1 

# MEMORANDUM

Eastern Research Group, Inc.
110 Hartwell Avenue Lexington, MA 02421

Date: February 8, 2012
To: James Covington, EPA
From: Jeff Cantin and Cal Franz, ERG Re: Airport Deicing Operations ELG Economic Analysis: Economic Profile Update

1. Introduction

This is an update to the 2006 economic profile prepared as part of EPA’s Economic Analysis for Proposed Effluent Limitation Guidelines and St andards for the Airport Deicing Category . The update covers the period 2007 through 2010, although most data is available only through the end of 2009. The 2006 profile established that demand for deicing servi ces is derived from the demand for airline travel,
which in turn is derived from the demand for trav el for business purposes, vacation, and other leisure activities. Therefore, this update examines cha nges in underlying economic factors during the 2007-2010 period and how such changes affected travel dema nd and airline and airport operational performance.

2. Economic Climate

The major event impacting the U.S. aviation industr y during the update period is the U.S. (and global) recession. Officially, the recession began in Decem ber 2007 (NBER, 2008). This slowdown in economic activity produced slower growth (1.9 percent GDP increase) in 2008 and a decline (-2.9 percent in GDP) in 2009 (BEA, 2010). The recession was triggered by a housing market collapse, which affected the values of securities tied to real estate pricing. Th e resulting losses at financial institutions led to a confidence and liquidity crisis that required massive government intervention (IMF, 2009). Through Fiscal Year 2009, job losses totaled 6.9 million, with the unemployment rate rising to 10.6 percent by January 2010, the highest rate recorded since 1983 (BLS, 2010).2 The impacts of the recession, while widespread, were nevertheless uneven across the U.S. The figure below shows that despite a national average unemplo yment rate of 9.3 percent, jobless rates in 2009 remained below 4 percent in several Midwestern states and were below 7 percent in another dozen states. Michigan (13.6 percent), Nevada (11.8 percent), a nd South Carolina (11.7 percent) topped the list of states with the highest unemployment rate. On a year to year basis, Michigan (+5.3 percent), Nevada (+5.1 percent), Alabama (+4.9 percent), and Sout h Carolina (+4.8 percent) recorded the highest percentage increases in unemployment rate from 2008 to 2009.

Another important factor impacting the performance of the airline industry during the update period is the oil price shock that began in 2007 a nd continued into 2008. Jet fuel prices, which had already climbed to $1.91 per gallon by 2006, reached a peak of over $4.00 per gallon in September 2008 (EIA, 2010). As will be shown below, airlines were already cutting cap acity in response to the recession and this resulted in a sharp decline in demand. Prices began a steady fall through mid 2009, reaching a low of $1.10 per gallon in March. Throughout 2010, prices hovered around the $2.00 mark.

U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB (Dollars per Gallon)

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00

2004 2005 2006 20 07 20 08 2009 20 1 0 Sept '083 3. Additional Factors or Events

In addition to the recession and the oil price shock, sev eral other events or factors impacted the airline industry during the update period and are noteworthy.

H1N1 outbreak

In 2009, a new strain of influenza known as H1N1 was identified. Unlike previous strains, H1N1 does not disproportionately affect older people or people w ith compromised immune systems or other underlying medical conditions, and otherwise healthy individuals were found to be equally susceptible (WHO, 2009). An outbreak in Veracruz, Mexico prompted Mexican authorities to close many public and private facilities in an attempt to limit the spread, but by June 2009 the Centers for Disease Control declared the outbreak to be a pandemic.

Although no travel restrictions or advisories were imposed by health authorities, and no special precautions were taken by U.S. airlines (Jacobs, 2009), the outbreak is believed to have affected travel demand. Mexico’s resort regions in the southeast, wh ere the pandemic originated, were particularly hard hit. The Cancun region reported that occupancy rates dropped from 75 percent in April to 20 percent in May and early June, and 22 hotels were forced to suspend operations (SourceMex, 2009). Regional airport authorities reported a 50 percent decline in traffic in May compared to 2008.

