1. M I T I n t e r n a t i o n a l C e n t e r f o r A i r T r a n s p o r t a t i o n Impact of Air Transportation on Regional Economic and Social Connectivity in the United States Ryan Tam and R. John Hansman Massachusetts Institute of Technology JUP Meeting October 17, 2002

2. 2 MIT Overview Conceptual Model Relationship between the Economy and the Air Transportation System Changes in the Airline Industry after Deregulation Industry Challenges Since 9/11 Key Questions for the Airline Industry

3. 3 MIT Conceptual Model

4. Relationship between the Economy and the Air Transportation System Growth in Air Travel The Economy Changes in Regional Geography Changes in the type of Air Travel

5. 5 MIT Growth in Air Travel Domestic air travel grew faster after deregulation 750 million RPMs per year 1.8 billion RPMs per year Deregulation Source: BEA and BTS OAI data

6. 6 MIT Growth in Air Travel Domestic capacity has more than doubled since 1978 Source: ATA data

7. 7 MIT Economic Activity RPM trends parallel economic growth Source: BEA and BTS OAI data

8. 8 MIT Economic Activity Closer correlation between GDP and RPMs after deregulation Source: BEA and BTS OAI data

9. 9 MIT Economy Traditional measures of employment and spending in the aviation industry — 11.6 million direct, indirect, and induced jobs — $316 billion dollars in earnings Does not capture the “Enabling Effect” — Air connectivity provides access to markets, capital, ideas, and people Source: FAA Economic Impact of Civil Aviation on the US Economy 2002, Interim Results

10. 10 MIT Regional Geography State Population vs. Air Travel Source: BEA and DOT 10% Database

11. 11 MIT Regional Geography Per Capital Personal Income vs. Air Travel Source: BEA and DOT 10% Database

12. 12 MIT Social Characteristics Increase in use of air travel for non-work purposes Source: US DOT NPTS, US Census Data

13. Hub-and-Spoke Networks Yield Management Changes in the Airline Industry After Deregulation

14. 14 MIT Hub Growth: Atlanta Source: OAG June 1965

15. 15 MIT Yield Management Real yields have gone down (1978 cents) Source: ATA data

16. 16 MIT Yield Management Average domestic load factors have gone up Source: ATA data

17. Industry Challenges Since 9/11 Airline Profitability Post 9/11 Recovery Investor Confidence

18. 18 MIT Airline Profitability Operating profit Source: ATA data

19. 19 MIT Airline Profitability Southwest has maintained profitability after 9/11. Source: Airline financial reports

20. 20 MIT Airline Profitability Traffic is about 7.3 percent before 2001 levels. Source: ATA data

21. 21 MIT Industry/Airline Recovery CASM RASM 9/11-9/13Time $/ASM Security costs Quick Recovery Insolvency Slow Recovery

22. 22 MIT Investor Confidence Southwest has a market share greater than the rest of the US majors, JetBlue, and ATA combined. Source: Yahoo! Finance, 9/4/02 Total Market Size: $18.9 Billion

23. Key Questions for the Airline Industry

24. 24 MIT Industry Structure Changes in the Revenue Paradigm — Traditional market segmentation assumptions are failing — Low-fare competition — Dominance of low-fare, non-work related travel — New paradigm is needed Key Questions

25. 25 MIT Reductions in Operating Costs — Rolling banks, other actions may decrease connectivity Impact on Small Markets Government Intervention — What is the appropriate role of government? — ATSB loan guarantees may keep yields down in some markets—worse for the industry — Will the public tolerate potential disruptions during restructuring? Key Questions cont’d

26. 26 MIT Conclusions Increased usage and change in air travel demand indicates evolution of strong social and economic dependency Financial threat is forcing a major industry restructuring System is at risk; scope is unprecedented Further government intervention is likely

27. MIT International Center for Air Transportation http://web.mit.edu/aeroastro/www/labs/ICAT/index.shtml http://web.mit.edu/airlines/ Ryan Tam, MST Candidate Center for Transportation & Logistics 77 Massachusetts Ave #35-220 Cambridge, MA 02139 Phone: (617) 253-0993 E-mail: rtam@mit.edu Professor R. John Hansman Dept. of Aeronautics & Astronautics 77 Massachusetts Ave #33-303 Cambridge, MA 02139 Phone: (617) 253-2271 E-mail: rjhans@mit.edu

29. 29 MIT Industry Structure Southwest United Low-fare carriers can provide connectivity in some markets.

30. 30 MIT Industry Structure Combined networks (7/00) of: AirTranMidway ATAMidwest Express FrontierSpirit Jet BlueVanguard Legend American Airlines What is the future of connectivity?

31. 31 MIT Reductions in Costs American is converting to a rolling bank system at DFW; more efficient, but may decrease connectivity. Source: AA Electronic Timetables

32. 32 MIT Impact on Small Markets Continental — Near DFW (<150 miles): Abilene, Tyler, and Waco — Near MCO (<50 miles): Daytona Beach, Melbourne — Near PHL: Atlantic City United — Bellingham, WA — Little Rock, AR — Victoria, BC — Mobile, AL — Lynchburg, VA — Newport News, VA — Staunton, VA. Most communities retained service after 9/11 with reduced frequencies or smaller aircraft. Most discontinued cities had alternate service nearby.

33. 33 MIT Impact on Small Markets Capacity decrease at American after 9/11 was achieved by elimination of the last bank; hubs survived. Source: AA Electronic Timetables

34. 34 MIT Investor Confidence Financial market does not believe that all the carriers will survive.