**CHAPTER I**

**EXECUTIVE SUMMARY**

**A GREAT START**

**FOR AVIATION IN THE NEW MILLENNIUM!**

Amid a year of escalating fuel prices, growing labor unrest, and
increasing flight delays at U.S. airports, the U.S. commercial aviation
industry recorded its 9^th^ consecutive year of traffic growth and the
general aviation industry recorded its 6th consecutive year of increased
aircraft shipments and record aircraft billings.

Growth in both domestic and international aviation continues to be
driven by the continued economic expansion in the U.S and most world
economies. The current U.S. economic expan­sion, currently the longest in
post-war history, is well into its tenth year (38 quarters, dating from
1991:3). U.S. Gross Domestic Product (GDP) growth has averaged
3.6 percent during the current expansion compared to 4.8 percent during
the previous longest post-war expansion (35 quarters, from 1961:1 to
1969:3).

In addition, U.S. inflation (as measured by the consumer price index)
averaged less than 2.6 percent during the current expansion. The
relatively low rate is due, in large part, to a 1.5 percent average
annual decline in fuel prices during the 1992-99 time period. However,
fuel prices were up 29.5 percent in fiscal year 2000.

Globally, economic gains have averaged about one percent less (GDP up
2.8 percent) than those of the United States during the current economic
expansion. However, the slower rate of world economic growth reflects,
to some extent, the impact of the Southeast Asian financial crisis in
1998, when GDP expanded by just over 2.1 percent.

![](media/image1.wmf){width="3.2416666666666667in" height="2.34375in"}

The relatively strong growth in both U.S. and world GDP since 1994 is
largely responsible for the strong demand for aviation services, a
period marred only by the 1998 Southeast Asia financial crisis which
negatively impacted traffic demand in that region. Worldwide passenger
demand, as measured by revenue passenger kilometers, expanded by an
average of 6.1 percent over the 1994-1999 time period. During this same
period, the number of passengers carried worldwide increased at an
average annual rate of 5.3 percent, growing from 1.1 billion in 1993 to
almost 1.6 billion in 1999. Although traffic figures are not available
for worldwide traffic in 2000, it appears that growth should be in the
6.0 to 8.0 percent range.

U.S. air carrier (sum of large air carriers and regionals/commuters)
traffic, as measured by revenue passenger miles (RPMs), has averaged
5.1 percent since 1993. During this same period, the number of
passengers carried on U.S. air carriers increased at an average annual
rate of 4.3 percent, growing from 515.6 million in 1993 to 693.5 million
in 2000. The absolute increase in RPMs during this 7-year period totals
over 200 billion. This eclipses the absolute increases of 174 billion
and 132 billion achieved during the entire decade of the 1980s and
1970s, respectively.

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

U.S. air carrier domestic RPMs expanded at an annual rate of 5.3 percent
between 1993 and 2000 while the number of passenger enplanements
increased by 4.5 percent annually. A large part of this growth is
attributed to the smaller regional/commuter carriers, whose RPMs and
enplanements grew at average annual rates of 12.5 and 7.1 percent
compared to 5.1 and 4.1 percent for the larger air carriers.

![](media/image3.wmf){width="3.2416666666666667in" height="2.34375in"}

During this same 7-year period, U.S. air carrier international RPM and
enplanement growth averaged only 4.3 and 2.7 per­cent annually, the
slower growth due, in large part, to depressed traffic in Asia/Pacific
markets\--RPMs up 1.5 percent and enplanements down 2.8 percent. Latin
American markets' RPMs and enplanements grew by 8.1 and 5.1 percent,
respectively, during the same period while growth in Atlantic markets
averaged 5.1 and 4.1 percent.

Air cargo demand has grown at a somewhat faster pace than passenger
demand since 1993, with worldwide freight revenue ton-kilometers (RTKs)
increasing at an annual rate of 6.0 percent over the 1994-1999 period.
U.S. air carrier freight revenue ton-miles (RTMs) grew by 7.6 percent
annually over the 1994-2000 period, 5.1 percent in domestic markets and
10.1 percent in international markets.

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height="2.3194444444444446in"}

Expanding U.S. and world economic growth, combined with the strong
demand for both passenger and air cargo services, have led to record
profits for both world and U.S. air carriers. Based on data compiled by
the International Civil Aviation Organization (ICAO), world air carriers
(including U.S. airlines) reported cumulative operating and net profits
totaling \$78.2 and \$34.0 billion, respectively, over the 6-year period
ending in 1999. U.S. air carriers' cumulative operating and net profits
totaled \$47.2 and \$23.7 billion, respectively, over the 7-year period
ending in 2000. For U.S. carriers, this is more than double the combined
reported profits of the decade of the 1970s (\$5.8 billion operating and
\$3.4 billion net profits) and the 1980s (\$11.6 billion operating and
\$2.6 billion net profits).

![](media/image5.wmf){width="3.2416666666666667in" height="2.45in"}

The turnaround in the general aviation industry can be attributed to a
combination of two events\--the current U.S. economic expansion that
began in 1991 and the passage of the General Aviation Revitalization Act
in 1994. Based on projections by the Aerospace Industries Association of
America, general aviation aircraft shipments are expected to record a
6^th^ consecutive year of increase in 2000 (up 12.0 percent to 2,795)
while industry billings are expected to reach a new all-time high of
\$8.2 billion.[^1] General aviation shipments have more than tripled
since 1994 while billings have increased almost 5-fold over the same
time period.

![](media/image6.wmf){width="3.2416666666666667in"
height="2.295138888888889in"}

The FAA's General Aviation and Air Taxi Activity Survey also reports
increases in both the general aviation active fleet and hours flown for
a 5^th^ consecutive year in 1999. In addition, general aviation activity
at FAA air traffic facilities, both itinerant and local operations,
continues to perform at levels well above those achieved during the
mid-1990s.

The strong growth by both the commercial and general aviation industries
during the last 7 years has also expanded the demand for services at FAA
air traffic facilities. During this period, activity growth at combined
FAA and contract tower airports grew at an average rate of 1.5 percent
(IFR activity up 2.1 percent) annually, while activity at en route
centers grew at an annual rate of 3.0 percent.

![](media/image7.wmf){width="3.2416666666666667in" height="2.35625in"}

Most of the growth at FAA air traffic facilities has occurred in just
the last 4 years. Since 1997, activity at towered airports has increased
at an annual rate of 2.6 percent (IFR up 3.0 percent), while activity at
en route centers grew by 3.3 percent annually. It is the growth over the
past 4 years that has given rise to the delays now occurring at most
U.S. commercial airports.

Clearly, the 7-year period since 1993 has indeed been a time of
unprecedented growth for both the commercial and general aviation
industries. The extremely positive results recorded during this period
have assuredly provided the aviation industry with high expectations for
continued growth and prosperity throughout the 12-year forecast period.

**REVIEW OF 2000**

UNITED STATES AND WORLD ECONOMIC ACTIVITY

The U.S. economy expanded by 5.4 percent in 2000, the 4^th^ consecutive
recorded increase of 4.0 percent or better. However, inflation was
3.2 percent in 2000, the highest recorded increase in prices since 1991
(up 5.1 percent). In both years, the driving factor behind the
relatively high inflation was increased fuel prices, up 11.6 percent in
1991 and 29.5 percent in 2000.

