Biography for William Swan

Chief Economist, Seabury-Airline Planning Group. AGIFORS Senior Fellow. ATRG Senior Fellow. 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. ( [email protected]

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Scott Adams

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

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

Increasing Regional Competition

35 30 25 20 15 10 5 0 1970 1975 Europe 1980 1985 1990 1995 2000 2005

Rising Competition in Long-Haul Flows

25 20 15 10 5 0 1970 1975 1980 1985 1990 1995 Atlantic Pacific Asia-Europe 2000 2005

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?

Half of Travel is in Connecting Markets

16% 14% 12% 10% 8% 6% 4% 2% 0% Connecting Markets <3 .1

25 <6 .2

5 <1 2.

5 <2 5 <5 0 <1 00 Nonstop Markets <2 00 <4 00 O&D Passengers per Day <8 00 <1 60 0 16 00 +

$220

Fares Higher in Small Markets

Connecting $200 $180 $160 $140 $120 HCCs without LCCs HCCs with LCCs LCC fares $100 1 3 5 7 9 13 20 30 41 61 Market Size, Log Scale 86 122 172 281 479

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

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

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

Forecasters in 1990 Were Confused

230 220 1990 FORECAST 210 200 190 180 170 160 150 140 130 1970 1975 1990 data 1980 1985 1990 1995 2000 2004 data 2005 2010

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

60% 50% 40% 30% 20% 10% 0% -10% -20%

Largest Routes are Not Growing

as bypass flying diverts traffic

ASK growth Frequency growth World, 1993-2003 Top 100 Routes Airplane size growth

Big Routes Do Not Mean Big Airplanes 450 400 350 300 250 200 150 100 50 Average 0 0 2000 4000 6000 8000 10000 12000 Seats Per Day

All Airport Pairs under 5000km and over 1000 seats/day

All Airport Pairs under 5000km and over 1000 seats/day

14000 16000 18000

Big Aircraft Markets Do Not Stay Big 450 400 350 300 250 200 150 150

>5000km, 5+deps/week

200 250 300 350 400 Seats/Departure Aug 1991 450

Small Airplanes Not in New Markets 450 400 350 300 250 200 150 5000 6000

>5000km, 5+dep/week

7000 8000 9000 Distance (Km) 10000 11000 12000 13000

Big Airports Do Not Mean Big Airplanes 350 300 250 200 150 100 50 0 0 200 400 600 800 Jet Departures Per Day 1000 1200 1400

Top 12 Airports in 12 World Regions

Congestion is Not Driving 747 Shares UP

80% 70% 60% 50% 40% 30% 20% 10% 0% 19 85 19 87 19 89 19 90 19 93 19 95 19 97 19 99 20 01 20 03 NRT HKG HND JFK PEK LHR AMS CDG FRA LGW LAX SFO ORD

Smaller is better

• Small Airplanes are Quieter • Big Airplanes turn Slower

Noise Per Seat Lowest for Small Airplanes 3 2 1 0 0 100 200 Airplane Seat Count 300 400

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.

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”

Cost Reductions Keep Coming

0.16

Props 0.14

0.12

0.10

Better Airplanes, Higher Bypass, Hotter Turbines Revenue Lower Management, Higher Load Facors Distributiion Airport costs, Lower LCCs, commissions nonunion pilots, Costs, Lower ATC faster turns?

costs?

Future Cost Improvements 0.08

0.06

reported

Yield trend

yields

-2.4%/year Estimated Fares -1%/yr 0.04

0.02

0.00

1970 1980 1990 2000 2010 2020 2030

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

William Swan: Data Troll Story Teller Economist