**CHAPTER I**

**EXECUTIVE SUMMARY**

**A STALLED RECOVERY**

**AND AN**

**UNCERTAIN OUTLOOK**

What began as a strong recovery in the demand for aviation services
started to wane in the 2^nd ^half of fiscal year (FY) 2002. A sluggish
economy, a plunge in equity prices, a raft of allegations of corporate
accounting fraud, and increased international tensions all took their
toll. Weak traffic demand, coupled with the failure of full-fare
business travelers to return in any significant numbers, forced carriers
to resort to discounting to fill empty seats, with a devastating impact
on both passenger yields and profits. The general aviation industry's
7-year run of increased shipments and billings also came to an end in
2002. Much of the decline in general aviation shipments is the result of
a weak economy. Increased numbers of used business jets for sale and
stepped-up scrutiny by corporate management of excessive corporate
expenses also lessened shipments and billings.

The greatest impact from the September 11^th^ events occurred during the
4^th^ quarter of calendar year (CY) 2001 (the 1^st^ quarter of FY 2002).
Normally, there is little difference between calendar and fiscal year
results and growth rates. However, there will be large differences in
2002 and over the next several years. Therefore, where appropriate,
statistics and growth rates will be noted on both a fiscal and calendar
year basis.[^1]

**THE RECOVERY STALLS:**

**A REVIEW OF 2002**

One of the longest running boom times in aviation history came to an
abrupt halt on September 11^th^, 2001. Thus ended a 7-year period when
the U.S. and world commercial and civil aviation achieved unprecedented
growth in demand for aviation services and profitability. Although the
terrorist attacks struck mainly at the United States and, in particular,
its aviation industry, it had worldwide effects. As expected, these
events had the greatest impact on the United States---its economy, its
air carriers, and its travel markets. However, they affected world
economic growth and air travel demand as well.

UNITED STATES

AND WORLD

ECONOMIC ACTIVITY

On November 26, 2001, the National Bureau of Economic Research
officially announced that in March 2001 the U.S. economy had entered its
10^th^ recession since the end of World War II. However, the severity of
the recession was not known until early 2002. Instead of a one quarter
decline (down 1.1 percent in 3^rd ^quarter CY 2001) as initially
estimated, the economy actually declined for 3 consecutive quarters
starting with the 1^st^ quarter of CY 2001. Not coincidentally, the
downturn in U.S. domestic passenger and cargo demand also began during
this same quarter.

The U.S. experienced an uneven economic recovery in FY-2002. After
growing by 2.7 and 5.0 percent during the first 2 quarters of the fiscal
year, growth slowed to 1.3 during the 3^rd ^quarter but rebounded
strongly to 4.0 percent in the 4th quarter. U.S. Gross Domestic Product
(GDP) growth, which averaged 3.3 percent during the 10-year expansion
period, has now suffered two consecutive sub-par years---up 0.8 percent
in FY 2001 and 1.7 percent in FY 2002. The recovery in 2002 is
considered weak compared with previous recovery periods.

U.S. inflation (as measured by the consumer price index) averaged
1.5 percent in FY 2002. The low increase in prices is due, in part, to a
14.1 percent decline in energy prices. However, the recent trend in fuel
prices is upward.

Globally, economic gains averaged about a half percentage point less
than those of the United States during the past economic expansion.
World GDP growth also slowed in the past 2 years, averaging 1.2 percent
in 2001 and an estimated 1.8 percent in 2002. The slowdown is partly due
to the growing dependency of many world economies on export trade with
the United States.

In CY 2002, Canada's economy will grow nearly one-third faster than the
United States---up 3.3 percent compared with 2.4 percent. Despite
another year of negative growth in Japan (down 0.2 percent), forecasters
expect the combined economies of the Asian/Far East nations to grow 2.2
percent in 2002. Japan's weakness is more than offset by China's strong
economic activity (up 7.9 percent). The combined economies of Europe,
the Middle East, and Africa nations should grow by only 1.2 percent in
2002, partly the result of sluggish growth in western European (up 1.0
percent) countries. Economic growth in Latin American countries,
weakened by the financial crisis in Argentina (down 12.2 percent), is
forecast to contract by 1.5 percent in 2002.

![](media/image1.wmf){width="3.24375in" height="2.3381944444444445in"}

COMMERCIAL AVIATION

The demand for air travel both within the U.S. and between the U.S. and
other world travel regions declined sharply in 2002, forcing both U.S.
and foreign flag carriers to cut scheduled flights. Worldwide travel
demand, both local and international, also declined during much of 2002,
forcing world airlines to also adjust schedules downward.

Just as the impact from the events of September 11^th^ varied among
individual countries and world travel areas, so has the timing and
strength of the recovery. In addition, there are differing rates of
recovery among the operating entities within individual countries, that
is, among mainline, low cost, and regional/ commuter carriers. For the
most part, it appears that domestic travel recovered faster than
international travel and low-cost and regional carriers continued to
outperform the larger mainline carriers.

World Travel Demand

Strong growth in both U.S. and world GDP prior to September 11^th^
helped create the strong demand for world aviation services since 1993.
Revenue passenger kilometers (RPKs) and passengers were up 6.4  and 5.4
percent annually over the 1994-2000 time period.

In 2001, worldwide RPKs and passengers declined by 2.9 and 2.1 percent
respectively. Although worldwide traffic results are not available for
2002, preliminary figures from around the world suggest that worldwide
passenger demand is recovering at a somewhat faster pace than is demand
in the United States. Air Transport World estimates that world RPKs will
decline by only 0.5 percent while the number of passengers carried
declines by 0.8 percent.[^2] The Association of Asian Pacific Airlines
(AAPA) reports an increase of 4.7 percent in RPKs and a decline of 0.2
percent in available seat kilometers (ASKs) for the 11 months ending
November 2002. Additionally, it appears that traffic in this region
turned positive in May. Statistics published by the Association of
European Airlines (AEA) indicate declines of 5.7 percent in RPKs and
9.9 percent in ASKs for the same 11-month period. Some of the largest
declines among AEA carriers were on the North Atlantic routes, with RPKs
down 9.3 percent and ASKs down 15.8 percent. Intra-European traffic and
capacity was down 7.2 and 7.7 percent, respectively, over the 11-month
period.

![](media/image2.wmf){width="3.240972222222222in"
height="2.3131944444444446in"}

In CY 2002, U.S. and foreign flag carriers combined transported an
estimated total of 122.0 million passengers between the United States
and the rest of the world, a decline of 5.2 percent from 2001. Passenger
traffic volume is expected to decline in all four world travel regions
in 2002: Atlantic markets, 43.3 million (down 8.7 percent); Canadian
transborder markets, 17.9 million (down 7.8 percent); Asia/Pacific
markets, 22.4 million (down 2.4 percent); and Latin American markets,
38.3 million (down 1.2 percent).

Prior to 2001, air cargo demand had grown at a faster pace than
passenger demand, with worldwide freight tonnes and revenue ton
kilometers (RTKs) growing an average annual rate of 8.6 and 8.0 percent
over the 1994-2000 period. However, slowing U.S. economic activity and
imports from key world regions, and the collapse of the high-tech
industry and demand for information technology equipment, resulted in
significant decline in the demand for air cargo services worldwide in
2001. Freight tonnes and RTKs were down 5.0 and 3.9 percent,
respectively. However, worldwide cargo demand appears to be responding
positively to the stronger global economic recovery. Air Transport World
estimates that RTKs will increase by 5.0 percent in 2002.[^3] For the 11
months ending November 2002, AEA statistics indicate a decline of only
0.9 percent in RTKs. AAPA reports an increase of almost 10.0 percent for
the same period.

![](media/image3.wmf){width="3.2416666666666667in"
height="2.640277777777778in"}

For the 7-year period ending in 2000, data compiled by the International
Civil Aviation Organization (ICAO) shows that world air carriers
(including U.S. air carriers) reported cumulative operating and net
profits totaling \$89.0 and \$42.0 billion, respectively. However, the
events of September 11^th^, combined with the worldwide slowdown in
economic activity, resulted in record losses in 2001\--operating and net
losses of \$10.9 and \$12.0 billion, respectively. Preliminary estimates
by Air Transport World indicate that worldwide operating and net losses
could total \$10.2 and \$12.0 billion, respectively, in 2002. U.S.
airlines are expected to account for almost all of the projected
loss\--a \$9.8 billion loss in both operating and net profit in CY 2002.

![](media/image4.wmf){width="3.247916666666667in"
height="2.4569444444444444in"}

U.S. Travel Demand

Commercial air carriers reduced capacity significantly after the events
of September 11^th^. Although capacity gradually recovered from the low
levels flown in the months immediately following the terrorist attacks,
capacity has not returned to pre-September 11^th^ levels. In fact, a
number of large carriers have significantly reduced capacity levels from
those flown during summer 2002.

After growing at an average annual rate of 3.0 percent during the
1994-2000 period. U.S. commercial air carrier (sum of large air carriers
and regionals/commuters) system capacity (domestic plus international),
as measured by available seat miles (ASMs), increased by only 1.4
percent in 2001 and declined by 8.6 percent in 2002. [^4] The level of
capacity flown in 2002 is just slightly more than that flown in 1998.

