1. Outlook for Commercial Aircraft 1995-2014 McDonnell Douglas (Made in 1995)

2. 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

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

4. U.S. Model of Traffic 1970-1994

6. 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

7. 1971 182201264 3274.94 11.45 0 19.0206 8.09406 2.43799 1972 202652304 3452.91 11.11 0 19.1270 8.14697 2.40785 1973 215756144 3651.27 10.89 0 19.1897 8.20283 2.38785 1974 221456816 3638.07 11.36 0 19.2157 8.19921 2.43010 1975 224028416 3616.46 10.59 0 19.2273 8.19325 2.35991 1976 245964320 3818.56 10.65 0 19.3207 8.24763 2.36556 1977 266469696 4004.01 10.57 0 19.4008 8.29505 2.35802 1978 309646592 4204.62 9.68 1 19.5509 8.34394 2.27006 1979 343078208 4326.54 9.48 1 19.6535 8.37252 2.24918 1980 328645248 4315.22 11.18 1 19.6105 8.36990 2.41413 1981 315857664 4420.95 11.44 1 19.5708 8.39411 2.43712 Year RPK RUSGDP RYIELD DEREG LRPK LRUSGDP LRYIELD 1970 177229744 3170.24 11.34 0 18.9930 8.06156 2.42834

8. YearRPK RUSGDPRYIELDDEREGLRPKLRUSGDP LRYIELD 1982332448608 4326.1710.14119.62208.372442.31649 1983355620608 4500.589.59119.68948.411962.26072 1984380121728 4807.669.81119.75608.477972.28340 1985426488704 4986.659.06119.87118.514522.20387 1986476926944 5136.748.01119.98298.544172.08069 1987512747904 5285.047.99120.05538.572642.07819 1988523850144 5485.748.31120.07678.609912.11746 1989525450720 5670.548.47120.07988.643042.13653 1990543236992 5743.808.35120.11318.655882.12226 1991530778048 5687.947.91120.08998.646102.06813 1992552915264 5842.707.50120.13078.672952.01490 1993560909824 5973.137.82120.14518.695032.05668 1994597945920 6179.357.27120.20908.728971.98376

9. U.S. Model of Traffic 1970-1994 Q = 2752 (RUSGDP) 1.48 (Real Yields) -0.36 Exp(.10D) t = 14.04 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

10. 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 -0.36. 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 1.48. A ten-percent increase in income increases passenger travel by 14.8 percent Deregulation increases demand by 10.5%

11. 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 = 8.09 + 1.46 LRUSGDP - 0.360 LRYIELD + 0.117 DEREG Predictor Coef Stdev t-ratio p. Constant 8.088 1.123 7.20 0.000 LRUSGDP 1.4623 0.1079 13.55 0.000 LRYIELD -0.3602 0.1121 - 3.21 0.004 DEREG 0.11712 0.02475 4.73 0.000 s = 0.03089 R-sq = 99.5% R-sq(adj) = 99.4% Analysis of Variance SOURCE DF SS MS F p Regression 3 3.7414 1.2471 1307.09 0.000 Error 21 0.0200 0.0010 Total 24 3.7615 Durbin-Watson statistic = 1.21

12. Excel Output

13. U.S. Passenger Traffic Growth is forecasted at 4.2% for 1994-2014 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%

14. 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