Joel Tkach, Tourism Educators Conference 2013

What Every Tourism Educator Should Know About Aviation

Joel TkachVancouver Airport Authority

1. Airlines are for-profit enterprises

…or they at least try to be.

1. Airlines are for profit enterprises“If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”— Warren Buffett, 2008

Broadcast-ing

Financial Brewers Railroads Airlines Education

53%

38%

15%13%

2%

-2%

2012 Net Profit Margins by Industry

Source: Yahoo Finance

Revenue Costs Net Income$0

$50

$100

$150

$200

$250

Airfare$159.93

Cargo & Other$45.15

Ancillary$8.06

$0.77

$213.14 $212.37

2011 US Airline Financial Results Per Enplaned Passenger

Source: Airlines for America quoting USDOT Form 41 data as reported by US airlines.

Fuel 30%

Labour 20%

OtherTransport Re-

lated 17%

12%

9%

8%

Landing Fees 2%2%

Airline Operating Expenses

Fuel, 30%

Labour, 20%

Other Transport Related, 17%

Rent & Ownership, 12%

Other Non-Transpo Related, 9%

Professional Services, 8%

Landing Fees, 2%

Communication, 2%

Source: Air Transport Association, 2009. Fuel adjusted for 2012.

William S. SwelbarMIT International Center for Air Transportation, June 2012

Corporate vs. Airline Profits

1. Airlines are for-profit enterprises

• Low margin• High cost• Highly sensitive to externalities

2. Aviation is a highly regulated industry

Running an airline is like having a baby: fun to conceive, but hell to deliver.— C. E. Woolman (1889-1966), principal founder, Delta Air Lines

Canadian Airport U.S. Border Airport

Cross Border Shopping

Canadian City Leakage

1 Toronto1,839,00

0

2Vancouver

953,000

3 Hamilton 808,000

4 Montreal 799,000

5 London 747,000

6 Windsor 230,000

7 Winnipeg 163,000

8 Waterloo 141,000

9Quebec City

124,000

10

Abbotsford

99,000

Canadian City

Leakage %

1 Windsor 99%

2Fredericton

75%

3 London 69%

4Abbotsford

56%

5Thunder Bay

55%

6 Hamilton 43%

7 Saint John 42%

8Quebec City

28%

9 Montreal 24%

10 Winnipeg 24%

U.S. Border City Leakage

% Cdn

1 Buffalo1,675,0

0033%

2 Detroit 712,000 2%

3 Burlington 648,000 52%

4Bellingham

596,000 62%

5 Seattle 389,000

1%

6Plattsburgh

155,000 75%

7Niagara Falls

135,000 85%

8Grand Forks

87,000 36%

9 Bangor 67,000 16%

10 Syracuse 70,000 4%

Cross Border Shopping(US passenger volume only)

Source: Canadian Airports Council, 2012

Toronto & Vancouver 21-22%

Comparison of a Family of Four Residents of Vancouver Can leave from either YVR or BLI Travelling return to Hawaii, Dec 13-20, 2012 Assuming Canadian-US Exchange at Par

Vancouver (YVR) to Honolulu (HNL)

Base Fare pp

Fees/Taxes pp

Total pp

Total for Family

$397.99 $122.52 $520.51

$2,082.04Bellingham (BLI) to Honolulu (HNL)

Base Fare + Fees/Taxes

Total Total for Family

$347.60 $58.40 $406.00

$1,624.00

BLI is $458.04 cheaper than

YVR

Cross Border Shopping

DTW is $295 cheaper than YXU

WestJet – YXU to MCO Depart Dec 10/11

Return Dec 17/11

Base Fare $377.98

G.S.T. $20.25

H.S.T. $1.95

AIF $15.00

ATSC $12.14

U.S. Taxes and Fees

$52.14

NAV/INS $15.00

Total Fees & Taxes $116.48

TOTAL $494.46

Delta DTW to MCO Depart Dec 10/11

Return Dec 17/11

Base Fare $165.58

U.S. Tax $12.42

PFC $9.00

U.S. Segment Fee $7.40

U.S. Sept 11th Security Fee

$5.00

Total Fees & Taxes $33.82

TOTAL $199.40

The Base Fare in London is $212 more expensive than in Detroit. The Additional Charges in Canada are $116 while in the U.S. they are $33.

Source: Canadian Airports Council, 2012

!

Cross Border Shopping

Foreign Ownership

2. Aviation is a highly regulated industry

• Air bilateral agreements• Taxation• Foreign Ownership• Safety & Security

3. Airlines have two primary business models

If we went into the funeral business, people would stop dying.— Martin R. Shugrue, Vice-chairman Pan Am, 1996.

Point-to-Point/Low Cost

Network/Legacy3. Airline primary business models

Market 2011 O&D Annual Connecting

%Index

Connecting

Vancouver 12,556,553 3,894,247 23.7% 100

Minneapolis/St. Paul 15,924,309 12,884,074 44.7% 189

Denver 25,239,065 21,815,968 46.4% 196

Toronto 22,408,370 8,879,139 28.4% 120

Calgary 9,101,741 3,224,175 26.2% 111

Seattle 24,200,166 4,954,209 17.0% 72

San Francisco 29,533,969 7,681,230 20.6% 87

Source: Sabre Marketing Information Data Transfer (MIDT)

Origin & Destination vs. Connecting Passenger Traffic

3. Airline Primary Business ModelsLow Cost Model

Greater Efficiency

Passengers

Lower Airfares

Lower Costs

Revenue

Simplified Pricing (Low Cost)

Common Fare

Willing to pay more

Unwilling orunable to pay more

Fare $100

$200

$0 100Seats

200

Passengers: 100Revenue: $10,000

Lost opportunity

Yield Management (Network)

Fare AFare $100

$200

$0 100Seats

200

Passengers: 160Revenue: $16,000

Fare BFare C

Fare DFare E

Lost opportunity

Fare F

3. Airline Primary Business Models

• Network/Legacy• Low Cost• Yield Management

4. Airlines have portable assets

This is a nasty, rotten business.— Robert L. Crandall, CEO & President of American Airlines (1985-1998)

• Profitable• Feeds a profitable route• Seasonality• Consistent performance• Competitive response• Politics

4. Airlines have portable assets

5. Airline route planning is complex

They don't realize that while you're sitting here talking, someone is f***ing you. Changing a fare, changing a flight, moving something. — Gordon M. Bethune, CEO Continental Airlines, 2004

5. Airline route planning is complex

• Can I profit?• Can I fly there?• Is that route consistent with my business

model?• What will be my competitors response?• Is my airline better served by placing the

aircraft elsewhere?

If you can run one business well, you can run any business well. — Richard Branson, Founder, Virgin Group

• Employment: 56.6 million• Economic activity: $2.2 trillion• 35,000 routes from 3,846 airports• Base airfares are well below rate of inflation• 51% of international tourism relies on air

service

Commercial Aviation

Source: IATA 2012 Annual Review

• 23,600 jobs• $1 billion annual wages• $5.3 billion GDP• $11.7 billion economic output• $608 million annually to governments

YVR

Summary1. Airlines are for-profit enterprises2. Aviation is a highly regulated industry3. Airlines operate from two primary business

models: network/legacy & point to point/low cost

4. Airlines have portable assets5. Airline route planning is complex

YVR Case Studywww.bcic.ca/yvr

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Thank you