Worldwide economic growth is expected to average 4.4 percent in 2000,
the strongest growth achieved since 1976 (up 5.1 percent). Most of this
expansion is the result of unprecedented strong growth in the United
States and Canada (up 4.7 percent) offsetting somewhat slower growth in
European/Africa/Middle East countries (up 3.6 percent). The economies of
the Asian/Far East and Latin America countries are expected to expand by
4.4 and 4.3 percent, respectively, in 2000.

COMMERCIAL AVIATION

In 2000, the large U.S. air carriers' system capacity (ASMs or available
seat miles) increased by 4.4 percent, only slightly less than the
4.6 percent increase recorded in 1999. Passenger demand (RPMs and
enplanements) grew by 6.4 and 4.7 percent, respectively. As a result of
faster traffic growth relative to growth in capacity, the system-wide
load factor (including domestic and international services) increased to
72.2 percent, an all-time record high. The previous highest system load
factor was the 70.9 percent recorded in 1998.

Domestic capacity (50 states, Puerto Rico, and the U.S. Virgin Islands)
increased by 4.6 percent in 2000. Domestic capacity is up 10.1 percent
over the past 2 years, the highest consecutive year increase recorded
since 1986-87 (up 19.5 percent). RPMs and passenger enplane­ments grew by
6.3 and 4.9 percent, respectively, the result being a 1.1 point increase
in load factor to 70.9 percent. This is also an all-time record high,
surpassing the previous high of 70.1 percent recorded in 1998.

Traffic growth would have been higher in 2000 except for the "Y2K
effect" on traffic. It appears that a relatively large number of
travelers avoided travel by air around the first of the year for fear of
the Y2K impact on airline safety. In December 1999 and January 2000,
domestic passengers were up only 1.5 and 1.7 percent, respectively.
International passengers were down 7.0 and 7.1 percent during the same
time period. Although some of the lost travel may have been rescheduled
for later in the year, it is possible that passenger traffic could have
been between 0.5 and 1.0 percent higher.

Regional/commuter airline traffic continued to grow at rates
significantly higher than that of the larger air carriers, with RPMs and
enplanements up 18.2 and 7.1 percent, respectively. Regionals/commuters
capacity increased by 15.3 percent in 2000, the result being a 1.5 point
increase in load factor to 59.0 percent---a new all-time high.

In 2000, it is estimated that U.S. and foreign flag carriers combined
transported a total of 139.2 million passengers between the United
States and the rest of the world, an increase of 6.0 percent over 1999.
This traffic volume is distributed among the four world travel markets
as follows: 52.7 million (up 8.2 percent) in Atlantic markets; 39.4
million (up 1.7 per­cent) in Latin American markets; 26.5 million (up
9.5 percent) in Asia/Pacific markets; and 20.6 million (up 4.0 percent)
between the United States and Canada.

On the other hand, international enplanements on U.S. flag carriers
alone grew by only 2.4 percent in 2000, less than half the estimated
growth in total international traffic to and from the United States.
U.S. carrier passenger enplane­ments were up 9.3 percent in Atlantic
markets and 2.8 percent in Latin American markets. How­ever, the number
of passenger enplanements in Asia/Pacific markets declined by
8.9 per­cent in 2000, the 3^rd^ consecutive year of declining passenger
traffic. During this 3-year period, U.S. air carriers Asia/Pacific
enplanements have declined by 29.1 percent while total passengers in the
market are up 8.2 percent. While these declines may reflect some loss of
market share by U.S. flag carriers, the large decline in U.S. carrier
passenger counts is a bit misleading. A large part of the decline is the
result of the restructuring and/or elimination of intra-Asia routes by
Northwest and United, the two largest U.S. carriers operating in the
region. The elimination of the shorter-haul intra-Asia markets also
helps to explain the large increase in the average Asia/Pacific
passenger trip length (up 1,342 miles) between 1997 and 2000.

U.S. air carriers' air cargo traffic was up 6.7 percent in 2000, with
domestic RTMs up 4.9 percent and international RTMs up 8.4 percent. This
represents a significant turnaround from 1999 when cargo traffic
declined 0.9 percent, the first recorded decline since 1985. The decline
in 1999 was largely due to a 2.7 percent decline in international cargo
traffic, in particular freight movements between the U.S. and Latin
American and Asian markets. It appears that these markets have turned
around in 2000.

Domestic freight/express RTMs (12.1 billion) were up 5.3 percent while
domestic mail RTMs (2.5 billion) were up 3.2 percent over 1999 levels.
International freight/express (14.8 billion) and mail (531.9 million)
RTMs were up 8.6 and 4.4 percent, respectively, in 2000.

Industry operating and net profits totaled \$7.6 and \$3.6 billion,
respectively in 2000. This represents declines of \$1.1 billion in
operating profits and \$1.7 billion in net profits from 1999. Operating
revenues were up 8.3 percent in 2000, due to a combination of strong
traffic growth and a 3.5 percent increase in passenger yield. Operating
expenses were up 10.0 percent, due, in large part, to a 48.0 percent
increase in the price of jet fuel\--from 49.69 to 73.83 cents per
gallon. The run-up in oil prices is estimated to have increased industry
operating expenses by over \$4.8 billion in 2000.

The impact of higher fuel prices on individual carrier' profits varied
considerably, largely depending on the percentage of fuel requirements
that each carrier was able to hedge at lower-than-market costs.
Generally, the larger air carriers were more favorably impacted by use
of these fuel-hedging strategies. For example, in September 2000
domestic jet fuel prices averaged 89.98 cents per gallon. However, the
average price paid for jet fuel ranged from a low of 67.51 cents by
American Airlines to a high of \$1.91 per gallon by Tatonduk, a cargo
carrier in Alaska.

In general, hedging appears to have further heightened the disparity
that exists among the individual U.S. carriers with regard to financial
profitability and/or viability. In 2000, all but two of the
15 majors[^2] reported positive earnings, with operating and net profits
for the group totaling \$7.3 and \$3.7 billion, respectively. Operating
results for the majors ranged from a high of \$1.4 billion (American) to
a loss of \$364.1 million (Trans World). Three carriers (American,
Delta, and United) accounted for over half (54.1 percent) of the group's
total earnings. Not surprisingly, these three carriers were among the
leaders in the percentage of fuel hedged in 2000.

The financial results of many of the smaller nationals[^3] and
regionals[^4] worsened in 2000, with 22 of the 53 reporting carriers
incurring operating losses. The combined operating profits of the
nationals and regionals totaled just under \$500 million in 2000, with
earnings ranging from an operating profit of \$220 million (Atlas
Airlines) to an operating loss of nearly \$51 million (Vanguard
Airlines).

A number of the smaller carriers cited the burden of escalating fuel
prices and the lack of hedging protection as major factors for their
poor financial performance in 2000. The record for the low cost,
low-fare, new entrant carriers was mixed in 2000, with several of the
carriers posting large operating losses. Since December 1999, a total of
10 carriers have filed Chapter 11 bankruptcy, including several startup
carriers.

The regional/commuter airline industry posted an operating profit of
\$546.2 million in 2000, \$162.4 million less than the \$708.6 million
profit recorded in 1999. The nine Form 41 carriers (operating at least
one aircraft with more than 60 seats) reported operating profits of
\$341.4 million while 81 Form 298-C carriers (operating only aircraft
with 60 seats or less) posted profits of \$204.8 million. The lower
profits reflect the significantly higher fuel prices in 2000.