![](media/image5.wmf){width="3.240972222222222in"
height="2.2979166666666666in"}

During the 1994-2000 period, U.S. air carrier system revenue passenger
miles (RPMs) and passenger enplanements grew at annual rates of 5.1 and
4.4 percent respectively. However, RPMs and enplanements both declined
in 2001 and 2002. Passenger enplanements were down 1.8 percent in 2001
and 8.2 percent in 2002 while RPMs declined 0.4 and 8.6 percent over the
same time periods. The number of system passengers carried in 2002 is
slightly less than the number transported in 1997.

![](media/image6.wmf){width="3.2472222222222222in"
height="2.3444444444444446in"}

U.S. commercial air carriers achieved a load factor of 71.0 percent in
2002, an increase of 1.2 percentage points over 2001. While this is
below the all-time high of 72.1 percent recorded in 2000, it still
represents the second highest load factor on record.

Large Air Carriers

In FY 2002, U.S. large air carriers\'[^5] system ASMs (the sum of
domestic and international services) declined by 9.8 percent while
passenger demand (RPMs and enplanements) declined 9.7 and 10.5 percent,
respectively. The system-wide load factor remained flat at 71.2 percent.

Domestic capacity (50 states, Puerto Rico, and the U.S. Virgin Islands)
was down 13.6 percent during the 1^st^ quarter of FY 2002 (October-
December), the period most heavily impacted by the events of September
11^th^. For the whole year, domestic capacity declined by
8.4 percent.[^6] The level of domestic capacity flown in 2002 is just
slightly more than what was flown in 1998.

![](media/image7.wmf){width="3.2416666666666667in"
height="2.145138888888889in"}

Domestic passenger traffic fell even more than capacity in the 1^st^
quarter of FY 2002. RPMs were down 16.9 percent and passenger
enplanements down 18.7 percent. For the entire year, domestic RPMs and
enplanements declined 8.3 and 10.5 percent, respectively. The number of
domestic passengers enplaned in 2002 was fewer than the number enplaned
in 1996.

![](media/image8.wmf){width="3.248611111111111in"
height="2.204861111111111in"}

Domestic load factor fell 4.1 percentage points in October and was down
2.6 points for the 1^st ^quarter of the year. For the entire year,
domestic load factor averaged 70.0 percent, the same as in 2001.

International ASMs declined 18.0 percent during the 1st quarter of 2002
and were down 13.7 percent for the entire year.[^7] Capacity declined in
all three world travel regions in 2002\--20.0 percent in Pacific
markets, 13.9 percent in Atlantic markets, but just 3.8 percent in Latin
American markets. The level of international capacity flown in 2002 is
just slightly less than in 1997.

International RPMs declined 37.2 percent in October and were down 26.9
percent for the 1^st ^quarter of 2002. For the entire year, RPMs were
down 13.5 percent. RPMs were also down in all three world travel
regions\--17.6 percent in Pacific markets, 13.2 percent in Atlantic
markets, and 7.5 percent in Latin American markets. International RPMs
were last at the 2002 level in 1997.

![](media/image9.wmf){width="3.2416666666666667in"
height="2.145138888888889in"}

International passenger enplanements declined by 10.1 percent in 2002,
with large declines occurring during the 1^st^ quarter (down
23.9 percent) of the year. In 2002, enplanements declined in all three
world travel regions; 18.7 percent in Pacific markets, 12.3 percent in
Atlantic markets, but only 3.6 percent in Latin American markets.

![](media/image10.wmf){width="3.248611111111111in"
height="2.204861111111111in"}

International load factors averaged 74.6 percent in 2002, up 0.2
percentage points over the previous year.

Added security measures worldwide have affected cargo traffic not only
in the months immediately following September 11^th^, but throughout
much of the year as well. U.S. air carriers' air cargo traffic declined
4.0 percent in 2002, with domestic RTMs down 5.9 percent and
international RTMs down 2.2 percent.[^8] The recovery in U.S. cargo
traffic has been stronger than that of passenger traffic, reflecting, in
part, the economic recovery currently underway in the U.S. and the
world. However, neither domestic nor international RTMs have returned to
the activity levels achieved in 2000.

![](media/image11.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Regionals/Commuters

The impact of September 11^th^ on regional/commuter carriers was
generally more positive than negative. This was largely because major
air carriers transferred a large number of routes to their regional
partners. This allowed the larger carriers to cut capacity while still
maintaining presence in these markets. Regional/commuter growth in 2002
was also inflated by the recovery from the lengthy 98-day strike (March
26-July 1) that shut down operations at Comair in 2001.

Regional/commuter ASMs were up 16.6 percent in 2002,[^9] up 17.7 percent
in domestic markets but down 9.5 percent in international markets. Route
transfers from the larger domestic partners were often in longer
distance, nontraditional markets that could be flown more efficiently by
regional jets. As a result, the average flight stage and passenger trip
length increased 31.7 and 37.1 miles, respectively, in 2002. The number
of regional/commuter departures, by contrast, declined 2.5 percent in
2002.

Regional/commuter traffic also continued to grow in 2002. System RPMs
were up 21.9 percent, up 23.1 percent in domestic markets but down 6.9
percent in international markets. Regional/commuter carriers achieved an
all-time high load factor of 61.3 percent in 2002, up 2.6 percentage
points over 2001.

![](media/image12.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Regionals/commuters enplaned 90.7 million passengers in FY 2002, an
increase of 8.5 percent over 2001. Domestic passengers totaled 88.0
million (up 9.4 percent) while international passengers totaled 2.7
million (down 13.7 percent). The large disparity in growth relative to
passenger miles is due to the large increase in stage and passenger trip
length.

![](media/image13.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

U.S. Air Carrier Financial Results

Prior to the January-March 2001 quarter, large commercial air carriers
had strung together 24 consecutive profitable quarters. During that time
they reported cumulative operating and net profits of \$43.9 and \$22.2
billion, respectively. The large carriers have now incurred losses for
7 consecutive quarters, with cumulative and net losses totaling \$16.2
and \$14.0 billion, respectively. Operating and net losses are expected
to total \$10.5 and \$9.8 billion, respectively, in FY 2002. Losses
would have been greater had not the Federal government approved a
\$5.0 billion emergency aid package for U.S. airlines.

![](media/image14.wmf){width="3.247916666666667in" height="2.35in"}

Operating revenues were down 16.3 percent in 2002, due to a combination
of declining traffic (RPMs down 9.7 percent) and passenger yields (down
10.8 percent). The large decline in passenger yields is due, in part, to
a shift in the mix of traffic from higher fare business travelers to
personal/pleasure travel. The decline also reflects continued intense
competition from low cost carriers as well as fare reductions to attract
flyers during periods of recent weak travel demand.

On the other hand, operating expenses were down only 11.2 percent.
Declining fuel prices (down 18.1 percent in FY 2002) and tight cost
cutting measures were partially offset by increasing insurance and
security costs.

![](media/image15.wmf){width="3.2416666666666667in"
height="2.6638888888888888in"}

In 2002, only 3 of the 14  majors[^10] reported a profit, with operating
losses for the group totaling \$10.3 billion. Operating results for the
majors ranged from a profit of \$904.2 (Federal Express) to a loss of
\$3.8 billion (American/ TWA). The three cargo carriers[^11] reported
combined operating profits of \$1.0 billion while the 11 passenger
airlines reported combined operating losses of almost \$11.2 billion.
Four carriers\--American, Delta, United and US Airways\--accounted for
more than 85 percent of the passenger carriers' total losses.

The financial results of many of the smaller nationals and
regionals[^12] also worsened in 2002, with 28 of the 44 reporting
carriers incurring operating losses. Nationals and regionals reported an
operating loss of \$303.9 million in 2002, with earnings ranging from an
operating profit of \$78.2 million (JetBlue) to an operating loss of
nearly \$84.8 million (Sun Country).

Low-cost, low-fare, new entrant carriers continue to have mixed
financial results, but several of the stronger carriers reported
profitable operations in 2002. AirTran, Frontier, and JetBlue had
combined profits of \$84.5 million.

Six carriers filed for Chapter 11 bankruptcy and/or ceased operations
since September 11^th^. Federal emergency funds may have averted other
bankruptcy filings. Also, the government\'s Air Transportation
Stabilization Board, with a total of \$10 billion provided for U.S.
government-backed loan guarantees, approved and finalized three loan
guarantees and conditionally approved another three applications[^13],
either averting Chapter 11 filings or allowing bankrupt carriers to
restructure and continue operations

The regional/commuter airline industry posted an operating loss of
\$346.6 million for the 12 months ending March 31, 2002, a deterioration
of \$730 million from the \$384.0 million profit recorded over the same
12 month period a year earlier.[^14] Most of the loss occurred during
the 6-month period ending December 2001 (\$356.2 million) and largely
reflects the impact of the events of September 11^th^. Regional/commuter
carriers reported a profit of 72.5 million for the quarter ending March
2002. In addition, preliminary data indicates that the industry should
be profitable over the next 2  quarters and most likely will report an
operating profit for full year FY 2002.

