Outlook for Commercial Aircraft McDonnell Douglas (Made in 1995)

Executive Summary By 2014, the world’s passenger jet fleet to be 18,600 aircraft 13,600 new aircraft will be needed, valued at $1.1 trillion. Aircraft demand forecasts require passenger demand forecasts Passenger demand forecasts require income and price forecasts

Income and Price Forecasts 1.U.S. Real GDP will grow at 2.8% annually 2.Real passenger yields to decrease 1.35% annually

U.S. Model of Traffic

Variable in Passenger Demand Model RPK = Revenue Passenger Kilometers (in thousands) one passenger traveling one kilometer RUSGDP = U.S. Gross Domestic Product (GDP) (in $bill.) Consumer Price Index RYIELD = Real Yields = (Passenger Revenues/CPI) Revenue Passenger Kilometers LRPK = logarithm of Revenue Passenger Kilometers LRUSGDP = logarithm of Real U.S. GDP LRYIELD = logarithm of Real Yields Deregulation = 0 Before 1978 (Air Passenger Deregulation Act) 1 After 1978

Year RPK RUSGDP RYIELD DEREG LRPK LRUSGDP LRYIELD

YearRPK RUSGDPRYIELDDEREGLRPKLRUSGDP LRYIELD

U.S. Model of Traffic Q = 2752 (RUSGDP) 1.48 (Real Yields) Exp(.10D) t = t=-3.26 t=3.60 R-Squared = 99.5 % Q = U.S. revenue passenger-kilometers RUSGDP = real U.S. gross domestic product Real Yields = Prices in $ per revenue passenger kilometer D = 1 for deregulation year and 0 otherwise

The R-Squared statistic indicates that the 99.5% of the variation of the ln RPK about its mean value is explained by the model. The overall model is statistically significant. The t-values are greater than 2 indicating that each elasticity estimate is statistically significant The price elasticity is Aggregate demand is price inelastic. Remember, this is not an individual airline’s price elasticity. A ten percent reduction in real fares increases demand by 3.6% The income elasticity is estimated to be A ten-percent increase in income increases passenger travel by 14.8 percent Deregulation increases demand by 10.5%

MINITAB Results: Regressing the Log of Rev. Pass. Kilometers on the Log of Real USGDP, the Log of Real Passenger Yields, and a Deregulation Dummy Variable (0=without Dereg and 1=with Dereg.) The regression equation is LRPK = LRUSGDP LRYIELD DEREG Predictor Coef Stdev t-ratio p. Constant LRUSGDP LRYIELD DEREG s = R-sq = 99.5% R-sq(adj) = 99.4% Analysis of Variance SOURCE DF SS MS F p Regression Error Total Durbin-Watson statistic = 1.21

Excel Output

U.S. Passenger Traffic Growth is forecasted at 4.2% for Passenger revenue yields will change by -1.35% North America economic growth is 2.8% Using the estimated elasticities and assumed growth rates for income and prices, traffic will grow by approximately: 1.48*(2.8%) + (-0.36)*(-1.35%) = 4.63% Income Elasticity Price Elasticity So as not to be overly optimistic: lower to 4.2%

Remaining Steps for determining Aircraft Requirements 1. Develop load factor assumptions for each route a. Load Factor= Passenger Kilometers/Seat Kilometers b. Convert traffic (RPKs) revenue passenger kilometers to available seat kilometers (ASKs). 2. Determine size and range of delivery requirements a. carrier utilization (aircraft hours per year) b. productivity c. retirement schedule for airline’s present fleet 3. Account for bilateral agreements and airport congestion 4. Consider availability of used aircraft