2005 FAA AVIATION FORECAST CONFERENCE

FAA AVIAION FORECASTS FISCAL YEARS 2005 -- 2016

Presented by

Robert L. Bowles

Manager, Statistics and Forecasts

Federal Aviation Administration

## Slide 1---FAA Aviation Forecasts Fiscal Years 2005 -- 2016

**The demand for aviation products and services continued to recover in
2004, recording substantial gains in many key measures. However, it is
important to understand where the industry is today relative to where it
was 4 years ago. Since 2000, aviation has endured a number of
unanticipated incidents---an economic recession, terrorist attacks, the
war in Iraq, the SARS epidemic, and the recent run-up in oil
prices\--that have impacted not only commercial aviation but general
aviation as well. We all know the results\--falling traffic and fares,
record losses for commercial aviation, carrier bankruptcies, declining
FAA workload, etc. Although the forecasts call for growth in most
sectors of the industry, it is important to remember that the base from
which we expect to grow is considerably lower than any of us would have
thought possible just a few years ago.**

# Slide 2\--Domestic Passengers Up 6.7 % in 2004

**Domestic passenger volume was up 6.7% in FY 2004 to 627.2 million,
with growth occurring in all segments of domestic industry\--network
carriers were up 0.4 percent, low-cost carriers up 11 percent, and
regional/commuters up19 percent.**

**Despite strong growth in 2004, domestic passenger volume remains 2.2
percent below 2000 levels.**

# Slide 3---International Passengers Up 11.7 % in 2004

**International passenger volume to and from the U.S. was up 11.7
percent in FY 2004 to 134.0 million, with all travel regions recording
double-digit growth The fastest growing region was the Pacific (up 17.7
percent) as demand rebounded from the SARS epidemic in 2003. Latin
America, Canadian Transborder, and Atlantic regions were each up over 10
percent.**

**Despite the strong growth in 2004, international passenger volume
remains 4.7 percent below 2000 levels.**

**[Slide 4---Domestic Yield Down 18.3 % Since 2000]{.underline}**

**The price of flying has fallen significantly since 2000. In nominal
terms, domestic mainline carrier yield declined 2.2 percent in 2004 and
is down 18.3% from the level in 2000. This decline reflects primarily
the growth of low-cost carriers, and the collapse of the 1990's fare
structure. To put this into perspective, 2004 nominal domestic yields
are at about the same level as they were in 1987.**

**[Slide 5---Low-Cost and Regional Carriers Increase Market
Share]{.underline}**

**As I just mentioned, one of the causes of the drop in fares observed
over the past several years has been the growth of low-cost carriers.
This chart shows that the combined domestic share of low-cost and
regional carriers has increased by 13 points since 2000. This share
increase reflects a 28 percent increase in low-cost carrier domestic
enplanements and a 57 percent increase in regional enplanements. During
this same 4-year period, network carrier enplanements declined 20
percent.**

**Causes of the increased share include the transfer of large numbers of
mainline markets to affiliated regional partners, as well as the
financial distress of legacy carriers that forced a restructuring and
downsizing of operations.**

# Slide 6---Air Cargo Revenue Ton Miles up Almost 5 % in 2004

**Turning to cargo, 2004 continued a pattern of growth that begun in
2003, with RTMs up almost 5 percent. Domestic cargo grew 3.8percent
while international cargo grew 5.5 percent.**

**[Slide 7---Commercial Air Carriers Have Lost \$25 billion Since
2000]{.underline}**

**Since 2000 the financial performance of the commercial air carriers in
the U.S. has been dismal, at best. Commercial carriers in the U.S. have
lost over \$25 billion including \$4.7 billion in 2004. While all
carriers have suffered to some degree over the past few years, much of
the recent poor financial performance is concentrated among the legacy
carriers, who despite large reductions in operating costs, still posted
a \$6.0 billion net loss in 2004. Higher jet fuel prices are estimated
to have cost the industry an additional \$3.4 billion in 2004**