U.S. Commercial Air Carrier Fleets

In the immediate aftermath of the terrorist attacks, many larger
airlines grounded large numbers of older less efficient aircraft and
deferred scheduled delivery of new aircraft over the next several years.
Many of the larger carriers continued to ground aircraft throughout the
year as they restructured to cut costs. At the end of CY 2002, AirClaims
data shows that a total of 566 aircraft sit idle in the desert.[^15]

The number of aircraft in the U.S. commercial air carrier fleet totaled
7,735 in 2002\--4,180 large air carrier passenger jets (over 70 seats),
1,034 cargo jets, and 2,521 regional/ commuter passenger aircraft. The
large carrier passenger jet fleet has fallen by 292 aircraft since
2000\--down 137 aircraft in 2001 and 155 aircraft in 2002. The cargo
fleet declined by 30 aircraft over the past 2 years while the regional/
commuter fleet increased by 247 aircraft\--89 in 2001 and 158 in 2002.
Over the past 2 years, the regional/commuter piston and turboprop fleet
fell by 215 aircraft while the number of regional jets increased by
462 aircraft.

Orders for commercial jet aircraft worldwide totaled only 407 during the
first 3 quarters of 2002, a 51.4 percent decline from the same period in
2001. Orders for the smaller regional jets (37 to 70 seats) totaled only
75 during 2002, a 76.3 percent decline from the 316 aircraft ordered
during the first 9 months of 2001. Although regional jet orders have
slowed over the past several years, all signs are that they will
continue to be the fastest growing segments of the industry over the
next several years.

Manufacturers delivered 719 commercial jet aircraft worldwide during the
first 3 quarters of 2002, a 17.3 percent decline over the same period in
2001. This included delivery of 211 regional jets, a 54.8 percent
decline from the same period in 2001.

GENERAL AVIATION

The turnaround in the general aviation industry that began with the
passage of the General Aviation Revitalization Act in 1994 encountered
setbacks in 2002. The events of September 11^th^ and their aftermath did
impact the demand for general aviation products and services, both
negatively and, in some cases, positively. Many of the temporary flight
restrictions and other measures that limit access of general aviation
aircraft operation remain in effect today, including denial of access to
Washington's Reagan National Airport. However, the continued weak U.S.
economy, declining industry profits, and increased corporate
accountability, may account for a large part of the declining demand for
general aviation aircraft in 2002.

Based on reports released by the General Aviation Manufacturers
Association (GAMA), industry shipments and billings both declined during
2002. During the first 3 quarters of CY 2002, aircraft shipments
declined 16.9 percent and billing were down 25.2 percent. Business jet
shipments were down 5.6 percent during the same period, the first
reported decline since 1996. The Aerospace Industries Association of
America (AIAA) expects general aviation aircraft shipments to total
2,153 in 2002, a decline of 17.7 percent. AIAA also projects that
industry billings will decline 13.8 percent to \$6.9 billion in
2002,[^16] the first reported decline since 1994.

![](media/image16.wmf){width="3.247916666666667in"
height="2.526388888888889in"}

Even with restrictions on the operation of general aviation aircraft
following September 11^th^, general aviation activity at FAA air traffic
facilities was, for the most part, flat in 2002. Operations at combined
FAA and contract towers declined just 0.1 percent in 2002, with
itinerant operations down 0.1 percent and local operations down
0.2 percent. Instrument activity at combined FAA and contract towers
declined 0.2 percent

The number of general aviation IFR aircraft handled at FAA en route
centers was up 1.9 percent in 2002. Restrictions placed on VFR flying in
effect forced previous VFR operations to file flight plans and fly IFR.
As a result, flight services at FAA flight service stations also
increased in 2002, the first recorded increase since 1989.

The FAA's 2001 General Aviation and Air Taxi Activity and Avionics
Survey reported declining general aviation activity levels for a
2^nd ^consecutive year, this following 5 years of continuous growth. The
general aviation active fleet and hours flown declined 2.8 and
5.9 percent, respectively, in CY 2001. According to the 2001 Survey, the
active general aviation fleet totaled 211,447 and flew an estimated
29.1 million hours. Based on reported general aviation activity counts
at FAA air traffic facilities, the FAA projects that the active fleet
will decline an additional 0.2 percent in CY 2002. The FAA also projects
that general aviation hours flown will increase 1.1 percent in CY 2002,
with most of the increase expected to occur among the turbine powered
aircraft fleet.

Business and corporate aviation continues to be a bright spot for the
general aviation industry. Increased growth in fractional ownership
companies and corporate flying has continued to expand the market for
jet aircraft, though at reduced annual numbers. Numerous trade journal
articles suggest that the fallout from September 11^th^ has spurred
interest in fractional or corporate aircraft ownership and provided new
growth opportunities for the on-demand charter industry. However, little
hard data exists to either confirm or quantify the increased interest.

The key to the future of general aviation is increased numbers of
student pilots. Unfortunately, the latest FAA Registry statistics
(January 4, 2003) show that the number of student pilots declined 8.9
percent in 2002, from 94,420 in 2001 to 85,991. However, it is assumed
that much of this decline is due to the restrictions placed on flight
schools and student pilot training after September 11^th^, particularly
with regard to foreign students.

The industry has, over the past several years, instituted a number of
industry-wide programs designed to attract new pilots to general
aviation. The future of the general aviation industry will depend, in
large part, on how successful the industry is in continuing to rebuild
and stimulate new interest in these programs.

FAA WORKLOAD

During the 1997-2000 time period, demand for both commercial and general
aviation services at FAA air traffic facilities expanded significantly.
Activity was up 2.6 percent annually at combined FAA and contract towers
and 3.3 percent a year at en route centers. This growth led to the
delays experienced at many U.S. commercial airports in 2000 and 2001.

For most U.S. airports, delays ceased to be a major problem on September
11^th^. During 2002, total activity at combined FAA and contract tower
airports (64.9 million) declined by 2.0 percent. The number of IFR
aircraft handled at en route centers (43.7 million) declined
3.3 percent. At the end of 2002, combined activity at FAA and contract
towers was 5.5 percent below the peak activity level recorded in 2000.
Activity at FAA en route centers is 5.0 percent below its 2000 peak.

![](media/image17.wmf){width="3.247916666666667in" height="2.3625in"}

Commercial activity (air carrier and commuter/air taxi) at combined FAA
and contract towers and en route centers declined 5.5 and 4.6 percent,
respectively, in 2002. Air carrier operations at towered airports
declined 10.5 percent to a total of 13.2 million, its lowest activity
level since 1994. The number of air carrier aircraft handled at FAA en
route centers declined 8.2 percent to 22.8 million, the lowest level
since 1997. Commuter/air taxi activity was up 1.4 percent at towered
airports and 6.1 percent at en route centers in 2002.

![](media/image18.wmf){width="3.247916666666667in" height="2.3625in"}

Noncommercial activity (general aviation and military) at combined FAA
and contract towers was up 0.2 percent in 2002, largely the result of a
5.0 percent increase in military operations. The number of noncommercial
aircraft handled at FAA en route centers was up 0.3 percent, due in
large part to a 2.0 percent increase in general aviation activity.

The number of traditional (nonautomated) services provided at FAA Flight
Service Stations (FSS) totaled 29.4 million in 2002, the first recorded
increase (up 0.4 percent) since 1989. All categories of flight services
increased in 2002: flight plans originated, up 0.4 percent; pilot
briefings, up 0.5 percent; and aircraft contacted, up 0.3 percent.

**FAA**

**AEROSPACE FORECASTS**

**FISCAL YEARS 2003 - 2014**

The challenges in developing this year's aviation forecasts have been no
less demanding than those faced last year. Last year's efforts were
hindered by a general lack of timely data and specific information on
the industry's future plans. This year we have a wealth of data to
analyze as well as announced future capacity plans from most major
carriers. However, the uncertainties and challenges confronting the
aviation industry have become considerably more complex and difficult to
quantify. Nevertheless, the FAA has developed a set of assumptions and
forecasts we believe are consistent with recent trends and expected
changes in the aviation industry.

Once again, the aviation forecasts and assumptions have been developed
around 3 distinct time periods. The major difference from last year is
that the period of recovery has been extended for one to two additional
years. Forecasts and assumptions have been developed for each of the
three major user groups---large air carriers, regionals/ commuters, and
general aviation---based around the following set of assumptions.

**Fiscal Year 2003**---Most user groups can expect modest recovery as
each group attempts to redefine itself in the post September 11^th^
operating environment and new industry realities. The focus will be on
restructuring and tight cost reductions to bring costs in line with
reduced demand and increased competition from low cost carriers.
However, profitability remains elusive to most user groups in 2003.

**Fiscal Year 2004**---The aviation industry approaches equilibrium
between expenses and revenues and begins to develop strategies to take
advantage of the recovery in both economic activity and the demand for
aviation products and services. Most of the industry should return to
profitability in 2004.

**Fiscal Years 2005 to 2014**---This period features a return to more
stable levels of growth in the demand for aviation products and
services. However, the industry may bear very little resemblance to the
structure that was in place before September 11^th^, both in cost
structure and its cast of players. Levels of demand are not expected to
reach previous long-term growth rates.

The main assumption in this year's forecasts is no further successful
terrorist incidents against U.S. or world aviation. Also, we have not
assumed a war with Iraq nor a major contraction of the industry through
bankruptcy or consolidation.

