will seek to reverse these
route transfers. For now, the transferring of routes is occurring at a
rapid pace. During the past year, US Airways, Delta, Northwest,
American, and United have announced the shifting of numerous routes from
the mainline carrier to their regional affiliates.

Network carriers have also expanded their domestic code-share alliances
in an attempt to increase revenues. In recent months the U.S. Department
of Transportation has conditionally approved both the United-US Airways
and Continental/Delta/Northwest domestic code share agreements. By
agreeing to code share, the carriers hope to increase revenues by
gaining access to new passengers through the network of their code share
partner(s). The carriers argued that these agreements would benefit
consumers by offering on-line service to travelers in markets that do
not have such service, as well as improved access to frequent flyer
programs and airport lounges. Opponents of the code share agreements
were concerned about the anti-competitive nature of such agreements
including the potential for collusion on pricing and the impacts of
dominant combined market share at key cities and the resulting
detrimental effects on entry by competitors.[^4] Measured in terms of
RPMs, the code-share agreements involve carriers that have almost 60
percent of the domestic market. American, which is the only large
network carrier not involved in a domestic code share agreement, will
most likely lose some market share. In addition, the growth in market
share of the low cost/low fare carriers may slow as these carriers may
not start service in markets that are dominated by the alliances or
abandon some markets in the face of competition from the alliances.

With United in bankruptcy, the possibility exists for the most
significant change in international markets since the sale of the Pan Am
and TWA Atlantic route networks in the late 1980's. Many believe that to
satisfy the demands of its creditors, United will have to sell assets.
Carriers such as American, Delta, or Northwest could gain access to new
markets and introduce new competition. In addition, international
markets have historically been subject to a series of bilateral
agreements. Such agreements, which started back in the 1940s, have
severely restricted competition. History has demonstrated that
competition improves efficiency, productivity, and worldwide economic
growth. At the present time, DOT is attempting to create a more
competitive international aviation environment for the U.S. airlines
through the expansion of open-skies agreements.

Discussions con­cerning the liberalization of markets are pro­ceeding with
other countries throughout the world. However, the recent ruling by the
European Court of Appeals, which essentially voids open skies agreements
that have been negotiated with individual countries within the European
Union, has prompted a great deal of uncertainty as to the future of open
skies. Prior to the ruling, the US and Great Britain had held
discussions about an open-skies agreement. Ultimately the discussions
went nowhere as the U.S. rejected a proposed alliance between British
Airways (BA) and American Airlines (AA). While many would have liked an
open-skies agreement, the "price" (approval of the AA/BA alliance)
proved too steep for the airlines involved. The expansion of "open
skies" agreements over the next several years could significantly
increase the level of activity of the more efficient U.S. carriers
vis-à-vis foreign flag carriers.

The industry is expected to continue toward globalization, through the
use of code-sharing agreements and alliances. Four large alliances have
formed and continue to seek members and add network connections. The
four are SkyTeam (Delta-Air France), Star Alliance (United-Lufthansa),
Oneworld (American-British Airways), and Northwest-KLM. The alliances
have been able to reduce costs through economies of scale. They have
also increased revenues and passenger traffic by expanding the reach of
the networks and providing seamless travel for their passengers.

To summarize, the industry is dynamic, but faces a period of great
uncertainty in the aftermath of the September 11^th^ attacks and the
bankruptcy of United and US Airways. Some trends that were taking place
prior to September 11^th^ will be accelerated, while others will not
proceed as rapidly as before. The outcome could fundamentally alter the
structure of the industry. Although some of these changes could result
in decreased short-term demand, in the long run the net effect will be
and reduced unit costs and fares, increased air carrier efficiency, and
increased demand for air travel.

MARKET CHANGES

While September 11, 2001 was a watershed date in aviation, a number of
important trends were occurring in the industry prior to that date and
are expected to continue although the pace may be slowed as the industry
adjusts to a new reality. Among these are: 1) the ability of air
carriers to more closely adjust the number of discounted seats to
maximize revenues and profits; 2) the growth of competition by low-cost
carriers; 3) increased numbers of routes being transferred from mainline
to regional operators; 4) increased efficiency and productivity; and 5)
declining real fares. In the near-term, the increased time and cost of
new security measures will offset some of the benefits of the trends
mentioned above. In addition, the reduced propensity to fly by both
business and leisure passengers will diminish some of the benefits.
However, given the precarious financial condition of the industry, labor
may be more accommodating in wage negotiations. In the long run we see
the cost of business travel falling, reducing the sensitivity of
business travelers to the cost of air trips. It is anticipated that
short-haul markets will see a rebound in traffic with improvements in
security processing times. It is also expected that consumers will
continue to prefer pleasure travel by air versus other modes and a
long-term expansion of the economy.

Business demand for air travel has become more price elastic for three
reasons. First is the increase in the availability of substitutes. Not
only has new technology, such as videoconferencing, expanded rapidly and
become more widely accepted but also the development of more productive
and efficient corporate aircraft (fractional ownership for example) has
given business travelers more choices than previously. Second, concerns
over security have reduced the propensity of business travel, especially
over shorter distances. Since the September 11^th^ attacks, the
advantages of air travel versus other modes of transport for short-haul
travel has been reduced due to concerns over security as well as the
increased processing time. For shorter haul trips this processing time
is a significant percentage of the total travel time and as this
percentage increases, more business travelers will use substitutes. It
remains to be seen whether this becomes a long run trend or dissipates.
Third, as the relative price of business travel increased vis-a-vis
discounted travel, business travelers became more tolerant of the
conditions of discounted travel (advance purchase, Saturday night stays,
etc.) in order to qualify for the discounts.

In the future, we believe that business travelers will see some relief
from the skyrocketing cost of business travel. With successful cost
restructuring and the resulting lower cost structures, carriers will be
able to offer lower business fares. In addition, improved internet
search engines will allow business travelers more efficient ways to
search and find low fares.

The demand for leisure travel increased during the 1990s because of
increasing consumer preference for air travel, increasing disposable
income, expanding personal wealth, and lower relative fares. The 1998
Air Travel Survey conducted by the Air Transport Association of America
showed that the percent of individuals who have ever flown increased
from 74 percent

in 1990 to 81 percent in 1997. Despite the events of September 11^th^,
the trends mentioned above are expected to lead to a continued increase
in the demand for leisure travel.

It was clear that in the immediate aftermath of the events of September
11^th^, the public's propensity to fly was reduced. Despite the fact
that more than a year has passed, it is too soon to tell if the
reduction has become permanent. It is also evident that demand has not
rebounded in the way that many analysts thought. However, it remains to
be seen whether the modest recovery in demand forecast is indeed due to
a permanent shift in the propensity to fly, or some other reason. If the
reduction is indeed permanent, then the future growth in demand may not
approach historic levels even with vigorous economic growth.

While the relative price of flying has decreased consistently since
deregulation, the airline industry has, for the most part, been
profitable, albeit marginally. However, the events of September 11^th^
and the ensuing financial turmoil has resulted in fewer airlines,
diminished productivity (at least temporarily), and record losses.
Adding to carrier woes, the increase in the amount of taxes and fees
added to the ticket price in the past few years has widened the gap
between what customers pay and the revenue the airlines receive. The
industry has been lobbying very hard for tax relief to help it return to
profitability. One area debated is who should pay the increased cost of
security in the post September 11^th^ world. The airlines argue that
such functions are the responsibility of the federal government and as
such the costs should be borne by the government. In addition, removal
of the security fee would provide a measure of tax relief that the
industry is seeking. The government position is that the users of the
system should bear part of the increased security costs. Should the
government position prevail in the long run, the associated costs to
both the airlines and consumers would reduce demand. It is not clear
that future productivity increases, capacity growth, and competition
will be sufficient to keep relative fares declining. These market
conditions would make it difficult for the industry to achieve
acceptable rates of return on capital.

GLOBAL RISKS AND UNCERTAINTIES

The forecasts of scheduled commercial air carrier demand are based on a
specific set of assumptions concerning economic growth in the United
States and abroad, the political environment in which they will take
place, Government tax policy, and changes in industry structure. The
uncertainties surrounding these assumptions are larger than in prior
forecasts and could cause outcomes to be significantly different from
those forecast. Developments that could alter the forecasts include:

-   additional terrorist attacks utilizing commercial aircraft in the
    U.S. or abroad;

-   war with Iraq;

-   the impact of regional jets;

-   the impact of additional security measures on costs and travel
    convenience;

-   the continued recovery of consumer confidence in flying commercial
    airlines;

-   the strength and speed that the United States and world economies
    emerge from recession;

-   the number of business cycles that occur over the forecast period;

-   the movement of future oil prices;

-   the degree of competition in both the domestic and international
    markets;

-   the potential for consolidation within the industry;

-   how far carriers can reduce unit costs;

-   how fast yields decline due to increased competition and cost
    reductions.

In addition, the network of bilateral pacts that the United States
currently has in place in Europe, the Far East, and South America could
significantly inhibit the expansion plans of air carriers operating in
these international regions and restrain traffic growth. On the other
hand, the move towards deregu­lation, privatization of national carriers,
and expansion of open-skies agreements could result in significantly
greater traffic growth.

