Manitoba Aviation Council 2011 Conference · IATA Industry Statistics Global traffic: Passenger traffic up 6.0% Freight up 2.3% North America traffic: Airlines have seen a 6.7% growth

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Manitoba Aviation Council2011 Conference

Aviation Industry Update

Karla PetriManager, Economic & Financial Analysis

InterVISTAS Consulting, Inc.

April 27, 2011

InterVISTAS

1. Who is InterVISTAS

2. Economic Update

3. Aircraft Orders

4. Trends

5. Canadian Workforce

6. Outlook Canadian / Manitoba Economy

A leading management consulting company with extensive expertise in the transportationand tourism industries

Over 400 clients and 2,000 projects worldwideProject experience in 63 countries90 professionals in 7 officesMultilingual capabilities

1. Who we are…

Our History

3

www.naco.nl

• airport consultancy in airport development and design

• specialized in terminal and ancillary buildings, airside & landside infrastructure, integrated noise modeling

• staff: 200

• offices in Europe, Africa and the U.S.

• Head Office: The Hague, The Netherlands

www.dhv.com

• international consultancy and engineering group

• operating in transportation, aviation, building and manufacturing, water, urban and regional development, and environmental sustainability

• staff: 5,500

• offices in Europe, Asia, Africa and North America

• Head Office: Amersfoort, The Netherlands

www.delcan.com

• multidisciplinary engineering, management and technology consulting firm

• operating in the transportation, information technology and water sectors

• staff: 600

• 10 offices in Canada, 9 offices in the U.S., 3 offices international

• Head Office Canada: Markham ON

• Head Office U.S.: Chicago IL

Our Corporate Partners

InterVISTAS


2. Economic Update

3. Aircraft Orders

4. Trends



6

Economic Recovery can take many forms:

• V-shapedA rapid recovery back to previous level

Most recessions are V-shaped

• U-shapedA period of stagnation, with a slow recovery

• L-shapedAn extended period of stagnation

Japan 1990s. Great Depression

• W-shapedA V-shaped recovery, followed by another recession

US, 1970s

Econo-geek Vocabulary

7

US Real GDP Growth (Historical)

-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

Sources: Historical – Bureau of Economic Analysis; Recessions as defined by the National Bureau of Economic Research

8


-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007


W WW

9


-4%

-2%

0%

2%

4%

6%

8%

10%19

47

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007


W WW V V

10

US Real GDP

• Most forecasts still have V-shaped recovery

• But there is risk recovery could be W-shaped

Managing contraction of Fed Assets Without 2nd recessionWithout inflation

will be a challenge

11

Canada Real GDP Growth

1.1%0.3% 0.4%

2.4%

3.5%

4.6%5.0%

4.5%

-0.7%-3.7%

-5.4%

-3.0% -1.0%

-6%

-4%

-2%

0%

2%

4%

6%Q

4-20

07

Q1-

2008

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

H1-

2010

H2-

2010

H1-

2011

H2-

2011

Sources: Historical – Statistics Canada; Forecast – Bank of Canada Monetary Policy Report (April 2009. Q3 from 31Aug 2009

Ann

ualiz

ed Q

/Q G

row

th R

ate

CIBC update

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%19

9719

98

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Historical Data

Forecast Data

Real GDP Growth - Mexico

Sources:

Historical Data: Mexico: International Monetary FundForecast Data: Mexico: International Monetary Fund

2 Recessions

Global Economic Shift - 2040

US$ Trillion

2000 2040

North America 11 30

Japan 4 6

China 1 26

India 0.5 12

Brazil 0.8 4

• China is already• A larger economy than Japan• A larger generator of tourists than Japan

IATA Industry StatisticsGlobal traffic:

Passenger traffic up 6.0%Freight up 2.3%

North America traffic:Airlines have seen a 6.7% growth in passenger traffic and an 11.9% capacity increaseFreight has grown 11.9% (second only to Latin America)

Critical Factors:Political unrest in Middle East will slow recoveryEarthquake in Japan, and aftermath, will dampen demand and slow recovery (Japanese travel market represents 6.5% of worldwide passenger traffic)Industry is vulnerable to fuel prices increases

Source: IATA, March 29, 2011

Value of Goods Shipped by Air

• Japan: 31%

• US: 26%

• Canada: 10%

• Even for imports• Canada’s use of Air Cargo is low

by global standards for developed economies• Air Capacity enables economic growth

• Canada now has one of the most restrictive international air policies in the world

Fuel Prices

$-

$20

$40

$60

$80

$100

$120

$140

$160

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

U.S.

