The 12th Annual

Home

Join Us Next Year.
We're Raising The Bar...

___________

The Boyd Group, Inc.
Advisors to the Aviation Industry
Since 1984
78 Beaver Brook Canyon Road
Evergreen, Colorado, 80439
303-674-2000
303-674-9995 Facsimile
aviation-info@aviationplanning.com

Highlights of The 2007 Event

Traffic Growth: Constricted By Capacity

Billings & Beijing:  Now More Important Than Orlando

IT: To Fundamentally Transform Airport Facility Needs

Labor: It'll Leave The Table With Either $$$ Or Strike Posters

Consolidation: United's Tossed Itself On The Sale Block. Scenario Planning Time

FAA's NextGen: A Totally Lost Cause. FAA Now "Irrelevant"

Airliner Demand:  Strong, But Who'll Be The Manufacturers?

______________________

This year again, The Boyd Group Annual Aviation Forecast Conference set another attendance record, with well over 200 aviation leaders in attendance, including a dozen airlines, all four global aircraft manufacturers, airports from all over the nation, and key suppliers.

We again want to thank all of our sponsors, including Sarasota Bradenton International Airport, Embraer, Northwest, Delta Air Lines, AirIT, Airline Weekly, Airport Revenue News, and Airbus.

Surprise This Year: Embraer's Conference Gift

Embraer outdid itself this year. They went through the motions to raffle off a very nice Conference-schemed model of the E-190. They then announced that all conference attendees would receive one as a gift from Embraer.

We want to thank Embraer for being not only a great and long-term client of The Boyd Group, but for sponsoring the Annual Forecast Conference for more than a decade.

And SRQ Outdid Itself, Too

We enthusiastically want to thank our hosts, the Sarasota Bradenton International Airport, and its president, Rick Piccolo. The reception SRQ sponsored on Monday evening at the Powell Crosley Mansion was nothing short of outstanding. It showcased Sarasota perfectly.

The grounds, right on the bay, allowed for leaders from all areas of aviation - manufacturers, airlines, labor, airports, financial institutions, and suppliers - to mix, have an adult beverage, and schmooze as the sun set over the water.

During the event, as if on cue, a couple of porpoises showed up in the adjoining boat slip to entertain the guests.

We have it on good authority that Mr. Piccolo put them up to it.

The Light At The End of The Tunnel: What Light?

Below are just some of highlights from the Conference. There was an enormous amount of information and data, and it's not possible to cover all of what went on. Nevertheless, here are some key points.

Five Trends To Watch. The Boyd Group has isolated five key trends that will shape aviation and aviation planning in the coming 18 months.

International Focus. First, air traffic and air transportation will be increasingly globally-driven in the future. The investment by BMW at Spartanburg has generated not only more international traffic, but that traffic has spurred more domestic travel as well.

Those not-used-to-being-questioned academics who babble on about how major airlines are dumping domestic routes and shifting to international markets might want to get some knowledge about the industry before they continue to misinform our kids. The fact is that DTW-SHA doesn't have enough traffic to support nonstop service. But connect it to the Northwest hub at DTW, and that domestic route system makes it viable.

We reviewed also how international-related factors are becoming more important for smaller and mid-size communities. As just one example, we outlined the estimated 1.6 million annual trips generated by US residents from India. This traffic is demonstrated at communities all through the US, and can be important to maintaining and building service to international gateway hubsites.

Whole New Facility Metrics. Another emerging trend is how new IT systems will fundamentally change not only how airlines process passengers, but also affect the types of airport facilities that will be needed in the future.

One of our sponsors, AirIT, demonstrated that passenger processing can be done virtually anywhere... all that's needed at the airport are the portals to check documents and go through the TSA's excuse for security screening. Factor that concept into space needs, and the traditional metrics for curb space, hold space, linear processing points, and baggage become very obsolete indeed.