**DOMESTIC TRAFFIC: ASSUMPTIONS, MODELS AND FORECASTS**

During the past several years the FAA has adopted a decision-theoretic
forecasting system. The approach is generally accomplished in two
stages. Initially, projections are made with the use of econometric and
time series models. The model equations and outcomes are then adjusted
based upon "expert industry opinion" to arrive at subsequent forecasts
for use in the decision-making process. As was done last year, near term
forecasts (those for 2003 and 2004) have been developed utilizing a set
of assumptions regarding capacity and expert judgment as to the degree
and timing of the industry recovery from the events of September 11^th^.
Forecasts for the years 2005 and beyond were based on results derived
from the models described below.

In developing the short-run demand forecasts it was assumed that: 1) no
new terror attacks against U.S. airlines will occur; and 2) U.S. large
carriers will not reach pre-September 11^th^ levels of capacity until
2005. The key assumption of the long-run demand forecasts is that the
historic relationship between demand and economic growth has not been
permanently impacted by the events of September 11^th^ and will resume
by 2005. In addition, it was assumed for the long-run demand forecasts
that: 1) industry improve­ments in efficiency and productivity continue
but at less than historical rates; 2) taxes and fees on airline tickets
remain at current levels; 3) competitive forces remain strong; and 4)
capacity is continuously adjusted so that demand and supply are in
equilibrium.

Since models are relatively simple descriptions of very complex systems,
they cannot account for all the political, social, psychological, and
economic factors and their interactions that will lead to a particular
set of outcomes. Therefore, it is essential to use judgment to account
for the complexities of the operating environment. This can be
accomplished by adjusting the exogenous variables, adjusting the model
outputs, or revising the models initial parameter estimates.

FAA periodically reviews and adjusts its projections based on forecasts
and discussions with analysts outside FAA. Some important outside
sources for adjusting FAA's projections are forecasts developed by: 1)
the International Civil Aviation Organization's (ICAO) Asia/Pacific Area
Traffic Forecasting Group (May 2002); 2) ICAO's North Atlantic Traffic
Forecasting Group (May 2002); and 3) the National Academy of Sciences'
Transportation Research Board Future Aviation Activities International
Workshop (September 2002).

MODELING DOMESTIC RPMS AND ENPLANEMENTS

The model used to develop the FAA's domestic commercial air carrier
forecasts relies upon a system of statistical and deterministic
equations. The pivotal equations of the system relate RPMs and
enplanements to two primary independent variables\--GDP and yield\--both
adjusted for inflation. This analytical framework for forecasting
enplanements ties the domestic forecast model closer to projected
changes in economic activity and reduces the number of subjective
inputs. This approach is expected to reduce the standard errors of the
forecasts.

Market forces quickly took hold following deregulation of the industry
in 1978. To adjust for the jointly dependent variables in the demand and
supply equations, three-stage least squares is used to estimate the
demand equations.

In recent years the amount of excise taxes and fees added on to the base
price of a ticket has increased significantly and may influence the
modal choice of travelers. In addition, as more and more consumers have
access to low base fares, the percentage of the average ticket price
that taxes and fees account for is increasing. For example, the \$200
round trip ticket to Florida may actually cost the customer \$250-\$260
after all the taxes and fees are levied. If airline demand is becoming
increasingly leisure oriented and price sensitive, ignoring the tax
impacts on behavior may lead to an overestimation of the level of demand
in the future. The traditional definition of yield does not include the
amount of taxes that the consumer paid and may represent a
misspecification of the price variable that should be used in models
estimating aviation demand. In order to address this problem, the FAA
has constructed a measure of yield that incorporates the tax and fees
paid by consumers. Both yield series move in similar fashion over time
but in recent years the gap between the two series has widened.

![](media/image30.wmf){width="3.240972222222222in"
height="2.3118055555555554in"}

Although it is aggregate demand that we forecast, it would be preferable
to use different models to estimate the two distinct components of each
market\--business and personal travel. A further refinement would
distinguish the long-haul from the short-haul market. This approach
would provide important information for developing public policy and
would most likely improve the accuracy of the forecasts. Clearly, these
markets are affected by different sets of variables, and adjust at
different rates to them.

For example, most experts in the industry would agree that the price
elasticity of demand for business travel differs from the price
elasticity of demand for pleasure travel. Further­more, theory would
suggest that business profits are a factor in determining business
travel, and that some measure of personal or family income is an
important variable affecting pleasure travel.

At this time, however, the lack of an adequate database subdivided into
these four com­ponents precludes the development of forecasts for each
market at the national level. Additional research and data collection is
necessary to advance this approach.

A more detailed description of the models used to estimate domestic
traffic and yields can be found in Appendix A.

U.S. LARGE AIR CARRIER

YIELD AND OPERATIONAL VARIABLES

Domestic Capacity

Between 1978 and 1990, domestic capacity grew an average of 5.5 percent
annually, matching the growth of traffic during the same period. From
1991 through 1997, capacity grew 2.4 percent annually. During this
period, the carriers developed the capability to rapidly adjust capacity
to changing conditions in domestic demand while pushing up load factors.
Following a capacity increase of almost 9 percent between 1998 and 2000,
capacity grew 0.4 percent in 2001, and fell 8.4 percent in 2002. The
decline in capacity for the first 3 quarters ranged between 7.7 to 13.6
percent. During the 4^th^ quarter capacity was down only 1.1 percent, as
the prior year levels were significantly impacted by the shutdown of
U.S. airspace on September 11^th^ and the subsequent capacity reductions
instituted by carriers during the last 2 weeks of September.

In 2003, capacity is forecast to decrease 0.8 percent, as capacity
reductions by the network carriers offset increases by the low fare
carriers. In 2004, capacity is forecast to grow 3.3 percent driven
primarily by higher utilization rather than fleet additions as carriers
have deferred many deliveries of new aircraft until 2005 or beyond. For
the balance of the forecast, domestic capacity is forecast to grow 3.2
percent a year. Over the 12-year forecast period, the average annual
increase in domestic ASMs is forecast to be 2.9 percent, with domestic
ASMs totaling 893.6 billion in 2014.

Passenger Yield

During the period 1970 through 1977, domestic real yield declined at a
rate of 1.3 percent a year. Since deregulation, the decline in real
yield has accelerated, so that by 2001 real yield fell to 13.76 cents,
an average yearly decline of 2.2 percent\--1.7 times higher than the
rate achieved during the 1970s. In the 1970s the dominant reason for the
decrease was the introduction of large numbers of more efficient jet
aircraft into the air carrier fleets. In the 1980s the decline resulted
from the airlines adjusting to deregulation by rationalizing their route
structures and increasing labor productivity.

Financial weakness of the industry in the early 1990s along with excess
capacity, the growth of new-entrant, low-cost carriers, and the
expansion of Southwest into new markets has brought about intense fare
competition. Increased competition has pushed high-cost carriers into
restructuring, increasing productivity, and lowering unit costs.

In 2001 nominal yield increased in the first two quarters, then declined
sharply as the weak economy reduced business traffic. Nominal yield was
down in all quarters of 2002, as the fall in demand following the
September 11^th^ attacks and a weak economy forced carriers to heavily
discount fares in order to attract traffic. Real yield fell 13.7 percent
for the year, the largest decline in the modern era.

Nominal yield is forecast to increase 3.3 percent in 2003 as the heavy
discounting used to stimulate demand from depressed levels following the
September 11^th^ attacks wanes and business and leisure demand improve.
Yield will be down versus 2002 in the first quarter but turns positive
for the balance of the fiscal year. Yield continues its upward trend in
2004 with nominal yield up 5.3 percent as discounting is less prevalent,
demand returns to more normal

![](media/image31.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

levels, and capacity remains tight as carriers will be hesitant to
increase too rapidly.

![](media/image32.wmf){width="3.2472222222222222in"
height="2.5388888888888888in"}

In the long run, the effects of continued competition (especially from
low fare carriers), productivity increases, and expanding capacity more
than offset rises in jet fuel and security costs. It is also assumed
that the air carriers will optimally adjust their capacity to meet
future demand. During the period 2005 through 2014, nominal yield
increases 0.9 percent a year, while real yield declines 1.4 percent.
Over the 12-year forecast period, nominal yield increases from 11.87
cents in 2002 to 14.30 cents in 2014, with real yield decreasing
0.6 percent a year.

Passenger Trip Length

In 2002 the average domestic passenger trip length for large U.S.
carriers increased 22 miles. This was due largely to the continued
turning over of short-haul routes to code-sharing regional partners and
the expansion of Southwest and other low fare carriers into longer-haul
markets.

![](media/image33.wmf){width="3.2416666666666667in"
height="2.490972222222222in"}

The rapid integration of new state-of-the-art aircraft into the
regional/commuter fleet\--especially regional jets with ranges of up to
1,500 miles---has begun to significantly alter the route system of the
industry. These new aircraft are enabling regional/commuters to greatly
expand the number and types of markets they serve.

