# Presentation: 777393

## Slide 1

**Notes:**
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.  

## : : Domestic Passengers Up 6.7% in 2004

**: :** Domestic Passengers Up 6.7% in 2004

**2000 Passenger Level**

**Down 2.2 % from 2000**

**Notes:**
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 FY 2004, domestic passenger volume remains 2.2 percent below 2000 levels.

## : : International Passengers Up 11.7% in 2004

**: :** International Passengers Up 11.7% in 2004

**2000 Passenger Level**

**Down**** 4.7 %**
**from 2000**

**Notes:**
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, passenger volume remains 4.7 percent below pre-September 11th levels. 

## : : Domestic Yield Down 18.3% Since 2000

**: :** Domestic Yield Down 18.3% Since 2000

**2000 Yield Level**

**Notes:**
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.

## : : Low Cost & Regional Carriers Increase Market Share

**: :** Low Cost & Regional Carriers Increase Market Share

**Notes:**
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 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.  

## : : Air Cargo Revenue Ton Miles Up Almost 5% in 2004

**: :** Air Cargo Revenue Ton Miles Up Almost 5% in 2004

**2000 RTM Level**

**Notes:**
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.

## : : Commercial Air Carriers Have Lost $25 Billion Since 2000

**: :** Commercial Air Carriers Have Lost $25 Billion Since 2000

**Notes:**
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 making 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

## : : General Aviation Hours Flown Have Bottomed Out

**: :** General Aviation Hours Flown Have Bottomed Out

**2000 Hours Flown Level**

**Down 9 % from 2000**

**Notes:**
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.  While hours growth in 2004 is estimated to have been just 0.8 percent, fixed wing turbine hours are estimated to up 3.2 percent.  In addition, 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.

## : : FAA/Contract Tower Instrument Operations Up 2% in 2004

**: :** FAA/Contract Tower Instrument Operations Up 2% in 2004

**2000 Instrument Operations Level**

**Down 7.2 %**
**From 2000 **

**Notes:**
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.

## : : Recovery In Activity Not Uniform Among All Airports

**: :** Recovery In Activity Not Uniform Among All Airports

*In 2004 Commercial Operations at 17 of 35 Major U.S.Airports Already At 2000 Levels*

**Notes:**
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 11th 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. 

## : : U.S. Economy Grows An Average Of 3.2% Annually 

**Notes:**
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.

## : : World Economy Grows An Average Of 3.2% Annually 

**$34,821**

**$37,142**

**$38,338**

**$50,825**

**$35,981**

**Notes:**
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.

## : : Energy Prices Spike in 2005 Then Fall Over Next 3 Years

- All Signs Point to Continued Recovery

**Notes:**
Energy prices, as measured by the oil and gas deflator, are projected to rise 21 percent in 2005 but then decline almost 17% over the next 3 years before rising slowly for the balance of the forecast.  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 the projected rate of inflation—2.5 percent.

## : : Domestic Real Yield Falls An Average Of 1.7% Annually

**: :** Domestic Real Yield Falls An Average Of 1.7% Annually

**Notes:**
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 the 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.

## : : Domestic Passengers Return to Pre 9/11 Levels in 2005

**: :** Domestic Passengers Return to Pre 9/11 Levels in 2005

**Notes:**
Turning specifically to 2005, we are projecting that domestic passengers will grow 3.6 percent and surpass pre-September 11th 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.  

## : : International Passengers Return to Pre 9/11 Levels in 2005

**: :** International Passengers Return to Pre 9/11 Levels in 2005

**Notes:**
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.

##  Latin America -- 2004
 Pacific -- 2005
 Canadian Transborder -- 2005
 Atlantic -- 2006

* **Pacific -- 2005*
* **Canadian Transborder -- 2005*
* **Atlantic -- 2006*

**: :** Every World Travel Region Returns to 2000 Levels by 2006

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

## : : Total Passengers Exceed One Billion In 2015

**: :** Total Passengers Exceed One Billion In 2015

**Notes:**
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% 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.

## Passenger Market Share

**: :** By 2016 Low Cost and Regional Carrier Domestic Share ≈ 55%

**Low**
**Cost &**
**Regionals/**
**Commuters**

**Low**
**Cost &**
**Regionals/**
**Commuters**

**Large Network**
**Carriers**

**Large Network**
**Carriers**

- 2016

- 2004

**43%**

**≈**** ****55%**

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

## : : Regional Jet Fleet Grows 38% Over Next Three Years

**: :** Regional Jet Fleet Grows 38% Over Next Three Years

**Notes:**
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.  

## : : Low Cost Carriers Drive Mainline Carrier Fleet Growth

**: :** Low Cost Carriers Drive Mainline Carrier Fleet Growth

**Notes:**
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.

## : : Cargo Revenue Ton Miles Increase 82% By 2016

**: :** Cargo Revenue Ton Miles Increase 82% By 2016

**Notes:**
Turning to our forecast of cargo carrier activity, we are projecting that cargo RTMs will increase by 82%, 5.1% 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.  

## : : General Aviation Hours Flown Up 20% By 2016

**: :** General Aviation Hours Flown Up 20% By 2016

**Notes:**
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.

## : : By 2016 Instrument Operations Up 29% At FAA/Contract Towers

**: :** By 2016 Instrument Operations Up 29% At FAA/Contract Towers

**Notes:**
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 instrument operations make up almost 60% of all instrument operations, up from 56% in 2004.

## : : Eight Additional Airports Exceed 2000 Levels by 2006

**: :** **Eight Additional Airports Exceed 2000 Levels by 2006**

*Commercial Operations at 25 Large U.S.Airports Will Exceed 2000 Levels By 2006*

**Notes:**
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.

##  Congestion On Rise As Demand Returns
Several Airports Already Experiencing Delays
 Change in Aircraft Mix Makes Future Workload More Complex
Rapid Growth in RJs
Strong Growth in GA Business Jets
 Falling Yields Pose Risk To Matching FAA Funding Needs With Demand For FAA Services

**: :** Implications For The FAA

* **Congestion On Rise As Demand Returns*
*Several Airports Already Experiencing Delays*
* **Change in Aircraft Mix Makes Future Workload More Complex*
*Rapid Growth in RJs*
*Strong Growth in GA Business Jets*
* **Falling Yields Pose Risk To Matching FAA Funding Needs With Demand For FAA Services*

**Notes:**
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 seen 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 more 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.

##  Deteriorating Financial Condition Of Legacy Carriers

 Sustained Higher Fuel Prices

 Increasing Delays At U.S. Airports

**: :** Forecast Risks

* **Deteriorating Financial Condition Of Legacy Carriers*
* **Sustained Higher Fuel Prices*
* **Increasing Delays At U.S. Airports*

**Notes:**
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.

##  Recovery of Traffic Continues In 2005 And Beyond
Commercial Carrier and Domestic Passengers Return To Pre 9/11 Levels
Commercial Carrier Passengers Exceed One Billion in 2015

 Low Cost Carriers Increase Share => Falling Fares

 Rising Demand For FAA Services

 Downside Risks Are Significant

**: :** Forecast Summary

* **Recovery of Traffic Continues In 2005 And Beyond*
*Commercial Carrier and Domestic Passengers Return To Pre 9/11 Levels*
*Commercial Carrier Passengers Exceed One Billion in 2015*
* **Low Cost Carriers Increase Share => Falling Fares*
* **Rising Demand For FAA Services*
* **Downside Risks Are Significant*

**Notes:**
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 11th 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 a rising demand for FAA services.  This rising demand for services requires additional resources which 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.