Volcanic ash disruption

In March 2010, a violent eruption of the Eyjafjallaj ökull volcano in Iceland began ejecting ash into the air. The resulting ash clouds reached a height of 30,000 feet, sufficient to cause concern among authorities over possible damage to aircraft traveling through the cloud. On the basis of this concern, a number of European countries closed their airspace resu lting in widespread air traffic disruption. Much of Northern Europe’s airspace was closed from April 15 to April 23, and intermittently for several weeks afterwards as the ash cloud was tracked (The Telegraph, 2010).

On April 16 it was reported that 16,000 of Europe's usual 28,000 daily scheduled passenger flights were cancelled and by April 21 an estimated 95,000 flight s had been cancelled (CBS News, 2010). In total, some eight million passengers were estimated to have been stranded.

During the closure period, the Airline Transport Association reports that U.S. carriers operated approximately 337 daily departures a nd arrivals between Europe and th e U.S. As shown in the table below, over 60 percent of scheduled flights were cance lled during this period. The impacts of the closure extend beyond the loss of passengers on these flights, as not all inbound international passengers have gateway U.S. cities as their final destination. Some p assengers were also forced to cancel their connecting or continuing domestic flights within the U.S. A ccording to the Boyd Group consultancy, the losses associated with the first four days of cancellations totaled $80 million, with Delta and United suffering the highest losses (Boyd, 2010).4 Impact of 2010 Iceland Volcano Eruption on U.S. Inbound and Outbound Flights
Date Number of flights cancelled Percent of total April 15, 2010 165 49.0 April 16, 2010 280 83.1 April 17, 2010 282 83.7 April 18, 2010 310 92.0 April 19, 2010 297 88.1 April 20, 2010 270 80.1 April 21, 2010 75 22.3 Total 1,679 62.3 Source: ATA, Impact of Icelandic Volcanic Eruption on U.S. Carriers. Available at http://www.airlines.org/News/Releases/Pages/news_4-22-10volcano.aspx

4. Airports

The 2006 profile reported the number of airports in the U.S., based on 2004 data reported in the Federal Aviation Administration’s (FAA’s) National Plan of In tegrated Airports System (NPAIS). A comparison
with the most recent NPAIS shows that since 2004 th ere were no changes in the number of primary hubs, but 14 nonprimary airports have closed (FAA, 2010). No other changes to the number of commercial service airports were reported, although one a dditional primary airport has been proposed.

Close inspection of the table shows a small but noti ceable decline in the share of enplanements and aircraft accounted for by NPIAS airports. In 2004 non- NPIAS airports accounted for only 0.1 percent of enplanements and 10.2 percent of based aircraft . In 2008 these shares had risen to 0.9 percent for enplanements and 25.2 percent of based aircraft.5 Changes in Number of Airpor ts, Enplanements, and Aircraft Based at NPIAS Airports

Airport Type Number of Airports Percentage of Enplanements Percentage of Based
Aircraft

2004 2008 2004 2008 2004 a 2008 b Commercial Service Large Hub 30 29 68.7% 68.0% 1.1% 0.7%

Commercial Service Medium Hub 37 37 20.0% 20.0% 3.0% 2.1%

Commercial Service Small Hub 72 72 8.1% 8.0% 4.7% 4.0%

Commercial Service Nonhub 243 244 3.0% 3.0% 10.6% 10.1% Non-primary Commercial Service 135 121 0.1% 0.1% 2.4% 1.6%

General Aviation Relievers 274 269 0.0% 0.0% 28.8% 21.9%
General Aviation 2,573 2,560 0.0% 0.0% 41.2% 34.4% Existing NPIAS Airports 3,364 3,332 99.9% 99.1% 91.8% 74.8% Non-NPIAS Airports 16,459 16, 402 0.1% 0.9% 10.2% 25.2%

a Based on active fleet of 214,591 aircraft in 2005. b Based on active fleet of 228,668 aircraft in 2008. Source: FAA, 2006 and FAA, 2010.

