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strategic
transportation
& tourism
solutions
Session TE104Improving Air Access to Tourism Destinations
Paul Ouimet & Hans Mohrmann
48th ICCA Congress & Exhibition
November 10, 2009
2
Session Outline
1. Global Aviation Trends
2. Air Service DevelopmentStrategy
3. Financial Incentives& Negotiations
strategic
transportation
& tourism
solutions
Global Aviation Trends
4
Gulf Warand
Recession
Asian EconomicFlu
9/11,EconomicDownturn& SARSoutbreak
0
500
1,000
1,500
2,000
2,500
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009P
Global Air Traffic
Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA).
(Millions)
IATAforecasts3.3% increasein 2010
Financial CreditCrisis and
GlobalRecession H1N1
Outbreak
5
0
500
1,000
1,500
2,000
2,500
1990 1995 2000 2007 2008
Domestic International
Shift in Global Air Traffic
Passengers by Sector
Source: International Civil Aviation Organization (ICAO).
24%
76%
35%
65%
(Millions)
6
Slowing Traffic Growth
7
Operating Profit – Global Airlines
Source: Industry Financial Forecast Table (IATA Economics).
Operating Profit ($ billions)
-20
-15
-10
-5
0
5
10
15
2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F
8
Volatile Fuel Prices
Crude Oil Spot Prices
January 2007 to November 2009
$-
$20
$40
$60
$80
$100
$120
$140
$160Jan-0
7
Mar-
07
May-0
7
Jul-07
Sep-0
7
Nov-0
7
Jan-0
8
Mar-
08
May-0
8
Jul-08
Sep-0
8
Nov-0
8
Jan-0
9
Mar-
09
May-0
9
Jul-09
Sep-0
9
Nov-0
9
U.S
.$
per
barr
el
Current$79
Source: Nymex.
Peak $147
9
Increasing Fuel Burden
Source: Air Transport Association.
2000
76%
24%
Fuel
Labour
Other
14%
34%52%
2008
Fuel
Labour
Other
29%
21%
50%
Air Carrier Expenses
10
Traffic and Capacity – U.S. Network Carriers
Notes: Includes American Airlines, Continental Airlines, Delta Air Lines/Northwest Airlines, United Airlines and U.S. Airways.
w14
Slide 10
w14 Will update to reflect Global carriersweatherillj, 11/2/2009
11
Industry-Wide Capacity Cuts
12
Consolidation: Mergers & Failures
EasyJetgodba
Ryanairbuzz
LufthansaSwiss
AustrianBrussels
US AirwaysAmerica West
Air CanadaCanadian
DeltaNorthwest
Air FranceKLM
GolVarig
KLMMartinair
AlohaSkyEurope
MyAirAviacsa
Centralwings
FlyLAL
Sterling
XL AirwaysZoom
Silverjet
EOS
MaxJet
Nationwide
ATA
Oasis Hong Kong
SkyBus
13
Airline Alliances and Passenger Share
American AirlinesBritish AirwaysCathay PacificFinnairIberia AirlinesJapan AirlinesLan AirlinesMalevQantas AirwaysRoyal JordanianAir NorstrumAmerican EagleBA CityflyerJapan Transocean Air
AeroflotAeromexicoAir France-KLMAlitaliaChina SouthernCSA Czech AirlinesDelta Air LinesKorean AirNorthwest AirlinesAir EuropaKenya Airways
Air CanadaAir ChinaAir New ZealandAll Nippon AirwaysAsiana AirlinesAustrian AirlinesbmiEgyptairLOT Polish AirlinesLuthansaScandinavian AirlinesShanghai AirlinesSingapore Airlines
South African AirwaysSpanairSwissTAP PortugalThai AirwaysTurkish AirlinesUnited AirlinesUS AirwaysAdria AirwaysBlue1Croatia AirlinesContinental Airlines
14% Share 16% Share 24% Share
14
Growth of Low Cost Carriers
15
Growth of Low Cost Carriers
LCC Capacity Share by Region (YTD Aug-2009)
16
Intercontinental LCCs
17
Market Shift to Low Cost Carriers
• In addition to network airlines, charter carriers are losing market share toLCCs – particularly on short haul leisure routes
Source: UK CAA.