In the near-term, the turnover of short‑haul markets by the majors to
their code‑sharing regional partners will continue as the majors try to
reduce costs. In addition it is assumed that short-haul demand will
recover more slowly than in other markets as there are greater
substitution opportunities for travelers in these markets relative to
long-haul markets. As a result, domestic trip length is forecast to
increase 6.0 miles in 2003. By 2004, the pace of short-haul market
transfers slows and continued rapid growth in the short-haul low fare
markets results in domestic trip length declining by 7.5 miles. During
the period from 2005 to 2014, expansion of low-cost carriers into
longer-haul markets, restructuring of the regional/commuter fleets, and
expansion of point-to-point service, are expected to increase the
domestic trip length modestly. For the entire forecast period, the
average trip length increases 0.5 miles per year, increasing from 907.5
miles in 2002 to 913.8 miles in 2014.

Average Aircraft Size

Between 1986 and 1993, the average number of seats for the large
domestic Form 41 carriers remained relatively stable at 154.5, with a
standard deviation of only 0.4 seats. From 1993 through 2001, the
average number of seats fell from 154.7 to 147.1 seats. The large
increase in domestic short-haul traffic by the low-cost, low-fare
carriers (Southwest, Airtran, etc.) is the most likely explanation for
this decline.

In 2002, the trend of declining average seat size was reversed as the
average number of seats for the large domestic Form 41 carriers
increased 0.8 seats. The reason for this increase was that the large
network carriers accelerated the shift of smaller, less dense markets to
affiliated regional carriers and at the same time, retired a number of
their smaller B-737's and DC-9's.

Current fleet plans by the large air carriers show that the average
aircraft seat size is increasing. However, following the events of
September 11^th^, the major carriers have deferred taking delivery of
new aircraft. Thus increases in aircraft size will be very small in the
near term. Those aircraft that will enter the fleet are larger than
those in the existing fleet. The result will be an increase in the
average seat size throughout the forecast period.

The seating capacity for domestic large air carriers is forecast to
increase, on average, 0.9 seats per year, with modest increases in
2003 and 2004 of 0.5 and 0.8 seats, respectively, then rise 1.0 seats
per year for the balance of the forecast. In 2014, the average aircraft
seat size will be 159.2 seats, up from 147.9 seats in 2002.

Passenger Load Factor

Domestic load factor was relatively stable over the period 1978 through
1993, ranging from a low of 57.7 percent to 63.0 percent. From
1993 through 2000, the load factor increased 9.8 percentage points,
expanding from 61.4 percent to 71.2 percent. During this period carriers
developed the capability to rapidly adjust capacity to changing
conditions in both the domestic and international markets to meet demand
while pushing up load factors.

In 2002, domestic load factor remained unchanged from 2001 at 70.0
percent. Year-over-year domestic load factor was down 2.7 points in the
1^st^ quarter, as demand fell precipitously following the attacks, then
was positive for the balance of the year as capacity reductions
generally matched the reduced level of demand. With the slight capacity
decrease in 2003, domestic load factor is forecast to increase 2.5
points to 72.5 percent in 2003. Year-over-year quarterly increases of
0.5 to 4.2 points are forecast, with gradual improvement throughout the
year as the full extent of the anticipated capacity reductions don't
occur until the 2^nd^ half of the year.

Load factor is projected to increase 0.4 points in 2004 to 72.9 percent
with year-over-year increases in the early part of the year. Following a
slight decrease in 2005, load factor increases are projected for the
remainder of the forecast period as the industry returns to a more
stable operating environment, resulting in a load factor of 75.5 percent
by the end of the forecast period.

FORECASTS

Revenue Passenger Miles

During the economic expansion of the 1990's, domestic RPMs grew an
average of 4.0 percent per year over the 10-year period. Scheduled
domestic RPMs for U.S. large carriers totaled 443.6 billion in 2002,
down 8.3 percent compared to the 1.3 percent decrease in 2001. Traffic
declined 13.3 percent during the 1^st^ half of the year but improved
gradually throughout the period. Traffic declined in the 3^rd^ quarter
by 7.6 percent and then rose 1.1 percent in the 4^th^ quarter, solely
because of September's 19.8 percent increase.

Traffic is not expected to rebound sharply. Domestic RPMs for the large
carriers in 2003 are forecast to be up 2.7 percent with faster growth
occurring in the 1^st^ half of the year. The modest recovery of traffic
continues in 2004, with growth of 3.8 percent. As the economy returns to
its long-term growth rate in 2005, traffic increases, on average, 3.6
percent a year for the remainder of the forecast period. The average
annual increase in domestic RPMs over the 12-year planning horizon is
forecast to be 3.6 percent, with domestic RPMs for the large carriers
reaching 674.8 billion in 2014.

Passenger Enplanements

U.S. scheduled domestic large air carriers enplaned a total of 488.8
million passengers in 2002, down 10.5 percent from 2001, and the first
back to back decline in annual enplanements since 1980-81. Similar to
RPMs, domestic enplanements were down throughout the year with
improvement occurring throughout the period. The 18.7 percent decline in
the 1^st^ quarter was the greatest decline in year-over-year
enplanements in the post deregulation era. Enplanements are forecast to
increase 2.0 percent in 2003 with faster growth in the 1^st^ half of the
year. In 2004, modest growth of 4.7 percent is forecast, with growth
fairly steady throughout the year. For the remainder of the forecast
period, enplanements increase 3.5 percent a year. The growth in
enplanements is projected to average 3.5 percent annually during the
12-year forecast period, with the number of large carrier domestic
enplanements reaching 738.4 million in 2014.

**INTERNATIONAL PASSENGERS: METHODOLOGY AND FORECASTS**

MODELING INTERNATIONAL RPMS AND ENPLANEMENTS

Similar to the forecasts of domestic traffic, forecasts for U.S. flag
carriers' international RPMs and enplanements for the three world
regions\--Atlantic, Pacific, and Latin America, are a combination of
near-term expert judgment forecasts coupled with longer term forecasts
based on the forecast methodology described below. Forecasts for 2003
and 2004 were developed utilizing assumptions about capacity and the
recovery in demand. Forecasts for 2005 and beyond were developed by
initially estimating total passengers (U.S. and foreign flag carriers)
for each world region based on the economic activity in both the region
and in the U.S. Second, projections of U.S. and regional GDP, coupled
with models relating U.S. flag carriers' enplanement growth to total
passenger growth, plus assumptions concerning U.S. market share in each
region, are used to forecast U.S. flag carriers' international
enplanements. The forecasts of enplanements and assumptions

![](media/image34.wmf){width="6.997916666666667in"
height="9.136111111111111in"}

![](media/image35.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

concerning average trip length are then used to derive U.S. flag
carriers' international RPM projections. This approach ties U.S. flag
carrier activity in the international regions to total demand and
should, over the long-term, increase

the accuracy of the FAA facility workload and trust fund revenue
projections.

Although economic theory suggests that fares, exchange rates, and
relative country consumer prices should be important arguments in an
international demand equation, the analyses clearly demonstrate that
aggregate economic activity explains a large percentage of the
variability in demand and is sufficient to develop accurate macro
international forecasts.

However, these aggregate results may differ significantly from micro
analyses of individual markets categorized by distance, type of flying,
and level of competition.

ATLANTIC MARKET

U.S. Large Air Carrier Yield and Operational Variables

Capacity

After increasing 32.6 percent between 1996 and 2001, U.S. carrier
capacity in Atlantic markets decreased 13.9 percent in 2002.
Year-over-year capacity was down in every month except September with
the largest decreases occurring between October and February. Based on
published OAG schedules and discussions with carriers, capacity
increases during the next few years are expected to be modest. In 2003,
capacity is projected to increase 3.4 percent with capacity growing
faster in the 1^st^ half of the year and then slowing as anticipated
cuts by United are implemented.

Atlantic market capacity in 2004 is projected to increase just 1.4
percent with year-over-year increases not occurring until the later half
of the year. For the period 2005 through 2014, forecast capacity growth
averages 4.6 percent per year with the rates of growth diminishing over
the course of the forecast. The average annual growth over the 12-year
forecast period is 4.3 percent with Atlantic ASMs totaling 161.1 billion
in 2014.

Passenger Yield

In 2002 current dollar yield (9.27 cents) declined 4.6 percent, while
real yield in the market dropped 6.0 percent. This followed a drop in
real yield in 2001 of 3.2 percent. Yield was down more than 10 percent
on a year-over-year basis in the 1^st^ half of 2002 as the events of
September 11^th^ led to a precipitous drop in demand that forced
carriers to offer significant discounts in order to attract traffic. In
the 2^nd^ half of the year, yield was up versus 2001 as business demand
picked up. In 2003, yield is forecast to be up modestly on a
year-over-year basis. For all of 2003, yield in Atlantic markets is
forecast to rise 2.9 percent in nominal terms, and 0.6 percent in real
terms.

Yield resumes its historic decline in real terms in 2004 despite a small
increase in capacity in the market. This reflects concerns about
possible discounting by United and other financially distressed carriers
during the slower winter months. Nominal yield is forecast to be up just
0.7 percent while real yield declines 1.3 percent. For the balance of
the forecast period, real yield is projected to decline 0.6 percent a
year, while nominal yield is expected to increase at an annual rate of
1.7 percent. For the period 2002 through 2014, nominal yield increases
from 9.27 to 11.29 cents.