Orders for commercial jet aircraft totaled 1,450 during the first 3
quarters of 2000, a 54.7 percent increase over the same period in 1999.
The smaller regional jets (37 to 70 seats) accounted for 45.6 percent of
the orders (661 aircraft) during 2000, a 51.6 percent increase over the
436 aircraft ordered during the first 9 months of 1999. While the total
number of jets in the U.S. regional/commuter fleet totaled only 569 in
2000 (547 defined as regional jets), the 1,582 orders over the past 11
quarters show that this will continue to be the fastest growing segment
of the industry over the next several years.

A total of 788 commercial jet aircraft were delivered during the first 3
quarters of 2000, a slight decline from the same 1999 period. A total of
206 regional jets were delivered during the first 9 months of 2000, a
53.7 percent increase over deliveries during the same 1999 period.

GENERAL AVIATION

By any measure, 2000 was another very good year for general aviation.
Unit shipments of general aviation aircraft are well on their way to
recording a sixth consecutive year of increase. General aviation
manufacturers' shipments increased from 928 aircraft in 1994 to
2,525 aircraft in 1999 (up 172 percent) and were up an additional
16.3 percent (2,000 units) during the first 3 quarters of 2000. Of
particular importance is the renewed interest in piston powered
aircraft. Shipments of piston powered aircraft have more than tripled
between 1994 and 1999 (from 499 to 1,747) and were up an additional 13.8
percent (1,336 units) during the first 9 months of 2000.

Shipments of jet aircraft have increased in each of the past 7 years
(from 171 in 1992 to 514 in 1999) and are headed toward an 8^th^
consecutive year of increase (352 units, up 15.1 percent) through the
first 3 quarters of 2000. The increased sales of jet aircraft reflects,
to a large extent, the relative importance of the rapidly growing
fractional ownership programs to the industry's current turnaround and
its future growth. While shipments of turboprop aircraft (down 2.6
percent in 1999) have not fared as well as the other two aircraft
categories, shipments totaled 233 (up 36.3 percent) during the first
9 months of 2000.

Billings for general aviation aircraft totaled almost \$7.9 billion in
1999\--an all-time record high. During the first 9 months of 2000, the
industry reported billings of almost \$6.3 billion, up 10.4 percent over
the same time period in 1999. The larger increase in shipments relative
to billings reflects increased shipments of the lower unit-priced piston
aircraft. The export market for general aviation aircraft has been a
mixed bag so far in 2000. Export shipments were up 11.3 percent during
the first 3 quarters of the year. However, billings declined
20.7 percent over the same time period.

Based on the results of the 1999 General Aviation and Air Taxi Activity
and Avionics Survey, the active general aviation aircraft fleet and
hours flown both increased for a 5^th^ consecutive year, up 7.2 and 13.0
percent, respectively. According to the 1999 survey, the active general
aviation fleet totaled 219,464 and flew an estimated 31.8 million hours.

General aviation activity counts at FAA air traffic facilities were
mixed in 2000, possibly reflecting the increased price of aviation
fuels. In September, the price of jet-A ranged between \$2.31 and \$2.60
per gallon while the price of avgas ranged between \$2.35 and \$2.82 per
gallon. Operations at combined FAA and contract towers declined
0.5 percent, with itinerant operations down 0.8 percent and local
operations basically unchanged from 1999. Conversely, instrument
operations at the combined towered airports increased for a 4^th^ fourth
consecutive year, up 1.9 percent in 2000 and 17.8 percent over the last
4 years.

After recording increased activity for 8 consecutive years (up 20.3
percent between 1992 and 1999), general aviation activity at FAA en
route centers declined by 0.7 percent in 2000. Despite a decline in the
number of general aviation aircraft handled in 2000, there were some
positive trends that reflect continuing growth in business and corporate
flying. Although domestic departures recorded at FAA en route centers
were down 1.7 percent, oceanic departures were up 40.4 percent.
Additionally, both domestic and oceanic overs at FAA en route centers
showed positive gains in 2000, up 2.5 and 16.2 percent, respectively.

Although local operations (generally touch-and-go activity) at FAA and
contract towered airports remained unchanged in 2000, local activity was
up 17.4 percent during the prior 3 years. If fuel prices decline as
projected, we can expect the turnaround exhibited in recreational and
instructional flying over the previous several years to resume once
again.

The number of active pilots are estimated to have increased for a 3^rd^
consecutive year in 2000, totaling 645,539. All four of the major pilot
categories are estimated to have increased in 2000\--student, private,
commercial, and airline transport. The number of instrument rated pilots
was estimated to increase by nearly 6,000 to 315,100 in 2000, also the
3^rd^ consecutive year of increased numbers.

Although most of the statistics relating to general aviation activity
are encouraging, it is the numbers relating to student pilots, one of
the key factors impacting the future of the general aviation industry,
that are of particular importance to the general aviation industry. The
industry has, over the past several years, instituted a number of
industry-wide programs, including "BE A PILOT," which are designed to
attract new pilots to general aviation. The future direction of the
industry will depend, in large part, on the success of these programs.

FAA WORKLOAD

At the end of fiscal year 2000, there were a total of 459 towered
airports\--267 FAA towers and 192 FAA contract towers. This compares to
402 FAA towers and 33 contract towers in 1994, the year that the FAA
began an extensive conversion of Level 1 towers.

In 2000, FAA contract towers accounted for 22.6 percent of the total
combined activity at the 459 towers, up from only 3.0 percent in 1994.
As in 1994, the majority of traffic activity at contract towers is
performed by general aviation aircraft\--83.0 percent in 2000 compared
to 82.8 percent in 1984.

FAA and Contract Towers

The combined activity counts at FAA and contract towers totaled
68.7 million in 2000, an increase of 0.8 percent over 1999. The
relatively slow growth in the tower counts was, in large part, due to
declines in both general aviation and military activity. General
aviation operations declined 0.5 percent while military activity was
down 1.2 percent. Commercial operations (the sum of air carrier and
commuter/air taxi) totaled 25.9 million, an increase of 3.1 percent. Air
carrier operations grew by 3.9 percent while commuter/air taxi
operations increased by 1.7 percent.

Air carrier counts were negatively impacted during the summer months by
the labor unrest at United Airlines. It is estimated that United
cancelled a total of 15,000 flights (30,000 operations) during the June
to September period.

Activity at FAA air traffic control towers totaled 53.2 million in 2000,
a decline of 3.4 percent from 1999 activity levels. Operations at
contract towers totaled 15.5 million, an increase of 18.6 percent.

Instrument operations at the combined FAA and contract towers totaled
53.0 million in 2000, an increase of 2.3 percent. General aviation
activity was up 1.8 percent while military activity grew by 1.6 percent.
Commercial activity expanded by 2.7 percent in 2000, with air carriers
up 4.4 percent and commuters/air taxis up 0.3 percent. Instrument
activity at FAA towered airports (98.4 percent of total combined
operations) were also up 2.0 percent in 2000, while instrument
operations at contract towers increased 17.4 percent.

FAA En Route Centers

The number of Instrument Flight Rule (IFR) aircraft handled at FAA's en
route air traffic control centers totaled 46.0 million in 2000, an
increase of 3.1 percent over 1999. The number of commercial and military
aircraft handled were up 4.1 and 3.0 percent, respectively. General
aviation activity declined 0.7 percent in 2000.