The figure below shows the number of departures (sche duled and unscheduled) by year and airport class. As shown, 2006 represented a down year for the i ndustry, but departures rebounded somewhat in 2007, increasing by 145,000 (1.4 percent) across all airport classes. Departures then fell by 450,000 (-4.3 percent) in 2008 and by another 745,000 (-7.4 percent) in 2009. The declines felt by medium and small hubs in 2009 were actually twice as steep as the declines experienced by large hubs.

Number of Departures by Airport Class (2000 - 2009)

5.57 5.44 5.48 6.18 6.57 6.65 6.48 6.52
6.27

5.91

1.62 1.63 1.65 1.94 2.02 2.05 2.02 2.09 1.97 1.77

0.72 0.70 0.72 0.88 0.93 0.94 0.90 0.92 0.88 0.78
0.53 0.50 0.61 1.00 1.02 1.01 0.97 0.99 0.93 0.84

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009millions

Large Hub Medium Hub Small Hub Nonhub Source: EPA analysis of BTS T-100 database.6 The two figures below show the number of U.S. passenger and cargo departures, indexed to 2006. Although the passenger data shows a decline since 2006, the totals are still consistent with more recent (2000 forward) performance. Looking at cargo-only departures, however, there appears to be a steady decline in domestic departures since 2003. Indeed , since 2003 domestic cargo departures have fallen 27 percent, from 650,000 to 470,000 annually. One possible explanation for some of the decline in cargo departures is that with fewer passengers checking bags (in response to checked bag fees) there is more room for cargo space on passenger flights.

Domestic and International Passenger Departures (2006=100)

97.7 102.9 103.5

101.4

86.0 92.3 98.3 100.0 101.5 96.6

90.4

92.9 99.4

80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0

2003 2004 2005 2006 2007 2008 2009

Domestic International

A similar pattern for the number of enplanements. Enplanements rose 3.5 percent to 871 million in 2007 but these gains were erased by declines the followi ng year. From 2008 to 2009, enplanements fell by another 46 million (from 841 million to 795 million), representing a further 5.5 percent drop.7 Domestic and Internationa l Cargo Depa rtures (2006=100)

104.0

102.2 101.5

100.0

85.6 93.3 96.2 99.4

95.6

88.0

75.0 90.5 97.9

70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0

2003 2004 2005 2006 2007 2008 2009

Domestic International

Number of U.S. Enplanements by Year (millions)

752

733 803 872

795

740 841 841

842

650 700 750 800 850 900

2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: Totals represent hub and nonhub airports only. Source: EPA analysis of BTS T-100 database.8 5. Airlines

The 2006 economic profile documented th e continued fragile state of the U.S. airline industry. Beginning with the events of September 11, 2001, a series of setbacks have interrupted the industry’s return to profitability. These included the war in Iraq and the SA RS outbreak, which affected international travel demand, and more recently the spike in fuel prices described above.

Quarterly airline profit and loss data reported to the Department of Transportation show that the industry’s downturn in 2008 erased all of the profits recorded in 2007. Losses in 2008 totaled a record $5.7 billion. The decline continued into the first quart er of 2009 before the industry returned to modest profitability in the second quarter. Profits through 2009 we re a modest $448 million but soared in the first quarter of 2010 to more than $3 billion as fuel prices fell, the airlines capacity adjustments took effect, and the economic recovery solidified.

Virtually all of the losses recorded through 2008 and 2009 occurred among the network carriers. Low cost and regional carriers remained modestly profitable throughout the entire period shown. Likewise, network carriers benefited the most from the recent turnaround, accounting for more than $2.4 billion of the $3.0 billion profits in the first quarter of 2010.