$ p

er b

arre

l

Crude Oil Spot PricesJanuary 2007 to May 2011

Impacts on Global Airline Industry

2010 fuel bill estimated at $139B

2011 fuel bill forecast at $166B (based on $96/barrel FC)annual increase of $27B (2011 over 2010)

29% of operating expenses (2011) compared with 14% (2003)

2011 fuel bill represents a cost increase of 370% since 2003

Political unrest in the Middle East is pulling oil prices up

Earthquake in Japan and aftermath is impacting recovery

Revenue impact - industry profits of $8.6 billion are forecast for 2011 (following profits of $16.0 billion in 2010)

For every dollar increase in the barrel of oil price (over FC) industry will experience additional costs of $1.6B

Source: IATA, March 29,2011

Fuel Cost as a Percentage of Airline Operating Costs

Source: IATA Industry Financial Forecast Table, March 2011

Year % of Operating Costs

Average Price per Barrel of Crude Total Fuel Cost

2003 14% $28.8 $44 billion

2004 17% $38.3 $65 billion

2005 22% $54.5 $91 billion

2006 26% $65.1 $117 billion

2007 28% $73.0 $135 billion

2008 33% $99.0 $189 billion

2009 E 26% $62.0 $125 billion

2010 F 26% $79.4 $139 billion

2011 F 29% $96.0 $166 billion

19

Consensus Economics Oil Price Forecast

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

US$

Medium Term Oil Price Forecast

•Its not down•Its not back to $145

20

2 Sigma Range of Forecasts

Forecast 95% ranges

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

21


Forecast 95% ranges

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

•Everyone seems to agree

22


Forecast 95% ranges

$-

$20

$40

$60

$80

$100

$120

2010 2011 2012 2013 2014 2015 2016

upper 2 sigma

average

low er 2 sigma

•Everyone seems to agree

Note the scale

If History Repeats ….

Oil Price with Full Historical Range

$-

$50

$100

$150

$200

$250

$300

2010 2011 2012 2013 2014 2015 2016

Upper range

Base price forecast

Lower range

Note the scale

Consequences of Fuel Increase• Will impact airline profitability

• Will accelerate adoption of efficient aircraft

• Will favour move to turboprop• Especially Q400

• Same speed as RJs• Much lower fuel consumption• Comfort comparable to RJs

• Will affect decision on 737/A320 replacement• At $100 oil, engine update• At $175, new aircraft

InterVISTAS


2. Economic Update

3. Aircraft Orders

4. Trends



26

Aircraft Delivery

• In spite of recession, globally we will see record aircraft deliveries in coming years

• 1,400 projected for 2011

• Much of the capacity will be delivered to Asia, Europe, Middle East

• These markets will be hotly contestedEspecially Europe-Asia/Australia NZ

27

World Aircraft Deliveries: 1995-2015

0

200

400

600

800

1,000

1,200

1,400

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Tota

l Airc

raft

Del

iver

ies Airbus Boeing

Source: Airbus and Boeing websitesThe Airline Monitor, Jan/Feb 2009

Projected

2011: A Critical Year for the Future

The future narrow body aircraft

#1: New engines on an existing airframe• 15+% reduction in fuel and carbon• New complementary technologies

#2: New engines on a new airframe• 20-40% reduction in fuel and carbon• Larger decrease in total operating cost• But a more expensive aircraft KEY: The 2011 decision will determine (i.e., lock

in) the course, economics & impact of aviationfor two decades

Narrow Body ReplacementAirbus

• Initial announcement is A320neo

• New engine option• 15% fuel/carbon reduction• Airbus view:

• No further engine technology for next 10 years• Thus deploy new engine technology immediately

• The engineering is not far advanced

• Airbus could still switch to new airframe if market demands

• E.g., A-350 switch

Narrow Body Replacement

Boeing • Indicates it is likely to decide on NBR in 2011

• Would take longer to bring to market • But may offer a better long term product• But a higher cost per aircraft• Key issue:

• What will fuel prices be in 2020-2045?• $100 per barrel favours new engine on existing plane (737G4)• $175 per barrel favours new aircraft

InterVISTAS


2. Economic Update

3. Aircraft Orders

4. Trends



Slower Growth?

