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Small Community Service Small Community Service Prospects Prospects Faye Malarkey Faye Malarkey Regional Airline Association Regional Airline Association Federal Aviation Administration Federal Aviation Administration 30th Annual Aviation Forecast Conference 30th Annual Aviation Forecast Conference March 18, 2005 March 18, 2005

Small Community Service Prospects Faye Malarkey Regional Airline Association Federal Aviation Administration 30th Annual Aviation Forecast Conference March

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Small Community Service Small Community Service ProspectsProspectsFaye MalarkeyFaye Malarkey

Regional Airline AssociationRegional Airline Association

Federal Aviation AdministrationFederal Aviation Administration30th Annual Aviation Forecast Conference30th Annual Aviation Forecast Conference

March 18, 2005March 18, 2005

Regional Airline FactsRegional Airline Facts

Estimated 129 million passengers Estimated 129 million passengers transported in 2004transported in 2004

More than 15,000 flights a dayMore than 15,000 flights a day 1 in 4 domestic passengers travel 1 in 4 domestic passengers travel

on regional airlineson regional airlines Regional airlines operate Regional airlines operate

approximately 2,700 aircraft, approximately 2,700 aircraft, approximately 1/3 of the U.S. approximately 1/3 of the U.S. commercial airline fleetcommercial airline fleet

Regional Airline ServiceRegional Airline Service Serve 735 airports inServe 735 airports in North America North America

(95% of total)(95% of total)

Serve 655 airports inServe 655 airports in United States United States (98% of total)(98% of total)

Regional airlines provide the Regional airlines provide the only air service at 72 percent only air service at 72 percent of these airportsof these airports

Regional Airline PassengersRegional Airline Passengers11 million in 1978 11 million in 1978 129 million in 2004 129 million in 2004

0

20

40

60

80

100

120

140

1978 1983 1988 1993 1999 2000 2001 2002 2003 2004(est)

Code SharingCode Sharingthe lifeblood of the regional industrythe lifeblood of the regional industry

54 code-sharing 54 code-sharing agreementsagreements 10 owned by 10 owned by

majors/nationalsmajors/nationals 2 partially owned by 2 partially owned by

majorsmajors 42 marketing 42 marketing

agreementsagreements

(as of (as of January 2005)January 2005)

Code-sharing airlines transport Code-sharing airlines transport 99% of passengers99% of passengers

Code-SharingCode-Sharing Under “fee for departure” agreements, Under “fee for departure” agreements,

major airlines determine where regional major airlines determine where regional airlines fly airlines fly Major pays regional flat rate per flightMajor pays regional flat rate per flight Service must fit within the network Service must fit within the network Service must match revenue objectives of major, Service must match revenue objectives of major,

including opportunity cost of flying to one market vs. including opportunity cost of flying to one market vs. anotheranother

Under “pro-rate” contracts, regional and Under “pro-rate” contracts, regional and major airlines partner on routes and service major airlines partner on routes and service Regional paid portion of revenue from fare, assumes Regional paid portion of revenue from fare, assumes

portion of financial riskportion of financial risk New fare environment making this service harder to New fare environment making this service harder to

provide. Communities may need to provide revenue provide. Communities may need to provide revenue guarantees for new regional serviceguarantees for new regional service

Regional Airline FleetRegional Airline Fleet

0

500

1,000

1,500

2,000

2,500

3,000

1983 1988 1993 1998 1999 2000 2001 2002 2003

Prop/Piston Jets

Turboprop routes have dropped 54 percent over the last decade (from 1429 routes to 651).

Turboprop Routes 1Q1995Turboprop Routes 1Q1995

Turboprop Routes 1Q2005Turboprop Routes 1Q2005

Short-haul markets have lost substantial Short-haul markets have lost substantial service since 2001service since 2001

The shortest bands drop at the highest rate due to availability of The shortest bands drop at the highest rate due to availability of substitute products (car, bus, train, access to LCC by driving to substitute products (car, bus, train, access to LCC by driving to

alternative airport)alternative airport) Number of US Domestic Markets under 300 SM

Change 1H00/1H04

-21.9%

-38.2%

-23.1%

-10.3%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

0-299 0-99 100-199 200-299

Distance Bands (SM)

% C

han

ge

Source: BACK / OAG Schedules DatabaseSource: BACK / OAG Schedules Database

Regional Airline ServiceRegional Airline Servicemakes the hub and spoke system workmakes the hub and spoke system work