The starting point for the commercial aviation forecasts (air carriers
and regionals/commuters) was the future schedules published in the
Official Airline Guide (OAG). Using monthly schedules allowed FAA
forecasters to develop capacity and demand forecasts on either a monthly
(large air carrier) or quarterly (regionals/commuters) basis for the
year 2003 and then to extract these schedules/demand forecasts into
2004.

A major assumption in last year's forecasts was that the long-term
relationships inherent in the forecast models have not changed
substantially. Based on last year\'s results and the changes occurring
within the industry, this assumption may no longer be valid. The large
air carrier models were re-estimated this year and the results do
predict slower long-term growth than forecast in previous years. The
large air carrier forecasts for the years 2005 to 2014 were derived from
the growth rates predicted by this new model.[^17]

This year FAA forecasters benefited immensely from the September 2000
12^th^ FAA/Transportation Research Board (TRB) International Workshop on
Future Aviation Activities. Invited industry participants from all
aviation sectors critiqued updated 2002 forecasts and provided direction
and guidance on industry assumptions and forecasts for the period out to
2010. Besides the FAA/TRB workshop, FAA forecasters held discussions
with individual carriers, aircraft and engine manufacturers, aviation
associations, and other industry experts to gain additional insight and
guidance on current trends and future aviation demand.

**ECONOMIC**

**FORECASTS**

The Executive Office of the President, Office of Management and Budget
(OMB) provides the economic forecasts used by the FAA to project
domestic aviation demand. In addition, the FAA uses the U.S. macro
economic projections of the Congressional Budget Office (CBO) as well as
those of Global Insight, Inc. (formerly DRI-WEFA, Inc.), a commercial
forecasting service. These alternative forecasts provide the FAA with a
range of economic forecasts to gauge the risk associated with variations
from the OMB projections. The FAA uses the world and individual country
economic projections provided by Global Insight to forecast the demand
for international aviation services.

In any given year there are likely to be variations around the long-term
trend. None of the current economic models used by the FAA are precise
enough to predict interim business cycles. In addition, no forecaster
can predict the precise timing of discontinuous developments such as the
1991 Gulf War, the 1997-98 Southeast Asia financial crisis, the 1998
Northwest Airlines' strike, or the September 11^th^ terrorist attacks.

The projected growth of aviation demand in this and following chapters
is consistent with the national short- and long-term economic growth
forecasts discussed in greater detail in Chapter II of the published
forecast document. Summary Table I-1 contains the key U.S. and world
economic assumptions used to develop the domestic and international
aviation demand forecasts. Summary Table I-9 provides economic
projections for GDP and oil prices by calendar year. Annual historical
data and economic forecasts are presented in tabular form in Tables 1
through 5.

United States Economy

While the three economic projections used by the FAA agree on the
general direction of the U.S. economy---a strong recovery beginning in
2003 and moderate long-term growth---they disagree on the timing and
strength of the recovery. They also differ on future energy prices.

The OMB economic forecasts project the economy will grow by only 1.5
percent during the 1^st^ quarter of FY 2003, then average almost 3.3
percent growth over the last 3 quarters of the year. OMB expects this
strong growth to continue over the next several years, expanding by
3.6 percent in both 2004 and 2005.

CBO and Global Insight both forecast a slower recovery in 2003, but
higher growth in 2004 and 2005. CBO forecasts the economy will grow just
over 1.1 percent during the first 3 quarters of 2003, 3.8 percent in
2004, and 3.7 percent in 2005. Global Insight assumes growth of
2.6 percent in 2003, 4.3 percent in 2004, and 3.9 percent in 2005.

![](media/image19.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Over the entire 12-year forecast period, OMB projects U.S. real GDP to
grow at annual rates of 3.2 percent. CPO and Global Insight forecast
growth averaging 3.1 and 3.3 percent, respectively, over the same
period.

![](media/image20.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

OMB projects that energy prices (as measured by the oil and gas
deflator) will decline by 2.7 percent in 2003 and 7.4 percent in 2004,
then increase at an annual rate of 1.7 percent over the remainder of the
forecast period. Over the entire 12-year period, the OMB forecast
assumes that nominal energy prices will increase by only 0.5 percent
annually. In real terms, OMB expects energy prices to decline at an
annual rate of 1.7 percent over the 12-year period. CBO forecasts a 3.4
percent annual increase in nominal fuel prices\--an annual increase of
1.0 percent in real prices. Global Insight projects nominal fuel prices
to increase by 2.3 percent a year---no increase in real terms.

![](media/image21.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

OMB projects that consumer price increases (as measured by the Consumer
Price Index) will remain at relatively low rates throughout the forecast
period, averaging 2.2 percent annually. CBO and Global Insight assume
average annual rates of 2.4 and 2.3 percent, respectively, over the
12-year forecast period.

World Economy

Worldwide economic growth should grow moderately in 2003 (up 2.8
percent), then expand by 3.7 and 3.5 percent, respectively, in 2004 and
2005. Over the entire 12-year forecast period, worldwide economic growth
should exceed that of the United States by only 0.1 percentage points
yearly, increasing at an average annual rate of 3.3 percent. Economic
growth is forecast to be greatest in the Latin American and Asia/Pacific
regions, expanding at annual rates of 4.0  and 3.6 percent,
respectively. Economic growth in Canada and Europe/Africa/Middle East
countries are expected to average 3.0 and 2.7 percent, respectively,
over the forecast period.

![](media/image22.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

**AVIATION TRAFFIC AND**

**ACTIVITY FORECASTS**

The large commercial air carrier traffic and activity forecasts are
shown in Summary Table I-2 and the forecast assumptions in Summary Table
I-3. Chapter III of the published forecast document contains a detailed
discussion of the forecasts and underlying assumptions. Tables 6 through
18, 20, 22 and 23 contain year-to-year historical data and forecasts.

Summary Table I-4 contains the regional/ commuter forecasts and
assumptions. Chapter IV in the published forecast document provides a
detailed discussion of the forecasts and assumptions. Tables 24 through
28 provide year-to-year historical and forecast data.

Summary Table I-5 provides the air cargo forecasts. Chapter III (page
III-15, and pages III-46 to III-52) in the published forecast document
provides a detailed discussion of the forecasts and assumptions. Tables
19 and 21 provide year-to-year historical and forecast data.

Summary Table I-6 provides the general aviation forecasts. Chapter V in
the published forecast document provides detailed discussions of the
forecasts and assumptions. Tables 29 through 33 provide year-to-year
historical data and forecasts.

Summary Table I-9 provides domestic and international traffic forecasts
on a calendar year for large air carriers, regionals/commuters, and air
cargo carriers.

Commercial Aviation

In 2002, the U.S. commercial aviation industry, consisting of large air
carriers and regional/commuter airlines, flew 894.9 billion ASMs, a
decline of 8.6 percent from 2001. These carriers enplaned 627.6 million
passengers (down 8.2 percent) who flew 632.1 billion RPMs (down 8.6
percent).

In 2014, FAA expects U.S. commercial air carriers to fly a total of
almost 1.4 trillion ASMs (up 3.6 percent annually). They will transport
nearly 1.0 billion passengers (up 3.9 percent annually) almost 1.0
trillion passenger miles (up 4.1 percent annually).

Large Air Carriers

Domestic Capacity and Traffic

After September 11^th^, most U.S. air carriers immediately reduced
domestic capacity approximately 20 percent across the board. At the end
of FY 2002, domestic capacity remained 8.4 percent below 2001 levels and
8.0 percent below 2000 levels. Domestic capacity is forecast to decline
0.8 percent in 2003, largely in response to extensive route
restructuring by the larger majors, most notably United Airlines and US
Airways. Domestic capacity is projected to increase 3.3 percent in 2004,
3.5 percent in 2005, and 3.0 percent in 2006, effectively returning to
pre-September 11^th^ levels in 2006. Thereafter, capacity is expected to
increase at an average annual rate of 3.2 percent over the final 8 years
of the forecast period.

![](media/image23.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Domestic air carrier RPMs and passenger enplanements are forecast to
increase at average annual rates of 3.6 and 3.5 percent, respectively, 
over the 12-year forecast period. Domestic RPMs are forecast to increase
by 2.7 percent in 2003, 3.8 percent in 2004, and to average 3.6 percent
growth over the remaining 10 years of the forecast period. Domestic
enplanements are projected to increase by 2.0 percent in 2003,
4.7 percent in 2004, and 3.5 percent annually over the 2005-2014 time
period. Domestic RPMs are projected to return to pre-September 11^th^
levels in 2005, enplanements in 2006.

![](media/image24.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

The domestic load factor, flat at 70.0 percent in 2002, is expected to
increase to 72.5 percent in 2003 and to 72.9 percent in 2004. Domestic
load factors are projected to continue to increase throughout the
forecast period, reaching 75.5 percent in 2014.

Domestic passenger yields, which declined by 12.4 percent in 2002, are
forecast to increase by 3.3 percent in 2003, 5.3 percent in 2004, and
then grow at an average annual rate of 0.9 percent over the remaining 10
years of the forecast period. Nominal domestic yields are not expected
to return to pre-September 11^th^ levels until 2012. In real terms,
yields are projected to increase by 1.0 percent in 2003, 3.2 percent in
2004, then decline an average of 1.4 percent over the remainder of the
forecast period.

