northwest regional air service initiative steering committee meeting market analysis/strategies june...
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Northwest Regional Air Service Initiative
Steering Committee MeetingMarket Analysis/Strategies
June 6, 2007
Report topics
• Northwest Regional Air Service Initiative (NWRASI) background
• Market analysis– True market estimates
– Pro forma forecasts
• Discussion/input
Issues
Goals
Project scope
NWRASI Background
Air service issues
• Service in secondary markets is deteriorating
• Regional airline relationships and fleet trends are increasing small community service issues
• Industry trends making future service improvements difficult
• Many leaders in small communities have little understanding of the issues and/or how to address them
Goals
• Improve air service to the OR and WA traveling community
• Provide better access from secondary markets in OR and WA to the national air transportation system
• Engage smaller communities in OR and WA in finding solutions to regional air service issues
Project scope
• Phase I: Small community air service development tool kit– Mentor Program
– Air service DVD
– Small Community Air Service Handbook
• Phase II: Small community air service market analysis– True market estimates
– Pro forma analyses
• Phase III: Small community air service strategy– Potential air service markets
– Service provider options
– Service strategies
– Recommendations
Educate
Analyze
Strategize
NWRASI airports
Community AirportAirportCode
Astoria, OR Astoria Regional Airport AST
Klamath Falls, OR Klamath Falls Airport LMT
Moses Lake, WA Grant County International Airport MWH
Newport, OR Newport Municipal Airport ONP
Pendleton, OR Eastern Oregon Regional Airport PDT
Port Angeles, WAWilliam R. Fairchild International Airport
CLM
Pullman, WAPullman-Moscow Regional
AirportPUW
Redmond, OR Redmond Municipal Airport RDM
Roseburg, OR Roseburg Regional Airport RBG
Salem, OR Salem Municipal Airport SLE
Wenatchee, WA Pangborn Memorial Airport EAT
Yakima, WA Yakima Air Terminal YKM
12 Oregon and Washington communities
participated in the NWRASI
True market estimates
Pro forma forecasts
Market Analysis
Market analysis - questions
1. Where are air travelers traveling to/from today?
2. How many by origin and destination market?
3. Does it make economic sense to serve these communities?
Market analysis - steps
• Identification of airport catchment areas (ACA)
• Collection of air travel data (MIDT)
• Model air travel markets where data does not exist
• Analyze and summarize market information (total passenger volume by destination)
• Complete pro forma analyses on potential markets
Phase III – Small community air service strategies
Estimating air service demand (true market)
• Methodology– Each NWRASI airport has its own
unique air service market
– ACA population defined for each market by zip code
– Economics and demographics considered for proxy markets
– Competing (alternate) airport service considered
• Data sources– YE 10/2006 MIDT for zip codes included in each catchment area
– Airports with existing service combined MIDT and DOT airline data by destination
– Airports without existing service estimated using travel factors based on several factors including proximity to larger airports
Example – true market estimate w/ air service
• Like many NWRASI communities, isolated from large population centers
• Current scheduled air service
• Airport catchment area population of ~78,368
• True market estimate of 119,334 origin and destination passengers annually
• Portland is the #1 market
Klamath Falls:
Catchment population 78,368
Travel factor 1.52
Travel factor proxy N/A
Domestic true market 109,964
International true market
9,370
Total true market 119,334
Methodology LMT DOT/MIDT
Example – true market estimate w/o air service
• No current scheduled air service
• Airport catchment area population of ~96,724
• Used travel factor proxy (Wenatchee) to estimate the true market
• True market estimate of 114,371 origin and destination passengers annually
• Seattle is the #1 market
Moses Lake:
Catchment population 96,724
Travel factor 1.18
Travel factor proxy EAT
Domestic true market 100,328
International true market 14,043
Total true market 114,371
MethodologyEAT travel factor and
market distribution
