Cautious Projections

Nov. 8, 2001

Cautious Projections

The Boyd Group conference report

By John F. Infanger, Editorial Director

November/December 2001

Michael Boyd predicts the 70- to 100-seat airliner segment will be the hot growth area. Meanwhile, he sees Boeing cutting out the 717 program because of a lack of multiple configurations for carriers.

COLORADO SPRINGS, CO — The Boyd Group, at its annual forecasting conference in October, took on the task of projecting growth among the carriers and U.S. airports at a time when uncertainty rules the industry. Two possibilities — Boeing’s pullback from the 717 and potential bankruptcy for United — have subsequently been echoed by respective company officials. Also at the conference: biometrics and security.

Michael Boyd, president of The Boyd Group, based in Evergreen, CO, says that the lack of leadership and a clear-cut strategy from Washington in the aftermath of the September 11 attacks is hurting the potential rebound of the system. The airline industry, he says, was already in a significant downturn through the first two quarters of 2001, and reactions to the recent tragedies will both bring and accelerate change.
Michael Boyd foresees positive growth for peripheral airports in metropolitan areas, as well as stability for airports that serve small communities with strong global economic ties.
Low-fare carrier service will help maintain better than average growth in the Southwest U.S., while the Northeast will continue to benefit as JetBlue expands, says Michael Boyd.

Security remains challenge number one, he says, "because the same incompetent security system is still in place." Until a new system is clearly identified and implemented, both airports and airlines will continue to scramble to meet changes in direction. At the same time, the impact of the September 11 tragedies has led to declining load factors that have had a significant negative effect on the collection of passenger facility charges used to fund airport infrastructure. Combined with the shutdown of the system and the prolonged closure of Washington Reagan National Airport it has made the bond markets jittery, which could have a negative impact on long-term airport project funding, says Boyd.
Because of these factors, projecting the future of the airline business becomes even more precarious, though not impossible, says Boyd.
"We are going to have a different kind of system, and it’s not all bad," he says.
Overall, Boyd predicts a drop in U.S. airline activity of 8-9 percent for 2001 over 2000, a loss of some 230 million enplanements. Airline revenue lost as a result of the hijackings will approach $32 billion, he says, and direct aviation losses could reach as high as $55 billion.
Other Boyd predictions ...
• There will evolve a more regional airport system approach, which will bode well for peripheral metropolitan airport growth (Milwaukee; Oakland; Burbank; Flint, MI; et. al.).
• Major hubs will see a higher percentage drop in growth, particularly on high frequency routes such as Dallas to Chicago.
Airline by Airline Breakdown
Michael Boyd and securities analyst Ray Neidl of ABN AMRO break down the prospects of U.S. carriers as follows ...
United had financial problems before September 11, accounting for half of industry losses in the second quarter of 2001. A big reason: labor contracts. Its investment in a bizjet subsidiary is not seen as prudent.
SkyWest and Atlantic Coast: both should make money in the third quarter and could reap business due to the pullout by majors to smaller markets.
Mesa has some 35 percent of its routes at risk.
Alaska: a lot of liquidity; stable Alaska market.
Northwest: solid liquidity, plus the new DTW midfield terminal should bring new traffic, even luring hub activity from O’Hare. Mesaba markets may lose service, and long-term service to remote cities in the Dakotas, Minnesota, and Michigan are at risk.
U.S. Airways is not as strapped as the general media would portend, and restructuring by other majors could bring opportunity. A necessity: significant labor concessions.
American: in the strongest position of any major carrier; will accelerate retirement of MD-80s, F-100s, while shifting activity from O’Hare to St. Louis. Will scale back or eliminate San Jose hub operation; see elimination of Eagle subsidiary by 2005.
America West: "In pretty good shape, other than the fact that they have no money," says Boyd. Could see cutbacks in Mesa feeder service to PHX from smaller communities.
Continental will continue to focus on core strengths (Cleveland, Newark, and Houston hubs); in a good position to grow in Latin America. May increase international activity at Newark.
Delta will shift more activity to regional partners (SkyWest, ASA, ACJet) and be less dependent on Comair following the recent strike. Will likely cancel many 50-seat RJ options.
Southwest will still have its "effect" on markets, but faces challenges regarding turnaround times because of security and longer haul markets. It will become harder to attract new Southwest service.