The decline in real yields over the latter years of the forecast is
based on the assumption that competitive pressures will continue to
exert pressure on carriers to hold the line on fare increases.
Competition in domestic markets will come from established low-fare
carriers such as Southwest, as well as smaller low-cost carriers such as
AirTran, Frontier, and JetBlue.

Large air carrier aircraft operations, which declined by 10.5 percent in
2002, are forecast to decline by 2.0 percent in 2003, then increase by
3.3 percent in 2004 and 2.8 percent in 2005. Thereafter, air carriers
operations grow at an average annual rate of 2.6 percent over the
remaining 9 years of the forecast period. However, air carrier
operations are not expected to return to pre-September 11^th^ activity
levels until 2009/2010. The slower growth in activity at FAA air traffic
facilities relative to expected traffic growth (2.2 versus 3.5 percent
growth in domestic enplanements) reflect increased efficiencies in three
operational measures.

The average domestic aircraft is forecast to increase by 0.9 seats
annually, from 147.9 seats in 2002 to 159.2 seats in 2014. Domestic load
factors are expected to increase from 70.0 percent in 2002 to 75.5
percent in 2014. The passenger trip length increased 22 miles in 2002
and is projected to increase another 6.0 miles in 2003. Much of this
increase is because the larger air carriers continue to transfer many of
their shorter distance routes to their regional affiliates. As demand
recovers, the larger carriers are expected to resume operation of some
of these routes. As a result, the average domestic passenger trip length
is forecast to decline from 913.6 miles in 2003 to 905.5 miles in 2007.
After that, the average trip length is expected to increase gradually,
reaching 913.8 miles in 2014.

Large Air Carriers

International Capacity and Traffic

FAA provides forecasts of total passenger traffic (sum of U.S. and
foreign flag carriers) for travel between the United States and three
world travel areas\--Atlantic, Latin America (including Mexico and the
Caribbean), and Asia/Pacific\--as well as for U.S./Canadian transborder
traffic. These forecasts are based on historical passenger statistics
obtained from the United States Immigration and Naturalization Services
(INS) and Transport Canada and on regional world historical data and
economic projections obtained from Global Insight.

Total passenger traffic between the United States and the rest of the
world is estimated to total 122.0 million in CY 2002, a decline of
5.2 percent from 2001. Passenger traffic is expected to increase
4.6 percent in 2003, 4.8 percent in 2004, and to average 4.6 percent
over the rest of the 10-year forecast period, reaching 210.4 million in
2014. Total traffic between the U.S. and the rest of the world is
expected to return to pre-September 11^th^ levels in 2005.

Over the entire forecast period, passenger demand is expected to be
strongest in Latin American and Pacific markets, growing at an annual
rate of 5.0 and 4.9 percent, respectively. Passenger traffic is
projected to grow 4.7 percent annually in Atlantic markets and
3.2 percent a year in Canadian transborder markets.

In the aftermath of the September 11^th^ terrorist attack, U.S. air
carriers, over a period of several weeks, reduced international capacity
by approximately 17 percent. At the end of 2002, international capacity
remained 13.7 percent below 2001 levels. International capacity is
forecast to increase 3.1 percent in 2003, 2.1 percent in 2004, and 5.5
percent in 2005. Thereafter, capacity increases 4.2 percent annually
over the last 9 years of the forecast period. The relatively slow growth
in 2003 and 2004 largely reflects route restructuring by the major
carriers, especially United Airlines following its filing for Chapter 11
bankruptcy.

![](media/image25.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

U.S. carriers international RPMs and enplanements declined 13.5 and
10.1 percent, respectively, in 2002. U.S. carrier RPMs are forecast to
increase 4.3 percent in 2003, 2.4 percent in 2004, and 5.1 percent
annually over the remainder of the forecast period. Enplanements are
projected to grow 5.4 percent in 2003, 1.7 percent in 2004, and 4.9
percent yearly over the final 10 years of the forecast period, reaching
83.6 million in 2014. U.S. carrier international RPMs are expected to
exceed pre-September 11^th^ levels in 2006, enplanements in 2005.

![](media/image26.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

The slower growth in U.S. carrier international traffic compared to
total traffic in 2003 and 2004 reflects major route restructuring by
U.S. airlines and assumes a loss of market share to foreign flag
carriers. However, some of the slower growth relative to foreign flag
carriers reflects a shift to more flying by foreign flag alliance
partners. This shift enables U.S. carriers to continue to promote and
sell travel to foreign travel destinations without incurring the costs
of actually operating aircraft on these routes.

The forecasts of international demand assume that U.S. air carriers will
benefit from the strong economic recovery expected to start in mid to
late 2003 in both the United States and world markets. International air
carrier RPMs and passenger enplanements are forecast to increase at
annual rates of 4.8 and 4.7  percent, respectively, over the 12-year
forecast period. The stronger growth in international travel relative to
domestic markets is being driven by the strong passenger demand
projected in the Latin American and Asia/Pacific markets---passengers up
5.1 and 4.7 percent, respectively.

International load factors are forecast to increase from 74.6 percent in
2002 to 75.4 percent in 2003. They will then increase gradually to
76.8 percent in 2008, and hold at or near this level throughout the rest
of the forecast period.

International passenger yields were down 6.0 percent in 2002, about half
the loss in domestic yields. Yields are expected to increase by 2.3
percent in 2003 and then by 1.6 percent annually over the remainder of
the forecast period. In real terms, international yields decline at an
annual rate of 0.6 percent over the forecast period. The decline in real
yields is based on the assumption that competitive pressures will
continue to exert pressure on carriers to hold the line on fare
increases. In international markets, this will take the form of expanded
open sky agreements and new and existing global alliances.

Regionals/Commuters

Capacity and Passenger Traffic

Most regionals/commuters were not only able to maintain their
pre-September 11^th^ flight schedules but were able to increase their
schedules in response to the transfer of large numbers of additional
routes from their larger code-share partners. Regional/ commuter ASMs
were up 16.6 percent in 2002, up 17.7 percent in domestic markets but
down 9.5 percent in international markets. Over the next 3-year period,
regional/commuter capacity is forecast to increase at rates of 16.4,
14.3, and 10.8 percent. These relatively larger increases are due
largely to the projected delivery of 705 regional jets during this
period. Capacity is expected to slow to 5.3 percent annually over the
remainder of the forecast period and to average 7.3 percent growth over
the entire forecast period.

![](media/image27.wmf){width="3.2416666666666667in"
height="2.395138888888889in"}

Regional/commuter airlines RPMs grew by 21.9 percent in 2002, up 23.1
percent in domestic markets and down 6.9 percent in international
markets. RPMs are projected to increase 14.6 percent in 2003, 13.3
percent in 2004, 9.9 percent in 2005, and average 6.2 percent over the
remainder of the forecast period.

Regional/commuter carriers achieved a load factor of 61.3 percent in
2002, up 2.6 percentage points over the previous year. Load factors are
projected to decline gradually over the first 5 years of the forecast
period, reaching 58.4 percent in 2007. However, load factors are
expected to increase over the rest of the forecast period and reach 64.0
percent in 2014.

![](media/image28.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Passenger growth is expected to be less than that for RPMs, growing by
7.1 percent in 2003, 9.7 percent in 2004, and 7.0 percent in 2005. Over
the 12-year forecast period, regional/commuter passengers are forecast
to increase an average of 5.6 percent a year, from 90.7 million in 2002
to 174.1 million in 2014. In 2014, regionals/commuters are expected to
transport 17.5 percent of all passengers in scheduled commercial air
service, up from 14.5 percent in 2002.

![](media/image29.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Regional/commuter aircraft operations at FAA air traffic facilities
increased only 1.3 percent in 2002 despite a 16.6 percent increase in
ASMs. The significantly slower growth relative to ASMs is due largely to
an increase of 37.1 miles in the passenger trip length. This longer trip
length is also reflected in the number of regional/commuter aircraft
handled at en route centers\--up 6.1 percent in 2002. This increase was
due almost entirely to a 18.3 percent increase in the number of
overflights, that is, flights that traverse one or more en route
centers.

Regional/commuter activity is expected to increase rapidly over the next
several years, averaging 3.5 percent over the next 3 years. Thereafter,
regional/commuter operations are forecast to grow at an average annual
rate of 2.5 percent over the rest of the forecast period. Slower growth
in activity at FAA air traffic facilities relative to ASMs (2.8 versus
7.3 percent) and passengers compared to and RPMs (5.6 versus 7.7
percent) results from higher load factors and longer trip lengths.

Over the 12-year forecast, the average passenger trip length is forecast
to increase from 339.2 miles in 2002 to 431.6 miles in 2014. However,
much of the growth occurs during the first 3 years of the forecast
period\--up an average 15.0 miles a year. The relative large increases
during this period result from two factors\--the integration of large
numbers of regional aircraft into the regional/commuter fleet and the
continued transfer of nontraditional longer haul routes from their
larger code-share partners. Thereafter, the passenger trip length
increases by 5.0 miles annually over the rest of the forecast period.

Greater use of the larger regional jets also results in the average
seating capacity of the regional fleet increasing from 42.8 seats in
2002 to 50.4 seats in 2014.