2010 Hamburg Aviation Conference

• Growth in coming decade likely to be less than historicLess than previously forecast

Climate changeRecovery of personal liquidity Markets maturing Perhaps 3.5% vs. 5%

Likely to be theme for 2013 conference


& tourismsolutions

Traveler Demographic Trends

34

IATA Premium Passengers

International vs. Domestic

In recent years, international traffic growth was seen as a “safe haven” for legacy carriers

LCCs have begun to make inroads in international markets, including Canada, the Caribbean and Latin AmericaLeisure travel on key international routes has dropped precipitously

At present, some domestic markets are proving to be more stable than international markets


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Changing Airline Fees

Airline Ancillary Fees

Airlines have turned to ancillary fees as a source of incremental revenueAdditional fees on passenger tickets allow airlines to differentiate base fares from optional add-ons:

Fuel surcharges (return of…)A la carte add-ons to base fares for services such as: expedited processing, meals, seat assignments, extra baggageAllegiant and Spirit charge a convenience fee for ticketing done via the internet or on the phoneSouthwest has bucked the “add-on fees” trend

Consumer backlash could result from excessive fees being levied

Ancillary Revenues

Source: Centre for Asia Pacific Aviation and airline reports, via Boeing Current Market Outlook 2008-2027.

0% 5% 10% 15% 20% 25%

Southwest 3.0%IndiGo 4.4%

AirTran 4.7%WestJet 4.8%Mandala 5.0%

Air Berlin 5.3%Norwegian 5.9%Air Deccan 6.5%

Air Asia X 7.0%JetBlue 7.3%

SkyEurope 8.0%SpiceJet 8.0%

Viva Macau 8.0%AirAsia 9.0%

Jetstar 10.0%Sterling 11.5%

Spirit 13.5%Vueling 14.4%easyJet 15.8%Ryanair 18.0%

Allegiant Air 20.4%

Ancillary Revenues as Portion of LCC Revenues2007-2008

39

Ancillary Revenues – Sell-up


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E-Commerce

Technology and Price

Travel is larger than the next four categories of e-commerce purchases combined

Over 65% of all travel now booked online

Downward pressures on ticket pricesThe credit crunch is further driving the use of price comparison websites for travel productsLCCs continue to grow rapidly and are targeting growth in mid-haul destinations and bring massive comparative economies of scaleSimultaneous with increasing airline fuel costs (370% increase)

British Airways targeting the leisure market to make up for the fall in business passengers; ba.com now offers Dynamic Packaging of holidays

Increased demand for Specialised Holidays

Time Rich Travellers - Aging population and early retirement means a growing market

• Money Rich or Time Poor TravellersLeisure time squeezed for the more affluent traveller. Shorter, more frequent trips & growing demand for experience-rich travel.

Many consumers lack time to do everything they would like and look for convenience to simplify their lives All-inclusive holidays cuts down travel planning necessity whilst learning holidays combine activities.

Share of travellers between age 60-69

Wellness: 28%

Tours: 33%

Cruise: 39% [All holidays – 17% between 60 -69 Source: Communication Networks Study on German Travel market

• By 2050 % of European population above the age of 60 to increase by 50%.

• Share above the age of 80 is also set to risedramatically, growing 2.5 times.