Air Traffic Management was a session at the Conference that drew some very strong approval. Captain Michael Baiada presented the concept of airlines moving to take control of their production lines, dynamically managing all aspects.

Today, the airline mostly launches the flight off the gate, and takes control back only when it gets to the destination. Given the continued deterioration of the ATC system, air carriers can no longer allow this. The quality deviation and variance levels necessary within such a system need to be so wide that costs are astronomical, and the product has a high level of "defects" - delays, cancellations, etc.

Captain Baiada brought out an interesting point of truth: the FAA is irrelevant to fixing the ATC system, mainly because over the past two decades they have proven that they simply are not up to the task. Waiting for the FAA to successfully implement the ATC system we need is akin to leaving the light on for Jimmy Hoffa. "NextGen" is really old programs with new names and are virtually all late, anyway.

Therefore, the airline industry's mantra of how they're "working with the FAA" is just so much meaningless jargon, and will accomplish nothing. Just as it has in the past 20 years.

In his presentation, Captain Baiada noted that airlines must accept the fact that the ATC system is an incompetently-managed mess, and since there is no fix on the horizon, airlines must work to hone systems to dynamically manage all of the factors of the production line from departure to arrival.

To the maximum extent possible, that means identifying and monitoring revenue flows. In his presentation, Captain Baiada outlined how Delta Air Lines is now beginning to do this at ATL, with material improvements in cost reduction and higher efficiency.

Disruptive & Engulfing Technologies. The 787 is the first of what we call "disruptive" technologies - where traditional systems are made obsolete and left in the dust. The new production tracks and supply chains are in many ways distinct from past ones. Then we have the demand that the 787 will create. The Boyd Group Global Fleet Demand Forecast indicates that the 787's economics will be a competitive necessity, and will "engulf" Boeing's ability to meet that demand. The result is that other manufacturers will see significant market opportunities. In particular, the Airbus A-350XWB is in line to become a huge market success in the 2013 - 2017 timeframe. These concepts were discussed in detail in the session outlining The Boyd Group 2008 - 2017 Fleet Demand Forecast.

Labor: No More New Age Touchy-Feely Stuff. It's Money or We Walk. One trend that should not be underestimated is the stance of organized labor. To a very large degree, labor feels hoodwinked. Regardless of the reasons, laying heavy bonuses on management - in some cases as far down as middle management - doesn't set well with men and women who gave up 20% or more, and in some cases their retirement pensions, to save their airlines after 9/11. It has made hollow the argument of, "Labor wants a raise? After all these years of losing money, a couple of profitable quarters simply isn't enough to start returning concessions."

Unfortunately, the perception of labor at some carriers is that senior management isn't part of that reality.

Regardless, again, of the range of factors, reasonings, and arguments, the fact is that management at some carriers has feasted on the airlines' turnarounds, and in one case - United - has descended into what can only be described as an exercise in Robber-Baron 101. Labor isn't going to walk away from the table this time without some serious money. It's not going to fly as a bargaining tactic to claim that "we're all in this together" when United employees and retirees are in some cases having to sell their homes while the CEO and his inner circle are getting millions in various goodies.

This means airlines have no choice but to begin to seriously look for ways to get the money they are going to absolutely need to pay for labor give-backs. And, the money can be there...

It's not a case of airlines trying to find the money to meet labor demands. It's going to be a #1 imperative to do so.

Trends That Are. And Probably Are Not

We covered a range of "trends" and non-trends in the airline industry.

Consolidation. The Trend Forecast indicates that any large-scale merger between two major carrier systems would be an operational nightmare. True, there is the belief that such events would "remove excess capacity" - but, a) it's based on the belief that there won't be competitive responses in major markets, and, b) THERE ISN'T ANY EXCESS CAPACITY. What they really mean is "squeeze out supply to raise prices."

That's not by itself a dishonorable goal - this is, after all, business. But what some proponents, such as US Airways, are really saying is that they want to restrict capacity. What they leave out is the hit to consumers in small and mid-size communities, as was demonstrated by what would have been the results of the US/DL proposal.