**[Slide 8---General Aviation Hours Flown Have Bottomed
Out]{.underline}**

**General aviation activity, as measured by hours flown, has essentially
remained flat following the downturn in 2001. However, there are signs
that point to a recovery in business flying. FAA ETMS data indicates
that general aviation jet aircraft hours were up 6 percent in 2004 while
fractional aircraft hours were up 14 percent.**

**In addition, GAMA reports that general aviation deliveries were up
over 10 percent in 2004. But perhaps most encouraging is the fact that
student pilots, considered to be a key to future industry growth,
increased for a second consecutive year in 2004.**

**[Slide 9---FAA/Contract Tower Instrument Operations Up 2.0 % in
2004]{.underline}**

**Most FAA activity measures increased in 2004, driven by the strong
demand in commercial travel. Instrument operations at FAA and contract
towers were up 2 percent in 2004, the first increase since 2000.
Commercial activity (the sum of air carrier and commuter/air taxi) was
up 4 percent while general aviation activity was essentially flat (down
0.2 percent). Despite the increase, instrument operations remain
7 percent below the peak levels of 2000.**

**[Slide 10---Recovery in Activity Not Uniform Among All
Airports]{.underline}**

**Although most FAA activity measures were up in 2004, it is important
to note that the recovery has not been uniform among airports.
Commercial operations exceeded pre-September 11^th^ levels at only 17 of
the 35 largest airports in 2004. This list includes airports like ORD
and LGA, where growth was spurred by large increases in regional carrier
activity, and DEN and PHL, where growth was fueled by low-cost carriers.
In 2004, the combined commercial operations at the 35 airports was still
2.7 percent below activity levels recorded in 2000.**

**[Slide 11---U.S. Economy Grows an Average of 3.2 %
Annually]{.underline}**

**Looking forward, all of the signs we see point to a continued recovery
and further growth in demand. OMB forecasts that the U.S. economy will
expand by 3.7 percent in 2005, 3.5 percent in 2006, and will average 3.2
percent over the forecast period.**

**[Slide 12---World Economy Grows and Average of 3.2 %
Annually]{.underline}**

**World economic growth is also forecast to rise modestly over the
forecast period. Global Insight is forecasting world economic growth to
average 3.2 percent over the next 12 years with Latin America (up 3.9
percent) and Asia (up 3.6 percent) projected to have the highest
growth.**

**[Slide 13---Energy Prices Rise Sharply This Year Then Decline Over
Next 3 Years]{.underline}**

**Energy prices, as measured by the oil and gas deflator, are projected
to rise 21 percent in 2005, then decline almost 17% over the next 3
years, before rising 2.1 percent annually over the balance of the
forecast period.**

**This translates into \$45/barrel in 2005, falling to \$37/barrel by
2008. In terms of jet fuel price per gallon, the forecast assumes \$1.30
per gallon in 2005, falling to \$1.14 per gallon in 2008. Over the
entire forecast period, oil prices are projected to rise an average of
1.5 percent per year, 1.0 percent less than projected rate of
inflation---2.5% annually.**

**[Slide 14---Domestic Real Yield Falls an Average of 1.7 %
Annually]{.underline}**

**Despite the projected large increase in fuel prices in 2005, the
forecast assumes that domestic passenger yields will fall 3.1 percent,
5.7 percent in real dollars. Domestic real yield is forecast to decline
an average of 1.7 percent annually over the forecast period. By 2016,
domestic real yield is forecast to be 39 percent lower than it was in
2000. Increasing low-cost carrier share, longer trip distances, and a
fundamental change in the business traveler market to lower fares all
contribute to the decline.**

**International real yields are forecast to decline 0.7 percent annually
over the forecast period.**

**[Slide 15---Domestic Passengers Return to Pre 9/11 Levels in
2005]{.underline}**

**Turning specifically to 2005, we are projecting that domestic
passengers will grow 3.6 percent and surpass pre-September 11^th^
levels. All sectors will see growth, although passenger growth for
mainline carriers will be relatively modest as capacity reductions at
United and American will limit growth to 0.7 percent in 2005. Much of
this growth in 2005 occurs among low-cost and regional carriers, the
latter carrier group projected to increase by 15 percent in 2005.**

