Aviation Forecast Conference 2005 - Highlights

The 10th Annual

Aviation Forecast Conference

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Hughlights From The
2006 Conference

The Boyd Group, Inc.
Advisors to the Aviation Industry
Since 1984
78 Beaver Brook Canyon Road
Evergreen, Colorado, 80439
303-674-2000
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aviation-info@aviationplanning.com

2005 Conference Summary & Highlights

We want to thank all of the attendees, speakers, and sponsors for making this year's Annual Forecast Convention the biggest yet. It's a first - we basically took over the entire Hilton Savannah DeSoto Hotel for the event.

The General Forecast Summary:
That Light?
It Might Actually Be
The End of The Tunnel

This year, The Boyd Group forecast analyses - airline trends, traffic growth, and global fleet demand - all point to a future that is nowhere near as dire as some would paint it.

Actually, through the fog of media stories on bankruptcies and the shrieking proclamations of doom from a few financial analysts, the emerging fundamentals of the airline industry are sound. Yes, sound.

Indeed, once the current fuel-cost crisis is addressed by carriers in adjusting cost structures (which they will) our data shows a potentially robust future for most segments of aviation.

Total heresy, naturally, but this was a Forecast Conference, not a wallow in semi-factual history, which, incidentally, describes a good portion of what's being written about the industry today.

On the aircraft demand side, as we reviewed at our 2002 Forecast Conference in Sarasota, the demand for new-generation mainline-cabin aircraft is now just short of a boom. Boeing, Airbus, and Embraer are now all looking at very crowded orderbooks.

The only dark spot is in the area of regional jets, a segment of global fleet demand that has assumed room temperature. As we also forecast back then - to the guffaws of many - the demand for RJs is now at an end, and slow - or maybe fast - retirement of substantial portions of this fleet is inevitable. There will be a couple of hundred RJs soon vying for space under the sunny desert skies.

This week's announcement by Bombardier that the 50-seat CRJ is going out of production was a nice bit of validation. Now that it's a reality, plan on others earnestly beginning to "forecast" a decline in RJs in the industry.

That points to the small jet provider segment, - what other consultants still call "regional airlines" or, in one recent case, believe it or not, "commuters."

When it comes to "fading business models" the SJP segment defines the term. As our conference attendees learned four years ago, there's been a glut of these small jets, and their economics and ergonomics guarantee a major decline in the demand mega-carriers will have for them in the coming years. Not that they will go away, just that there's going to be a need for a lot fewer of them in the future.

Of course, most of this is at variance with the accepted thinking by many in the media and in academia, but give it a year or so, and they'll be parroting what our attendees learned at this conference.

Great Presentations. We especially want to thank our speakers, who gave the attendees a whole range of new perspectives on all aspects of aviation, from airline strategies, to aircraft manufacturers' programs, to the trends in fuel demand and costs. Of particular value was an impromptu exchange of views on the Wright Amendment between executives of American and Southwest. No bloodshed, but a lot of illumination on both sides of the issue.

Sponsors. We want to thank all of our sponsors, including Northwest Airlines, Embraer, Air IT, Savannah-Hilton Head Airport, Airport Revenue News, and the Sarasota-Bradenton International Airport.

Conference Presentations Available. As has been the case over the past decade of Forecast Conferences, the presenters provided valuable insight on what to look for in the year ahead. Brief synopses of presentations are outlined below. However, the conference workbook and the handouts from each session are available on order for $195. Click here for details.

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Highlights Of Speaker Presentations

Henry Joyner - Sr. VP - Planning, American Airlines

Underscoring the fact that legacy airlines are far from dead, Mr. Joyner outlined the enormous strides that AA has made in reducing costs, to the point of reporting a profit in the second quarter of 2005.

While fuel is still a difficult issue, Mr. Joyner pointed out how trust and cooperation between management and labor has resulted in American being well postured to survive and eventually grow.

Attendees received an added bonus when Mr. Joyner eloquently provided his company's stand on the Dallas Love Wright Amendment issue, in response to comments made by the following speaker, who clearly had a different take on the matter. Both gentlemen were direct and candid and the attendees walked away with a much better understanding of the positions being taken by both airlines.

Robert Montgomery - VP Properties, Southwest Airlines

A return speaker to the Conference, Bob reviewed how Southwest's future planning is being adjusted as necessary to meet new competitive challenges. Of note, he mentioned that Southwest would consider the addition of seat assignment, if the customer base was willing to pay the higher fares it would likely demand.

Tom Bach - VP Network Planning, Pricing & Revenue Management

As our luncheon speaker, Tom's lively presentation covered how Northwest is using chapter 11 to re-structure itself for the future. Normally, that would be a a topic that would run neck-and-neck with a eulogy at a pet cemetery.

Not this time.

Three years ago, Mr. Bach was our keynote speaker at the seventh annual Boyd Group Forecast conference, held in Sarasota. The subject was airline pricing, which ranks second only to Sominex in its ability to quickly induce sleep. Tom, however, actually made it interesting and got the attendees very involved in asking follow-up questions.

