Growth Flat According to FAA

Regional capacity growth will be modest, passenger demand growth will slow and regional revenue passenger miles (RPMs) will outpace industry growth, according to the 2008-2025 FAA Forecast released last week. Capacity While capacity is forecast to grow in 2008, about the same rate as in 2007, demand growth...

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Regional capacity growth will be modest, passenger demand growth will slow and regional revenue passenger miles (RPMs) will outpace industry growth, according to the 2008-2025 FAA Forecast released last week.

Capacity
While capacity is forecast to grow in 2008, about the same rate as in 2007, demand growth in 2008 is forecast to be slower than 2007. Capacity is projected to grow 2.7 percent as mainline carrier domestic market capacity increases slowly (0.3 percent) while regional carrier capacity growth remains modest. Over the forecast period 2008 through 2025, U.S. economic growth is expected to remain moderate with rates ranging between 2.7 and 3.0 percent through 2018 and then slowing to around 2.5 percent for the balance of the forecast period.
Passenger demand growth will slow in 2008 with system RPMs forecast to increase 2.9 percent (up 2.8 percent and 3.1 percent for mainline and regional carriers, respectively) while passenger enplanements rise 1.5 percent. The agency projected that, over the forecast period, regional RPMs will outpace the 4.2 percent industry growth and four percent mainline growth at six percent. Growth is projected to speed up in 2009 as system RPMs and passengers increase 4.7 and 3.8 percent, respectively, while capacity increases 4.6 percent. For the overall forecast period, system capacity is projected to increase an average of 4.1 percent a year.
System passengers are projected to increase an average of 3.0 percent a year, with regional carriers growing faster than mainline carriers (3.8 vs. 2.8 percent a year, respectively). By 2025, U.S. commercial air carriers are projected to fly 2.1 trillion ASMs and transport 1.3 billion enplaned passengers a total of 1.7 trillion passenger miles. Planes will remain crowded, as load factor is projected to continue to increase to 81.7 percent by 2025. Passenger trip length is also forecast to increase by more than 250 miles over the forecast to 1,325.5 miles (up 14.0 miles annually), reflecting growth in the relatively longer international trips and longer domestic trips resulting from increased point-to-point service and larger regional jets.
For FY 2008, nominal mainline carrier domestic passenger yield is projected to increase 3.6 percent (0.4 percent increase in real terms). For the entire forecast period, increases in nominal yields are projected to grow at a rate of 1.6 percent a year, while in real terms they are projected to decline an average of 0.7 percent a year owing to increased competition from low-cost carriers.
The agency expected mainline aircraft size to decrease over the forecast period to 147.7 seats from the 160.6 seats in the current fleet as an increasing share of domestic capacity will be flown by aircraft with 160 or fewer seats. It also noted the increasing influence of smaller narrow-bodies such as the ERJ 190 in a 100-seat configuration at both low-cost and mainline carriers.
The greater number of the larger 70- and 90-seat regional jets in the fleet coupled with 50-seat jet retirements increases the average seating capacity of the regional fleet – from 49.6 seats in 2007 to 50.5 seats in 2008 up to 63.0 seats in 2025.
Domestic passenger trip length is forecast to decline in 2008 and 2009 by 3.2 and 0.7 miles, respectively, as network carriers continue to realign capacity. After 2009, trip length is projected to increase steadily for the balance of the forecast, reaching 1,007.8 miles by 2025. The FAA cited the transfer of routes to regionals, the increase in point-to-point service and the introduction of 70- and 90-seat regional jets.