Air Cargo

Air cargo traffic on U.S. commercial air carriers declined 4.0 percent
in 2002, down 5.9 percent in domestic markets and 2.2 percent in
international markets. Air cargo RTMs carried by all-cargo carriers
declined only 0.2 percent in 2002, down 2.8 percent in domestic markets
but up 3.5 percent in international markets. Air cargo RTMs transported
by passenger carriers declined 10.0 percent in 2002, down 13.6 percent
in domestic markets and 8.0 percent in international markets. The
greater decline in cargo carried by passenger carriers was due, in part,
to the stringent security restrictions placed on the carriage of cargo
on passenger aircraft after September 11^th^. It also reflects the large
cutbacks in passenger carrier schedules in 2002.

FAA expects air cargo traffic to increase faster than passenger traffic,
with system RTMs growing 5.0 percent yearly (versus 3.9 percent for
RPMs) over the 12-year forecast period. Domestic RTMs are forecast to
increase 3.9 percent (versus 3.6 percent) annually while international
RTMs are projected to increase 5.8  percent (versus 4.9 percent) a year.
The strong recovery in the global economy and increased business volumes
attributable to e-commerce should stimulate the demand for the rapid
movement of goods and products by air, both in domestic and
international markets.

Domestic RTMs are forecast to increase 5.0 percent in 2003, 3.9 percent
in 2004, and to average 3.8 percent over the final 10 years of the
forecast period. Most growth in demand for domestic cargo services
should occur among all-cargo carriers because of stricter security
restrictions for transporting cargo on passenger aircraft and the faster
growth of freight/express relative to mail. All-cargo carrier domestic
RTMs are projected to increase 4.4 percent a year over the entire
forecast period, compared with growth of only 2.4  percent annually for
passenger carriers. All-cargo carriers\' share of domestic RTMs is
forecast to increase from 74.0 percent in 2002 to 78.3 percent in 2014.

![](media/image30.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

International RTMs are forecast to increase 4.3 percent in 2003 and 5.5
percent in 2004. After that, international cargo traffic is forecast to
increase 6.0 percent a year over the rest of the forecast period.
All-cargo and passenger carrier international RTMs are projected to
increase at annual rates of 6.3 and 5.2 percent, respectively, over the
12-year forecast period. All-cargo carriers\' share of international
RTMs is projected to increase from 53.6 percent in 2002 to 56.6 percent
in 2014.

![](media/image31.wmf){width="3.2416666666666667in"
height="2.4854166666666666in"}

Commercial Aircraft

The number of commercial aircraft is forecast to grow from 7,735 in 2002
to 10,842 in 2014, an average of 2.9 percent a year. Most of the growth
occurs over the last 10 years of the forecast, with the fleet expected
to grow only 1.9 percent in 2003 and 2.1 percent in 2004.

![](media/image32.wmf){width="3.2416666666666667in"
height="2.4555555555555557in"}

Over the past year, many of the larger air carriers grounded large
number of their older less efficient aircraft and deferred delivery of
new aircraft scheduled for delivery over the next several years. As
such, the number of large passenger jets (over 70 seats) declined by
155 aircraft in 2002 and are expected to decline by an additional 51
aircraft in 2003 and 36 aircraft in 2004. Over the remaining 10 years of
the forecast period, the large air carrier passenger fleet increases by
an average of 90 aircraft a year, reaching a total of 5,261 aircraft in
2014. The narrowbody fleet is projected to grow by 75 aircraft annually
over the 12-year forecast period, the widebody fleet by only 15 aircraft
a year.

The regional/commuter passenger fleet is forecast to increase at an
average annual rate of 4.0 percent over the forecast period, from 2,521
in 2002 to 4,034 aircraft in 2014. The number of regional jets (up to
70 seats) in regional/ commuter service is projected to grow from 976 in
2002 to 2,834 in 2014, an average annual increase of 9.3 percent.
However, the turboprop/piston fleet is expected to decline from 1,489 in
2002 to 1,144 in 2014. Turbo­prop/piston aircraft are expected to account
for only 28.4 percent of the regional fleet in 2014, down from a 59.1
percent share in 2002.

Cargo large jet aircraft are forecast to increase from 1,034 in 2002 to
1,547 in 2014, an average increase of 3.4 percent (43 aircraft) a year.
The narrowbody jet fleet is projected to decline by 38 aircraft over the
12-year forecast period. The widebody jet fleet is projected to increase
by 46 aircraft yearly.

General Aviation

After September 11^th^, thousands of general aviation aircraft were
grounded for weeks by FAA temporary flight restrictions imposed on the
operation of aircraft in security sensitive areas around the country,
effectively closing much of the airspace to VFR traffic. In addition,
many flight schools curtailed pilot training as new restrictions were
imposed on the training of pilots from foreign countries. Under
continuing heightened security measures, some airspace and airports in
and around Washington, DC and New York City remain closed to VFR
traffic, including Washington's Reagan National Airport. These security
restrictions impacted the general aviation community, although not to
the extent that they would have prior to the passage of the General
Aviation Revitalization Act of 1994.

The current forecast assumes that business use of general aviation
aircraft will expand at a more rapid pace that that for personal/sport
use. The business/corporate side of general aviation should continue to
expand based on the security restrictions imposed on flying by
commercial aircraft. Security concerns for corporate staff combined with
more convenience and schedule flexibility have made fractional and
corporate aircraft ownership as well as on-demand charter flights viable
alternatives to travel on commercial flights.

The active general aviation fleet is projected to increase at an average
annual rate of 0.7 percent over the 12-year forecast period, growing
from an estimated 211,040 in 2002 to 229,490 aircraft in 2014. The more
expensive and sophisticated turbine-powered fleet (including rotorcraft)
is projected to grow at an average annual rate of 2.3 percent over the
12-year forecast period. However, the jet fleet is responsible for most
of this growth, increasing from 8,000 in 2002 to 12,300 in 2014, an
average annual increase of 3.6 percent.

![](media/image33.wmf){width="3.2416666666666667in" height="2.21875in"}

At the September 2002 TRB/FAA workshop, the Business Aviation Panel
suggested that the market for the new Eclipse jet aircraft could add an
additional 5,000 aircraft to the active fleet by 2010. The Eclipse, a
relatively inexpensive (priced at under \$1 million) twin-engine
business aircraft, is believed to have the potential to redefine the
business jet segment by expanding business jet flying and offering
performance that may support true air-taxi business service. However,
because it has not yet received certification, the forecasts do not
include the entry of this or similar type aircraft into the fleet.

The number of piston powered aircraft (including rotorcraft) are
projected to increase from 165,190 in 2002 to 170,210 in 2014, an
average increase of only 0.2 percent annually. This slow growth is due,
in part, to declining numbers of multi-engine aircraft, which decline at
an average rate of 0.2 percent over the forecast period. Single engine
pistons and piston rotorcraft increase at annual rates of 0.3 and 1.1
percent, respectively, during the 12-year forecast period.

In 2004, owners could register approximately 2,000 existing ultralights
not currently included in the FAA\'s aircraft registry counts, as
\"light sport\" aircraft. The forecast assumes registration of these
aircraft over a 2-year period beginning in 2004. In addition, it is
projected that approximately 300-500 newly manufactured light sport
aircraft will enter the active fleet on an annual basis beginning in
2005. This new aircraft category is expected to total 6,200 by 2014.

The number of general aviation hours flown is projected to increase by
only 1.1 percent in 2003 and 1.4 percent in 2004, largely the result of
the lingering effects of a sluggish U.S. economy and the events of
September 11^th^. However, hours flown are expected to increase
1.6 percent a year over the last 10 years of the forecast period. Much
of the increase over this latter period reflects increased flying by
business and corporate aircraft as well as increased utilization rates
on other general aviation aircraft.

Hours flown by turbine aircraft (including rotorcraft) increase an
average of 3.7 percent yearly over the forecast period, compared with
only 0.6 percent for piston powered aircraft. Jet aircraft account for
most of the increase, expanding at an average annual rate of
6.2 percent. The large increases in jet hours are due to the expected
increases in the fractional ownership fleet and its activity levels.
Fractional ownership aircraft average approximately 1,200 hours annually
compared to only 360 hours for all business jets.

![](media/image34.wmf){width="3.2416666666666667in" height="2.21875in"}

The number of active general aviation pilots (excluding air transport
pilots) are projected to total 595,130 in 2014, an increase of almost
81,000 (up 1.2 percent annually) over the forecast period. A large part
of the expected growth (55,000 pilots, 68.0 percent) is projected to
occur in the private and commercial categories, reflecting the expected
increase in the demand for pilots among fractional ownership companies
and business corporations. The number of private pilots are projected to
total 290,550 (up 0.9 percent annually) in 2014. Commercial pilots are
forecast to increase from 137,504 in 2002 to 162,600 in 2014, an average
annual increase of 1.4 percent.

The number of student pilots is projected to increase by only 1.0
percent in 2003, reflecting sluggish U.S. economic activity and the
lingering uncertainties surrounding restrictions imposed on flight
school and pilot training. However, growth picks up in 2004 and averages
2.1 percent over the entire forecast period. Almost 25,000 new student
pilots are projected to be certified during the 12-year forecast period.