![](media/image36.wmf){width="3.2472222222222222in"
height="2.5388888888888888in"}

Passenger Trip Length

In 2002 the average passenger trip length in the Atlantic market
decreased 43.1 miles, the largest decrease since 1986. Most carriers
recorded decreases in trip length with American (including TWA)
recording the largest decrease. Since 1990, average trip length has
increased from 3,341.4 miles to 4,168.7 miles\--up 827.3 miles. The
increase in average passenger trip length over the period was primarily
due to more direct flights and expanded service into Central and Eastern
Europe. In the future we expect that trip length will increase with
expanded service from non-East Coast U.S. gateways, especially in light
of anticipated service reductions by United at Dulles.

The average trip length is forecast to increase only 8 miles in 2003 as
capacity additions by the industry (mostly returning to markets
abandoned or frequency reductions in the wake of the September 11^th^
terrorist attacks) will lead to a greater share of the traffic flying on
longer haul routes. Passenger trip length is anticipated to increase
33.0 miles in 2004 and then moderate throughout the forecast and
increase an average 13.2 miles annually during the forecast period. For
the period 2002 through 2014, trip length in Atlantic markets increases
from 4,168.7 miles to 4,332.3 miles\--up 163.6 miles.

Average Aircraft Size

The average aircraft size in the Atlantic market continuously increased
during the 1970s and early 1980s as the widebody DC-10s/L-1011s and
B-747s dominated the market, peaking at 332.0 seats in 1985. Since the
mid 1980s, the advent of the B-767 and other aircraft flying
Extended-Range Twin-Engine Operations (ETOPS), has resulted in the
average seat size steadily declining. In 2002 the average aircraft size
increased slightly (1.3 seats) to 233.9 seats---98.1 seats below the
1985 peak. Over the 12-year forecast period, the average aircraft size
in the Atlantic market gradually increases as the major carriers expand
the number of non-stop city-pair services and use of larger two-engine
widebody aircraft. Average aircraft size increases 0.9 seats per year to
244.9 seats by 2014.

Passenger Load Factor

Despite the 13.9 percent decrease in capacity in 2002, the Atlantic
market load factor rose just 0.6 points from 76.4 percent to 77.0
percent as RPMs declined by 13.2 percent. Traffic fell 28.5 percent
during the 1^st^ quarter of the year but then improved, falling 12.8
percent during the 2^nd^ and 3^rd^ quarters. Traffic declined only 0.9
percent on a year-over-year basis in the 4^th^ quarter, mainly because
of the impact of the events of September 11^th^ and their aftermath on
the prior year figures.

Despite the capacity increase forecast for the Atlantic market, load
factor in Atlantic market is forecast to rise 0.8 points in 2003 as
traffic increases faster than capacity. Year-over-year increases in load
factor are forecast throughout the year. Load factor is forecast to rise
slightly in 2004 as traffic growth slightly outpaces capacity increases.
For the year, load factor in

the Atlantic market is projected to increase 0.6 points from 77.8 to
78.4 percent. Load factor increases steadily to 80 percent by 2008 as
traffic increases, driven by economic growth and falling real yields,
outpace capacity increases. For the balance of the forecast, load factor
remains at 80 percent as the market achieves equilibrium.

Forecasts

Total Passengers: U.S. and

Foreign Flag Carriers

Based on Immigration and Naturalization Service (INS) data, which is
compiled by the Department of Commerce, passengers in the Atlantic
market decreased 10.3 percent in CY 2001 (the latest full year for which
data is available). Data for the first half of 2002 indicate that
significant declines in traffic continue.[^5]

U.S. air carrier market share for the Atlantic region had been steadily
declining since 1988, when it peaked at 48.5 percent. However in 2000
and in 2001, U.S. market share increased from 38.6 percent to 40.0
percent. In 2002, preliminary data for the 1^st^ half of the year
indicate that the increase in U.S. flag carrier share continued. Based
on 1^st^ half data, we project that U.S. carrier market share will
increase significantly to 42.7 percent, the highest level since 1994.

Total passengers traveling in the Atlantic market are forecast to grow
faster than the rate of U.S. flag carriers for CY 2003 and 2004. In
CY 2003, passengers are forecast to increase 4.9 percent with the
highest rates of growth occurring in the 2^nd^ half of the year. In
CY 2004, growth is higher in the 1^st^ half of the year. For the year,
total passengers traveling in the Atlantic market are forecast to
increase 5.9 percent. For the remainder of the forecast period, total
passengers increase an average of 4.5 percent per year. Over the entire
forecast period, total passengers increase an average of 4.7 percent per
year, from 43.3 million in 2002 to 75.4 million in 2014.

The International Civil Aviation Organization (ICAO) North Atlantic
Traffic Forecasting Group (Canada, U.S., U.K., and Portugal) was formed
with the primary objective of developing forecasts of air traffic over
the North Atlantic and between North American and the Caribbean. Annual
forecasts are provided for both total passengers and aircraft movements
to support air navigation systems planning activity for ICAO and its
member states.

The Group met in May 2002 and updated its forecasts to incorporate the
effects of the September 11^th^ attacks. Copies of the 2002 report
entitled, "*North Atlantic Air Traffic Forecasts for the Years
2000-2005, 2010 and 2015,"* can be obtained from the FAA's Statistics
and Forecast Branch, Office of Aviation Policy and Plans, phone (202)
267-3355.

U.S. Large Carrier

Passenger Enplanements

U.S. scheduled air carriers in the Atlantic market enplaned a total of
18.0 million passengers in 2002, down 12.3 percent. Enplanement growth
was negative for every month of the year through August, then turned
positive in September. Atlantic passenger enplanements are forecast to
rebound in 2003, with the largest year-over-year increases occurring
early in the year. For the year, enplanements are forecast to increase
4.3 percent. Growth in passengers is forecast to

![](media/image37.wmf){width="6.995138888888889in" height="8.7625in"}

![](media/image38.wmf){width="6.997916666666667in"
height="9.136111111111111in"}

slow to 1.4 percent in 2004, with the fastest growth occurring during
the second half of the year. During the period 2005 through 2014,
enplanements are forecast to increase 4.5 percent per year on average,
stimulated by economic growth and falling real yields. For the entire
12-year forecast period, enplanements increase on average 4.3 percent
annually. The number of Atlantic market enplanements reaches 29.7
million in 2014---65.6 percent higher than in 2002.

U.S. Large Carrier

Revenue Passenger Miles

From 1991 through 2000, Atlantic market RPMs continuously increased at a
rate of 7.1 percent per year, due to strong, steady economic growth in
the U.S. and Europe and declining real yields. After falling 1.0 percent
in 2001, Atlantic market RPMs fell 13.2 percent to 74.8 billion in 2002.
Declines in traffic were greatest in the 1^st^ half of the year and then
gradually improved throughout the balance of the year.

RPMs are up sharply early in 2003 but continued public concerns about
flying as well as a modest economic recovery in both the U.S. and Europe
limit the strength of the traffic recovery. Traffic is projected to
increase 4.5 percent for all of 2003. The recovery in traffic slows in
2004 as anticipated capacity reductions by United limit traffic growth
to 2.2 percent. The highest rates of growth are projected to occur in
the later half of the year. Beyond 2004 for the balance of the forecast
period, RPMs are projected to grow 4.8 percent per year on average. The
average annual increase in RPMs over the 12-year forecast horizon is
4.6 percent, reaching 128.8 billion in 2014.

LATIN AMERICAN MARKET

U.S. Large Air Carrier Yield and Operational Variables

Capacity

In 2002, regional capacity decreased 3.8 percent, following increases of
2.9 percent in 2001 and 0.5 percent in 2000. Despite the decrease in
2002, capacity in the market is up 32.4 percent since 1995. Capacity
declines averaged 6.7 percent during the first 9 months of FY 2002. In
the 4^th^ quarter, capacity began to grow again, running flat during
July and August and then up 17.7 percent in September.

Based on OAG schedules and discussions with carriers, capacity growth in
the Latin American market will be similar to other international
markets. Capacity is projected to increase about 5 percent on a
year-over-year basis in the 1^st^ half of FY 2003, then decline in the
2^nd^ half of the year. For the year as a whole, capacity is projected
to increase 2.1 percent. Capacity growth is projected to be just 1.8
percent in 2004, then accelerate to 4.7 percent in 2005 as carriers
continue to expand service into both the Caribbean and South America.
For the period 2005 through 2014, forecast capacity growth averages 5.7
percent per year. The average annual growth over the 12-year forecast
period is 5.0 percent with Latin American ASMs totaling 91.2 billion in
2014.

![](media/image39.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

Passenger Yield

In 2002 Latin American yield (12.42 cents) decreased 8.5 percent while
real yield declined 9.8 percent. In 2001 nominal and real yield
increased 4.4 and 1.2 percent, respectively. Since 1995, real yield in
the market has declined 22.4 percent.