This year, he was again in rare form, taking issues such as fuel, alliances, and costs, and actually making them interesting and upbeat. His sense of humor kept the attendees fully engaged, and the information provided addressed a range of misconceptions regarding both Northwest and its bankruptcy filing.

Robert Fornaro - COO, AirTran Airways

People who know Bob Fornaro are well aware that he's all business. The success of his airline is proof positive.

At the conference, in his usual direct and no nonsense style, Bob discussed the core reasons for AirTran's success - simply focusing on what they do best, and staying within a clear strategic objective. The message was that AirTran knows what it can, and what it cannot, do.

Bob covered the fleet growth at AirTran, with a successful introduction of 737-700s to its fleet of B-717s. With this fleet, AirTran can now access virtually any point in the continental US from Atlanta, or from either coast, giving it enormous planning flexibility.

James May - President, Air Transport Association

An innovative comparison of current airline industry events to those described in Midnight In The Garden of Good & Evil, a best-selling novel set in Savannah, was the vehicle by which Jim May made some very insightful comments on the state of the airline industry.

Jim illuminated the fact that the airline industry and the consumers it serves would be far better off if Washington would simply stop using air carriers as a cash cow, with enormous taxes and fees. The desperate need to upgrade airport and airway infrastructure needs to be pushed from the very top of the Administration, he informed the conference.

Paul Matsen - Executive VP & Chief Marketing Officer - Delta Air Lines

Conference attendees were briefed on how Delta is adjusting its costs and revenues to meet the challenges of the new, high fuel cost environment. While the core system is sound, some reductions in flying - adjustments - can be expected.

Drew Magill - Director, Market Analysis, Boeing

The 787 is more than a new airliner. It is the foundation of entirely new technologies that will fundamentally change both the aircraft manufacturing industry, and the airline industry as well. A video presentation informed the Conference of the incredible design flexibility made possible by new composite-material technology.

Memo to Airbus: your A-380 is big, but it could be in trouble.

Ray Neidl - Financial Analyst, Calyon Securities

Always a great speaker, Ray brought up what might have been one of the best ideas of the Conference, albeit one that could cause temporary chaos at our airports - but with a positive outcome.

Referring to the obnoxious tax and fee burden imposed on the airline industry, he suggested that airlines be required to only charge consumers for the fare itself, and require that the consumer pay the fees and taxes separately at the airport on day of departure.

When the flying public realizes that that $500 fare has another $80 in taxes, there would be a lot of unhappy passengers calling their congressman. As long as airlines are required to bury these fees in the total price of the ticket, the flying public will be blissfully unaware that they are being milked by their government.

John Armbrust - President, Armbrust Aviation & Publisher of Jet Fuel Report

Competition among petroleum products for scarce pipeline capacity and lack of refineries point to jet fuel not only staying expensive, but also becoming increasingly vulnerable to spot shortages at some airports.

Thirty years of low investment in petroleum infrastructure are now coming home to roost for the entire US economy, but particularly for fuel-intensive industries such as airlines.

The Conference attendees were shown the tenuous supply chain involving jet fuel, and how even minor glitches can cause shortages and huge price swings. John predicted that oil prices will fall somewhat in the near term, due to changes in speculation. But long term, there isn't too much to look forward to in regard to prices of jet fuel. The "crack spread" - the price relationship between refined jet fuel and raw crude - is widening. This means that even as oil prices come down, other factors in the supply chain will keep jet fuel disproportionately high.

Mark Hale - Vice President, Embraer Aircraft

Five years ago, attendees at The Boyd Group Forecast Conference were advised that a new type of mainline jet would be coming to airports sometime after 2005.

These "E-Jets" (a term The Boyd Group worked with Embraer's ad agency to develop to describe these new generation airliners) would bring much lower costs and replace the gap left with the retirement of smaller DC-9s, Fokker-100s, and 737s.

Embraer 170/190s are now coming on line. Mark went over how these aircraft offer carriers a full-size cabin, and a full mainline product, at operating costs that can invade the traditional operating envelope of smaller aircraft.

Front Porch Discussion: Will The Meek Inherit The Skies?
Shaun Nugent - CEO, Sun Country, and Ben Baldanza - CEO Spirit Airlines

The pace was shifted somewhat, with a laid-back session where CEOs of two successful, low-profile niche carriers presented their overall strategies and views of the airline industry.

Both of these gentlemen have a presentation style that is really very "un-corporate." The on-going expansion of Spirit was outlined candidly and indicated how this airline is marching to its own drummer, focusing on Caribbean destinations. Sun Country is also looking at specific niches and has perfected the ability to swap out aircraft with a European carrier which has traffic demand that is counter-cyclical to that of the US.

Then we sat down and had an informal discussion, moderated by Mike Boyd. The casual nature of the event brought out not only some great questions from the attendees, but it also sparked some very interesting insights from the speakers as well.

This session worked so well, we're planning at least two "fireside chats" at next year's Forecast Conference. (Yes the meeting room next year actually has a fireplace.)

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Key Forecast Sessions

Aviation leaders attend this conference because they receive cutting-edge forecasts prepared by The Boyd Group. Not "consensus" projections. This conference has built its following on hard, direct, and focused forecast data produced independently by The Boyd Group.