FAA Workload Forecasts

There were 483 towered airports at the end of September 2002, 266 FAA
towers and 217 contract towers. While the number of FAA towers will
remain constant at 266 in 2003, FAA expects the number of FAA contract
towered airports to increase by 7 to 224. In 2002, aircraft activity at
these seven airports totaled approximately 791,000 operations, with
general aviation accounting for 94.2 percent of the total activity.

Summary Table I-7 provides forecasts of aircraft activity at combined
tower facilities. Summary Table I-8 provides summary forecasts of
activity at FAA facilities [only]{.underline}, including FAA towers, en
route centers, and flight service stations. Chapter VII in the published
forecast document provides detailed forecasts and discussion of aircraft
activity at FAA and contract facilities. Tables 34 through 51 provide
year-to-year historical data and forecasts

Summary Table I-9 provides forecasts on a calendar year basis for
activity at en route centers.

FAA and Contract Towers

Activity at the combined FAA and contract towers totaled 64.9 million
operations in 2002, a decline of 2.0 percent from 2001. Activity is
expected to increase remain flat in 2003, largely the result of a
decline of 2.0 percent in air carrier activity. Activity is expected to
rebound sharply beginning in 2004, increasing by 2.6 percent in 2004 and
2.0 percent in 2005. Activity at combined FAA/contract towers is
projected to increase at an average annual rate of 1.7 percent over the
remaining 9 years of the forecast period, reaching 79.1 million
operations in 2014. A large part of the growth after 2005 is the result
of increased commercial aircraft activity (up 2.5 percent annually).
Activity at combined FAA/contract towers are expected to return to
pre-September 11^th^ levels in 2005/06.

General aviation activity is forecast to remain constant in 2003,
reflecting decreased activity levels that began last March (down
5.1 percent March - August). After that, general aviation activity
increases at an average annual rate of 1.4 percent over the remainder of
the forecast period, reaching 43.6 million operations in 2014. General
aviation activity would have declined in 2003 without the addition of
the seven new contract towers.

Military activity, which increased 5.0 percent in 2002, is expected to
increase by 0.4 percent in both 2003 and 2004, the increased activity
due to the seven new contract towers. Military activity is held constant
at the 2004 activity level throughout the remainder of the forecast
period.

Combined instrument operations counts at FAA and contract towered
airports declined by 2.7 percent in 2002. Instrument activity is
expected to decline 0.4 percent in 2003, then increase by 2.6 percent in
2004 and 2.5 percent in 2005. Thereafter, instrument operations increase
at an average annual rate of 2.0 percent over the remainder of the
forecast period, totaling 61.9 million operations in 2014. Instrument
activity at combined FAA/contract towers are expected to return to
pre-September 11^th^ levels in 2006.

![](media/image35.wmf){width="3.2416666666666667in" height="2.21875in"}

Commercial aircraft instrument operations are forecast to increase at
significantly faster rates than are general aviation instrument
operations, up 2.5 versus 1.4 percent over the forecast period. Much of
the increase in commercial activity is due to strong growth by
commuter/air taxis\--up 2.8 percent annually compared to 2.2 percent for
the air carrier segment. Military activity is expected to remain
constant at its 2002 level of activity throughout the forecast period.

En Route Centers

The workload at FAA en route traffic control centers declined by 3.3
percent in 2002, largely due to declines in air carrier and military
activity\--down 8.2 and 2.9 percent, respectively. Commuter/air taxi and
general aviation activity were up 6.1 and 1.9 percent, respectively. The
number of aircraft handled at en route centers is forecast to decline by
0.3 percent in 2003, largely the result of a 2.1 percent decline in air
carrier activity. En route traffic activity then grows by 2.9 percent in
2004, 2.7 percent in 2005, and averages 2.1 percent over the rest of the
forecast period, reaching a total of 55.6 million aircraft handled in
2014. Activity at FAA en route centers is expected to recover to
pre-September 11^th^ levels in 2005.

The number of commercial aircraft handled is projected to increase
2.4 percent annually while general aviation en route activity increases
1.6 percent a year over the 12-year forecast period. Military activity
is held constant at the 2002 activity level throughout the forecast
period.

![](media/image36.wmf){width="3.2416666666666667in" height="2.21875in"}

The higher growth rate at FAA en route centers, relative to activity at
combined towered airports (2.0 versus 1.7 percent), reflects that
commercial activity accounts for a much larger percentage of center
activity---72.3 versus 37.4 percent at towered airports in 2002.
Therefore, the projected larger increases in commercial aircraft
activity have a much greater impact on total center traffic during the
forecast period.

Flight Service Stations

Total flight services originating at traditional FAA flight service
stations (non-automated) were up 0.4 percent in 2002, the first recorded
increase since 1989. However, most of this growth occurred during the
first quarter of 2002, when IFR and VFR flight plans were up 18.3  and
11.5 percent, respectively. These large increases were due, in part, to
restrictions placed on VFR flying after the September 11^th^ terrorist
attacks.

Flight services are forecast to decline 1.8 percent in 2003 and then
decline gradually (0.1 percent annually) over the remaining 11 years of
the forecast period, totaling 28.6 million flight services in 2014. The
number of flight plans originated is expected to decline over the first
3 years of the forecast period, then increase at an annual rate of
0.4 percent over the rest of the forecast period. In 2014, the number of
flight plans originated totals almost 5.8 million, essentially the same
activity level recorded in 2002. The number of pilot briefs (down
0.3 percent annually) and aircraft contacted (down 0.8 percent annually)
decline throughout the entire 12-year forecast period, totaling 7.2 and
2.7 million, respectively in 2014.

The number of DUATS services are projected to grow at an average annual
rate of 1.5 percent over the forecast period, from 16.5 million in 2002
to 19.6 million in 2014. Combined FSS and DUATS services are expected to
total 48.2 million in 2014, an annual increase of 0.5 percent.

**FORECAST RISKS**

The risks inherent in this year's forecasts are largely on the downside.
Prominent in everyone's predictions of future aviation demand is the
assumption that there will not be another terrorist incident aimed at
U.S. aviation. Yet aviation, because of its high visibility and global
reach, has been and will continue to be a target for international
terrorism. However, the implementation of tighter security measures has,
to a large extent, restored the public's confidence in the integrity of
our aviation security systems.

With respect to some inconvenience to travelers that may result from
increased security processing times, little hard data exists to either
confirm or quantify a corresponding effect on activity. In fact,
restored public confidence in aviation security post-September 11^th^
can be attributed to the Transportation Security Administration's work
under very tight deadlines to create a system that improves security
while trying to alleviate customer inconvenience. Currently at many
sites, the TSA exceeds its internal goal of wait times under 10 minutes.

A possible war with Iraq provides one of the greatest risks to achieving
the forecasts contained herein. The U.S. commercial aviation industry
was impacted significantly after Iraq invaded Kuwait on August 2, 1990.
On August 17, the Civil Reserve Air Fleet (CRAF) program activated
approximately 50 U.S. air carrier aircraft. The price of jet fuel
doubled from \$0.57 a gallon in July to \$1.14 a gallon in October and
U.S. commercial carriers reported operating losses of nearly \$3.8
billion during the 1^st^ half of FY 1991. Also during the first 6 months
of FY 1991, domestic enplanements declined 3.1 percent and passengers on
North Atlantic routes declined 28.0 percent. Additionally, Continental
and America West filed for Chapter 11 bankruptcy and Eastern, Midway,
and Pan American ceased operations. The U.S. commercial aviation
industry can ill afford similar impacts in 2003.

Since the events of September 11^th^, Midway, National, Sun Country,
United, US Airways, and Vanguard have filed for Chapter 11 or Chapter 7
bankruptcy. All but United and US Airways have ceased flying.
Twenty-five percent of U.S. large air carrier capacity is now operating
under Chapter 11 bankruptcy. Competing carriers may have to either seek
bankruptcy or risk confrontations with its unions to match the lowered
costs of a restructured United or US Airways. This scenario could lead
to more contractions in aviation services, mainly to small and medium
sized communities. The demand for aviation services would also be
significantly impacted under such a scenario.

The commercial industry's current financial condition, combined with the
uncertainty of other large carrier\'s response to the United and U.S.
Airways bankruptcies, could conceivably result in a major consolidation
of the industry over the next several years. While consolidation may
improve the financial health of individual carriers and the industry,
the fear is that consolidation could lessen competition in many markets.
Less competition could mean higher fares to the flying public and lower
travel demand.

Over the past several years, the gap between what a traveler pays and
the revenue that airlines receive has widened due to increases in the
amount of taxes and fees added to the ticket price. It is now being
debated as to who should bear the cost of increased security\--the
passenger, the airline, or the Government. If the cost of added security
is passed on to the consumer or airlines, it would not only result in a
significant increase in costs to both consumers and airlines, but it
could also reduce demand at the same time.