FAA Flight Service Stations

The number of traditional (non-automated) services provided at FAA
Flight Service Stations (FSS) totaled 30.5 million in 2000, a 5.9
percent decline from 1999 levels. All categories of flight services
declined in 2000: pilot briefings, down 7.2 percent; aircraft contacted,
down 3.0 percent; and flight plans originated, down 5.1 percent.

The Direct User Access Terminal System (DUATS) provides an automated
alternative to the FSS for obtaining pilot briefing information and
filing flight plans. The number of weighted DUATS services totaled
15.0 million (up 7.9 per­cent) in 2000. Combined FSS and DUATS services
totaled 45.5 million in 2000, a decline of 2.4 percent from the number
of combined transactions recorded in 1999.

**FAA**

**AEROSPACE FORECASTS**

**FISCAL YEARS 2001 - 2012**

Relatively few additions or format changes have been made to this year's
FAA aviation forecast document. The changes made are relatively minor
and occur mainly in Chapter IV, Regionals/ Commuters, and in Forecasts
Tables 23-26, which pertain to that segment of the aviation industry.

Several adjustments were made to the regional/commuter historical
database to correct for understated traffic. Carriers reporting on DOT
Form 298-C are only required to report originating passengers and not
enplanements, which includes both originating passengers as well as
connecting passengers. With the increased hubbing activities of ComAir
and Atlantic Coast, this resulted in an understatement of almost 1.9
million passengers (2.5 percent) in 1999. Additionally, the "wet
leasing" arrangement between Chicago Express and American Trans Air
resulted in all of regional carrier's traffic being reported as air
carrier. Adjustments were made for the period 1997-2000 to correct for
these undercounts of regional/commuter passengers.

In addition, a one-time analysis of 10 years of the regional/commuter
carrier's Official Airline Guide schedules (1991-2000) is included as
part of the discussion in Chapter IV. The purpose of the analysis was to
assess the impact that regional jets have had on the regional/commuter
industry since their introduction in 1993.

Other changes include the addition of regional/commuter passenger yield
and available seat mile data to the regional/commuter forecast tables.

For a 3^rd^ year, the document contains a chapter on commercial space
transportation prepared in conjunction with the staff of the FAA's
Commercial Space Transportation Office. This chapter is intended to
provide an overview of the state of the space transportation and
includes forecasts of expected commercial launches over the next several
years. The forecasts and discussion can be found in Chapter IX.

The Web version of *FAA Aviation Forecasts Fiscal Years 2001 -- 2012*
does not contain the discussion of assumptions and forecasts for the
individual aviation sectors that are included in the printed
version---commercial air carriers, regionals/commuters, general
aviation, and helicopters. In addition, the printed version contains
discussions and forecasts of the U.S. and world economies, activity at
FAA air traffic facilities, and commercial space launches. Copies of the
printed forecast document can be obtained by contacting the Statistics
and Forecast Branch at (202) 267-3355.

**ECONOMIC**

**FORECASTS**

The economic forecasts used by the FAA to project domestic aviation
demand are provided by the Executive Office of the President, Office of
Management and Budget (OMB). In addition to the OMB forecasts, the FAA
also uses the U.S. macro economic projections of two commercial
forecasting services\--DRI/McGraw Hill (DRI) and WEFA, Inc. (WEFA).
These alternative forecasts provide the FAA with a range of economic
forecasts with which to gauge the risk associated with variations from
the OMB projections. The FAA uses the world and individual country
economic projections provided by WEFA to forecast the demand for
international aviation services.

*On January 22, 2001, just after the forecast document had been
submitted for printing, OMB issued a revised 11-year (2001-2011)
forecast for the U.S. economy, significantly lowering the projected
economic growth in 2001. However, the long-term U.S. economic forecasts
for 2011/2012 remain basically unchanged. The web version of the
Executive Summary, Summary Tables I-1 through I-7, and the 49 Forecast
Tables have, where relevant, been revised to reflect the latest OMB U.S.
economic forecasts. The revised tables and series are noted by an R
after the table number.*

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
sufficiently precise to predict interim business cycles. In addition,
unanticipated developments, such as the 1997-98 Southeast Asia financial
crisis, the 1998 Northwest Airlines' strike, or United Airlines' labor
problems during the summer of 2000 cannot be predicted.

In addition to the economic forecasts prepared by OMB and the economic
forecasting services, the FAA incorporates many of the relevant
assumptions developed at the September 1999 FAA/TRB Future Aviation
Activities 11^th ^International Workshop. Although the FAA makes use of
the recommendations and assumptions developed for both the commercial
and general aviation industries, it relies heavily on the assumptions
and forecasts prepared by the three industry panels on general
aviation\--Light General Aviation, Business Aviation, and Vertical
Flight\--in preparing its general aviation and helicopter forecasts. The
12^th^ FAA/TRB Workshop is scheduled to be held in Washington, D.C. on
September 12-14, 2001.

The projected growth of aviation demand discussed in this and subsequent
chapters is consistent with the national short- and long-term economic
growth forecasts discussed in greater detail in Chapter II. Table I-1R
summarizes the key U.S. and world economic assumptions used in
developing the domestic and international aviation demand forecasts.
Annual historical data and economic forecasts are presented in tabular
form in Tables 1 through 5.

United States Economy

While there is basic agreement among most economic forecasters as to the
general direction of the U.S. economy\--sustained growth\--there are
significant differences among the economic projections supplied by OMB,
DRI, and WEFA, especially during the 2002-2005 time period. The two
economic forecasting services are both considerably more optimistic than
OMB with regard to economic growth during this period, averaging
3.7 percent annual growth compared to only 3.1 percent for the revised
OMB forecast.

The revised OMB economic forecasts anticipate moderate growth throughout
the forecast period. In the short-term, U.S. real GDP is projected to
increase by 2.7 percent in 2001, then increase to average growth of
3.2 percent over the next 5 years. GDP is forecast to increase at an
average annual growth rate of 3.1 percent over the entire 12-year
forecast period. The consumer price index is projected to remain in the
moderate range throughout the 12-year forecast period, increasing at an
average annual rate of 2.5 percent.

The oil and gas deflator, which was up 29.5 percent in 2000, is
projected to decline by 5.0 percent in 2001, 16.9 percent in 2002, and
5.0 percent in 2003. Starting in 2004, oil prices resume a more moderate
upward trend, increasing by an average 1.8 percent over the remaining 9
years of the forecast period. Fuel prices are forecast to decline at an
average annual rate of 0.9 percent over the entire 12-year forecast
period, the result being a 3.4 annual decline in real fuel prices.

No major disruptions in the price or availability of oil have been
assumed during the 12-year forecast period.

World Economy

Worldwide economic growth is expected to exceed that of the United
States by approximately 0.3 percent annually over the 12-year forecast
period, increasing at an average annual rate of 3.4 percent. Economic
growth is forecast to be greatest in the Asia/Pacific and Latin America
regions, expanding at annual rates of 4.6  and 4.4 percent,
respectively. These high rates of growth assume that the two regions
have fully recovered from the impacts of Southeast Asian and Brazilian
financial crises. Economic growth in the Europe/Africa/Middle East
countries and Canada are expected to average 2.8 and 2.7 percent,
respectively, over the forecast period.