![](media/image40.wmf){width="3.2472222222222222in"
height="2.5388888888888888in"}

In 2003 and 2004 real yield is forecast to remain flat as weak demand to
deep South American markets (Argentina, Brazil) is offset by increased
flying to relatively shorter haul Caribbean destinations. From 2005
through the remainder of the forecast period, real yield resumes its
historic decline, falling at a rate of 0.5 per­cent a year. During the
12-year forecast period, real yield declines at a rate of 0.4 percent a
year, while nominal yield increases at an annual rate of 1.8 percent,
reaching 15.37 cents in 2014.

Passenger Trip Length

For the first time since 1990, passenger trip length in Latin America
declined, falling 68.7 miles to 1,619.2 miles. Carriers redeployed
capacity from longer haul destinations in South America to relatively
shorter haul destinations in the Caribbean and Mexico. Despite the
decline in 2002, the average trip length has increased 384.4 miles, from
1,234.8 miles in 1990 to its current level.

The primary reason for the increase in trip length during the 1990's was
the continued expansion of U.S. carriers into South America\--Argentina,
Brazil and Chile\--and the expansion of routes from the Northeast to the
Caribbean. Except for a one year decline in 2003, this trend is expected
to continue over the forecast period. The average trip length is
forecast to decrease 37.9 miles in 2003 as carriers continue to reduce
capacity from longer haul destinations in South America. Beginning in
2004, capacity in the longer haul destinations of the region will be
restored gradually leading to an increase in trip length of 12.4 miles.
For the balance of the forecast period\--2005 through 2014\--trip length
increases average 10.9 miles a year. During this time, Latin American
market trip length expands from 1,593.6 to 1,684.7 miles.

Average Aircraft Size

The average aircraft size in the Latin American market increased during
the 1970s and early 1980s as widebody aircraft dominated the market,
peaking at 220.2 seats in 1986. With the advent of the B‑757 and other
flying ETOPS since the mid 1980s, the average seat size has steadily
declined. In 2002 the decline continued as average seat size was just
172.8 seats\--a decline of 47.3 seats from 1986, and the lowest figure
since 1974.

Average seat size is projected to increase to 173.5 seats in 2003, as
reductions in service will be mostly in routes that utilize older less
efficient two-engine aircraft. For the balance of the forecast, the
average aircraft size in the Latin American market is expected to
gradually increase as the major carriers expand the number of non-stop
city-pair services into deep South America, and their use of larger
two-engine widebody aircraft. The average aircraft

size is forecast to increase approximately 0.5 seats per year to 179.0
seats by 2014.

Passenger Load Factor

Load factor in the Latin American market showed little variability from
1987 through 1994, ranging from a low of 57.9  to 62.5 percent. From
1994 through 2001, the load factor increased 8.3 percentage points,
expanding from 60.9 to 69.2 percent*.*

In 2002, declines in RPMs were greater then declines in capacity,
resulting in load factor declining to 66.5 percent---down 2.7 points
from the 2001 figure. Year-over-year load factor decreases were recorded
throughout the year with the greatest decrease occurring in the 1^st^
quarter, reflecting the immediate impact of the events of September 11th
on demand.

Load factor is forecast to increase 1.4 points to 67.9 percent in 2003
with the largest increases in the later part of the year. In 2004 the
load factor is forecast to increase to 68.8 percent, a 0.8 point
increase from 2003, with the largest gains in the 1^st^ half of the
year. During the period 2005 to 2009, load factor is forecast to climb
gradually reaching 70 percent by 2009. For the duration of the forecast
the load factor remains at 70 percent as the market reaches equilibrium.

Forecasts

Total Passengers: U.S. and

Foreign Flag Carriers

Based on INS data, total passengers in the Latin American market (South
America, Central America/Mexico, and the Caribbean) fell 4.8 percent in
CY 2001. The largest decrease in 2001 occurred in the South America
region, which was down 5.4 percent. The Caribbean region decreased 4.5
percent, while the Central America/Mexico region decreased 4.8 percent.
During the period 1991-2001 the South American region has been the
fastest growing with passengers increasing 6.2 percent annually. At the
same time, the Central America/Mexico market increased 4.6 percent per
annum, while the Caribbean market increased only 2.2 percent a year,
reflecting the impact made by cruise traffic in the region.

U.S. air carriers' market share in the Latin American region has been
increasing steadily over the past decade. Between 1991 and 1996, U.S.
air carriers' market share increased from 58.8 to 64.3 percent.
Following a decline in share in 1997, U.S. carriers' market share has
increased from 61.7 percent to 65.1 percent in 2001. Market share for
U.S. carriers in the Caribbean, Central America/Mexico, and South
America in 2001 was 73.3, 59.7, and 63.9 percent, respectively.

Between 1990 and 1998 the percentage of total passengers that were U.S.
citizens traveling in the Latin American market decreased steadily from
67.3 percent to 63.4 percent. Continuing a trend of recent increases,
the ratio increased from 64.8 percent in 2000 to 65.2 percent in 2001.

Preliminary data for 2002 on total passengers traveling in the Latin
America market indicates that the decline in passengers following the
September 11^th^ attacks is slowing. Total passengers in the Latin
America market are forecast to decline 1.2 percent in 2002. For 2003 and
2004, it is assumed that growth in the total market will be the same as
the growth of U.S. flag carriers. In 2003, passengers are projected to
grow 4.1 percent with the highest rates of growth in the 1^st^ half of
the year. Passengers grow at a similar rate in 2004 (4.3 percent) with
growth increasing throughout the year. For the period 2005 -- 2014,
total passengers traveling in the Latin

![](media/image41.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

![](media/image42.wmf){width="6.997916666666667in"
height="9.136111111111111in"}

American market are projected to increase 5.1 percent per year. Over the
entire forecast period, total passengers in the Latin America market
increase 5.0 percent per year, from 38.3 million in 2002 to 68.8 million
in 2014.

U.S. Large Carrier

Passenger Enplanements

U.S. scheduled large air carriers in the Latin American market enplaned
a total of 20.9 million passengers in 2002, down 3.6 percent from 2001.
Year-over-year decreases occurred in every month through June except
March, with double-digit decreases recorded in October and November.
Beginning in July, year-over-year passengers were up with September
recording a 23.2 percent increase.

In 2003, passengers are forecast to increase 6.7 percent with the
largest increases occurring in the 1^st^ half of the year. Growth
moderates in 2004 with passengers increasing 2.3 percent. Growth is
slowest in the 1^st^ half of the year and then picks up in the 2^nd^
half. For the period 2005 -- 2014, economic growth in both the U.S. and
in Latin America propel enplanements upward at a rate of 5.2 percent per
year. The growth in enplanements is projected to average 5.1 percent
annually during the 12-year forecast period, with the number of Latin
American market enplanements reaching 37.9 million in 2014.

U.S. Large Carrier

Revenue Passenger Miles

Latin American market RPMs for U.S. large carriers steadily increased
between 1993 and 2001, due primarily to strong economic growth in the
U.S. and Latin America and declining real yield. During this period,
RPMs in the market increased 7.5 percent a year. In 2002, Latin American
market RPMs declined 7.5 percent, totaling 33.9 billion. Year-over-year
decreases occurred throughout the year until September, which had an
increase of 18.8 percent.

RPMs are forecast to increase 4.2 percent in 2003 with the strongest
growth in the 1^st^ half of the year. RPM growth slows in 2004, with a
projected increase of 3.2 percent. Growth is slowest in the 1^st^ half
of the year and then increases in the 2^nd^ half of the year. For the
balance of the forecast period RPMs are forecast to grow 5.9 percent per
year. The average annual increase in RPMs over the 12‑year forecast
horizon is 5.4 percent, reaching 63.8 billion in 2014.

PACIFIC MARKET

U.S. Large Air Carrier Yield and Operational Variables

Capacity

Following a modest increase in 2000 and 2001 after the Asian financial
crisis of the late 1990's, capacity in Pacific markets declined by
20 percent in 2002. Capacity was down throughout the year with the
greatest decreases occurring in the 1^st^ part of the year. In 2003,
capacity is up sharply in the early part of the year, then tightens as
anticipated reductions by United offset capacity increases by other
carriers. For the year as a whole, capacity increases 3.5 percent. In
2004, capacity growth is projected at 3.3 percent with growth most rapid
in the later half of the year. For the balance of the forecast period,
capacity is projected to increase an average of 4.9 percent per year.
For the 12 year forecast period, average annual capacity growth is
forecast to be 4.8 percent with ASMs in Pacific markets totaling 110.6
billion in 2014.

![](media/image43.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

Passenger Yield

Continued weakness in demand and public concerns about flying following
the September 11^th^ attacks led to a nominal yield decline in the
Pacific market of 7.6  percent in 2002. Real yield in 2002 decreased 9.0
percent for the 2^nd^ consecutive year. Yield declines were steepest in
the 1^st^ half of the year and by the summer quarter the declines in
yield had ceased.

