1. Biography for William Swan Chief Economist, Seabury-Airline Planning Group. Visiting Professor, Cranfield University. Retired Chief Economist for Boeing Commercial Aircraft 1996-2005 Previous to Boeing, worked at American Airlines in Operations Research and Strategic Planning and United Airlines in Research and Development. Areas of work included Yield Management, Fleet Planning, Aircraft Routing, and Crew Scheduling. Also worked for Hull Trading, a major market maker in stock index options, and on the staff at MIT’s Flight Transportation Lab. Education: Master’s, Engineer’s Degree, and Ph. D. at MIT. Bachelor of Science in Aeronautical Engineering at Princeton. Likes dogs and dark beer. (bill.swan@cyberswans.com)bill.swan@cyberswans.com © Scott Adams

2. 5 Surprises & One Wish Consolidation is a myth –Airlines a Birth-and-Death process Hubs are here to stay –Heaven or Hell? connect in FRA first Bigger is not better –No trend, no reason driving to bigger planes Smaller is better –Quieter and maybe Cheaper Fares declining gracefully –Yields plunge, Fares decline Trust the trends –But make a Forecast

3. Consolidation is a myth Venerable Heritage Carriers Dying –40% of 1981 airlines gone in 2001 Vital Start-up Carriers Rising –30% of current ASKs on new airlines Lots of new Routes –40% of growth is added airport pairs Diverted Travel off Old Routes –Secondary hubs bypassing Gateway hubs

4. Increasing Regional Competition

5. What Does “Equivalent Competitors” Mean? Scheduled Jet Schedules 1971-2003 –Airline share of Regional ASK (Available Seat Km) “Herfindahl” number of competitors –Competition is number of equal-sized airlines –Re-expresses actual airlines’ shares into equivalent equal-sized airlines –“Herfindahl” is a widely-accepted measurement – H = 1 / ∑(S a 2 )  airlines a

6. Rising Competition in Long-Haul Flows

7. Airport-Pair Competition is Flat (Passengers’ Perspective)

8. Long-Haul Competition Declines Based on Airport-Pairs

9. Competition Comes with Many New Pairs

10. Hubs are Here to Stay Half of air travel is connecting –Long-haul often more than once Growth is higher is small markets –Stimulated by direct and cheaper service Small markets pay premium fares –Covering cost of connecting services Evolution of Networks: –Gateway hubs –Regional hubs –Rolling hubs?

11. Half the Trips are Connecting

13. Half of Travel is in Connecting Markets

14. Fares Higher in Small Markets

15. HCC Revenues are 1/3 Small Markets LCC Revenues are 10% Small Markets

16. Atlantic Nonstop Premium is $75 Markets Served Nonstop vs. Connecting Markets

17. Economics of “Small Markets” Half of world-wide loads are connecting Small cities have small markets Small Markets pay more Value is there –Small cities have lower living costs Lower housing costs Higher air travel costs –Air Travel connects small cities to trade

18. Three Kinds of Hubs International hubs driven by long-haul –Gateway cities –Many European hubs: CDG, LHR, AMS, FRA –Some evolving interior hubs, such as Chicago –Typically one bank of connections per day Regional hubs connecting smaller cities –Most US hubs, with at least 3 banks per day –Some European hubs, with 1 or 2 banks per day High-Density hubs without banking –Continuous connections from continuous arrivals and departures –American Airlines at Chicago and Dallas –Southwest at many of its focus cities

19. Long-Haul Flights are to Hubs Carry mostly Connecting Traffic

20. Hub Concepts Hub city should be a major regional center –Connect-only hubs have not succeeded –Early hubs are centers of regional commerce Early Gateway Hubs get Bypassed –Early International hubs form at coastlines –Interior hubs have regional cities on 2 sides Later hubs duplicate & compete with early hubs –Many of the same cities served –Which medium cities become hubs is arbitrary –Often better-run airport or airline determines success –Also the hub that starts first stays ahead

21. Bigger is not better Trend is no growth in airplane size Big markets do not mean big airplanes Markets with big airplanes do not stay big New markets do not use small airplanes Bigger airports do not use bigger airplanes

22. Forecasters in 1990 Were Confused

23. Seat Count is -4% of World ASK Growth New Markets 41% Added Frequency 50% Longer Ranges 13% Smaller Airplanes - 4%

24. Air Travel Growth Has Been Met By Increased Frequencies and Non-Stops

25. What We Missed: New Routes

26. Largest Routes are Not Growing as bypass flying diverts traffic

27. JFK Gateway Hub Stagnant for 30 Years

28. Nonstop Premium is $20-$50 Nonstop vs. Connect in Same US O-D Market

29. Atlantic Premium is $75-$125 Fares Nonstop and Connecting, Same O-D Market

30. Big Markets do not Mean Big Airplanes

31. Big Routes Do Not Mean Big Airplanes All Airport Pairs under 5000km and over 1000 seats/day

32. Big Aircraft Markets Do Not Stay Big

33. Small Airplanes Not in New Markets

34. Small Airplanes Not on New Routes

35. Small Airplanes not in New Markets ?

36. Top 12 Airports in 12 World Regions Big Airports Do Not Mean Big Airplanes

37. Congestion is Not Driving 747 Shares UP

38. Congestion Affects Short & Small Flights

39. Smaller is better Small Airplanes are Quieter Big Airplanes turn Slower

40. Noise Per Seat Lowest for Small Airplanes

41. Normalized Against Their Own Lowest Available, Actuals Show the Same Pattern

42. Big Planes Turn Slower Define S = airplane seat count, as provided by airline and airplane type D = the distance in kilometers of the flight segment preceding the turn T = the turn time, in minutes Then T = 24 + 0.115 · S + 0.0088 · D Results from regression of same-flight number through flight ground times This says that turn times are equal to 24 minutes, plus 11.5 minutes for every 100 airplane seats, and 9 minutes for each 1000 km of average stage length. This means a 100-seat airplane with a 1000-km inbound flight turns in 44 minutes. A 200-seat airplane on the same route would seem to need 56 minutes, and a 400-seat airplane would require 79 minutes. A 4000-km transcon would require almost half an hour more time.

43. Fares are declining gracefully Yields ($/km) plummet at 2-3% a year Discount fares declining 1%+ per year Unrestricted fares flat with inflation Discount mix increasing –Stimulation with fare declines –More leisure demand Long Haul share increasing –With lower “yields”

44. Yields off 2% + Fares off 1% -

45. Yield Declines Faster Than Prices

46. International Yield, Also

47. Cost Reductions Keep Coming

48. One Wish A trend is a projection of past growth Lots of “forecasts” are trend projections Look at the trends A forecast includes reasons why When reasons change, forecast changes Do not change trend without reason why The future includes acts of will For example, some hubs are made, not born If you build it, they might come

49. William Swan: Data Troll Story Teller Economist