Passenger Airline System Quarterly Operating Profit/Loss ($millions)

-$2,000 -$1,500 -$1,000

-$500 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

2007 2008 2009 2010

Network Low-Cost Regional

The downturn triggered another wave of consolidation in the industry, most notably the acquisition in 2009 of Northwest (by Delta) and the 2010 announcement of the merger of Continental and United as well as Southwest’s acquisition of AirTran. The table below is based on unofficial data maintained by ATA on its Web site and shows complete d mergers and acquisitions since 2006.9 U.S. Airlines Mergers and Acquisitions
Airlines Announced Closed Resulting entity
Delta / Northwest 4/14/08 12/31/09 Delta Air Lines Republic / Midwest 6/23/09 7/31/09 Republic Airways Republic / Frontier 8/14/09 19/1/09 Republic Airways
United / Continental 5/3/10 10/1/10 United Airlines SkyWest / Atlantic Southeast / ExpressJet 8/4/10 11/15/10 Skywest / ASA

Southwest / AirTran 9/27/10 Southwest Airlines Source: Air Transportation Association, 2010. Available at http://www.airlines.org/Economics/DataAnalysis /Pages/USAirlineMergersandAcquisitions.aspx

. Accessed November 30, 2010.

U.S. Airlines are continuing to adjust the number of airc raft they are maintaining in their fleets. The table
below shows that between 2006 and 2010 the overall size of the U.S. fleet has declined by 554 planes, a decline of 7.2 percent. Noticeably, the decline in th e U.S. cargo fleet has been steeper than that for passenger aircraft, with the cargo fleet falling by more than 15 percent over this period.

Change in Size and Composition of U.S. Airline Fleet
Aircraft Type Number of aircraft, by year
2002 2003 2004 2005 2006 2007 2008 2009 2010 Mainline 4,118 4,022 4,024 3,906 3,898 3,983 3,795 3,666 3,666 Regional 2,499 2,549 2,747 2,830 2,784 2,787 2,700 2,612 2,620 Cargo 1,056 993 993 1,001 1,012 974 960 854 854 Total 7,673 7,564 7,764 7,737 7,694 7,744 7,455 7,132 7,140

Year to year change in number of aircraft
Mainline -96 2 -118 -8 85 -188 -129 0 Regional 50 198 83 -46 3 -87 -88 8 Cargo -63 0 8 11 -38 -14 -106 0
Total -109 200 -27 -43 50 -289 -323 8 Source: Source: FAA Aerospace Forecast, 2010-2030.

6. Airline costs

The operating cost structure of U.S. airlines over the update period was affected by two factors: an upswing in fuel costs which peaked in the third quart er of 2008 and a continued decline in the number of employees.

As noted previously, fuel prices throughout 2006 hovered around $2.00 per gallon but these began rising in 2007, and by September 2008 spot fuel prices ha d broken the $4.00 per gallon mark. Shortly after, prices dropped dramatically as airlines cut capacity and the recession began impacting travel demand. Since late 2009, prices have more or less stabilized at the $2.00 per gallon level. The chart below shows fuel costs as a share of operating costs rising from below 25 percent in 2006 to as high as 35 percent in the peak third quarter of 2008. The margin between fu el cost and labor cost (historically the largest contributor to airline cost) grew steadily over 2007-2008.10 

### U.S. Airline Operating Costs - Share of Total Costs

0% 5% 10% 15% 20% 25% 30% 35% 40%

2003 2 0

0 4 2005 2 0

0

6 2007 2 0

0

8 2 0

0

9 2 0

1 0

Fuel Labor

Transport related expenses Aircraft rents and ow nership

Other

Source: Air Transport Associat ion, Quarterly Cost Index, U.S. Passenger Airlines. Available at http://airlines.org/Economics/D ataAnalysis/Pages/QuarterlyCostIndex.aspx.

As documented in the 2006 economic profile, employment and labor costs have been declining as a result of long term structural changes in the industry. Mark et share is shifting from legacy airlines with more experienced (and higher priced) crew operating under uni on work rules to low-cost carriers with younger crews, more flexible work rules, and leaner overa ll operations. This has allowed the airlines to reduce total employment from 546,000 in 2000 to 404,000 in 2006, a decline of 26 percent. Since 2006, employment has fallen another 4.5 percent, to 385,000. This trend can be seen in the labor share of total costs (see Figure above), which declines steadily from 2003 to late 2008. The increase from 2008 to 2009 predominantly reflects a relative change in labor’s sh are of total cost, although the ATA data do show an increase in absolute labor cost from 2008 to 2009, d espite a decrease in industry-wide employment.11 7. Additional Factors/Issues

This section reviews a number of other factors underl ying U.S. airline and airport performance during the update period. Some of these are internal to the industry while others are external.