True market estimates
Passenger estimates form baseline
for pro forma forecasts
AirportTravelfactor
ACApopulatio
n
Truemarket
Travel factorestimate
Passengerdistributio
n
AST 1.39 90,739 126,213 Proxy: OTH Proxy: OTH
LMT 1.52 78,368 119,334 MIDT/DOT MIDT/DOT
MWH 1.18 96,724 114,371 Proxy: EAT Proxy: EAT
ONP 1.39 62,293 86,646 Proxy: OTH Proxy: OTH
PDT 0.95 116,942 111,044 MIDT/DOT MIDT/DOT
CLM 1.89 68,656 129,855 Prior study Proxy: SEA
PUW 2.43 71,320 173,657 MIDT/DOT MIDT/DOT
RDM 3.14 192,256 603,389 MIDT/DOT MIDT/DOT
RBG 2.06 93,341 191,816 Proxy: EUG Proxy: EUG
SLE 4.13 594,398 2,451,941 Proxy: PDX MIDT
EAT 1.18 144,021 170,450 MIDT/DOT MIDT/DOT
YKM 0.91 259,546 237,250 MIDT/DOT MIDT/DOT
Pro forma market screening
• Each pro forma is stand alone
• Frequency: Minimum service in a new market is 2 roundtrips to be viable
• Aircraft size: 19-, 30-, or 37-seat turboprop aircraft (74-seat if demand permits) and 50-seat regional jets
• Appropriate destinations and connecting hubs
• Codeshares with dominant hub carrier: PDX=AS/QX, SLC=DL, DEN/SFO=UA, PHX=US, BOI/GEG=universal codeshare
• Best case scenario for NWRASI participants
Markets selected for pro forma analyses
• Highlighted markets form core for strategies
• 25 pro forma analyses completed
HubNWRASI airport
AST CLMEAT
LMT MWH ONPPDT
PUW RBG RDMSLE
YKM
Boise
Denver
Phoenix
Portland
Salt Lake City
San Francisco
Seattle
Spokane
Key pro forma forecast elements
• Passengers forecast based on connecting opportunities and stimulation
• Average fares based on reported fares where service exists and reported fares in proxy market where no service exists
• Segment revenue determined by pro-rating connecting market revenue based on square root of the miles
• Estimated operating costs based on Form 41 carrier costs reported to the US DOT and manufacturer cost curves
SLC
PUW
Segment 1Segment 1
BeyondBeyond
Segment profit/ loss a key
consideration by airlines
Results - Boise
Statistical category MWH PDT PUW
Seats per aircraft 19 19 19 Roundtrips 2 2 2
Onboard passengers 8,921 8,763 14,662 Load factor 32.2% 31.6% 52.9%Local fare $150 $130 $124
Connect fare $159 $211 $199 Average fare $157 $210 $186
Segment revenue $757,646 $676,989 $1,238,528 System revenue $1,398,821 $1,841,187 $2,734,066
Segment cost $2,455,414 $1,829,020 $2,022,579 System cost $2,705,473 $2,283,057 $2,605,839
Segment profit/(loss) ($1,697,768) ($1,152,031) ($784,051)System profit/(loss) ($1,306,652) ($441,870) $128,227
System margin -93.4% -24.0% 4.7%
Only one market, PUW, was
profitable on a system basis
though marginal
Results – Denver/Phoenix
Only one market, RDM, was
analyzed for Denver and
Phoenix service
Although segment negative, both
Denver and Phoenix would provide ample system profits
Statistical category RDM-DEN RDM-PHXSeats per aircraft 50 50
Roundtrips 2 2 Unconstrained
passengers$79,724 $63,442
Onboard passengers $58,400 $58,400 Load factor 80.0% 80.0%Local fare $191 $180
Connect fare $247 $234 Average fare $231 $212
Segment revenue $8,379,814 $8,187,023 System revenue $13,479,203 $12,379,057
Segment cost $8,900,990 $8,841,584 System cost $10,889,752 $10,476,477
Segment profit/(loss) ($521,176) ($654,561)System profit/(loss) $2,589,452 $1,902,580
System margin 19.2% 15.4%
Note: Load factor capped at 80 percent.
Results - Portland
All six were positive on a system basis; negative segment basis
Statisticalcategory
CLM EAT MWH PUW RBG YKM
Seats/aircraft 19 19 19 19 19 19 Roundtrips 3 2 3 2 2 2
Unconstrained pax $28,653 $21,536 $26,259 $21,993 $25,512 $17,729 Onboard pax $27,047 $18,031 $26,259 $18,031 $18,031 $17,729 Load factor 65.0% 65.0% 63.1% 65.0% 65.0% 63.9%Local fare $125 $113 $125 $161 $108 $96
Connect fare $171 $185 $173 $191 $168 $197 Average fare $169 $157 $167 $184 $165 $176
Segment revenue $1,533,559 $1,457,991 $1,750,969 $1,701,181 $1,027,254 $1,135,729 System revenue $4,581,147 $2,824,234 $4,384,193 $3,313,384 $2,967,099 $3,128,712
Segment cost $2,632,665 $1,665,668 $2,747,458 $2,335,847 $1,645,956 $1,299,231 System cost $3,821,224 $2,198,502 $3,774,416 $2,964,606 $2,402,496 $2,076,494
Segment loss ($1,099,106) ($207,676) ($996,489) ($634,665) ($618,702) ($163,502)System profit $759,923 $625,732 $609,777 $348,779 $564,604 $1,052,218
System margin 16.6% 22.2% 13.9% 10.5% 19.0% 33.6%
Note: Load factor capped at 65 percent.
