Boyd Group www.aviationplanning.com
General Trends
Prediction: Traffic – Year 2005 - 4.0% - 5.5% Growth. Or, Maybe Less
The unexpected and welcome traffic growth of 2004 is not likely to continue into 2005. At some point, carriers are going to consider reducing capacity - at today's levels and load factors, they're still losing money - including many of the LCCs. Whether they will is a whole 'nother smoke.
Sino-Centricity - Just As Predicted
Now, Add In The Two US International Growth Belts
It's here, as we predicted a year ago. From an economic perspective, you're either connected to China, or you're disconnected from growth.
That means not only having access to China but to have adequate air service between the economic growth centers in the US that are increasingly Sino-Centric.
There are two major US industrial "growth belts." If you take a line, 75 miles vertical, put the middle of it on I-90 at Erie, and pull it west across to Muskegon you've identified the Lake Erie Growth Belt. Then, take a line 125 miles long, place it vertically with the mid-point at Charleston, SC, and pull it west across the the Dallas-Fort Worth Metroplex. That is the I-10/I-40 Growth Belt.
It is in these two regions that air service development will be must aggressive - both internationally and domestically. It is in these two regions that investment is pouring in. Koreans are building one of the largest integrated auto factories in the nation at Montgomery. Chinese money is investing in white goods manufacturing in the Carolinas. The BMW facility at Greenville and the Daimler (the Chrysler is silent) factory in Alabama represent huge and continuing foreign investment in Dixie. EuroCopter has a new facility at Columbus, Ms. Nissan is cranking out not only vans, but also Lexus SUVs at Canton, Mississippi.
Then go north. The GE facilities at Erie are selling and upgrading locomotives around the world. Toledo is home to a new and expanded Daimler factory producing Jeeps. Oakland and Genesee Counties in Michigan are booming with international investment.
This economic growth is internationally-focused. That means new demands for air service, both to international gateways, and intra-regional service. In the north, the NW hub at Detroit will be the locus of growth. (Chicago/O'Hare, with congestion, construction, and political shenanigans galore, will be marking time, mostly.) In the South, it's access to ATL via Delta, to IAH via Continental, and access to the AA hub at DFW that will count.
The point is that going forward, these are the areas that will see international investment spur new air service. That means that some smaller communities that may have been otherwise written off will experience new interest from mega-carriers. Tupelo, Jacksonville NC, Golden Triangle, and others need not worry about losing service. They won't be the next LAX, but they will have much improved access.
Airline Trends
It's The Fuel, Stupid.
The amount of half-baked information and intellectual drivel coming out of some sections of the media about the airline industry gives more impetus to convince people to hit the 'net and do their own research. 'Cause what's coming out in a lot of stories is pure nonsense.
Here's a flash: if oil prices had not spiked from the mid $20 range to $45-$50 per barrel, the same talking heads in some corners of the media would be gushing about the huge turn-around of legacy carriers. The fact is that most legacy carriers are no longer legacy, at least as far as their operating models go. They have cleaned up much of the slack in their systems. Labor unions by and large have come to the party, not only to negotiate, but to bring some innovative suggestions of their own on how to improve their airlines. If these things had not happened, the jump in fuel prices would have killed off most of the legacies. Fact: The models have, in most cases, been adjusted to the new realities. It's just the gas pump that's the problem. A big problem that's affecting all sectors of the industry.
Fares - Still Irrational
Again underscoring the fact that some aviation reporters need to go back to covering high school football, few events have been as mis-reported as Delta's fare restructuring.
"Delta Slashes Fares 40%!" "New Fare Wars In The Offing!" "Will Airlines Ever Learn?" are the types of shrieking headlines that followed Delta's fare announcement. They would have done Chicken Little proud.
First, give the folks at Delta some credit. They didn't just fall off the cabbage truck. What they did was re-order their pricing schedule, not necessarily implement a program that will be revenue-negative. The problem is that a lot of journalists and even some airline analysts don't have a clue when it comes to airline pricing. Here's a hint. A lot of those now-slashed "walk-up" fares were mainly placeholders on some cyber tariff-sheet. In some cases, very few people were using them. In many other cases, it's likely that a consumer couldn't even buy one of them - there was another, lower "walk-up" in the market, placed there for competitive reasons.
That much said, don't look for any real relief in the pricing area. The trend is still toward depressed yields. Southwest, with most of its fuel hedged, knows it has a window of opportunity, and will be in no hurry to jack up fares. Independence Air, flying high-cost RJs and charging low fares, is trying to make it up on volume. And, the "over capacity" mess will continue. But not is all lost - the legacy carriers do have an advantage - the network revenue stream...
Hubbing - The Core Strength
Watch mega carriers continue to focus on the "Shreveport-Shanghai" strategy to compete with low-cost cherry-pickers. The system feed AA gets at DFW from SHV allows it to compete with low-fare inroads on trunk routes from airlines such as AirTran. The system feed that Northwest gets at DTW from Shanghai, Taipei, and Kaoshiung, gives it an advantage in markets where Spirit or Southwest compete. The low-fare model is great but it has limitations. It won't work at Bangor, which leaves that traffic open to legacy carriers. And it won't work in trying to access traffic at Tokyo, either.
Small Jet Providers
What we predicted last year is now coming to pass. There is a glut of RJs, and it's starting to come home to roost. Like RJs fixin' to find that home in the Arizona desert. The United re-bid of the Air Wisconsin contract is one example. (By the way, that's a great way to build collaborative relationships with a small jet provider who's responsible for taking care of your passengers. Just keep bidding it out.) The deal will likely leave anywhere between 30 and 50 RJs as excess. Toss in the Independence Air situation - they've dumped somewhere around 25 RJs so far, and if they fail, there's another 50 or so that have uncertain futures. No, they won't be picked up quickly, as there won't be much of a void in service if that carrier ends up sleeping with the fishes.
It is in these two regions that air service development will be must aggressive - both internationally and domestically. It is in these two regions that investment is pouring in. Koreans are building one of the largest integrated auto factories in the nation at Montgomery. Chinese money is investing in white goods manufacturing in the Carolinas. The BMW facility at Greenville and the Daimler (the Chrysler is silent) factory in Alabama represent huge and continuing foreign investment in Dixie. EuroCopter has a new facility at Columbus, Ms. Nissan is cranking out not only vans, but also Lexus SUVs at Canton, Mississippi.
Then go north. The GE facilities at Erie are selling and upgrading locomotives around the world. Toledo is home to a new and expanded Daimler factory producing Jeeps. Oakland and Genesee Counties in Michigan are booming with international investment.
This economic growth is internationally-focused. That means new demands for air service, both to international gateways, and intra-regional service. In the north, the NW hub at Detroit will be the locus of growth. (Chicago/O'Hare, with congestion, construction, and political shenanigans galore, will be marking time, mostly.) In the South, it's access to ATL via Delta, to IAH via Continental, and access to the AA hub at DFW that will count.
The point is that going forward, these are the areas that will see international investment spur new air service. That means that some smaller communities that may have been otherwise written off will experience new interest from mega-carriers. Tupelo, Jacksonville NC, Golden Triangle, and others need not worry about losing service. They won't be the next LAX, but they will have much improved access.
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