Reducing fuel consumption

In the face of rising fuel costs, and in particular the record increases they faced in 2008, airlines have become aggressive in their efforts to reduce fuel c onsumption. Most observers agree there is no single strategy that can be relied on to reduce costs but that the cumulative effect of a broad-based plan can be successful. Some of the tactics being used are shown in the text box below.

In addition, airlines are benefiting from improvement s in airport operations that will reduce their time spent taxiing and waiting for runway clearance. While these improvements are intended to reduce congestion and avoid tarmac delays, they will also decrease aircraft idling time and fuel consumption. (FAA, 2010).

Passenger Surcharges

Faced with lower operating margins, airlines have moved in recent years to introduce new or increased fees and charges. Most notably, these include charg es for checked baggage, which were nonexistent in 2007 but yielded airlines close to $2 billion in 2009 (GAO, 2010). At least one airline has introduced fees for carry on bags, charging as much as $30 to board with a bag that will only fit in the overhead compartment (Negroni, 2010). According to SITA (an air transportation consultancy), the proportion of passengers checking baggage dropped from 82 percen t in 2007 and 2008 to 76 percent in 2009 (SITA, 2010). Fewer checked bags translates to reduced need for baggage handlers and reduced workers compensation claims, although the latter may be offset by increased claims among cabin crew. In 2009, SITA estimates there were 24 percent fewer lost or mishandled bags which translated to $94 million in reduced lost or damaged claims (SITA, 2010).

Airlines are employing a variety of tactics to reduce fuel burn

Lightening cabin interiors

 Removing unused ovens, magazine racks, and trash compactors

 Replacing paper cockpit manuals and logbooks with electronic ones

 Replacing silverware with lighter metals or plastic

 Replacing meal serving carts with lighter ones made primarily from plastic

 Removing phones from seat backs and stripping out unneeded wiring

 Eliminating glassware for soda and juice or replacing it with plastic

 Replacing carpet with lighter products

 Carrying less water

Changing operational practices

 Towing aircraft to take-off areas

 More frequent washing of planes and engines

 Plugging planes into ground power as soon as the plane lands

 Stripping old paint before re-spraying

Sources: Kahn, 2008; Clarke, 2008.12 In addition to bag check fees, airlines have introduced new or increased fees for a variety of services, such as early boarding, seat selection and upgrades, ticke t cancellations, and onboard meals and snacks (GAO, 2010). U.S. airlines have also added and dropped fuel su rcharges in response to periods of high fuel price. One website that tracks fares shows that in September, 2008 (the peak of the fuel price spike) most U.S. carriers had fuel surcharges in place that ranged from $13 to $146 (FareCompare, 2008). These surcharges tend to be reduced or dropped when fuel prices stabilize.

Marketing of airline tickets

The percentage of travelers booking airline tickets on line continues to grow. Survey data from market research firm J.D. Power indicate the percentage of travel reservations booked online reached 71 percent in 2008, up from 56 percent in 2007 (J.D. Power, 2008). Increasingly, consumers have access to tools that allow them to compare prices and select the lowest price. Such price transparency should in theory promote greater competition among airlines serving the same markets. At the same time, however, concerns have been raised over the information being presented to consumers, particularly with respect to fees and taxes. GAO reports that while information on fees and taxes is generally available on airlines’ own Web Sites, that same information is not ava ilable through online and traditional travel agencies (GAO, 2010). It has been speculated that this strategy is designed to steer consumers to the airline’s web sites and away from sites that allow cross-airlin e fare comparisons. This concern prompted the Department of Transportation to propose new rules in June, 2010, to mandate greater transparency for consumers (DOT, 2010).13 8. References

BEA, 2010. U.S. Economy at a Glance: Perspective from the BEA Accounts. http://www.bea.gov/newsreleases/glance.htm . Accessed November 29, 2010.