**AVIATION TRAFFIC AND**

**ACTIVITY FORECASTS**

The large commercial air carrier traffic and activity forecasts are
summarized in Table I-2R, the forecast assumptions in Table I-3R. A
detailed discussion of the forecasts and underlying assumptions can be
found in Chapter III. Year-to-year historical data and forecasts can be
found in Tables 6 through 22.

The regional/commuter forecasts and assump­tions are summarized in Table
I-4R. The general aviation forecasts are summarized in Table I-5.
Detailed discussions of the forecasts and underlying assumptions for the
regionals/ commuters and general aviation can be found in Chapters IV
and V. Year-to-year historical data and forecasts can be found in
Tables 23 through 26 for regionals/commuters and Tables 27 through 31
for general aviation.

Commercial Aviation

Domestic Air Carrier

Passenger Traffic

Domestic air carrier RPMs and passenger enplanements are forecast to
increase at annual rates of 4.2 and 3.6 percent, respectively, over the
12-year forecast period. The forecast assumes that domestic RPMs and
enplanements will grow by 3.3 and 2.7 percent, respectively, in 2001,
then increase marginally faster in 2002, growing by 3.5 and 2.9 percent,
respectively. U.S. carriers are expected to achieve somewhat higher
growth beginning in 2003, with RPMs and enplanements averaging 4.4 and
3.8 percent over the remainder of the forecast period.

Higher passenger yields are expected to impact domestic traffic demand
in the short-term. Domestic passenger yields are expected to increase by
2.9 and 2.5 percent during the first 2 years of the forecast period
(basically flat in real terms), due in part to higher fuel costs in 2001
and expected higher labor costs in both years. Yield increases moderate
thereafter, averaging 0.8 percent over the remaining 10 years of the
forecast period. Real yields decline by an average 1.7 percent during
the same 10-year period.

The relatively large decline in real yields over the latter years of the
forecast is based on the assumption that increased competitive pressures
(both domestically and internationally) will force 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 from low
cost carriers, such as Frontier and JetBlue. Internationally, increased
competition will come from expanded open sky agreements and new and
existing global alliances. Additionally, the expanded use of electronic
ticketing should continue to reduce the costs associated with this
marketing/distribution function. There should also be considerably less
pressure exerted on operating costs from rising oil prices throughout
the forecast period

Air carrier aircraft operations are forecast to increase at an annual
rate of 3.1 percent during the 12-year forecast period. The slower
growth in activity at FAA air traffic facilities relative to expected
traffic increases (3.6 percent growth in domestic enplanements) reflects
the efficiencies which result from the assumed increases in both
domestic average aircraft size (up 0.7 seats annually) and the passenger
trip length (up 4.6 miles annually). However, very little gain is
expected to result from increased domestic passenger load factors. The
current forecast assumes that load factors will decline gradually from
70.9 percent in 2000 to 70.0 percent in 2003, then resume its upward
trend and average 70.5 percent for most of the remaining years of the
forecast period.

International Air Carrier

Passenger Traffic

Forecasts of total passenger traffic (sum of U.S. and foreign flag
carriers) are provided between the United States and three world travel
areas\--Atlantic, Latin America (including Mexico and the Caribbean),
and the 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 WEFA.

Total passenger traffic between the United States and the rest of the
world is expected to grow from 139.2 million in 2000 to 258.8 million in
2012, an average annual growth rate of 5.3 percent. Passenger traffic is
expected to be strongest in Latin American and Pacific markets, growing
at annual rates of 6.4 and 6.2 percent, respectively, over the forecast
period. Passenger traffic is projected to grow 4.4 percent annually in
Atlantic markets and 4.0 percent a year in Canadian markets.

U.S. air carrier international RPMs and passenger enplanements are
forecast to increase at average annual rates of 6.1 and 5.9 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 America and Asia/Pacific
markets---up 6.5 and 6.1 percent, respectively. Passenger growth in the
Atlantic markets averages 5.1 percent over the same 12-year forecast
period.

The slowdown in U.S. economic activity slows U.S. air carrier
international demand only marginally in 2001, with RPMs and enplanements
up 6.4 and 5.8 percent, respectively. Stronger growth is expected to
resume in 2002 (RPMs and enplanements up 7.1 and 6.5 percent,
respectively) and to continue throughout most of the remainder of the
forecast period.

The air carrier forecasts assume that commercial air carriers will
continue to benefit from the strong economic growth expected to take
place both within the United States and worldwide. It is also assumed
that electronic technology improvements, along with a continuation of
cost containment efforts, will benefit the overall financial performance
of both U.S. and foreign flag carriers. In addition, the operation of a
fleet consisting entirely of more fuel-efficient stage-3 aircraft should
result in further cost savings and increased industry productivity.
These productivity improvements should strengthen the industry\'s
overall financial performance.

Regionals/Commuters

Passenger Traffic

The regional/commuter industry consists of carriers that report on DOT
Form 298-C (81 carriers in 2000) and DOT Form-41 (9 carriers in 2000).
For reporting purposes, the designation is based on aircraft
size\--carriers operating one aircraft with more than 60 seats report
all traffic, whether transported on larger or smaller aircraft, on DOT
Form 41. All other carriers report on DOT Form 298-C.

In 2000, the regional/commuter airlines enplaned 79.6 million
passengers, 12.5 percent of all passenger traffic in scheduled domestic
air service. By the year 2012, these carriers are expected to carry
154.1 million passengers (5.7 percent annual growth) and to account for
15.7 percent of all domestic passenger enplane­ments.

Regional/commuter airlines RPMs are expected to increase by 7.3 percent
annually over the forecast period, growing from 22.3 billion in 2000 to
52.2 billion in 2012. Most of the growth in regional/commuter traffic is
expected to occur among the Form 41 carriers (RPMs and enplanements up
8.7 and 6.8 percent, respectively) or from the larger Form 298-C
carriers who operate the new regional jets.

The significantly higher growth in RPMs relative to enplanements is the
result of expected large increases in the average passenger trip length
for regional/commuter carriers, increasing from 280.4 miles in 2000 to
338.8 miles in 2012. This increase in trip length is due to the
continued integration of large numbers of regional jets (1,617 over the
12-year forecast period) and high-speed turboprops into the
regional/commuter fleets. These aircraft, with ranges of up to
1,000 miles, are expected to open up numerous new opportunities for
growth in non-traditional regional/commuter markets. The increased use
of regional jets is also expected to lead to further route
rationalization by the larger commercial air carriers, including markets
in the 400 to 500 mile range and beyond. This phenomenon is expected to
be one of the drivers of growth for the regional/commuter carriers
during the first half of the forecast period.

The move to greater use of regional jets and larger propeller-driven
aircraft results in the average seating capacity of the regional fleet
increasing from 37.5 seats in 2000 to 46.0 seats in 2012. Most of the
growth in aircraft seat size occurs among the larger Form 41 carriers
whose average aircraft seat size increases to 53.0 seats in 2012, up
from 44.9 seats in 2000. Form 298-C carriers' average aircraft seat size
increases from 30.9 seats in 2000 to 36.5 seats in 2012. The number of
jets (regional and other) in U.S. regional/commuter service is projected
to grow from 569 in 2000 to 2,190 in 2012.