Results – Salt Lake City
Both Wenatchee and Pullman are profitable on a system basis
Statistical category EAT PUWSeats per aircraft 50 50
Roundtrips 2 2 Onboard passengers 39,348 40,891
Load factor 53.9% 56.0%Local fare $212 $167
Connect fare $229 $221 Average fare $226 $214
Segment revenue $4,649,189 $4,253,753 System revenue $8,907,199 $8,759,756
Segment cost $6,802,743 $5,927,505 System cost $8,463,367 $7,684,846
Segment profit/(loss) ($2,153,554) ($1,673,752)System profit/(loss) $443,832 $1,074,910
System margin 5.0% 12.3%
Results – San Francisco
Only Klamath Falls is positive on a segment basis; 2 airports are negative on a system
basis, Pullman and Yakima
Statistical category
LMT PUW RBG RDM SLE YKM
Seats/aircraft 30 50 30 50 50 50 Roundtrips 3 2 3 3 3 2
Unconstrained pax $41,673 $26,220 $63,121 $79,145 $273,199 $26,907 Onboard pax $41,673 $26,220 $45,990 $79,145 $87,600 $26,907 Load factor 63.4% 35.9% 70.0% 72.3% 80.0% 36.9%Local fare $186 $192 $142 $148 $130 $175
Connect fare $248 $214 $182 $201 $164 $222 Average fare $235 $211 $177 $189 $158 $215
Segment revenue $4,592,794 $3,129,934 $3,663,338 $7,941,328 $7,395,448 $3,192,976 System revenue $9,785,693 $5,534,403 $8,118,372 $14,997,442 $13,877,823 $5,792,846
Segment cost $3,858,676 $7,299,230 $4,501,612 $8,608,730 $9,106,608 $6,910,819 System cost $5,883,906 $8,236,973 $6,239,075 $11,360,615 $11,634,734 $7,924,768
Segment profit/(loss)
$734,118 ($4,169,296
)($838,273) ($667,402) ($1,711,160)
($3,717,843)
System profit/(loss) $3,901,787 ($2,702,570
)$1,879,297 $3,636,828 $2,243,089
($2,131,922)
System margin 39.9% -48.8% 23.1% 24.2% 16.2% -36.8%
Note: Load factor capped at a 70 percent load factor for 30-seat aircraft and 80 percent for 50-seat aircraft.
Results – Seattle
All 6 pro formas were negative on a segment basis but positive on a system basis
Note: Load factor capped at a 65 percent load factor for 19-seat aircraft and 70 percent for 37-seat aircraft.