Another point missed by consolidation proponents is that the revenue and cost synergies are a long way off, absent of any funny accounting. Fleets and labor and operational specs would take years to put together, and - missed by most - labor will end up getting badly hurt.

Mergers could be proposed in the coming year, if for no other reason than there's lots of money to be made in crafting the deals. And the reality is that United Airlines apparently has as its number one priority the goal to be acquired. It's in play, and that will of necessity spark some scenario planning at virtually every other airline.

Non-Trends: The B-School Buzzwords Are Flying. We covered three likely non-trends that are getting some currency in the veneer analyst circles.

A lot of this comes from analysts on the Street who have no real understanding of the airline business. Selling off frequent flyer programs might be an idea - if the downsides are fully understood. But if an airline management forgets its prime mission - which is running an airline, instead of concocting short-term stock deals - the company is in real trouble.

Ancillary Revenues... Maybe Just Additional Ancillary Costs. The ancillary revenues argument is directly opposite in some ways from the "sell-the-furniture" concept of "unlocking shareholder value." Peddling an airline's long-term investment in a maintenance operation might eliminate the ability to gain new revenues by in-sourcing, as is being done by American Airlines. (It also brings up efficiency issues, as well. Outsourced maintenance is just that. In-house maintenance technicians can be more time efficient with their own fleet upkeep.)

Adding to this is the "trend" toward charging for services that were previously in the price of the ticket. It's the current buzz in the media, often  written by reporters who have absolutely no idea about airline operations. To some degree, like food, it has some value - but only in shedding some infrastructure, and not in generating black ink to the bottom line.

But now, it's gotten to the level where one carrier has stated it is considering the concept of charging a passenger extra to get his checked bag to the claim area sooner. Great, the message is, "unless you pay us baggage extortion, we'll keep you waiting longer." 

Another problem with the idea of "ancillary revenues" is that it means more moving parts - more interaction between airline and passenger, more accounting, more equipment to collect the money, etc. Bottom line: while there may be some additional airline nickel-and-diming in the future, the net additional income won't amount to much more than just that - nickels and dimes.

If It's Not Branded. It Probably Won't Fly. Another current "trend that isn't'" is the growing concept that intra-regional airline travel has more than a sno-cone's chance in Miami of survival. Being peddled to communities like snake oil, whether it's on-demand air taxi or scheduled flights, write this down: it's a lost cause. In the case of scheduled intrastate or intra-regional service with independently branded C-402s or Piper Navajos, or Queen Airs or the like, unless the competition is a raft - i.e., the service is the only alternative to a boat trip, like the Cape & Islands - the deal's dead on arrival.

Fuel Outlook: Plan On $75 To $90 Oil

The combination of demand, a weak dollar, and shenanigans from speculators, there's not real hope of oil dropping in price. This was the message from John Armbrust, President of Armbrust Aviation Group, and a pre-eminent expert on fuel issues.

John illuminated other dynamics that are playing toward higher fuel prices. Emissions taxes in Europe - regardless of any rationale behind them - is one. Another is the fact that much of the world's oil supply is in the hands of crackpots running places like Iran and Venezuela.

The only potential factors that could bring down oil prices would be federal scrutiny of hedge fund practices, a national energy policy that addressed conservation as well as production, and a gain in the value of the dollar v the Euro. None of which, according to Mr. Armbrust, have much potential of seeing the light of day.

A Downturn May Not Hit As Hard As In The Past

The Trend Forecast session outlined that the traditional airline industry cycle of boom and bust will affect carriers differently in the future.

Today, comprehensive network carriers can respond effectively to a traffic downturn by reducing capacity. Most CNCs have the ability to "valve off" excess seats by parking some of their fleets - fleets that have low ownership costs. Despite some very lightweight media reports (including one recently in the business section of the New York Times) older aircraft are not some blight on the consumer. To the contrary, they offer the same comforts as new airliners, and are a boon in times of a downturn because they can be parked cheaply, fuel and maintenance costs notwithstanding.