• Cruise market in Europe has grown to over 4.4 Mio in 2008 (Up 10% Vs 2007)

Changes in family structure: Growth in Specialist Travel

Growth in more adventurous and language travel led by

- people having children later

- higher disposable income for the young

- rise in single person households

Share of travellers below the age of 30

Language Holidays: 72%

Winter Sport: 33%

Adventure Holidays: 43%

Club Holidays: 30%

[All holidays – 24% below the age of 30]

Source: Communication Networks Study on German Travel market

A particularly relevant group of travellers to Travel Agents....“Those aged 16-24 place a highvalue on the expertise, support and time-saving advantages of using a travel agent”

October 2008 ABTA survey


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Environmental Impacts

44

Factors

Potential for increased environmental regulation that will affect the industry

Pacific Carbon Trust, BC (all BC government travel must be offset)LEED requirements on new buildings

Travelers are beginning to demand carbon neutral travel

What will be impacts be on aviation?

Coming Soon to North America

Climate Change issue is not confined to Europe

North American attitudes are shifting rapidlyAviation will be targeted

InterVISTAS


2. Economic Update

3. Aircraft Orders

4. Trends



InterVISTAS Canadian Workforce Study *

Key findings of a comprehensive analysis of 31 Canadian airports –

Occupations, labour-related trends and recommendations.

* The Canadian Council for Aviation and Aerospace, in partnership with the Canadian Airports Council, and with funding from the federal government, commissioned InterVISTAS Consulting Inc. to conduct the Airport Occupations Study.

External Trends – Industry Impacts

Aging population

New Technologies

Increasing / Changing Security Requirements

Environmental and Sustainability Expectations

Increased International Travel

Asian Development

Competition with U.S. Airports – cost structure

Regulatory burden

Low Cost Carriers

Workforce Impacts

“Greying” of the airport workforce

7% of total workforce have left in the last 12 months - no net increase in workforce

Majority of employees are satisfied with salaries

Employee benefits - typically superior to most private sector jobs

Skilled workforce required

Comprehensive and complicated training needs – costly and time consuming (previous generation TC trained)

Growing regulation will increase the need for training

On the job training plays a more important role than formal education

Gap identified in mentoring and training and on-line curriculum

Boeing Global Employment Forecasts

• Growing maintenance personnel requirements:

• Will grow to 600,000, globally by 2029 • Will require 30,000 net additional each year• Includes replacement staff to cover retirements

and incremental staff for industry growth

• North America• Will require 137,000

• Compare to Europe at 122,000• Asia at 220,000

InterVISTAS


2. Economic Update

3. Aircraft Orders

4. Trends



Local Economic Outlook

Impacts of credit crisis/ recession were felt less so in Manitoba

Manitoba’s Economic growth remained positive

Canadian Business Travel recovering *

Projected to increase 4.6% in 2011 *

Source: Conference Board of Canada, Canadian Business Travel Outlook 2011 survey (survey of 56 Canadian Corporations with travel budgets exceeding $1M)

Consumer Confidence Improving

US is optimistic

“Present Situation Index” (current economic and employment situation) is highest it has been in 2 yearsSharp increase in “Expectations Index” (economy, income and employment expectations) for the next 6 months

Canada is optimistic

“Present Situation Index” is showing an upward trend in Q1 2011 (less so in BC and the Atlantic)Modest increase in “Expectations Index” (less so in Quebec)

Source: TNS Global Canada Quarterly Newsletter, Spring 2011 , www.tnsglobal.com

Consumer Confidence Improving

Manitoba is optimistic

“Present Situation Index” highest in Manitoba and Saskatchewan“Expectations Index” Manitoba Saskatchewan and Alberta show highest levels

Source: TNS Global Canada Quarterly Newsletter, Spring 2011 , www.tnsglobal.com

Overview

Manitoba in good shape, relative to other areas

Key impacts:Canada’s low use of Air Cargo compared to other developed nationsCanada’s restrictive regulatory environmentRising / unpredictable fuel pricesShocks – unrest in Middle East Japan earthquake /energyKey aircraft decisionsAirline industry costs / downward pressure on ticket pricesAging Canadian workforce and training / skills gapPassenger expectations / behavior / travel & tourism trendsPositive economic outlook and consumer confidence for Manitoba


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Thank You

Questions:

[email protected]

subscribe to Canadian Aviation Intelligence Report:

www.interVISTAS.com

Manitoba Aviation Council 2011 Conference · IATA Industry Statistics Global traffic: Passenger traffic up 6.0% Freight up 2.3% North America traffic: Airlines have seen a 6.7% growth

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