Brighter Days for the Carriers

Michael Boyd, a leading airline and airport analyst, opened his annual conference here in October saying, "I think the news is all good." His overriding message is that the air carriers are experiencing high load factors and have gotten their costs under control, which in turn is leading to profitability. In fact, Boyd and other speakers here foresee airlines recording profits across the board in 2007. At the same time, Boyd forecasts an airline sector that will continue to evolve, with composite aircraft being one of the catalysts to change. One caution that came out of the conference is for smaller communities which rely on 50-seat regional jet service - the 50-seaters, all here seem to agree, are on their way out due to poor economics. They will be replaced by 70-seat RJs or other aircraft; for some communities, that transition could lead to challenges in maintaining air service.

The Boyd Group's annual Aviation Forecast Conference brings together airline executives, aircraft manufacturers, and airports in an effort to forecast airline industry trends and how they will impact airports and air service, primarily in the United States. This year's conference included representatives from OEMs Boeing, Airbus, and Embraer; the air carriers in attendance included Frontier, Northwest, SkyWest, Southwest, Allegiant, US Airways, and Continental. Conspicuous by its absence was United.

According to Boyd, the airlines - particularly the legacy carriers - have figured out how to control their costs and capacity issues and, to some degree, raise ticket prices. Central to this turnaround, he says, has been the mainline carriers' ability in recent years to get a handle on labor costs. "Labor has changed," says Boyd; "it's part of the solution."

The carriers are rethinking how they grow in the future, he says, with an emphasis on a global marketplace, particularly China. For airports and their communities, a key consideration today is how they connect to the global marketplace.

Boyd says that U.S. carriers overall today are reporting load factors of some 80 percent; at 75 percent, he says, "you're full as an airline. "The airlines are going to be very different," he maintains. "The legacy carriers are the wave of the future."

THREE TYPES OF AIR CARRIERS

As the industry evolves, according to Boyd, the carriers are falling into three distinct categories: the legacy carriers; the low-cost airlines; and the niche carriers. Legacy airlines: Boyd prefers the term 'comprehensive network carriers', or CNCs. "This is where the real future is," comments Boyd, because of the hub-and-spoke carriers' ability to connect smaller communities to global markets by way of their hubs and alliances with other domestic and/ or foreign carriers. For example, he points to the Interstate 20/40 corridor in the Southeastern U.S. where foreign automobile manufacturers have set up shop, transforming those communities in the process and presenting opportunities to air carriers who can connect the dots to Japan, China, Europe, and other countries. In particular, Boyd is bullish on China: "If you ain't Sino-Centric, you ain't happening," he says. Boyd projects that airline fleets in China will grow some 300 percent over the next decade and the country will become the second largest demand market, after the U.S.

Within the next six years, he projects, the Chinese fleets will account for at least an "equal share" of trans-Pacific traffic. "You're going to have to deal with these people," he says.

Contributing to the CNCs' future success will be the diversity of their fleets, says Boyd.

Low-cost airlines: The biggest question mark for the domestic airline industry today is how the low-cost airlines will evolve, says Boyd. Most of the origination and destination markets that have been their bread and butter have been tapped. Thus, asks Boyd, will that lead to Frontier, JetBlue, Southwest, and AirTran to begin a feeding frenzy off each other? And, comments Boyd, "I don't know what they are anymore. They're not point to point. "The growth in this category is going to slow."

The 'low-cost' moniker, says Boyd, is becoming a misnomer as the CNCs have learned how to match fares and compete. And, the low-cost carriers are seeing their costs rise - to wit, Southwest Airlines pilots are today among the highest paid in the U.S. airline industry.

At the same time, LCCs are looking more like hub-and-spoke airlines - AirTran at Akron-Canton and Atlanta; Southwest at Houston, Midway, and Philadelphia; and Frontier at Denver. Niche carriers: Meanwhile, the niche carriers such as Allegiant and others are a unique model that focus more on discretionary consumer dollars rather than passenger counts, says Boyd. They are by their nature more flexible and less vulnerable; at the same time, Boyd says that overall they have a minimal impact on other airline systems, while providing niche service to communities - for example, Rockford, IL to Las Vegas.

NEW FLEETS AND THE 50-SEAT CHALLENGE

Boyd labels the next several years as the end of the iron age for airliners, evidenced by the dramatic order book for Boeing's composite 787 Dreamliner aircraft. While the aircraft manufacturers represented here question that assessment, they do acknowledge that composites will play an increasing role in aircraft manufacturing in the future. Boyd points to the Boeing 707's impact on the industry and how it ushered in the jet age and the demise of piston-driven airliners. He sees a similar revolution occurring with composites.

In turn, he says, that will lead to another revolution in the supply and support sectors. "For economic development purposes," comments Boyd, "it's going to be huge."

Regarding today's fleet, the demand is for single-aisle airliners, best represented by the Series 170 and 190 Embraer aircraft which are now entering the marketplace.

While Boeing and Embraer are well-positioned for today's demand, says Boyd, Airbus continues to scramble to clearly define its next generation airliner, and is hindered in that effort by ongoing setbacks with the A380 double-decker airliner which was originally scheduled to enter service this December.

Meanwhile, Boyd and others here predict the quick demise of the 50-seat passenger airliner in the U.S. market as rising fuel prices and other cost factors have made the aircraft inefficient to operate. They are expected to be replaced by RJs with 70 or more seats, which will ultimately impact service to some smaller communities that have come to rely on 50-seaters to access the air transportation system.

Mike Mooney, an analyst with The Boyd Group, foresees a "shakeout" among regional airports as they work to maintain air service, and likens it to the shakeout that occurred in the railroad industry in the early 20th Century when many smaller towns lost rail service.

Mooney also says that Bombardier is currently studying cargo configurations for the 50-seaters for potential conversion once they are taken out of passenger service.

Over the next decade, Boyd projects that more than 11,000 new airliner aircraft will enter the market - one-third of them in the U.S. The 70- to 100-seat aircraft from Embraer will make up a large part of the new airline fleet, projects Boyd, along with Boeing's line of 787s. He says Boeing's next-generation 737 fleet will be on the 85- to 150-seat platform, while the new 747-800s will fill the widebody niche.

VLJS - DISPELLING MYTHS

With the recent certification of the Eclipse 500, the era of the very light jet is upon us, with a host of manufacturers poised to fill the market.

While many foresee a network of air taxi operations in the U.S. made up of VLJs, Boyd instead sees these aircraft primarily serving as replacement aircraft for older business jets and turboprops. That said, he does foresee VLJs bringing a whole new dynamic to general aviation.

John Knudsen, co-founder of VLJ manufacturer Adam Aircraft based in Englewood, CO, says that "VLJs fill a value gap" between airline passenger service and business aviation. He says that Adam has some 412 firm orders for its VLJ, some of them designated for air taxi service.

Neither Boyd nor Knudsen see the VLJs having a significant impact on the air traffic control system, contrary to assertions by the Air Transport Association. Knudsen says that even if 2,000 VLJs were to enter the marketplace by 2010, he sees "minimal impact" on the system.

Boyd sees limited air taxi applications for the VLJ but a huge market for replacement business aircraft. And, like fractionals, VLJs could attract a new customer base, growing the GA market, he says.

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