The economic forecasts used to develop this year's aviation forecasts
assume a very strong recovery starting in mid-to-late 2003. Yet, the
U.S. economy continues to experience depressed equity values and
scandals surrounding business accounting practices, both of which could
slow the recovery. Slower economic growth would not only slow the
recovery in the demand for aviation services but would also slow the
industry's return to profitability. The latest Global Insight economic
forecasts project a 30 percent probability of the U.S. economy entering
a \"double-dip\" recession in 2003.[^18]

Internationally, the Japanese economy, currently in recession (GDP down
0.2 percent in 2002), continues to send mixed signals and a prolonged
recession or continued slow growth could negatively impact the entire
region. Argentina's current financial and political crises, (GDP down
12.2 percent in 2002) has spread to other regional economies, most
notably Venezuela (down 6.7 percent) and Uruguay (down 8.8 percent), and
could worsen and spread to additional countries. Also, if the economic
recovery in the U.S. is less than forecast, this could also negatively
impact countries whose economies are dependent on export trade with the
United States. The current forecasts assume strong passenger growth for
travel between the United States and other world regions. Any slowing of
demand could seriously inhibit the growth in world passenger demand.

The general aviation industry appears to have weathered both the events
of September 11^th^ as well as the economic recession. However, demand
for general aviation products and services, including business jets, was
down in 2002. How quickly the industry recovers depends, in large part,
on a strong recovery in the market for business jets. However, some
financial analysts are predicting that the business jet industry is at
the beginning of what could be a multiyear cyclical downturn. This,
combined with still unresolved security restrictions, could
significantly lower the demand for both business and corporate aircraft
and services.

Unresolved security restrictions also could constrain growth in personal
flying for years to come. Regardless of any new restrictions, how
quickly this flying segment responds to the economic rebound will go a
long way in determining whether general aviation achieves our predicted
increases in the demand for its products and services.

The current forecasts assume that commercial activity (air carrier and
regionals/commuters) return to pre-September levels in 2005/2006.
Therefore, delays could become a critical limit to growth within this
forecast period. How Government and industry planners use the next
several years to develop comprehensive plans to head off certain future
delays will be critical to fulfilling this forecast.

Also, reduced levels of total demand at FAA facilities do not
necessarily imply reduced workload for FAA air traffic controllers. Most
large air carrier schedule reductions at large hub airports occurred
during off-peak periods. At some airports, peak period activity levels
may have increased over pre-September 11^th^ levels. In addition, the
mix of aircraft now operating at most large hubs is significantly more
complex than before September 11^th^. Smaller regional jets that require
greater separation than the larger aircraft they replaced will operate a
greater proportion of flights now and in the future. These complexities
will make the FAA job more challenging even with less overall traffic.

The economic scenarios presented in this document call for a strong
recovery beginning in the latter half of 2003 and sustained moderate
growth for both the U.S. and world economies. If these economic
forecasts are realized, the demand for commercial and general aviation
products and services should fully recover from the twin effects of the
2001 economic recession and events of September 11^th^ by 2005. Demand
should also continue to expand throughout the rest of the forecast
period.

**FORECAST SUMMARY**

Highlights of the current FAA aviation forecasts for the 2003 - 2014
time period include:

-   The U.S. and world economies recover strongly from the current
    recession in mid to late 2003 and achieve moderate sustained growth
    through 2014. The U.S. economy is expected to grow only slightly
    less than that of worldwide economic activity (3.2 versus
    3.3 percent annually). Most of world economic growth is expected to
    take place in Latin American (4.0 percent annually) and Asia/Pacific
    (3.6  percent annually).

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-   Both U.S. large carrier domestic and international passenger traffic
    is expected to achieve positive growth in 2003, with international
    markets forecast to grow significantly faster than domestic markets
    (4.7 versus 3.5 percent annually) over the 12-year forecast period.
    Most of the growth in international travel over this is expected to
    occur in Latin American and Asia/Pacific markets, up 5.1 and 4.7
    percent, respectively.

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-   Regional/commuter passenger traffic will continue to grow at a
    faster rate than their larger domestic counterparts (5.6 versus
    3.5 percent annually) over the forecast period. Stronger growth
    results from additional route transfers from their larger code-share
    partners as well as from the establishment of nontraditional
    point-to-point using the new regional jets.

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-   Air cargo traffic is expected to grow at rates higher than those
    predicted for passenger traffic, with domestic and international
    RTMs increasing at annual rates of 3.9 and 5.8 percent,
    respectively, over the forecast period.

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-   General aviation is expected to achieve low to moderate increases in
    its active fleet (0.7 percent annually) and hours flown (1.5 percent
    annually), with most of the growth occurring in business and
    corporate flying.

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-   Combined aviation activity at FAA and contract facilities is
    expected to grow at annual rates of 1.7 percent annually over the
    12-year forecast period, with commercial activity (up 2.5 percent
    annually) increasing at significant higher rates than those
    predicted for general aviation (1.3 percent annually).

The major uncertainties that have the potential to impact the demand for
U.S. and international aviation services include:

-   A possible war with Iraq provides one of the greatest risks to
    achieving the aviation forecasts. For some period of time, it would
    reduce passenger demand as well as drive operating costs higher. In
    its current financial condition, this would be difficult for the
    U.S. commercial aviation industry to absorb.

.

-   The economic forecasts used to develop this year's aviation predict
    a strong recovery starting in mid to late 2003. Should the recovery
    be weaker, it could push out the recovery in travel demand for
    another year.

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-   For commercial aviation to recover its traffic and profitability,
    business travel must return to pre-2001 levels. The return of
    business travel depends on the recovery and strength of future U.S.
    and world economic activity.

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-   The current forecast projects only a 0.5 percent annual increase in
    fuel prices over the 12-year forecast period. The risk of war with
    Iraq and political unrest in Venezuela have the potential to push
    energy prices considerably higher than forecast. Should this occur,
    the impact on U.S. and world economic growth and air travel could be
    considerable.

-   The strong economic recovery forecast in Asia/Pacific and Latin
    American countries also could be overly optimistic. The current
    economic problems impacting both Japan and Argentina have the
    potential to worsen and spread to other Asia and South America
    countries. This would slow the traffic recovery forecast in these
    regions.

-   Again, there has been a corresponding increase in processing times
    associated with heightened security measures. Without little
    existing data to confirm or quantify any corresponding affect, it
    will be a challenge to forecast what impact unforeseen and increased
    security measures might have on the business traveler. Other, more
    convenient, flexible and economical travel alternatives may become
    more attractive to the business traveler especially involving
    short-distance scheduled travel. The loss of this traffic, mostly
    higher priced business travel, would impact heavily on the
    profitability of U.S. commercial airlines.

Nevertheless, FAA expects air travel to continue as the mode of choice
for both long distance domestic inter-city travel and international
passenger markets throughout the foreseeable future.

[^1]: All stated years and quarters for U.S. economic and U.S. air
    carrier traffic, and financial data and forecasts are fiscal years
    (October 1 through September 30); all stated years and quarters for
    international economic and world traffic and financial data and
    forecasts are calendar years, unless otherwise denoted. Table I-9
    (page I-34) contains summary traffic statistics and growth rates on
    a calendar year basis.

[^2]: *Air Transport World*, January 2003.

[^3]: *Air Transport World*, January 2002

[^4]: In calendar year 2002, it is estimated that U.S. commercial air
    carriers' system capacity and traffic performed as follows: ASMs
    down 3.9 percent; RPMs down 2.2 percent; and enplanements down 2.8
    percent. The system load factor is expected to average 71.0 percent
    in 2002

[^5]: Defined as air carriers whose majority of flights are operated in
    aircraft having more than 70 seats.

[^6]: In calendar year 2002, it is estimated that large air carrier
    domestic capacity and traffic performed as follows: ASMs down 4.0
    percent; RPMs down 3.1 percent; and enplanements down 5.6 percent.
    The domestic load factor is expected to average 70.1 percent in
    2002.

[^7]: In calendar year 2002, it is estimated that large air carrier
    international capacity and traffic performed as follows: ASMs down
    7.9 percent; RPMs down 4.3 percent; and enplanements down 1.7
    percent. The international load factor is expected to average
    75.8 percent in 2002.

[^8]: In calendar year 2002, it is estimated that domestic and
    international RTMs increased 4.0 and 3.1 percent, respectively.

[^9]: In calendar year 2002, it is estimated that regional/commuter ASMs
    grew by 20.2 percent, RPMs by 26.9 percent, and enplanements by 13.9
    percent. The calendar year load factor is expected to average
    61.6 percent.

[^10]: Defined by the U.S. DOT as carriers with annual operating
    revenues greater than \$1 billion. Includes TWA for 1^st^ quarter FY
    2002 but does not include American Eagle whose financial results are
    reported with the regionals/commuters. 

[^11]: DHL, Federal Express, and United Parcel.

[^12]: The U.S. DOT defines nationals as carriers with annual operating
    revenues between \$100 million and \$1 billion; regionals as
    carriers with annual operating revenues less than \$100 million.

[^13]: Loan guarantees have been approved for America West (\$380
    million), America Trans Air (\$148.5 million), and Aloha Airlines
    (\$40.5 million). Conditional approval has been given for loans to
    US Airways (\$900 million), Frontier Airlines (\$63 million), and
    Evergreen International (\$90 million).

[^14]: Regional/commuter carriers reported an operating loss of \$282.6
    million in FY 2001.

[^15]: *Aviation Daily*, Monday, January 13, 2003

[^16]: *2002 Year-end Review and 2003 Forecast---An Analysis*, Aerospace
    Industries Association of America, December 2002.

[^17]: A description of the air carrier model can be found in Appendix
    A.

[^18]: *U.S. Economic Outlook*, Global Insight, Inc., December 2002