Charter Operator Market Share: UK to Short-haul Leisure Markets
0%
25%
50%
75%
100%
Canary Islands Cyprus Greece Malta Spain
(excluding
Canary Islands)
Total
1998 2008
• Many charter operators have increased their focus on longer-hauldestinations (Middle East, Asia, Caribbean), where competition fromLCCs is less intense
18
Cumulative World Aircraft Fleet Surplus
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Air
cra
ftF
lee
tS
urp
lus
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Su
rplu
sa
s%
of
To
talW
orl
dF
lee
t
Cumulative Surplus Surplus as % of Total Fleet
Source: The Airline Monitor, Jan/Feb 2009
World Fleet SurplusPeaks in 2011 inCurrent Cycle
19
New Generation Aircraft
• High capacity ‘consolidator’ aircraft
• Airbus A380 - Boeing 747-8550 - 850 seats 467 seats
15,000 km range 14,800 km range
• Regional jets/turboprops
• Bombardier CRJ 900 - Embraer 190
86 - 90 seats 94 – 106 seats
3,600 km range 4,100 km range
• Medium capacity ‘hub buster’ aircraft
• Boeing 787 - Airbus 350XWB
200 - 300 seats 250 – 350 seats
14,500 km range 16,300 km range
• Very light jets
• Citation Mustang
4 seats
2,100 km range
20
Policy Issues
• Air Policy
• Open Skies
• Infrastructure
• ATC
• Airports
• Rates & Charges
• Facilitation
• Costs
• Processing
• Security
strategic
transportation
& tourism
solutions
Air Service Development
22
Why an ASD Program?
• Airline planners require detailed, accurateinformation to make new route decisions
• But airlines do not have the resources to fullyevaluate every market
• A sound, well articulated business case, canconvince airlines to introduce new air services
• Airports/destinations can influence the airlineplanning process
23
Destination & Airline Objectives
• Air service development is a long term,strategic effort
• Airlines will add service in order of expectedprofitability
• Different airlines pursuedifferent strategies
• Destinations can move upthe priority board with:
• Solid research &analysis (always)
• Incentives(sometimes)
PRIORITY ROUTE123456789
10
100
24
Airline Perspective
• New routes are a huge investment & risk to an airline
Seats Per FlightAircraftType
Annual PassengerRequirements
Airbus A340 280 153,300
Boeing 767-300 220 120,450
Regional Jet 100 54,750
Boeing 747 400 219,000
Boeing 737-700 140 76,650
Note – Assumes 75% load factor.Source – InterVISTAS
AnnualOperating Cost:
~$50 million
25
Influencing Airline Decisions
• Airline questions for new routes:
• How much can I stimulate the market?
• How will the competition react?
• How much market share will I achieve?
• What will be the connectivity contribution?
• Will the new route be a financial success?
• Airports/destinations can answer these questionsand reduce uncertainty and risk
26
Market Assessment• Required to quantify the true size of the existing
air travel market on an O&D basis
ASD Strategy
Business Case
Evaluate and NegotiateAirline Incentives
The ASD Process
• Deficiency analysis and detailed route analysis
• Packaging & presenting the information toairlines
• An appropriate incentive, in certaincircumstances, helps airlinescommit to new air services
27
New Route Business Cases
• Business cases should include all information airlineplanners require:
•Catchment area profile: demographics, economy,tourism, etc.
•Airport profile: facilities, traffic
•Market profile: market sizes, top city pairs, trafficleakage, etc.
•Suggested service: frequency, schedule, aircraft, routing
•Route analysis: market share, load factor, stimulationpotential, self-diversion, etc.
•Strategic considerations
28
Tourism Stakeholder Involvement
Route DevelopmentSuccess
Provide Unique Data
Guest origins, occupancy rates, ADRs,group potential, etc.
Support route development efforts
Budget support, airline fam trips, etc.
Adapt product to match target airlinebusiness models, where appropriate
All inclusive, fly-drive, package tours, etc.
Contribute to incentive funding
Quantify incremental benefit and invest
strategic
transportation
& tourism
solutions
Financial Incentives
30
Incentive Background
• Destinations have become increasinglyaggressive in pursuing new services
•Portland-Tokyo: $3.5 million
•Pittsburgh-Paris: $5.0 million
•Baltimore-London: $5.5 million
• Airlines often demand risk sharing programs
• Incentives can be a good investment, if usedproperly
31
Best Practices - Incentives
• Not all new services are equal
• Will the new service provide incremental benefit forthe destination?