Forecast:
Airline Industry Trends

Some trendy misconceptions were discussed.

It's Not "Over-Capacity" When Planes Are Full. When the industry is hovering around an 80% load factor, that means they're pretty much selling all of their product at times when people want to travel. The remaining 20% is the dregs - late night flights, positioning flights, mid-week and off-bank flying, etc. What seats have value to the customer, are mostly being sold out.

So it's pretty hard to claim that there's too much capacity when that capacity is chocka-block full. The issue, of course, is that it's hard to charge a price consumers will pay and at which an airline can get a reasonable ROI.

So, it's not really over-capacity. More correctly, there may be "over-competition" not over-capacity. There's a difference.

Over-capacity would be a case where there's a lot of unsold product in excess of market demand. Over-competition (for want of a better term) is where there are lots of players fighting for the demand, which depresses the prices that can be charged.

When the industry is running pretty much at capacity, the calls to end "over-capacity" are really calls for providing less product, thereby theoretically being able to charge more to fewer passengers - i.e., simply constrict capacity and squeeze lower-end, price sensitive passengers out of the market.

It's not going to happen, so all the babbling about the "need to consolidate to cut capacity" is just so much howling at the moon. Even the GAO recently issued a study concluding that when capacity has been materially reduced in the past, other carriers have replaced it quickly.

At the Conference, the forecast presentation outlined how fleets equivalent to the size of Continental Airlines in 2001 (mainline) have been eliminated from the US airline system over the last four years, yet "over-capacity" continues. But more than that, the forecast presented data that indicated that these reductions in capacity have only resulted in reduced service levels at small and mid-size airports. Where the "over-capacity" existed, it's still there. The reason: airlines are going to chase revenues in big markets.

Bottom-line: if one or more carriers went to airline heaven, that "over-capacity" in major markets would remain, yet it would be smaller airports that would take the hit. Example: The pull-down of the US Airways PIT hub (which has not and will not be replaced) has left a lot of airports in the Middle Atlantic and Mid-South with less access.

The Future: Legacy Carriers, Not LCCs. Most analysts today are focused on comparing airline costs. What they've missed is the other side of the P&L: it's something called revenue. And this is where the legacies have the future advantage.

The forecast isolated where new domestic and international revenue flows will be emerging in the future, and the vast majority of it is out of the reach of the LCC model.

Big-Time Shrinkage: "Regional" Airlines. The bankruptcy of Mesaba should have been the first clue to the analysts who have been proclaiming that "regional" airlines are just soooo profitable and will effortlessly be able to replace those clumsy legacy systems.

These entities, which in fact are today neither "regional" nor airlines, are facing a substantial shake-out. What has been missed by a lot of the me-too analysts is that these entities are vendors, not airlines. The majority of their revenues come from leasing crews and airplanes - predominantly regional jets - to major airline customers.

The Boyd Group identified an emerging glut of both RJs and the number of RJ operators four years ago. It's now here. Our fleet forecast indicates that as many as 200 or more RJs will be heading for the desert (or wherever else) over the next 36 months. (We'd note too, that Bombardier's recent decision to stop producing 50-seat jets also validates the fleet forecasts provided at our Conference four years ago - one that was totally at odds with virtually every other fleet forecast available.)

Air Service Focus For The Future: Get Sino-Centric. The long-term traffic demand forecasts accomplished by The Boyd Group have identified a key future economic trend: if you're not connected to China, you're not going to be connected at all.

Face it, in ten years we'll be talking about the new, high-quality cars being imported from China, or being made in Chinese-owned factories here. We'll be talking about those new airliners that will compete with Boeing, Airbus, and Embraer. We're already using large appliances that are built in Chinese-owned factories in the US.

The point: ease of access to points in the Middle Kingdom will be a factor in economic growth of any region of the nation. Best positioned carriers: Northwest, United, and - eventually - American and Continental. Most of this growth will be at mid-size communities, where Chinese investment will be focused.

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The Boyd Group Airport Traffic Forecast

The enplanement bubbles along the East Coast will tend to deflate sometime over the next six to twelve months. (The Independence Air pricing nonsense will come to an end at some point.) The result will be an artificially-flattened growth curve in 2006 - 2007.

Some misconceptions were also dealt with at the conference. One being the belief that Delta has slashed and burned capacity out of Cincinnati/Northern Kentucky International. The reality is that they've mostly just removed the spike in capacity added there over the past 24 months. A similar situation took place at Salt Lake City.

These are fairly typical examples of how major carriers are adjusting capacity. It also very clearly shows that these "cutbacks" do not result in market opportunities for LCCs to rush in to fill. In the case of American, for example, reducing ORD-DEN flights from nine daily to eight daily doesn't qualify as a vacuum of service.

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Copies of the conference presentations are available at $195. Note that the airline-industry presentations are not included, based on requests from the carriers' legal departments. Click here to order.

Year 2006: Join Us In Deer Valley!

The 2006 Boyd Group Aviation Forecast Conference will be held on October 8 - 10 at the Stein Eriksen Lodge in beautiful Deer Valley, just minutes from Salt Lake City International.

Clear your calendar. More details to come shortly.