Regional airlines are structured to work with network Regional airlines are structured to work with network carriers to absorb risks from network reconfigurationscarriers to absorb risks from network reconfigurations

21% of domestic passengers travel in markets that 21% of domestic passengers travel in markets that produce less than 50 passengers per day*produce less than 50 passengers per day*

Network carriers depend on these markets for 27 Network carriers depend on these markets for 27 percent of their passengers*percent of their passengers*

Low fare airlines provide limited service to small Low fare airlines provide limited service to small communities – only 7% of their passengers and 10% communities – only 7% of their passengers and 10% of their revenue come from smaller markets.*of their revenue come from smaller markets.*

The service provided by regional airlines The service provided by regional airlines is critical for the operational and financial is critical for the operational and financial success of the major airlinessuccess of the major airlines

*Source: “A Significant Co-Dependence” by Aaron Taylor, Eclat

Scope Clauses Create Scope Clauses Create InefficienciesInefficiencies

Scope clause restrictions, which some airlines have Scope clause restrictions, which some airlines have been able to revise but not eliminate, should be been able to revise but not eliminate, should be reevaluated in the current economic climatereevaluated in the current economic climate

Major and regional airlines must be able right-size Major and regional airlines must be able right-size aircraft to marketsaircraft to markets

Scope clauses fail to serve the long-term economic Scope clauses fail to serve the long-term economic interests of the regional airlines, major airlines, or interests of the regional airlines, major airlines, or the pilots of boththe pilots of both

It is simplistic to view scope only as a labor dispute It is simplistic to view scope only as a labor dispute when it continues to deprive communities of when it continues to deprive communities of competitive alternatives and increased nonstop competitive alternatives and increased nonstop routesroutes

In a deregulated environment, limitations on air In a deregulated environment, limitations on air service should not be acceptable to Congress or service should not be acceptable to Congress or federal policymakersfederal policymakers

Regional Airline Growth and Regional Airline Growth and SuccessSuccess

Regional airlines affected by major carriers Regional airlines affected by major carriers financesfinances

Regional airlines must maintain or reduce Regional airlines must maintain or reduce costs or will be priced out of the marketcosts or will be priced out of the market Majors have many choices for partnersMajors have many choices for partners Lower ticket prices and yields have caused majors Lower ticket prices and yields have caused majors

to reduce “fee per departure” contractsto reduce “fee per departure” contracts Regional carriers with “pro-rate fee” agreements Regional carriers with “pro-rate fee” agreements

seeing less income due to lower ticket pricesseeing less income due to lower ticket prices

Regional Airlines Have Reduced Regional Airlines Have Reduced Costs in Response to Reduced Costs in Response to Reduced

RevenueRevenueCost and Revenue Per ASM (cents)Cost and Revenue Per ASM (cents)

12131415161718192021222324

1998 1999 2000 2001 2002 2003

Cost Per ASM Revenue per ASMSource: DOT OIG

Taxes/Fees on a $200 Ticket* Have More Than TripledTaxes/Fees on a $200 Ticket* Have More Than Tripled

2004Taxes = 26% ($52)*

1972Taxes = 7% ($15)*

1992Taxes = 15% ($29)*

*Sample itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total price includes taxes and fees.

Source: ATA

Taxes and Fees Impact Taxes and Fees Impact ServiceService

Airlines face pressure on fares and Airlines face pressure on fares and cannot pass increased fees to cannot pass increased fees to passengerspassengers

Average leisure fares down 10 percent in 2004 Average leisure fares down 10 percent in 2004 compared with 2003; business fares down 8 compared with 2003; business fares down 8 percentpercent

All airlines must absorb increased costs or could All airlines must absorb increased costs or could lose passengers to other airlineslose passengers to other airlines

Passengers are even more price Passengers are even more price sensitive in short-haul marketssensitive in short-haul markets

Regional airlines lose passengers to the road as Regional airlines lose passengers to the road as the “fly-drive equation” changes and passengers the “fly-drive equation” changes and passengers drive to airports with lower fares drive to airports with lower fares

Taxes and Fees Impact Taxes and Fees Impact ServiceService

The aviation security fee in the President’s FY06 The aviation security fee in the President’s FY06 Budget Request would increase by 120 percent to Budget Request would increase by 120 percent to $5.50, capped at $8 one-way and $16 round-trip $5.50, capped at $8 one-way and $16 round-trip