Regional Aircraft
The regional carrier passenger fleet is forecast to increase by six aircraft in 2008. After 2008, the regional carrier fleet is expected to increase by an average of 37 aircraft (1.2 percent) over the remaining years of the forecast period, reaching 3,469 aircraft in 2025. The number of regional jets (90 seats or fewer) at regional carriers is projected to grow from 1,803 in 2007 to 3,114 in 2025, an average annual increase of 3.1 percent. All the growth in regional jets over the forecast period occurs in the larger 70- and 90-seat aircraft. During the forecast period, more than 1,000 regional jets of 50 or less seats are removed from the fleet, reflecting the relaxation of scope clauses. The turboprop/piston fleet is expected to decline from 1,033 in 2007 to 355 in 2025. Turboprop/piston aircraft are expected to account for just 10.2 percent of the regional fleet in 2025, down from a 36.4 percent share in 2007.
The number of commercial aircraft is forecast to grow from 7,816 in 2007 to 12,202 in 2025, an average annual growth rate of 2.5 percent or 244 aircraft annually. The commercial fleet grows by a net 92 aircraft in 2008 and 80 aircraft in 2009; however, most of this growth occurs in low-cost carriers.
The agency pegged the commercial industry at 36 mainline air carriers (over 90 seats), 84 regional carriers that use aircraft up to 90 seats and 27 all-cargo carriers. In 2007, regional carriers reported operating profits of $326.9 million, said the agency, adding the regional industry posted a net loss of $517.6 million, largely because of losses at Comair and Atlantic Southeast Airlines. It also said that, pacing with mainline yields, regional carrier domestic passenger yield increased a modest 0.5 percent in 2007, but is down 34.9 percent since 2000.
The total number of aircraft in the U.S. commercial fleet (including regionals) is estimated at 7,816 for 2007, an increase of 113 aircraft from 2006. This includes 3,972 mainline air carrier passenger aircraft (over 90 seats), 1,008 mainline air carrier cargo aircraft, and 2,836 regional carrier aircraft (jets, turboprops, and pistons). After falling in 2006 the regional carrier fleet grew by 52 aircraft in 2007 as declines in turboprop and piston aircraft were offset by an increase in regional jets. Since 2000, a total of 1,233 regional jets have come into the regional fleet while the number of turboprops and pistons declined by 671 aircraft.

Fuel
The forecast does not take mergers, consolidations or bankruptcies into account despite the growing activity in merger talks. It did account for changing economics, however.
“Although the fuel bill for U.S. commercial air carriers was essentially unchanged in FY 2007, the recent sharp increase in fuel prices threatens the continued profitability of the industry,” said the agency. “Given FY 2007 consumption levels, a one-cent increase in the price of jet fuel costs the industry $195 million annually. Thus, the $15-$20/barrel increase in the price of oil could add $7 billion to $9 billion to the industry’s annual fuel bill, an amount equal to the FY 2007 operating profit of the 10 largest passenger carriers.”
This year’s forecast assumes $86/barrel oil in 2008, up from $60/barrel in 2007, and then gradually falls back to $73/barrel in 2015. Rising fuel has already prompted carriers to cut capacity and service. Should oil prices reach $100/barrel on a sustained basis [they are now at $110], consolidation will result with several large U.S. airports losing their major service provider, said the agency.
With government statements of a U.S. recession in full swing now, the FAA assigned the likelihood at only 40 percent. Using a more pessimistic scenario provided by Global Insight which includes a weaker dollar, rising oil prices, higher inflation, a deeper housing downturn, and rising unemployment, FAA said the changes to the forecast were surprising.
“In 2008, domestic passengers in the pessimistic scenario would be 2.2 percent lower than in our base forecast with RPMs down even further,” it said. “The difference between the base forecast and the pessimistic scenario widens over the next 2 years so that by 2010, domestic passenger enplanements would be 7.7 percent lower than in the base forecast and RPMs would be 9.5 percent lower. Industry passenger revenue was 6.9 percent lower, hampering the industry’s drive for sustained profitability and balance sheet improvement. Also, the forecast assumes the addition of sizable numbers of regional jets into the fleet of regional carriers.
“However, the regional carriers’ future is closely linked to those of the larger network carriers,” the FAA continued. “Should one or more of these large carriers cease to exist (because of financial difficulties or merger), certain regional carriers could find themselves either saddled with excess capacity or lack of sufficient capacity, or lack of feed traffic. The recent experience of the Delta and Northwest bankruptcies saw opportunities for regional flying substantially reduced.”

FAA Operations
“We’ve had an almost 10-point gain in load factors since 2002,” Acting FAA Adminstrator Bobby Sturgell told conference participants. “That culminated in a record last year, with 765 million passengers, or more than two million a day.” He indicated that hitting the one-billion-passenger mark will be delayed a year to 2016 and cited a series of cascading events including $100 a barrel oil, an economic picture that’s in flux, potential consolidations, and credit market woes. He also noted credit crunch even spurred IATA to cut its global air traffic forecasts for ’08.


Sturgell said that the agency is accelerating NextGen routes — Required Navigation Performance (RNP) and area navigation (RNAV) — into Chicago, DFW, D.C. and New York affording more satellite-based navigation. “In fact, we’ve increased our production of RNP approaches this year, from 50 to 69,” he said. “We’re deploying the Traffic Management Advisor to JFK and LaGuardia and connecting it to the Washington, D.C. area. This will allow us to sequence incoming planes more efficiently — from as far as 100 miles away — and achieve capacity gains of 3-5 percent. We’re working with the Port Authority of New York and New Jersey to deploy what’s known as a Surface Management System at JFK. This will improve the airlines’ ability to plan ground operations, resulting in reduced noise, fuel and emissions.”