BLS, 2010. BLS-Historical Unemployment Rate Table". Data.bls.gov. http://data.bls.gov/PDQ/servlet/SurveyOutputServlet. Accessed November 29, 2010.

Boyd, 2010. Iceland Volcano Cuts Domestic Enplanements. April 19, 2010. Available at: http://www.aviationplanning.com/Update.htm#Boyd_G roup_International_Analysis:_Iceland_Volcano_ Cuts_Domestic_Enplanements

.

CBS News, 2010. U.K. Airports See Trans-Atlantic Flights Return. April 20, 2010. Available at http://www.cbsnews.com/stories/2010/04/20/world/main6413416.shtml

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Clarke, 2008. Emma Clarke. Airlines battle to survive soaring oil prices. CNN. June 17, 2008. Available

at http://www.cnn.com/2008/BUSINESS/06/17/airline.oilprices/index.html . Accessed November 30,
2010.

DOT, 2010. Department of Transportation. DOT Pr oposes Additional Consumer Protections for Air Travelers. June 2, 2010. Available at: h ttp://www.dot.gov/affairs/2010/dot11010.html. Accessed November 30, 2010.

EIA, 2010. U.S. Energy Information Administration. Petroleum Navigator.

FAA 2006. Report to Congress: National Plan of Integrated Airport Systems (NPIAS) 2007-2011.
Available at http://www.faa.gov/airports_airtraffic/airports/planning_capacity/npias/reports . Accessed September 2, 2008.

FAA, 2010. Report to Congress: National Plan of Integrated Airport Systems (NPIAS) 2011-2015.
Available at http://www.faa.gov/airports/planning_capacity/npias/reports . Accessed November 29, 2010.

FareCompare, 2010. U.S. Domestic Airline Ticket Fu el Surcharge Report. September 18, 2008. Available at: http://rickseaney.com/2008/09/18/us-domestic-a irline-ticket-fuel-surcharge-report. Accessed November 30, 2010.

GAO, 2010. United States Government Accountability O ffice. Commercial Aviation: Better Information about Airline-Imposed Fees and the Refundability of Government-Imposed Taxes and Fees Could Benefit Consumers. Testimony Before the Subcommitt ee on Aviation, Committee on Transportation and Infrastructure, House of Representatives. Statement of Gerald L. Dillingham, Ph.D. Director, Physical Infrastructure Team. July 14, 2010.

IMF 2009. World economic outlook : a survey by the staff of the International Monetary Fund. Washington, DC : International Monetary Fund. Available at: http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf

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Kahn, 2008. Chris Kahn. Airlines lighten up to cut fuel costs. USA Today. March 29, 2008. Accessed November 30, 2010.

Negroni, 2010. Christine Negroni. Less baggage, big savings to airlines. New York Times, April 6, 2010.14 SITA, 2010. Baggage Report 2010. Available at http://www.sita.aero/content/baggage-report-2010

. Accessed November 30, 2010.

SourceMex, 2009. Negative Impact On Mexican Tourism Continues From April Outbreak Of Swine Flu. SourceMex Economic News & Analysis on Mexico. August 5 2009. Available at http://www.allbusiness.com/travel-hospitality -tourism/lodging-lodgi ng-industry/12616969-1.html

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The Telegraph, 2010. Iceland volcano: latest travel news. May 17, 2010. Available at http://www.telegraph.co.uk/travel/travelnews/ 7605660/Iceland-volcano-latest-travel-news.html

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WHO, 2009. World Health Organization. Clinical features of severe cases of pandemic influenza Pandemic (H1N1). 2009 briefing note 13. Available at http://www.who.int/csr/disease/swineflu/notes/h1n1_clinical_features_20091016/en/index.html

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