• Blanket approach may not accomplish goals
• Align incentives with ASD goals
• Consider impact on existing services
• How will incumbent airlines react?
• Avoid existing routes
32
Best Practices - Incentives
• Should only be used to help a new service grow tomaturity
• Service must be self-sustaining in medium term
• Limited to 1-2 year term
• Should not be used to “buy” air services
• Carriers will drop routes when incentive expires
• This causes more harm than good
33
Best Practices - Incentives
• Air service checklist - will the route be:
• Strategically important?
• Marginally (un)profitable?
• Self-sustaining in the short term?
• Service must meet all three criteria
• Qualifying services:
• New routes only?
• Increases on existing routes? Does thiswork?
• Service retention incentives?
34
Types of Incentives
• Common types of incentives:
• Airport fee concessions
• Start-up cost reimbursement
• Operating cost reimbursement
• Direct subsidy
• Revenue guarantees
• Marketing support
• Ticket trusts/travel banks
• Designed to impact either the supply of or demandfor air services
35
Choosing the Right Incentive
• Must be determined case-by-case
• Varies by route and type of service
• Depends on airline needs
• Network development strategy, fleet constraints,growth potential, philosophy
• Source of perceived risk
• Traffic stimulation potential
• Cost control
• Community’s ability & willingness to pay
36
Determining Incentive Level
• What amount is required?
• Too much would be wasted money
• Too little and the airline will walk away
• Rules of thumb:
• % discount on fees
• % of breakeven revenue (revenue guar.)
• Set amount per seat (airport start-up & marketing)
• The amount depends on the structure, and theanalysis
37
$0
$2
$4
$6
$8
$10
$12
Breakeven
Community:$1 million incentive10% risk
Airline:$10 million B/E revenue requirement90% risk
Airline:Opportunity Cost
Determining Incentive Level
• Put the risk into perspective
• Why a lot may not be enough:
38
Regulatory Considerations
• Governments are increasingly intervening in airlineincentives
•EC guidelines on state aid
•FAA restrictions on airport funding
• If incentives are restricted, new routes must be basedon profit potential
•Trial & error becomes more risky
•Route analysis will be critical
39
Limits of Incentives
• Most airlines will only start new services theybelieve will be viable in the long term withoutincentives
• Incentives will not overcome:
• A weak business case
• Product mismatch
• So focus on the fundamentals
40
Airport Fees as Incentives
• Airport fees and ground handling charges account for 20% of total costsfor both Ryanair and Aer Lingus
• But Ryanair’s are much lower in absolute terms
0
20
40
60
80
100
120
Aer Lingus Ryanair
Unit Cost/Passenger (EUR)
Other Costs(Incl. Fuel)
Airport Fees &Ground Handling
Ryanair’s average revenueper passenger is €49.
If they were paying thesame airport fees asAer Lingus, their businessmodel would not besustainable.
To attract Ryanair andsimilar airlines, airportsmust offer low fees.
41
The Challenge…and solution
• How can airports afford aggressive airline incentives/fee discounts and still fundroute development marketing in a difficult economy?
NewAir Services
AdditionalFlights &
Passengers
IncrementalAirport
Revenues
Investment inMarketing &
Fee DiscountsThe solution:
Develop and maximisenon-aeronautical revenue streams:
• Retail & duty free
• Food & beverage
• Parking
• Loyalty & premium programs
• Land development
42
InterVISTAS Health Check
1. Benchmark against best practices:
• Sales performance and
• Retail space data
2. Visual observation:
• Flow, quality, lay-out, customer behaviour, in-storecirculation, boarding calls & security processing
3. Interviews with key players:
• Airport
• Main retailer
4. Identify Quick Wins:
• Immediate elements to improve, including quick cash-generating/temporary retail additions
5. Air Service Diagnostic:
• Identify air service deficiencies, appropriate air servicelevels, priority routes and target airlines
43
Airport Revenue Recovery Program
Short-term Tactics
• Health check
• Leakage recapture
plan• External funding plan
Long-term Strategy
• Commercial revenue
development strategy
• Air service
development strategy
Move from
Short-termRevenue Recovery
to
Long-TermRevenue Growth
44
Questions
Paul OuimetExecutive Vice [email protected]
Hans MohrmannExecutive Vice [email protected]