Global Fleet Forecast

The Boyd Group Global Fleet Demand Forecast was reviewed in detail. We revealed a number of trends that have been missed in other forecasts.

One is that the majority of demand for new jet airliners will be driven by earlier than expected retirements, caused mostly by entry of new-technology airliners in the 2009 - 2014 period. Another is the fact that over 1,200 "regional jets" will be retired out of fleets by 2017, and there is no new-generation replacement on the horizon in the <70 seat category.

Unlike other forecasts, The Boyd Group categorizes "regional jets" by cabin, not by seat capacity. This includes the ERJ series, the CRJ series, and the FRJ series. This is more accurate in that the mission applications, customer bases, and future demand are very different from mainline cabin airliners. There are material differences in these key factors between a CRJ-1000 and a E-190, even if the seat capacity is the same. They are not in the same airliner category whatsoever.

Another issue is that 37% of the demand for new airliners will be for units in the 75 to 125 seat category. But that category has only one current viable player, which is the Embraer E-Jet platform. (The 737-600 and the A-318 are built-down, are heavy, and have limited demand.) This opens huge opportunities for other manufacturers - including Sukhoi, Bombardier, and even Mitsubishi.

All Four Manufacturers Presented Their Forecasts, Too. This year, the Conference included fleet forecast presentations from all four aircraft manufacturers - Embraer, Boeing, Airbus and Bombardier.

Simon Pickup, Director - Business Operations at Airbus, was a repeat presenter this year, and we will do all possible to assure he joins us again next year at the Aviation Forecast Summit At Aspen, too. Without question, Mr. Pickup can make a fleet forecast, and, to be sure, a sales pitch for Airbus, fun and humorous.

His presentation took place the day after the first A-380 was delivered to Singapore Airlines. It is a technological marvel, but Airbus is going to trump itself with the A-350XWB. In fact, The Boyd Group would suggest that the real future story for Airbus is going to be not only the A-380, but even more so the A-350XWB. A second-generation composite airliner, it will not only benefit from the 787 demand that Boeing may not be able to meet, but its size and performance indicate it will arrive just as the first 777s begin to get retired.

Richard Wynn, Director - Future Market Requirements presented Boeing's views of the future as well. His otherwise stellar data and excellent delivery included for some reason a picture of Al Gore on one slide. An Al Gore at least five years and 75 pounds ago. Apparently, like new airliner designs, ex-politicians tend to put on excess weight, too.

Bombardier was represented by Mr. Barry MacKinnon, who reviewed the future for RJ-cabined airliners. But more importantly, he discussed the planned C-Series platform. The Boyd Group's independent forecasts indicate that this aircraft may well be a major competitor to Boeing and Airbus in the mid-100 seat range.

Embraer's Gordon Preston, Manager Airline Marketing, reviewed the market penetration of the E-Jet platform. As shown on the above slide, Embraer has the pleasant conundrum of being the only current player with a viable mainline-cabin airliner within the 75 to 125 seat range, which falls into the category that will represent over 37% of global demand, according to The Boyd Group's Global Fleet Demand Forecast.

Airports:USA(TM) Passenger Forecast 2008 - 2013

Traditional mathematical forecast methodologies are now completely useless in projecting air traffic. This is due to the fact that demand is now being controlled and metered by two fundamental dynamics that have little to do with population and demographics.

Traffic Quality. Not Volume. The fact is that capacity is not increasing. Carriers are full, and CNCs are not adding significant new capacity. Domestically, carriers will be looking to improve the quality of traffic - i.e., continually work to spill low-yield traffic with higher yield traffic. This, again, is the focus of CNCs adding new international flying. Not to run from LCCs domestically, but to better compete with them by buttressing on-board revenue with traffic fed from both domestic and international points that offer better system yields. That means connect traffic to Beijing is important. But so is the connecting traffic to Billings, instead of Orlando. System yield and system contribution, plus brand loyalty, trump high-volume, low-fare traffic.