**[Slide 16---International Passengers Return to Pre 9/11 Levels in
2005]{.underline}**

**We are projecting that international markets will continue to
experience high levels of growth in 2005, with passengers up 8.5%. The
highest growth is projected to occur in the Pacific (up 11.4 percent)
and Canadian Transborder (up 9.3 percent) markets with Latin America and
the Atlantic regions growing about 7.5 percent each. Overall
international passenger levels are projected to surpass 2000 demand
levels in 2005.**

**[Slide 17---Every World Travel Region Returns to 200 Levels by
2006]{.underline}**

**The rebound in international demand has not been uniform across
regions. Passenger demand in the Latin America region returned to 2000
levels in 2004 while the Pacific and Transborder regions are projected
to exceed 2000 levels this year. The Atlantic region is not expected to
surpass pre-September 11^th^ levels until 2006.**

**[Slide 18---Total Passengers Exceed One Billion in 2015]{.underline}**

**Looking out to the end of the forecast horizon, we are still
projecting that overall passenger demand will exceed one billion by
2015, reflecting an average growth rate of 3.6 percent per year.
Mainline air carrier growth is forecast to average 3.1 percent over the
forecast period---2.8 percent in domestic markets and 5.0 percent in
international markets. Regional carrier growth averages 5.5 percent,
with much of the growth occurring during the early years of the forecast
period.**

Slide 19---Low-Cost/Regional Carrier Domestic Share Approaches 55 % by
2016

**We expect low cost and regional carrier market share to continue to
grow over the forecast period. By 2016, their combined traffic could
account for more than 55 percent of all domestic passengers, up from
43 percent in 2004. A large part of the gain occurs during the early
years of the forecast period.**

**[Slide 20---Regional Jet Fleet Grows 38% Over Next Three
Years]{.underline}**

**Turning briefly to our commercial fleet forecast, we are projecting
that regional jets (up to 90 seats) operated by regional carriers will
grow by 621 aircraft, or 38 percent, over the next 3 years. This is on
top of more than a 1,000 aircraft increase since 2000. We should also
note that this year's forecast assumes the beginning of a shift from 50
seat aircraft to 70-90 seat aircraft. The forecast also assumes that the
numbers of turboprop and piston aircraft will decline modestly over the
forecast period.**

**[Slide 21---Low-Cost Carriers Drive Mainline Carrier Fleet
Growth]{.underline}**

**Mainline carrier fleet growth over the next 3 years will be driven
primarily by growth among low cost carriers. These carriers are
projected to grow their fleets by 235 aircraft over the next 3 years
(roughly 75 aircraft per year -- the equivalent of an AirTran or a Jet
Blue). These aircraft are expected to be used primarily to fund
expansion of these carriers' networks, thus increasing their ability to
serve more and more passengers who have historically been served by
legacy carriers.**

**Although we do see modest growth in the legacy carrier fleet, the 2007
fleet is almost 400 aircraft less than their 2000 fleet.**

**[Slide 22---Cargo Revenue Ton Miles Increase 82 % By
2016]{.underline}**

**Turning to our forecast of cargo carrier activity, we are projecting
that cargo RTMs will increase by 82 percent 5.1 percent per year, over
the forecast period. Domestic cargo RTMs are projected to increase 3.3
percent annually while international RTMs increase at an annual rate of
6.3 percent. Much of the growth in international markets is due to trade
expansion and new U.S. air carrier route authority to fly to China.
All-cargo carriers are expected to increase their share in both domestic
and international markets.**