![](media/image44.wmf){width="3.2472222222222222in"
height="2.5388888888888888in"}

A modest increase in yield is forecast in 2003. Year-over-year increases
in excess of 3 percent are forecast for the 1^st^ half of the year, then
moderate for the balance of the year. For the year as a whole, nominal
yield is forecast to increase 1.4 percent but decline 0.8 percent in
real terms. Capacity increases faster than demand increases in 2004 and
dampens any significant recovery in yield. Nominal yield is forecast to
increase only 1.1 percent for the year despite slow traffic growth. For
the balance of the forecast real yield declines averaging one percent
per year are projected. Nominal yield reaches 10.08 cents by 2014\--an
increase of 1.3 percent a year.

Passenger Trip Length

Following a very small increase of 8.9 miles in 2001, passenger trip
length in Pacific markets increased 74.8 miles in 2002 to 5,303.7 miles.
Passenger trip length was up during the 1^st^ half of the year, but
turned negative beginning in April. The downturn in passenger trip
length is projected to continue through the 1^st^ half of 2003, then
turn positive for the balance of the year. For the year passenger trip
length is projected to decrease 25.4 miles. As capacity is added back to
the region and carriers increase their flying from non-coastal gateways,
the average trip length is forecast to increase 57.5 miles in 2004. For
the remainder of the planning period---2005 through 2014\--slight
increases in trip length are expected. During this period, the average
trip length increases 2.3 miles a year, primarily due to more direct
flights and expanded service into the Asia/Pacific region. For the
12-year forecast period, the Pacific market trip length increases 58.0
miles from 5,303.7 to 5,361.7 miles.

Average Aircraft Size

Following a decrease of 3.6 seats in 2001, the average aircraft size in
the Pacific market fell from 304.1 seats to 294.6 seats in 2002, the
smallest average seat size in the region since 1988. The primary cause
of the decline in seat size was the reduction in B-747 capacity by
United following the events of September 11^th^.

Based on OAG schedules, little change in average seat size is projected
for 2003, although there is a good possibility for additional reductions
in B-747 capacity as United attempts to reorganize and emerge from
bankruptcy. Average seat size in 2003 is forecast to decrease by 0.1
seats to 294.5 seats and then grow slowly for the balance of the
forecast. By 2014 the

![](media/image45.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

average aircraft size is forecast be 300.5 seats, up 5.9 seats from the
2002 average seat size.

Passenger Load Factor

In 2002 load factor in the Pacific market increased 2.3 points to 77.5
percent as traffic decreased 17.6 percent while capacity decreased
20.0 percent. Following a 9.5 point drop in load factor in the 1^st^
quarter, load factor was up by 9.4 points in the 2^nd^ quarter. Load
factor remained strong for the balance of the year, up 4.5 points versus
2001.

Load factor is forecast to increase modestly to 77.8 percent in 2003 as
traffic increases faster than capacity in the region. Year-over-year
load factor increases are projected for the 1^st^ and last quarters of
the year. Load factor in the region is projected to decline one point in
2004 to 76.8 percent. As traffic returns to its long-term growth path
from 2004 to 2006, the load factor increases steadily to 77.5 percent by
2006. The load factor is projected to remain at 77.5 percent for the
period 2006 through 2014 as ASMs and RPMs expand at the same rate.

Forecasts

Total Passengers: U.S. and

Foreign Flag Carriers

Based on INS data, total passengers in the Pacific market decreased 11.4
percent in CY 2001 following an increase of 7.0 percent in 2000. However
for the first time since 1991, U.S. air carrier's market share rose from
39.1 percent to 39.7 percent in 2001.

Preliminary data for 2002 indicate that the decline in traffic is
subsiding. Passengers are projected to decline 2.4 percent during the
year. For CY 2002 to 2004, it is assumed that passenger growth in the
Pacific market will exceed that of U.S. flag carriers in the market.
Passengers are forecast to increase 4.2 percent in 2003 with the largest
increases occurring in the 1^st^ half of the year.

Passengers are projected to grow 4.0 percent in 2004 with growth slowest
during the 1^st^ quarter of the year, then picking up through the summer
quarter. For the period 2005 to 2014, passengers are forecast to
increase an average of 5.0 percent per year. Total passengers increase
from 22.4 million in 2002 to 39.9 million in 2014, an average of
4.9 percent per year.

U.S. Large Carrier

Passenger Enplanements

U.S. scheduled large air carriers in the Pacific market enplaned a total
of 9.2 million passengers in 2002, down 18.7 percent following a 1.6
percent increase in 2001. Enplanements were down sharply versus prior
year levels throughout the year until September, when the prior year
levels were impacted by the terrorist attacks. In 2003 passengers are
forecast to be up 4.5 percent with the largest increases forecast for
the 1^st^ quarter. Passengers are forecast to increase 0.9 percent in
2004 with declines in the 1^st^ half of the year and increases in the
2^nd^ half. For the period 2005 to 2014, passengers are projected to
increase an average of 5.0 percent annually. Enplanement growth is
projected to average 4.7 percent annually during the 12-year forecast
period, with Pacific market enplanements reaching 16.0 million in 2014.

![](media/image46.wmf){width="6.997916666666667in"
height="9.136111111111111in"}

U.S. Large Carrier

Revenue Passenger Miles

Traffic in the Pacific market decreased 17.6 percent in 2002, following
a 1.8 percent increase in 2001. The declines were sharpest in the 1^st^
quarter, then leveled during the next 2 quarters before diminishing
significantly in the summer quarter, which was boosted in large part by
the 19.8 percent gain in September. Growth is projected to continue in
the region in 2003 with RPMs up 4.0 percent spurred by large increases
in the 1^st^ quarter. Traffic growth is forecast to slow to 2.0 percent
in 2004 with rates accelerating throughout the year. RPMs for the
Pacific market are forecast to increase an average of 5.0 percent per
year from 2005 to 2014 as the economies of the region return to their
long-term historical growth. The average annual increase in RPMs over
the 12-year forecast is 4.8 percent, with RPMs totaling 85.7 billion in
2014.

U.S./CANADA

TRANSBORDER TRAFFIC

The transborder forecasts shown in this document (Chapter X, Table 10)
were developed in conjunction with Transport Canada and FAA's
projections of expected growth in this market.

In CY 1995, the U.S. and Canada signed an open-skies agreement. Between
1995 and 1998, transborder traffic grew 8.8 percent a year. Transborder
traffic growth moderated somewhat in 1999 and 2000, increasing at rates
of 3.5 and 6.8 percent, respectively. Transborder traffic fell in 2001
as the weak economies in both the U.S. and Canada, as well as the events
of September 11^th^, resulted in a decline of 6.4 percent. Passengers
are projected to continue to decline in 2002, falling another
7.8 percent before modestly rebounding in 2003 when growth of 5.6
percent is forecast. For the 12-year forecast period transborder traffic
increases from 17.9 million in CY 2002 to 26.3 million in 2014\--an
average of 3.2 percent a year.

AIR CARGO

Air cargo traffic is comprised of domestic and international revenue
freight/express and mail. The demand for air cargo transportation is a
derived demand resulting from economic activity. Cargo is moved in the
bellies of passenger aircraft and in dedicated all-cargo aircraft, on
both scheduled and nonscheduled service.

In 2002[^6], the total number of domestic and international air cargo
RTMs flown by U.S. commercial air carriers was 26.6 billion. The top
five carriers accounted for more than two-thirds of this total. The top
five carriers in terms of RTMs and their percentage shares were: FedEx
(31.4  percent), United Parcel Service (15.5 percent), United Airlines
(8.1 percent), Northwest Airlines (7.9 percent), and American Airlines
(7.2 percent).

HISTORIC FREIGHT/EXPRESS TONNAGE

Historic data were derived for domestic and international
freight/express tonnage. The domestic figures represent enplaned
domestic cargo tons at U.S. airports on U.S. commercial air carriers and
that reported by U.S. regional/commuter carriers. These data were

![](media/image47.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

compiled on a calendar year basis using the DOT Onboard T3 and T100
databases.[^7] Enplaned domestic cargo tonnage grew from 7.6  million
tons in 1994 to 12.7 million tons in 2001, an average annual increase of
7.6 percent. The 2001 level represents a 6.3 percent decrease from the
13.5 million tons enplaned in 2000.

The international figures are enplaned and deplaned international cargo
tonnage at U.S. airports on U.S. and foreign flag carriers and that
reported by U.S. regional/commuter carriers. These data were compiled on
a calendar year basis using the DOT International T100 database.
International cargo tonnage on U.S. and foreign flag carriers grew from
5.5 million tons in 1994 to 7.3 million tons in 2001, an average
annual increase of 4.1 percent. The 2001 level represents a decrease of
7.5 percent from 7.9 million tons in 2000. The U.S. flag carrier portion
of the total international tonnage has increased from 43.6  percent in
1994 to 47.8 percent in 2001. The distribution of total tonnage for U.S.
and foreign flag carriers by world region in 2001 was: Atlantic
(39.1 percent), Pacific (35.8 percent), Latin America (21.9 percent),
and Canada (3.2 percent).

REVENUE TON MILES

Historic data and forecasts are presented for domestic and international
cargo RTMs. In addition, within each of these two components trends and
forecasts are presented for all-cargo carriers and passenger carriers.
Passenger carriers transport cargo predominantly in the bellies of their
aircraft.