System Operational Constrictions Are Not Going To Change. The second dynamic is what is becoming an underlying factor in virtually every area of US strategic aviation planning: the air traffic control system,

The efficiency of the skies has been effectively sabotaged by the DOT/FAA's continuing bungling of the ATC system. Regardless of what the latest buzzwords may be from the FAA, the fact is that there is no viable solution to the ATC system on the horizon. Therefore, airlines will need to plan and operate within the context of a constricted system.

Bottom line: air passenger traffic will expand only within the confines of these restraints, and not due to fundamental growth in the US and international economies.

Pre-Conference Workshops

The three pre-conference workshops - on Air Service Development, Airport Economic Impact Analysis, and Airline Financials - were delivered on Sunday afternoon.

The data provided was comprehensive and the sessions were fully booked. This kind of work was a perfect excuse to afterwards repair to the pool garden for the welcome reception.

Presenter Highlights

The "Beach Banter" sessions were particularly fun. Rather than panels, we engaged in discussions where principals of The Boyd Group would interview and exchange ideas with key aviation leaders. Questions from the attendees were then often expanded on by the participants.

Like last year, when we did "fireside chats" at Deer Valley, this year we gave it a Florida theme, replete with beach chairs, an umbrella, and a life preserver, something often looked for in aviation.

At each, leaders in various areas of aviation were interviewed by a principal of The Boyd Group, resulting in a lively exchange of views. The results are a lot more relaxed and also a lot more informative than having speakers lined up at a table with microphones, answering random questions.

All the presenters were nothing short of great. One who really stood out was Will Ris, VP of Government Affairs of American Airlines. In a lively and completely PowerPoint-free presentation, Mr. Ris recounted how airlines are held to a much higher standard than other consumer industries. Consumers will put up with bad service from cable companies without a peep, yet go bonkers when a flight gets delayed by weather.

The Q&A period was also one of the most informative. Pointing to the shark float (in the picture above under the table) Mr. Ris commented on how thoughtful we were to display a portrait of his former boss at AA, Robert Crandall.

We were honored again by an incisive, no-holds-barred presentation by AirTran President & COO Bob Fornaro. The growth of his carrier and its future were candidly reviewed, as well as the issues surrounding AirTrans' offer to buy Midwest.

Another hit this year was the Beach Banter session with Laura Liu, Executive VP International of Northwest. The carrier's clear view of its future was discussed. In particular, Northwest feels it has sufficient new market opportunity with its Asian operations and the KLM alliance for the foreseeable future.

Speaking of KLM, Pieter Elbers, Sr. VP of Network for that carrier, presented his vision of the importance of alliances to both the EU and US markets. We were honored that Mr. Elbers joined us from his Amsterdam offices for the Conference.

In regard to airlines jumping out of Chapter 11 and taking on the world, Lee Macenczak - Executive VP - Marketing, Delta Air Lines, provided his company's new positioning and the progress it has made since exiting Chapter 11.

We were also honored to have a presentation from one of the leaders in the new generation of small jet providers. Jeff Jones VP - Planning at Republic Airlines illuminated the new role of small jet providers, as well as his company's multi-pronged strategy for the future.

Photos and More Information

Pictures and brief discussions of all of the presenters will be posted on the Conference Photos Page. We have literally hundreds, thanks to an eager intern from Embry-Riddle who became the Otto Preminger of the conference set. These will be posted during the week of 29 October.

We again want to thank all of the aviation leaders who attended the 2007 Conference.

Next year - at the thirteenth annual event -  we're raising the bar again. It will be The Aviation Forecast Summit At Aspen, held at the St. Regis Hotel and Resort. We'll be including a number of new forecast sessions and subjects. Full details and speaker lists will be posted. In the meantime, please click on the logo for more information.