Air Cargo

Air cargo demand by U.S. commercial air carriers is expected to grow at
annual rates that are about 1.0 percent higher than those forecast for
passenger demand. System RTMs are forecast to grow at an annual rate of
5.7 percent (compared to 4.7 percent for system RPMs) over the 12-year
forecast period, with domestic and international RTMs increasing 4.8 and
6.5 percent, respectively.

Cargo freight/express RTMs are forecast to more than double over the
forecast period as a strong global economy stimulates the demand for the
rapid movement of goods and products by air, both domestically and
internationally. Domestic freight/express RTMs are forecast to increase
from 12.1 billion tons in 2000 to 21.8 billion tons in 2012, an increase
of 5.0 percent annually.

International freight/express RTMs, owing to stronger worldwide economic
growth, are projected to increase at an average annual rate of 6.7
percent over the forecast period, from 14.8 to 32.0 billion tons.

Most of the growth in freight/express RTMs is expected to come from the
all-cargo carriers operating dedicated cargo aircraft. All-cargo
domestic and international freight/express RTMs increase at annual rates
of 6.0 and 8.2 percent, respectively, over the 12-year forecast period.
The percent of domestic freight moved by all-cargo carriers increases
from 78.5 percent in 2000 to 87.7 percent in 2012, international
freight/express from 50.7 to 60.3 percent.

Significantly slower growth is forecast for mail RTMs as electronic
alternatives (fax, email, direct bill payment, etc.) cut into the volume
of mail moved by air. Domestic and international mail RTMs are projected
to increase at annual rates of 3.9 and 2.8 percent over the forecast
period, with domestic mail RTMs increasing from 2.5 to 4.0 billion and
international mail RTMs from 531.9 to 745.2 million in 2012.

All-cargo carriers are expected to account for 31.2 percent of mail RTMs
in 2012, up from 24.9 percent in 2000. The disparity in all-cargo
carrier's share of mail RTMs relative to its share of freight/express
traffic (71.5 percent in 2012) reflects the fact that passenger carriers
operate flights throughout the day while the majority of all-cargo
carrier operations occur at night. Despite this scheduling disadvantage,
all-cargo carrier mail RTMs increase by 5.8 percent annually over the
forecast period compared to annual growth of only 3.0 percent for the
passenger carriers.

GENERAL AVIATION

The general aviation active fleet is projected to total 245,965 in 2012,
an increase of just under 25,000 aircraft or 0.9 percent annual growth
over the 12-year forecast period. In 2012, piston powered fixed-wing
aircraft are expected to continue to account for the majority of the
fleet, 75.6 percent compared to 78.1 percent in 2000. However, the
turbine powered fixed wing fleet is projected to make the biggest
inroads in the general aviation active fleet, increasing its share from
6.0 percent in 2000 to 7.7 percent in 2012. In 2012, experimental
aircraft account for 9.8 percent (up from 9.4 percent in 2000) of the
fleet while rotorcraft comprise 3.8 percent of the fleet (up from 3.5
percent in 2000).

The current forecast assumes that the business use of general aviation
aircraft will expand at a more rapid pace than personal use. This is
due, in large part, to the continued rapid growth in fractional
ownership and is reflected in the changing composition of the general
aviation fleet mix. The more expensive and sophisticated turbine-powered
fleet (including rotorcraft) is projected to grow at four-times the rate
forecast for the piston aircraft categories---2.7 compared to 0.6
percent. Turbine-powered fixed wing aircraft are projected to increase
at an average annual rate of 3.0 percent, totaling 18,880 in
2012---6,600 turboprops and 12,280 turbojets. The turbine rotorcraft
fleet is expected to increase at an annual rate of 1.5 percent over the
forecast period, totaling 5,960 in 2012.

The general aviation piston fleet are projected to increase by just over
13,000 aircraft (53.3 percent of the total increase) over the forecast
period, totaling 186,000 aircraft in 2012. The single engine fixed wing
piston aircraft category increases at an average annual rate of
0.7 percent\--from 151,640 aircraft in 2000 to 164,800 in 2012. The
number of piston powered rotorcraft increase by just under 1,000
aircraft, totaling 3,500 in 2012. Multi-engine fixed wing piston
aircraft are expected to remain constant at 21,200 aircraft throughout
the forecast period.

Experimental aircraft are projected to increase by 1.2 percent annually,
reaching 24,080  aircraft in 2012. Aircraft in the "other" category
(gliders, lighter-than-air, etc) are expected to total 7,545 in 2012, up
from 6,825 in 2000.

General aviation hours flown is projected to increase at an average
annual rate of 2.2 percent over the 12-year forecast period, to 41.7
million hours in 2012. The larger increase in hours relative to aircraft
reflects expected increases in the utilization of the general aviation
fleet. In 2012, piston powered aircraft (including rotorcraft) are
projected to fly 28.1 million hours (up 1.5 percent annually) while
turbine-powered aircraft (including rotorcraft) fly 11.7 million hours
(up 4.4 percent annually). Most of the increase in utilization occurs in
turbojet fixed wing aircraft, the fastest growing category of general
aviation aircraft---active fleet and hours up 4.3 and 7.0 percent
annually, respectively. These large increases are due to the expected
increases in both the fractional ownership fleet and its activity
levels. Utilization of fractional ownership aircraft average
approximately 900 hours annually compared to only 325 hours for all
business jets.

The number of active pilots are forecast to total 827,177 in 2012, an
increase of almost 179,000 (2.0 percent annually) over the 12-year
forecast period. Most of the expected growth is projected to occur in
the student and airline transport categories. The number of student
pilots are projected to increase by over 40,000 (2.7 percent annually),
totaling 144,200 in 2010. Airline transport pilots are forecast to
increase from 139,700 in 2000 to 204,400 in 2012, an average annual
increase of 3.2 percent. Projected growth among other types of pilot
certifications include: private pilot certificates, up 1.4 percent
annually to 309,600; commercial pilot certificates, up 1.4 percent
annually to 148,800; and helicopter only pilots, up 1.8 percent annually
to 9,890.

**FAA WORKLOAD FORECASTS**

There were a total of 459 towered airports at the end of September, 267
FAA towers and 192 contract towers. While the number of FAA towers is
expected to remain constant at 267 in 2001, the number of FAA contract
towered airports is expected to increase by a total of 29 to 221. This
includes the addition of 20 contract towers under a cost-share agreement
with local/state governments and another nine to be added under a fully
funded agreement. It is assumed that the 29 new contract towers will be
phased in throughout the year.

Since 1993, a total of 135 FAA towers have assumed contract tower
status. To overcome reporting inconsistencies caused by the tower
conversion program, the FAA has, since 1996, developed separate activity
forecasts for both FAA and contract towered airports. Activity at FAA
Air Route Traffic Control Centers and Flight Service Stations are not
affected by the contract tower conversions.

Summary forecasts of aircraft activity at combined FAA and contract
tower facilities can be found in Table I-6. Summary forecasts of
activity at FAA facilities [only]{.underline}, including FAA towers, en
route centers, and flight service stations, can be found in Table I-7.
More detailed forecasts and discussion of aircraft activity at FAA and
contract facilities can be found in Chapter VII and in Tables 32 through
49.