The forecast of cargo RTMs could not be further disaggregated into
freight/express and mail components due to a reporting problem in the
historic data. FedEx is reporting their activity under a contract with
the U.S. Postal Service as freight/express, rather than as mail. This
reporting, which began in August 2001, affects the consistency of the
historic distribution between freight/express and mail RTMs.

Industry Structure and Market Assumptions

Historically, air cargo activity has been highly correlated with GDP.
Additional factors that have affected the growth in air cargo traffic
include declining real yields, improved productivity, and globalization.
Ongoing trends that could potentially stimulate demand for air cargo
include increased market opportunities from open skies agreements,
decreased costs from global airline alliances, and increased business
volumes attributable to e-commerce. Ongoing trends that could
potentially limit growth include increased use of e-mail, decreased
costs of sending documents via facsimile, and the increased costs to
airlines in meeting environmental and security restrictions.

Significant structural changes have occurred in the air cargo industry.
Among these changes are the following:

-   *FAA security directive*

> In October, 2001 the FAA issued a new security directive under 14 CFR
> Part 108 to strengthen security standards for transporting cargo on
> passenger flights. This directive, which exempts all-cargo flights,
> was in response to the September terrorist attacks. This significantly
> impacted air cargo activity in 2002, including a shift from passenger 
> carriers to all-cargo carriers.

-   *Residual fear of mail due to terrorism*

> This affects mail volume and will likely increase the use of
> substitutes (e.g., e-mail).

-   *Reduced airline schedules*

> This will affect freight/express in particular by decreasing the
> available capacity.

-   *Modal shift from air to other modes (especially truck)*

This shift is likely to be accelerated by the additional costs
associated with air service resulting from increased security. The modal
shift is occurring for the integrated carriers (e.g., FedEx and United
Parcel Service) and for the U.S. Postal Service.

-   *Increased use of all-cargo carriers (e.g., FedEx) by the U.S.
    Postal Service to transport mail*

> This trend may also be accelerated due to security considerations.

The forecasts of RTMs are predicated on several basic assumptions. These
assumptions include the following: 1) FAA security restrictions
concerning cargo transportation on passenger carriers will remain in
place; 2) there will be no additional terrorist attacks in the U.S. and
confidence in flying will return;   3) there will be modest domestic and
international economic growth in 2003 followed by recovery in 2004; 4)
in the near-term modal shifts from air to ground and from passenger
carriers to all-cargo carriers will continue; and 5) in the long-term
cargo activity will be tied to economic growth and airline schedules
will return to more normal levels. Specific factors and assumptions
affecting the domestic and international components of air cargo
activity are noted in the following section.

The forecasts of cargo RTMs were prepared by considering the changes in
industry structure and market assumptions discussed above. The near-term
forecasts were also based, in part, on a consideration of economic
conditions and discussions with industry representatives. These
discussions included talks with cargo carriers and cargo consultants as
well as input from the Air Cargo Panel of the FAA/TRB 12^th^
International Workshop on Future Aviation Activities. The long-term
forecasts of RTMs were based primarily on regressions with GDP.
Forecasts of domestic cargo RTMs were developed from a regression
equation using real U.S. GDP as the independent variable. Projections of
international cargo RTMs were derived from an equation based on world
GDP, adjusted for inflation. The distribution of RTMs between passenger
carriers and all-cargo carriers was forecast based on an analysis of
historic trends in shares; the changes in industry structure and market
assumptions; and discussions with industry representatives.

From 1994 to 2002, total cargo flown on U.S. commercial air carriers
increased from 20.8 billion to 27.3 billion RTMs. This growth, which
averaged 3.5 percent per year, was faster than the rate of growth in
passengers. Domestic and international cargo RTMs grew an average of 1.9
percent and 5.2 percent, respectively, between 1994 and 2002. The slow
domestic growth largely reflects the relative maturity of the U.S. cargo
market.

Growth in domestic cargo RTMs has been dominated by all-cargo carriers.
These carriers have significantly increased their market share,
accounting for nearly three-quarters of domestic cargo RTMs in 2002.
FedEx and United Parcel Service are the two largest domestic all-cargo
carriers. Both of these carriers are integrated carriers who provide
door-to-door service using intermodal systems.

Revenue Ton Miles Forecast

The total number of air cargo RTMs flown by U.S. commercial air carriers
was 27.3 billion in 2002, a decrease of 4.0 percent from 2001. This
decrease reflects the continued slow growth in domestic and worldwide
economic activity in 2002. Furthermore, cargo activity is a
leading economic indicator and thus reflects the modest economic growth
projected for 2003.

Total RTMs are forecast to increase 4.6 percent in 2003 and 4.7 percent
in 2004. Over the 10-year period from 2005 to 2014, total RTMs are
forecast to increase at an average annual rate of 5.0 percent, based
primarily on economic growth. The forecast level of 49.0 billion RTMs in
2014 represents an average annual increase of 5.0 percent over the
entire forecast period.

Domestic Revenue Ton Miles[^8]

Domestic cargo RTMs flown by U.S. commercial air carriers were 13.1
billion in 2002, a 5.9 percent decrease from 2001. This decrease was due
to the slow economic growth in the U.S. and continued weakness in the
technology sector. Domestic cargo RTMs are forecast to increase 5.0
percent in 2003 as a result of improvements in the economy and a return
to growth from a depressed base. Domestic cargo RTMs are forecast to
increase 3.9 percent in 2004 and 3.7 percent in 2005 based on economic
recovery and a continuation of the modal shift from air to other modes
(e.g., truck). Over the 10-year period from 2005 to 2014, domestic cargo
RTMs are forecast to increase at an average annual rate of 3.8 percent,
based on projected growth in U.S. GDP. The forecast level of 20.8
billion RTMs in 2014 represents an average annual increase of
3.9 percent over the entire forecast period.

Both the freight/express and mail components of domestic cargo will
continue to be impacted in the near term by the intermodal shift from
air to ground transportation. For both components, this has resulted
from the ability of carriers to provide ground transportation at a
relatively lower price for distances up to 1,000 miles. In addition,
this relative cost of providing transportation is likely to be impacted
by increased air transportation costs to meet the FAA security
directive.

The freight/express component of domestic air cargo is highly correlated
with capital spending. Consequently, the growth of this component in the
future will be tied to improvements in the economy. The mail component
of domestic air cargo will be affected by overall mail volume, which is
related to the economy. This component will also be impacted by residual
fear related to terrorism and the increased use of substitutes (e.g.,
e-mail).

Historically all-cargo carriers have increased their share of domestic
cargo RTMs flown, from 58.9 percent in 1994 to 74.0 percent in 2002.
This has resulted from the significant growth of express service by
FedEx and United Parcel Service and the lack of growth of domestic
freight/express business for passenger carriers. In addition, the U.S.
Postal Service has increased its use of all-cargo carriers as a means to
improve control over mail delivery. The all-cargo share is forecast to
increase to 74.7 percent in 2003 as a result of the FAA security
directive, capacity reductions attributable to United and US Airways
operations under Chapter 11 bankruptcy, and restructuring of the
passenger carriers. The all-cargo share is forecast to increase to
78.3 percent by 2014 based largely on the faster growth of the
freight/express component relative to the mail component.

![](media/image48.wmf){width="3.2645833333333334in"
height="2.341666666666667in"}

![](media/image49.wmf){width="7.006944444444445in"
height="9.206944444444444in"}

International Revenue Ton Miles[^9]

International cargo RTMs flown by U.S. commercial air carriers were
14.2 billion in 2002, a decrease of 2.2 percent from 2001. This decline
was due to the modest economic growth of world GDP. International cargo
RTMs are forecast to increase 4.3 percent in 2003 due to improvements in
the world economy and increased schedules for passenger carriers.
However, the growth may vary by world region depending on regional
economic activity, the predominance of individual carriers, and the
impact of restructuring by United. International cargo RTMs are forecast
to increase 5.5 percent in 2004 and 6.8 percent in 2005 based primarily
on economic growth. Over the 10-year period from 2005 to 2014,
international cargo RTMs are forecast to increase at an average annual
rate of 6.0 percent based on projected growth in world GDP. The forecast
level of 28.1 billion RTMs in 2014 represents an average annual increase
of 5.8 percent over the entire forecast period.

![](media/image50.wmf){width="3.2645833333333334in"
height="2.341666666666667in"}

Both the freight/express and mail components of international cargo will
be affected by economic growth. The mail component will also be affected
by some residual fear of terrorism as well as improvements in mail
delivery services.

All-cargo carriers increased their share of international cargo RTMs
flown from 44.2 percent in 1994 to 53.6 percent in 2002. The all-cargo
share is forecast to increase to 55.6 percent by 2014 due to increased
demand for expedited service and the faster growth of the
freight/express component relative to the mail component.

**AIR CARRIER FLEET**

U.S. air carriers placed orders for an estimated 682 jet aircraft during
CY 2001 signaling an end to the boom in aircraft orders that began in
1996. Although the 682 orders were the fifth highest total in history,
it represented a 53.4 percent decline from the prior year total. Between
1965 and 2000, the average number of orders per year was 308.