The new tax would bring the total federal security The new tax would bring the total federal security tax on airlines to $4.7 billion per yeartax on airlines to $4.7 billion per year

Passengers traveling on regional airlines would be Passengers traveling on regional airlines would be disproportionately impacted because multiple disproportionately impacted because multiple flight segments mean more tax occurrences flight segments mean more tax occurrences

This fee increase would raise fares for travel to This fee increase would raise fares for travel to rural communities, will divert resources away rural communities, will divert resources away from carriers serving rural markets, and makes from carriers serving rural markets, and makes this service even more expensive for carriers, this service even more expensive for carriers, putting putting air service to smaller communities at air service to smaller communities at riskrisk..

Budget Cuts Impact ServiceBudget Cuts Impact Service AIP targeted for one of the largest AIP targeted for one of the largest

reductions ($600 million) in the entire reductions ($600 million) in the entire fiscal year 2006 budget request, despite fiscal year 2006 budget request, despite a proven track record that enhances a proven track record that enhances airport safety, capacity, and security airport safety, capacity, and security

Administration suggests airports should Administration suggests airports should respond to cuts by imposing maximum respond to cuts by imposing maximum PFCs as potential revenue source of PFCs as potential revenue source of $350 – 400 million per year$350 – 400 million per year

As airport rates and fees increase, As airport rates and fees increase, service becomes more expensiveservice becomes more expensive

Essential Air ServiceEssential Air Service EAS currently ensures commercial air EAS currently ensures commercial air

service to 146 communities (36 of service to 146 communities (36 of which are in Alaska)which are in Alaska)

Because of increasing costs and the Because of increasing costs and the continuing financial turndown in the continuing financial turndown in the aviation industry, about 37 aviation industry, about 37 communities have been forced into communities have been forced into the EAS program since 9/11/2001the EAS program since 9/11/2001

Essential Air ServiceEssential Air Service The FY06 Budget Request would severely cut The FY06 Budget Request would severely cut

and potentially dismantle the EAS program and potentially dismantle the EAS program Funding for EAS would be cut by $52 million (1/3 of Funding for EAS would be cut by $52 million (1/3 of

communities would be forced out)communities would be forced out) Cost-sharing criteria imposed on EAS communities based on Cost-sharing criteria imposed on EAS communities based on

hub airport distance hub airport distance Communities within 100 miles to large hub airports, 75 Communities within 100 miles to large hub airports, 75

miles to small-hub airports, or 50 miles to airports with jet miles to small-hub airports, or 50 miles to airports with jet service would lose commercial air service and receive only service would lose commercial air service and receive only 50 percent of previous funding for surface transportation 50 percent of previous funding for surface transportation use only use only

Communities less than 210 miles to a large or medium hub Communities less than 210 miles to a large or medium hub would receive a 25 percent cut funding cut (subject to fund would receive a 25 percent cut funding cut (subject to fund availability) availability)

Communities more than 210 miles would experience a 10 Communities more than 210 miles would experience a 10 percent funding cut (subject to fund availability) percent funding cut (subject to fund availability)

Demand ManagementDemand Management The FAA forecasts that traffic will exceed pre-2001 The FAA forecasts that traffic will exceed pre-2001

levels during the current fiscal year and will exceed 1 levels during the current fiscal year and will exceed 1 billion enplanements by 2014. billion enplanements by 2014.

Peak-hour pricing systems are inconsistent with Peak-hour pricing systems are inconsistent with national goals to enhance air service competition national goals to enhance air service competition throughout the United Statesthroughout the United States

Regional passengers pay the same aviation taxes and Regional passengers pay the same aviation taxes and fees as other travelers and should not face higher fees as other travelers and should not face higher ticket prices or limited travel options because we ticket prices or limited travel options because we failed to modernize and expand the airport and airway failed to modernize and expand the airport and airway system system

Congestion pricing limits service and fare choices of Congestion pricing limits service and fare choices of passengers in small or medium sized cities and is not passengers in small or medium sized cities and is not an appropriate solution an appropriate solution

RAA favors federally-mediated voluntary negotiations RAA favors federally-mediated voluntary negotiations to address capacity concerns, similar to those that to address capacity concerns, similar to those that were used effectively by the federal government for were used effectively by the federal government for Chicago O’Hare. Chicago O’Hare.

www.raa.orgwww.raa.org