FAA and Contract Towers

Activity at the combined FAA and contract towers is projected to grow
from 68.7 million in 2000 to 91.5 million in 2012, an annual increase of
2.4 percent. A large part of the growth is the result of increased
commercial aircraft activity, with air carrier and commuter/air taxi
activity up 3.1  and 2.4 percent, respectively, over the 12-year
forecast period.

General aviation activity is forecast to increase from 39.9 million
operations in 2000 to 52.2 million operations in 2012, an annual
increase of 2.3 percent. Much of this growth occurs in 2001 (up 3.08
percent) and 2002 (up 5.7 percent) and is due to the addition of the
29 new contract towers in 2001. Thereafter, general aviation activity
grows at an annual rate of 1.8 percent. The addition of new contract
towers also results in an increase in military activity\--from 2.9
million in 2000 to 3.2 million in 2002. Military activity is then held
constant at the 2002 activity level throughout the remainder of the
forecast period.

Combined instrument operations counts at FAA and contract towered
airports increase from 53.0 million in 2000 to 69.2 million in 2012, an
annual increase of 2.2 percent. Commercial aircraft instrument
operations are forecast to grow at a significantly faster rate than are
general aviation instrument operations, up 2.7 and 1.9 percent,
respectively. Military activity is expected to remain constant at
3.6 million operations through 2012.

FAA En Route Centers

The workload at FAA en route traffic control centers is forecast to
increase at an average annual rate of 2.5 percent during the 12-year
forecast period. In 2012, FAA en route centers are expected to handle
61.7 million IFR aircraft, up from the 46.0 million in 2000

The number of commercial aircraft handled is projected to increase at an
annual rate of 2.9 percent while the number of general aviation aircraft
handled increases at an average annual rate of 1.9 percent. Military
activity at en route centers is held constant at its 1999 activity level
of 4.2 million.

The higher growth rate at FAA en route centers, relative to activity at
combined towered airports, reflects the fact that commercial activity
accounts for a significantly larger percentage of center activity---71.9
versus 37.7 percent at towered airports in 2000. Therefore, the
projected larger increases in commercial aircraft activity have a much
greater impact on total center traffic during the forecast period.

FAA Flight Service Stations

Total flight services originating at traditional FAA flight service
stations (non-automated) are forecast to decline from 30.5 million in
2000 to 29.5 million in 2012, an average annual rate of decline of 0.3
percent. Of the services provided by the FAA, only flight plans
originated is projected to increase over the forecast period, growing
from 5.9 million in 2000 to 6.3 million in 2012. Both pilot briefings
and the number of aircraft contacted are forecast to decline over the
next 12 years, down 0.7 and 1.5 percent annually.

The number of DUATS services are projected to grow at an average annual
rate of 2.7 percent over the forecast period, from 15.0 million in 2000
to 20.7 million in 2012. Combined FSS and DUATS services are expected to
total 50.2 million in 2012, an annual increase of 0.8 percent.

**FORECAST RISKS**

There are a number of positive signs that point toward a continuation of
moderate to strong growth in both the commercial and general aviation
industries. This includes the projected strong growth in both the U.S.
and worldwide economies and declining real fuel prices throughout the
forecast period. However, there are also a number of uncertainties that
could cause the growth of the U.S. and world economies to be less than
that projected. Slower economic growth would ultimately slow the demand
for aviation services.

While there appears to be unanimity among the economic forecasting
services and OMB regarding continued strong growth in U.S economic
activity, there are a number of factors or recent trends that could slow
or reverse this optimistic outlook.

The U.S. economy grew at just a 2.2 percent annual rate in 3^rd^ quarter
2000, the slowest pace in 4 years. Opinions are mixed as to whether this
portends significantly slower growth over the next several years or
whether it represents a temporary slowdown with stronger growth resuming
once again in the 4^th^ quarter.[^5] The unemployment rate also
increased to 4.0 percent in the third quarter, pointing to slower job
growth and yet another sign of a slowing U.S. economy. WEFA assesses a
20 percent probability for its "slow growth" scenario (0.9 percentage
point less growth in 2001) and a 15 percent probability for its
"recession" scenario.

Over the past several years, the U.S. economy has benefited considerably
from the "wealth effect" created by the large increases in market equity
values. A continuation and/or escalation of the recent correction in
stock market equity values (the NASDAQ lost half its value in the past
9 months), considered inevitable by many economists, could dry up
venture capital which would hit the "new economy" particularly hard. In
addition, a large sustained correction would also erode household
wealth, dampen consumer confidence, and result in a sharp decline in
consumer spending for goods and services, including air travel.

A number of Wall Street financial analysts blame higher interest rates
for the recent decline in stock market values. The Federal Reserve has
raised interest rates six times over the past 2 years. As a result, real
interest rates are at their highest levels in 15 years. The higher
interest costs force business to spend more money on interest costs,
thus reducing corporate profits and acting as a drain on the economy.
WEFA predicts that the Federal Reserve will lower interest rates twice
in 2001.[^6]

Additionally, rising fuel cost present a major risk for all segments of
the economy, in particular aviation. The OMB forecasts assume a
25.0 percent reduction in fuel prices over the next 3 years and
declining real fuel prices over the entire 12-year forecast period.
Compared to other economic forecasting services, this is relatively
optimistic and, it would appear that most of the risk is on the
downside. Escalation of the current Middle East unrest could push oil
prices still higher. Should this occur, the potential impact on U.S. and
world economic growth and air travel could be considerable.

Many air carriers benefited from hedging strategies in 2000, essentially
locking in fuel prices at prices considerably lower than current market
prices, thus forestalling much larger increases in air fares.
Unfortunately, much of the industry remains unhedged for 2001 and any
escalation of fuel prices would likely have to be passed through in its
entirety to the flying public.

Labor problems at United Airlines disrupted the carrier's schedules
during summer 2000, resulting in the cancellation of approximately
15,000 flights during the 4-month June-September period. The recently
concluded pilots' agreement at United, thought to be excessive by many
financial analysts, has, in effect, established a higher wage base for
contract negotiations at other airlines. Currently, contract
negotiations are underway at American, Continental, Delta, Northwest,
and United (mechanics and flight attendants). Labor unrest is once again
threatening to disrupt carrier schedules. These actions could result in
lower activity counts in 2001. The price of labor peace might well be
significantly higher labor costs. Higher labor costs would result in
higher fares and subsequently lower passenger demand throughout the
entire forecast period.

The U.S. Department of Justice is expected to rule on the proposed
United Airlines/U.S. Airways merger in early spring 2001. Approval of
the merger could lead in another round of industry consolidation,
possibly resulting in an industry dominated by three or four "mega"
carriers.[^7] Such a restructuring of the industry would have a
significant impact on both the demand for air transportation and on the
aviation activity forecasts contained herein.

A slowing of U.S. economic growth would also impact the earnings of
corporations and ultimately travel budgets. In addition, much of
corporate America remains at odds with the U.S. commercial airline
industry over what it perceives as unreasonable and rapidly increasing
fares for business travelers. Higher fares could force business to
implement a number of measures to contain rising travel costs, including
a cutback in commercial air travel and/or a shift to travel by corporate
jets or fractional ownership companies.

The general aviation industry is also vulnerable to an economic slowdown
or recession, although not to the same extent it would have been several
years ago. The turnaround in the demand for general aviation products
and services since 1994 has occurred during a period of unprecedented
economic growth. No one actually knows how the industry would react to a
protracted slowing of demand or an economic recession. However, the
slowdown in general aviation activity at FAA facilities in 2000,
presumably the result of escalating fuel prices, shows that the general
aviation community does respond negatively to unfavorable economic
conditions.