• Airlines will move away from ownership in their feeder carriers, either assimilating the operations into the major or allowing the feeder airline to stand alone. This should help resolve the labor disputes among pilot unions regarding disparate salaries, as witnessed after American’s acquisition of Reno Air.
• Airports will find that they will need to do their homework when it comes to demonstrating to a carrier that theirs is a high yield market. At the same time, attracting new air service will become very difficult in the short term. That includes Southwest, says Boyd, which will become more select in adding cities to serve. "Southwest won’t do another Jackson (MS)," he predicts.
• While some smaller airports will see frequency or entire carrier service cut, there are some bright spots, says Boyd. Airports that serve isolated communities situated far from a hub should not see any significant cuts in carrier service. At the same time, airports in communities that have strong business ties to the global community, such as Peoria and the Quad Cities-Moline, IL, should be able to weather the cutbacks.
• Airports in Phoenix, Burlington, VT, and other high economic growth communities should continue to see strong air service.
• Essential Air Service (EAS) communities that are served by 19-seat aircraft will have difficulty retaining air service. The EAS program, he says, needs to be entirely revamped. "We need a real subsidy for places that really need it," he says.
• The U.S. carriers will begin to shift the fleet makeup to the new 70- to 100-seat aircraft, a primary reason being fuel efficiency. In the short term, however, the smaller regional jets will continue to have a major impact, particularly to smaller communities, continuing a trend of recent years. Long term, Boyd sees the smaller RJs being phased out. And, while recognizing that there is a market for the super-jumbo Airbus-380 now under development, he does not see demand justifying cost for developing the aircraft and sees the project putting Airbus in economic jeopardy.
• There will be little new airline entrant activity. "Friends don’t let friends start airlines," says Boyd.
Boyd says that the recent financial aid package to the carriers by Congress was necessary, and cautions that airline bankruptcies could still be on the horizon. In particular, he questions the viability of United Airlines, whose CEO was recently quoted as saying the company faced possible bankruptcy in 2002.
The analyst also calls for airport associations and other industry groups to speak out and stand up to FAA, cautioning that they may be too close to the politics of major issues. FAA, he says, is incompetent. Biometrics, and Consensus on Security
John Cockerham, president of TouchSafe International of Huntsville, AL, and David Forbes, CEO of Denver-based Quo Vadis International Security, told The Boyd Group conference that biometric identification techniques are an answer for better security at U.S. airports. And, both say it’s time to look outside industry for input.
According to Cockerham, security-related reactions at airports following September 11 have been long on perception and short on reality. The current system calls for finding an undesirable object to be able to identify an undesirable person. "That’s got to change," he says.
Cockerham sees biometrics as playing a key role toward improving security by identifying the passenger by way of a personal ID card that can be plugged into the airport system upon check-in. He calls for bringing together the various technological advances in fingerprint biometrics, facial geometry, voice recognition, and stress screening.
Radio frequency identification (RFID) tracking would then be used to follow the passenger through the airport and onto the aircraft. Luggage, meanwhile, will have similar RFID tags that tie directly to the specific customer, and be able to be tracked through the system as well.
Cockerham calls for creating an aviation security task force that would have representatives from an airline, an airport, operations, the technology sector, along with $5 million in seed money. Possible solutions would then be tested onsite at the participating airport.
Forbes, an Englishman, says Europeans have been dismayed by U.S. security inaction since the 1988 bombing of Pan Am 103. Specifically, he says the U.S. has suffered from regulatory confusion, predictability of weaknesses, poor accountability, low-skilled manpower, and a cost mindset, among other deficiencies.
He calls for public-private think tanks, federal supervision by a newly created agency, and firm Administration support. Forbes also sees a need for publication of a security rating for every airport, with stringent control penalties imposed on "insecure" airports. He also calls for biometric identification, which he deems essential for airside access.