**[Slide 23---General Aviation Hours Flown Up 20 % by
2016]{.underline}**

**Over the course of the forecast, we are projecting that the number of
hours flown by general aviation aircraft will increase by 20 percent.
Hours flown by turbine aircraft will grow more than six times faster
than hours flown by piston aircraft (4.1 percent per year vs.
0.6 percent) although non-jet aircraft will still account for 68.5
percent of total general aviation hours flown in 2016. The growth in
turbine hours reflects the growing GA jet fleet including fractional
ownership aircraft and the introduction of microjets (VLJs) into the
fleet.**

**[Slide 24---Instrument Operations Up 29% at FAA/Contract Towers By
2016]{.underline}**

**Instrument operations at FAA and contract towers are projected to grow
29 percent, or 2.1 percent per year, over the forecast period.
Commercial operations are projected to grow twice as fast as
non-commercial operations (2.7 percent per year vs. 1.3 percent), with
much of the increase driven by strong growth in commuter/air taxi
operations during the early years of the forecast period. By 2016,
commercial operations make up almost 60 percent of all instrument
operations, up from 56 percent in 2004.**

**[Slide 25---Eight Additional Airports Exceed 2000 Activity Over Next 2
Years]{.underline}**

**An earlier slide showed that 17 of the largest U.S. airports exceeded
2000 commercial activity counts in 2004. Over the next several years we
expect an additional eight airports to exceed 2000 levels. In the chart
shown here, the airports in blue lettering represent the 17 airports
exceeding 2000 levels of activity in 2004. The airports in red are
projected to exceed the 2000 activity level this year---JFK, BWI, IAD,
MCO, TPA, and HNL. The airports in green are projected to exceed 2000
activity levels in 2006---EWR and PHX. As demand continues to grow,
other airports will exceed their 2000 activity levels, suggesting that
the window of opportunity to deal with congestion and delays is closing
very quickly.**

**[Slide 26---Implications For the FAA]{.underline}**

**So what does this all mean to the FAA?**

**First, congestion is on the rise again as the demand for aviation
services continues to grow. You no doubt have heard that delays at many
airports were at record levels in 2004 and as demand increases, delays
will only get worse.**

**Second, the continued rapid growth in regional jets, business jets,
and the predicted growth of microjets will only serve to make the future
workload of the FAA more complex than it is today, requiring additional
FAA resources.**

**Finally, the continued decline in yields that we are projecting could
result in trust fund revenues not keeping pace with the resources FAA
needs to satisfy the expected growth in demand for FAA services.**

**[Slide 27---Forecast Risks]{.underline}**

**There are many risks to achieving our forecasts and they are mostly on
the downside. First, the deteriorating financial condition of the legacy
carriers is a significant risk. Should financial circumstances lead to
liquidation of one or more carriers, our projections of traffic and
associated workload would most likely not be met.**

**A second and related risk to the legacy carrier financial condition is
the possibility that fuel prices will not decline as we have assumed in
our forecast. Continued high fuel prices would more than likely be the
catalyst for a liquidation scenario.**

**Finally, there is a real risk that increasing delays at airports could
become so severe that they begin to impact the level of demand. Our
forecasts assume that there is enough capacity in the ATC system to
accommodate the projected levels of demand. Should this not be the case,
then our forecasts of traffic growth and workload may not occur.**

## Slide 28---Forecast Summary

**To sum up,**

**The FAA forecast calls for a continuation of the recovery in traffic
that began in 2003. Passenger demand is projected to return to and
exceed pre-September 11^th^ levels in 2005. Passenger growth continues
at modest rates (3.6%) over the forecast period with commercial carrier
passengers exceeding 1 billion in 2015.**

**Low-cost and regional carriers will continue to gain market share. The
expected gain in low-cost carrier market share is one of the principal
reasons behind our assumption for declining real yields.**

**The growth in traffic, both commercial and non-commercial, will lead
to rising demand for FAA services. This rising demand for services
requires additional resources that may or may not be met.**

**Finally, there are a number of downside risks to our forecast. The
financial condition of the legacy carriers, sustained high fuel prices,
and increasing delays could impact demand to such a degree that our
traffic and activity forecasts may fall short of projected levels.**

**This concludes my presentation. Thank you for your attention.**