The economic forecasts used to project passenger traffic in the
Asia/Pacific and Latin American markets---4.6 and 4.4 percent annually
over the 12-year forecast period\--are extremely optimistic, and not
unlike the projected large declines in fuel prices, most of the risk
appears to be on the downside. The Japanese economy continues to send
mixed signals, and since most Asian countries trade heavily with each
other, any slowdown in growth could negatively impact the entire region.
Additionally, a slowdown in U.S. economic activity would also negatively
impact those Asian countries whose economies are dependent on trade with
the United States.

The outlook for Latin America continues to depend on political actions
rather than economic fundamentals. Almost all the countries in the Latin
American region are experiencing setbacks at the political level, as
economic and market oriented reforms have not translated into political
system reforms. If the new political leadership in Mexico, Peru,
Columbia, and Argentina fail to implement the needed political system
reforms, foreign capital investment could slow or cease entirely, thus
placing the optimistic economic forecasts for the region in doubt.

Increased flight delays have become a major problem for the airlines,
the traveling public, and the FAA. Delays are closely linked to demand
and increased delays are a potential risk to achieving the aviation
demand forecasts presented in this document.

It is the growth over the last 4 years that has given rise to the
increased delays. During this period, activity at combined FAA and
contract towers and en route centers grew at average annual rates of 3.0
and 3.3 percent, respectively. And growth is not just confined to
commercial activity, which grew at annual rates of 2.2 and 3.7 percent,
respectively. What was not expected was the strong resurgence in the
noncommercial sector (general aviation and military) which had been
declining or dormant for the past decade. Growth among these users
averaged 3.8 and 2.3 percent annually over the last 4 years.

Similar growth is projected to continue for both the commercial and
noncommercial sectors throughout the 12-year forecast period, averaging
2.3 percent annually at combined towers and 2.5 percent annually at en
route centers. This high level of growth among both commercial and
general is a phenomenon that last occurred during the late 1970s. What
these increased activity levels presage in terms of future air traffic
delays or constraints on future demand is something that should be of
concern to the FAA, aviation officials, corporate America, and the
flying public. Increased delays will not only raise carrier costs but
could also act as a constraint to market entry. The consequence of both
events is rising fares and constrained demand.

If the economic scenarios presented in this document\--sustained
moderate growth for both the U.S. and world economies\--are achieved,
there is every reason to believe that the demand for commercial and
general aviation products and services will continue to expand
throughout the forecast period. The real question is whether there will
be enough capacity (airside and landside) to accommodate the projected
growth.

**FORECAST SUMMARY**

Highlights of the current FAA aviation forecasts for the 2001 to 2012
time period include:

-   The U.S. economy is expected to grow slightly less than that of
    worldwide economic activity (3.1 versus 3.4 percent annually), with
    most of world economic growth taking place in the Asia/Pacific (4.6
    percent annually) and Latin American (4.4 percent annually).

-   International passenger traffic is forecast to grow significantly
    faster than U.S. domestic traffic (5.9 versus 3.6 percent annually),
    with most of the international growth occurring in Latin American
    and Asia/Pacific markets, averaging 6.5 and 6.1 percent,
    respectively.

-   Regional/commuter passenger traffic will continue to grow at a
    faster rate than their larger domestic counterparts (5.7 versus
    3.6 percent annually). Growth in the industry is derived from the
    establishment of new markets utilizing the new regional jets and
    from further route rationalization by the larger commercial
    carriers.

-   Air cargo traffic is expected to grow at rates about one percent
    higher than those predicted for passenger traffic, with domestic and
    international RTMs increasing at annual rates of 4.8 and 6.5
    percent, respectively.

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-   The growth exhibited throughout the general aviation community,
    combined with industry-wide promotional programs, is expected to
    result in moderate sustained increases in the active fleet
    (0.9 percent annually), hours flown (2.2 percent annually), and
    student pilots (3.4 percent annually).

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-   Total aviation activity at FAA and contract facilities is expected
    to grow at annual rates of 2.2 to 2.5 percent annually, with
    commercial activity (up 2.7 percent annually) increasing at
    significant higher rates than those predicted for general aviation
    (1.9 to 2.3 percent annually).

Uncertainties that have the potential to limit the growth in the demand
for U.S. and international aviation services include:

-   The economic forecasts used to develop this year's aviation demand
    forecasts, both domestic and international, appear to be on the
    optimistic side. Therefore, most of the risk associated with these
    projections appears to be on the downside.

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-   The rising cost of fuel presents a major risk for all segments of
    the economy, in particular aviation. Although the current forecast
    projects a rapid decline in fuel prices over the next several years,
    an escalation of the current

> Middle East unrest could push oil prices still higher. Should this
> occur, the potential impact on U.S. and world economic growth and air
> travel could be considerable. 

-   The price of labor peace is growing and could lead to significantly
    higher labor costs over the forecast period. Higher labor costs
    would lead to higher air fares and lower the demand for air
    transportation.

-   The economic forecasts used to project passenger traffic in the
    Asia/Pacific and Latin American markets are also extremely
    optimistic. However, the Japanese economy continues to send mixed
    signals and economic outlook for Latin America continues to depend
    on political actions rather than economic fundamentals. If the
    current internal economic problems are not resolved, the potential
    for economic slowdowns or recessions in Asia and South America
    remain a very distinct possibility.

-   No one actually knows how the recovering general aviation industry
    or its customers will react to an economic slowdown or recession.
    However, the decline in general aviation activity in 2000,
    presumably the result of escalating prices for aviation fuels, shows
    that the general aviation community responds negatively to
    unfavorable economic conditions.

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-   Increased flight delays are a major problem for the airlines, the
    traveling public, corporate America, and the FAA. Delays are closely
    linked to demand and increased delays are perhaps, the major risk to
    achieving the aviation demand forecasts presented in this document.

Nevertheless, air transportation is expected to continue to dominate all
other transportation modes in both long distance domestic inter-city
travel and in international passenger markets throughout the foreseeable
future.

[^1]: *2000 Year-end Review and 2001 Forecast---An Analysis*, Aerospace
    Industries Association of America, December 2000

[^2]: Defined by the U.S. DOT as carriers with annual operating revenues
    greater than \$1 billion.

[^3]: Defined by the U.S. DOT as carriers with annual operating revenues
    between \$100 million and \$1 billion.

[^4]: Defined by the U.S. DOT as carriers with annual operating revenue
    less than \$100 million.

[^5]: On January 22, 2001 OMB lowered its projected growth for the U.S.
    economy in 2001 from 3.5 to 2.7 percent. The average annual growth
    for the 12-year forecast period was unchanged at 3.1 percent.

[^6]: In a surprise move, the Federal Reserve lowered interest rates by
    50 basis points on January 3, 2001. This was followed by another
    reduction of 50 basis points on January 31.

[^7]: American Airlines has announced its intentions to acquire Trans
    World Airways as well as taking a minority stake (49 percent) in DC
    Air. If both the United Airlines/US Airways and American
    transactions proceed as planned, United and American could control
    more than 55 percent of U.S. domestic airline capacity. (Source:
    Aviation Daily, Tuesday, January 9, 2001)