In 2001 orders for regional jets exceeded narrow body two-engine
aircraft. Regional jet orders (CRJs, EMBs, and Fairchild/Dornier)
totaled for 302 aircraft (44.3 percent) while orders for narrowbody
two‑engine aircraft (A‑318/319/320/321 and B-717/737/757) totaled 262
(38.4 percent). Orders for two-engine (A-300/330 and B-767/777) widebody
aircraft totaled 100 (14.7 percent) in 2001.

![](media/image51.wmf){width="6.995833333333334in"
height="8.815277777777778in"}

![](media/image52.wmf){width="3.2416666666666667in"
height="2.5597222222222222in"}

Aircraft manufacturers delivered 643 jet aircraft to U.S. customers in
CY 2001\--the largest number of deliveries ever. Of this total,
346 (53.8 percent) were two‑engine narrowbody aircraft, 59 (9.2 percent)
were for two-engine widebody aircraft, and 237 were for regional jets
(36.9 percent).

![](media/image53.wmf){width="3.2416666666666667in"
height="2.5597222222222222in"}

Passenger Jet Aircraft

In CY 2002, the fleet of passenger jet aircraft for U.S. air carriers
increased by an estimated 39 aircraft, the first smallest increase in
the fleet since 1992. Three categories had net increases: two-engine
widebody aircraft (up 16 or 3.5 percent), four-engine narrowbody
aircraft (up 5 or 45.5 percent) and regional jets (up 194 aircraft or
24.8 percent).

Based on the backlog of aircraft orders and the projections of air
carrier traffic, seat capacity, load factors, fleet requirements, and
aircraft productivity, the U.S. commercial air carrier passenger fleet
is projected to increase from an inventory of 5,156 aircraft in 2002 to
8,095 aircraft by 2014. This involves a net addition to the fleet (after
retirements of obsolete aircraft) of approximately 245 aircraft
annually.

The two‑engine narrowbody fleet is projected to grow by an average of 80
aircraft annually. By 2014, two-engine narrowbody aircraft are expected
to account for 53.4 percent of the fleet. The number of three-engine
narrowbody (B‑727) aircraft declines from 142 aircraft (2.8 percent of
fleet) in 2002 to 103 (1.3 percent of fleet) by 2014. Despite growing in
2002, the number of four-engine narrowbody aircraft declines from 16
aircraft in 2002 to 0 by 2004 and remains at that level throughout the
balance of the forecast.

The fleet of two-engine widebody aircraft (A‑300/310/330 and B-767/777)
is the fastest growing of the widebody group. This group is expected to
increase by an average of 21 aircraft per year (3.5 percent), expanding
from 477 aircraft in 2002 to 723 aircraft in 2014. The three-engine
widebody fleet (MD-11, DC-10, and L-1011) is projected to shrink at an
average annual rate of 8.0 percent, from 92 aircraft in 2002 to 34
aircraft in 2014.

Four-engine widebody (B‑747 and A-340) aircraft are forecast to decline
from 92 aircraft in 2002 to 78 aircraft in 2014, an annual average
decrease of 1.0 percent

The regional jet fleet consisting of aircraft ranging in size from 35 to
70 seats, is forecast to expand from 976 aircraft in 2002 to
2,834 aircraft in 2014, an increase of 9.3 percent a year. By 2014 the
regional fleet will account

![](media/image54.wmf){width="6.99375in" height="8.94375in"}

for 35.0 percent of the total passenger jet fleet; in 2002 the regional
jet fleet accounted for only 24.8 percent of the fleet.

Cargo Jet Aircraft

In CY 2002, the jet fleet of U.S. air carrier cargo aircraft decreased
by 0.5 percent to 1,034 aircraft. Based on the backlog of aircraft
orders and the projections of air cargo demand, the U.S. commercial
cargo fleet is projected to increase to 1,547 aircraft by CY 2014. This
involves an average net addition to the fleet (after retirements of
obsolete aircraft) of 43 aircraft annually or 3.4 percent per year.

Narrowbody aircraft, which accounted for 55.8 percent of the cargo fleet
in 2002, are projected to account for 34.8 percent in 2014. The fleet of
two-engine and four-engine narrowbody aircraft remains relatively
constant over the forecast period. Narrowbody two-engine aircraft total
160 in 2002 and 159 in 2014, while narrowbody four-engine aircraft total
128 in 2002 and 125 in 2014.

The number of three-engine narrowbody aircraft decrease during the
forecast period. Narrowbody three-engine aircraft decrease from 289
aircraft in 2002 to 255 aircraft in 2014.

Widebody aircraft accounted for 44.2 percent of the cargo fleet in 2002.
The fleet of widebody aircraft is forecast to increase to 65.2 percent
of the cargo fleet in 2014. The largest increase in the number of
widebody aircraft is projected to occur in the two-engine widebody
category. This category grows an average of 32 aircraft per year (9.2
percent annually), expanding from 206 aircraft in 2002 to 590 aircraft
in 2014.

The three-engine widebody fleet is projected to increase an average of 8
aircraft, or 3.6 percent, over the forecast period from 183 aircraft in
2002 to 279 aircraft in 2014. Conversions of DC-10 passenger aircraft to
MD-10's and new MD-11F orders drive the growth in this category. The
four-engine widebody aircraft fleet increases an average of 6.1 percent
per year, from 68 aircraft in 2002 to 139 aircraft in 2014. Unlike last
year's forecast, the current forecast does assume a number of A380's
entering the U.S. fleet beginning in 2008.

**AIRBORNE HOURS**

U.S. large commercial air carriers (passenger and cargo but excluding
regional jets) flew an estimated total of 12.9 million hours in 2002,
down from 14.4 million hours in 2001. The decrease in hours was driven
by decreases in activity following the September 11^th^ terrorist
attacks. More than 88 percent of total airborne hours were accounted for
in two aircraft categories: two-engine narrowbody (73.3 percent), and
two-engine widebody (14.9 percent).

In 2014, the total number of hours is forecast to expand to
18.7 million, an average annual increase of 3.1 percent. Airborne hours
are projected to decrease 0.9 percent in 2003 to 12.8 million, and then
increase 3.1 percent in 2004, to 13.2 million.

Two-engine aircraft (both narrowbody and widebody) are expected to
account for 92.0 percent of all airborne hours flown in 2014. Narrowbody
two-engine aircraft hours, which make up 70.8 percent of total hours in
2014, increase, on average, 2.8 percent per year. Widebody two-engine
aircraft hours, which account for 21.2 percent of total hours in 2014,
increase 6.2 percent per year. Four-engine widebody aircraft hours flown
are forecast to increase at an average annual rate of 2.7 percent.

![](media/image55.wmf){width="7.001388888888889in"
height="9.246527777777779in"}

The number of hours flown by three-engine aircraft is projected to
decline through 2014. Three-engine widebody hours flown are forecast to
decrease 1.3 percent a year. Although the fleet of three engine widebody
aircraft is forecast to increase, the growth in this fleet is with cargo
operators. Cargo utilization rates for hours are typically lower than
utilization rates for passenger applications. Three-engine narrowbody
aircraft hours are forecast to fall 2.9 percent annually, reflecting the
retirement of B‑727 aircraft and the increasing proportion of cargo
aircraft in this fleet. The share of total hours flown by three-engine
aircraft will decrease from 7.6 percent in 2002 to 4.1 percent in 2014.
Hours for the four-engine narrowbody fleet, made up primarily of DC-8
cargo aircraft, decrease at a rate of 1.2 percent a year, reflecting the
retirement of these aircraft from the fleet.

![](media/image56.wmf){width="6.997916666666667in"
height="8.971527777777778in"}

[^1]: Air Wisconsin, American Eagle, Atlantic Southeast, Chicago
    Express, Comair, Express Jet, Executive, Horizon, Mesaba, and Trans
    States.

[^2]: Operating cost comparisons may be skewed by individual carrier
    accounting practices regarding the treatment of writedowns of
    equipment following September 11th attacks.

[^3]: A Major carrier by definition is one that has annual operating
    revenues in excess of \$1B. American Eagle, considered a regional
    carrier, has been excluded from this analysis.

[^4]: On January 21, 2003 the U.S. DOT began an enforcement action
    against Continental/Delta/Northwest to block implementation of their
    proposed agreement after the carriers rejected key provisions of
    DOT's conditional approval.

[^5]: CY 2002 data is available through June. Estimates for the
    remainder of the year are based on ATA (thru Nov) and AEA (thru Oct)
    data.

[^6]: 12 months ending June 2002

[^7]: The domestic estimates include some transborder tonnage to Canada
    that is not reported separately.

[^8]: For the 12 months ending July 2001, domestic cargo RTMs were
    comprised of 83.6 percent freight/express and 16.4 percent mail.
    Therefore, the domestic cargo RTM forecast discussed below is driven
    largely by factors that impact domestic freight/express.

[^9]: For the 12 months ending July 2001, international cargo RTMs were
    comprised of 96.5 percent freight/express and 3.5 percent mail.
    Consequently, the international cargo RTM forecast discussed below
    is overwhelmingly driven by factors that impact international
    freight/express.