Statistical category
AST CLM MWH ONP PDT SLE
Seats/aircraft 19 19 19 19 19 37 Roundtrips 3 3 3 3 3 3
Unconstrained pax
$44,481 $40,931 $46,685 $25,585 $32,144 $233,324
Onboard pax $27,047 $27,047 $27,047 $25,585 $27,047 $56,721 Load factor 65.0% 65.0% 65.0% 61.5% 65.0% 70.0%Local fare $125 N/A $97 $125 $127 $125
Connect fare $183 $183 $187 $184 $234 $184 Average fare $172 $183 $166 $182 $223 $181
Segment revenue $1,625,404 $1,017,614 $1,656,074 $1,461,138 $2,041,059 $3,011,956 System revenue $4,664,156 $4,946,130 $4,483,814 $4,664,473 $6,033,140 $10,249,633
Segment cost $1,883,884 $1,383,216 $2,220,663 $2,974,050 $2,869,509 $4,325,540 System cost $3,068,998 $2,915,338 $3,323,482 $4,223,351 $4,426,420 $7,148,234
Segment loss ($258,480) ($365,603) ($564,589)($1,512,912
)($828,450) ($1,313,583)
System profit $1,595,158 $2,030,792 $1,160,332 $441,122 $1,606,720 $3,101,399 System margin 34.2% 41.1% 25.9% 9.5% 26.6% 30.3%
Key strategy considerations
• No point-to-point service
• With one exception, short-haul service does not pay for itself
• All service will require either cross-subsidy or direct subsidy
• All markets require codeshare at the hub to survive
• Service provided by multiple airlines are required to meet NWRASI hub and aircraft requirements
Issues
Short-term strategies
Long-term strategies
Discussion/input
Issues
1. Short-haul air service operating economics
2. Source and availability of appropriate aircraft
3. Airfares that are acceptable to the market
Issue – Short-haul service operating economics
Cost of operating short-haul NWRASI flights does not pay for itself on a segment basis
Flightsegment
Segment profit/(loss)
Systemprofit/(loss)
50-seat regional jetEAT-SLC ($2,153,554) $443,832 PUW-SFO ($4,169,296) ($2,702,570)PUW-SLC ($1,673,752) $1,074,910 RDM-DEN ($521,176) $2,589,452 RDM-PHX ($654,561) $1,902,580 RDM-SFO ($667,402) $3,636,828 SLE-SFO ($1,711,160) $2,243,089 YKM-SFO ($3,717,843) ($2,131,922)
37-seat turbopropSLE-SEA ($1,313,583) $3,101,399
30-seat turbopropLMT-SFO $734,118 $3,901,787 RBG-SFO ($838,273) $1,879,297
Flightsegment
Segmentprofit/(loss)
Systemprofit/(loss)
19-seat turbopropAST-SEA ($258,480) $1,595,158 CLM-PDX ($1,099,106) $759,923 CLM-SEA ($365,603) $2,030,792 EAT-PDX ($207,676) $625,752 MWH-BOI ($1,697,768) ($1,306,652)MWH-PDX ($996,489) $609,777 MWH-SEA ($564,589) $1,160,332 ONP-SEA ($1,512,912) $441,122 PDT-BOI ($1,152,031) ($441,870)PDT-SEA ($828,450) $1,606,720 PUW-BOI ($784,051) $128,227 PUW-PDX ($634,665) $348,779 RBG-PDX ($618,702) $564,604 YKM-PDX ($163,502) $1,052,218
Issue – Sources of appropriate aircraft
Airlines operating 19-, 30-, and 37-seat aircraft in the western US
Airline19-seatB1900
30-seatEMB 120
37-seatDash 8-200
Remarks
SkyWest X Possible available aircraft
Horizon X Phase out by 2009
Big Sky X Short-term focus on
Boston/Delta
Great Lakes X X Focus on EAS in Midwest
Mesa/Air Midwest X Focus on Kansas City operations
- phase out of 19-seat aircraft
Kenmore May be future possibility
• 19-seat B-1900s getting very old
• No new technology short-haul aircraft
Issue – Acceptable short-haul market airfares
• Must be low enough to limit passenger diversion to larger airports and low-fare carriers
• Requires codeshare to allow publishing of through fares rather than two local fares
• Low fares require some type of subsidy– Cross subsidy by carrier (pro-rate
adjustment)
– “Seat-buy” by carrier
– Non-airline direct subsidy
Strategy - discussion
• Narrow the scope of the NWRASI initial program by focusing on high utility hubs that can be served with the same aircraft type
• PDX and SEA service with 19- or 30-seat aircraft offer the greatest utility to the largest number of NWRASI airports
Economically viable NWRASI new service opportunities:Hub AST ONP CLM LMT RDM EAT YKM MWH PDT PUW RBG SLEBOI X DEN X PHX X PDX X X X X X X SLC X X SFO X X X XSEA X X X X X XGEG
Strategy - steps
Step 1: Engage Alaska Airlines/Horizon Air in high level discussions about NWRASI code-share needs at SEA and PDX
Step 2: Issue RFP seeking expressions of interest on operating 19-37 seat aircraft in designated Portland and Seattle markets
• RFP sponsors: State Economic Development Agency/State DOTs
Step 3: Solicit proposals for respondents in Step 2 (offer a payment to offset the cost of preparing a proposal)
• Will provide insight into potential subsidy needed
Step 4: A. Investigate/lobby for sources of needed subsidy dollars (federal, state, local)
B. If no response to RFP, make presentations to potential service providers
Step 5: Develop a plan to address individual NWRASI service needs at DEN, SFO, PHX, and SLC
Thank you
Questions & discussion