Hubs, Access, Connectivity

LEXINGTON, KY — Mike Boyd opened up his company’s 14th Annual Aviation Forecast Summit held here by stating, “It’s hub access that’s going to be the name of the game.” It was a theme echoed many times. In turn, airline alliances will play an increasingly larger role, leading to a seamless global travel experience. For smaller communities, says Boyd, it will become more difficult to access that global network, particularly due to the demise of the 50- and 70-seat regional jets, which will occur because of high fuel prices. “It’s a new airline industry,” comments Boyd. “Everything has changed.”

Looking ahead, it’s all about connectivity to the global economic and transportation networks, says Boyd. How a community gets there is a changing dynamic, he says, and the path will increasingly rely on connecting through the major hubs, although the hub makeup itself is changing, as evidenced in St. Louis, Pittsburgh, and Cincinnati.

The Evergreen, CO-based Boyd Group sees the 50- to 70-seat RJs slowly transitioning out of the marketplace due to airline/oil economics. “They’re going to go to the desert,” Boyd says. Back in the mid-90s, Boyd was one of the first to foresee the increasing role that RJs would play in the U.S. air transportation system. For several years now, he has been a leading voice in predicting their declining role as rising oil prices bring with them an operating cost structure that is unsustainable from a profitability standpoint. The challenge ahead: There is nothing in the current manufacturing product lines that will serve as replacements.

Once a community has hub access, it connects to the airline alliances — oneworld, SkyTeam, the Star Alliance — which are the “next big step” in a changing airline industry, says Boyd. Within the next several years, he predicts passengers will be booking flights directly through an alliance rather than with an individual carrier. “The future is matching Dayton to Dusseldorf,” he says.

“You’re either connected to the air transportation system or you’re out of the global economy.”

In fact, Boyd relates that there are three new dynamics bringing change to the makeup of the industry. One dynamic is the fact that “the entire industrial foundation of the nation is changing, structurally and geographically,” says Boyd.

A second dynamic is the changing U.S. fleet and the massive reductions in capacity, overall expected to reach 9 percent for 2009. That should lead to improved profitability for U.S. carriers in 2010, predicts Boyd, but a significant rebound in activity will prove difficult with so many airliners out of the system. “The hurdles you need to overcome to get air service have increased,” says Boyd.

A third dynamic is connectivity has grown in importance — access not air service, per se. “Demand is no longer the issue,” comments Boyd, citing the example of an airline considering service to Billings versus Fort Lauderdale. Because of higher yields, he says, “They’d rather have Billings.”

For communities and their airports, the goal is to keep ahead of the local market and use strategic intelligence to “connect the dots” to cities worldwide and the airline alliances that serve them. “Yesterday’s approaches to air service are increasingly ineffective,” says Boyd.

Gaining strength
According to Boyd, U.S. carriers “have adjusted very well since oil hit $175/barrel” and have taken control of their businesses. “The future isn’t as dire as people paint it,” he says. “We’re looking at a revenue environment that is strengthening.”

Maintaining his anti-Washington theme, Boyd says one challenge that faces the industry is air traffic modernization. He remains skeptical regarding NextGen implementation, both in its ultimate effectiveness and in the feds’ ability to get the job done.

Meanwhile, Jim Compton, executive vice president with Continental Airlines, and John Kirby, senior director for AirTran Airways, offered the carriers’ perspective.

Compton relates that half of Continental’s capacity is international; thus, being part of a global alliance is critical. Continental recently switched to the Star Alliance. Comments Compton, “Alliances increase competition. Networks are about optimizing revenue. You run the risk of being marginalized” if not part of an alliance.

At AirTran, which Boyd maintains has the lowest cost structure in the U.S. airline sector, the low-cost carrier is not yet part of an alliance, but is open to the idea, says Kirby. The current focus for AirTran is its growing presence at Milwaukee’s Mitchell International Airport, following a successful move into the Baltimore market. As the carrier moves its network West, it will continue with a second tier airport strategy

Will Ris, senior vice president with American Airlines, says it is time for countries to rethink foreign ownership rules. And James May, president of the Air Transport Association, says that “there’s been a shift from managing our fate through pricing to managing our fate through capacity.” Regarding NextGen, May calls for a “national debate” to heighten the importance of the new system and to offset individual states’ efforts in the Northeast to influence flight paths. Says May, “ATC is as much a political issue as a practical one.”

Fleet demand
From 2010 through 2019, Boyd projects the global demand for new airliners will be some 12,847 units, with China emerging as the number two market behind the U.S. “Replacements will be the main driver for new aircraft,” says Boyd. A question mark in the U.S. market moving forward is with aircraft in the 70-100 seat range. As RJs disappear, there’s no dominant replacement aircraft being produced by the manufacturers. “We see some demand for turboprops, but it’s very low,” explains Boyd.

Brent McBratnay, director at Airbus, relates that the new Airbus A350XWB now under development is a “game-changing aircraft” and the program is on track “at full speed.” Looking out 20 years, McBratnay says global air traffic will grow some 4.7 percent annually. “Air traffic has doubled every 15 years and we see that going forward,” he comments.

Drew Magill, director at Boeing, concurs that “we’ll definitely get back to the growth rates over time” that have been experienced historically. And of course, Boeing expects to begin delivering its own game-changing airliner, the Dreamliner 787, in 2010.

Meanwhile, at Bombardier the hot news is the OEM’s “C-series revolution”, a line of new 120-149 seat composite aircraft now under development. The C-series is based on the Learjet 85 bizjet. And, the OEM is recording some success with its Q-400 turboprop, according to Chuck Evans, director at Bombardier.

While connecting to hubs is central to accessing the system, Boyd relates that the hub mix is changing. “St. Louis is gone as a connecting hub; Pittsburgh is nearly gone; Cincinnati is materially reduced. We’re concerned about Cincinnati,” he says.

Regarding growth in enplanements Boyd comments, “Things have been kinda ugly; I think they’ll continue to be ugly.” For 2010, Boyd predicts enplanements will drop another 5.5 percent; number of available seats will drop some 10.1 percent; and, departures will be down 12.9 percent.

“There is no way there’s not going to be another drop,” says Boyd. “But we’re going to have a much healthier airline industry.”

Essentially, the U.S. market will remain in the 2-to-4 percent growth range for several years after 2010, says Boyd, with lost capacity not returning anytime soon.

Boyd doesn’t forsee any major corporate mergers on the horizon among the carriers, who instead will continue to rely more heavily on their strategic alliances.

Two wild cards, says Boyd are oil prices at $60-70/barrel or higher, and proposed cap and trade legislation to reduce emissions. “Cap and trade is stupid,” comments Boyd. “It’s going to hurt small community air service.”