Lexington, KY – “I’m heartened at this point in time because the airline industry has a pulse,” Mike Boyd, president of the Boyd Group International told those gathered at his 14h annual airline forecast summit in Lexington yesterday.

“It’s not just an inert mass any more. The airlines are taking action. The future is not as dire. I agree that the industry is going to have an ugly year this year but the US carriers have mitigated so much risk because they have taken control of things.”

He praised the current crop of airline CEOs for their quick action in cutting capacity last year and discipline in making even more cuts this year. “There is no lack of leadership in the industry,” he said. “Last year the US industry properly adjusted heading into the downturn. The industry is doing well having pre-emptively pullout out capacity, parked aircraft and knocked down gauge. In fairness t the rest of the world, the US has the advantage of a huge domestic market. We see the traffic continuing to decline in 2010but if we have the start of a turnaround in 2010 there will not be enough capacity to meet demand so maybe we can get some fare traction at last. The airline industry is doing a good job. Despite all the complaints about passenger service if you look at one metric – complaints – the rate is one 100th of 1%. If GM had that ratio they might still be making cars.”

However, there are still ways to squeeze more costs out of the industry, he said, adding every time the industry save minutes on a flight they save money. “How many times have we seen an aircraft arrive and then had to wait for the gate to be adjusted,” he asked. “They know the type of aircraft that will be next into that gate. Why wasn’t it readjusted when the last aircraft left? Why do they need galley trucks if all they serve is peanuts? Who is the moron who schedules an RJ into a hub with a 30 minute connection time so they have to do an OJ Simpson through the airport? I actually think they do that to get their passengers in better physical condition but every misconnected passenger is money lost.

“The airline industry is the only industry in the world that does not control its production line,” he continued, adding it is beyond him how anyone can outsource their customer service to someone that doesn’t actually work for the airline. “As for ATC I should note that one airline recently told its retirees it couldn’t afford their health care. But there was no mention of the $2 billion the ATC system costs them every year. There is a lot of room for airlines to cut costs and make money.”

With the growing role of alliances Boyd said that international carriers are becoming Global Network Carriers (GCN) with 25% of the capacity driven by international traffic. Related Story However, although low-cost carriers are in place worldwide without the link to these global alliances they will not have access to long term revenue growth.

“They are limited,” he said. ‘The good news is there are no lunatics wanting to start airlines, and no irrational carriers n the U.S. domestic market.”

However, that does not mean the industry in not in trouble. He pointed to the mob mentality as having control and winning on the message that airlines are bad. Boyd said Washington is complete devoid of leadership, citing the high-speed rail network initiatives promoted by the Obama Administration, calling it a sham.

Market Uncertainties
Boyd also cited the demand driver uncertainties including whether or not global alliances will go to joint-airline fleet orders. Fuel is another question as are emissions regulations which could force airliners out of the skies. “In the UK, it has been suggested that people be stopped from flying,” he said of the environmental jihadism now at play. As for technological breakthroughs, he wondered how deep they would be, how much of a trade off they will require and at what expense. He also questioned whether or not demand will stabilize in China and India.

Other uncertainties he discussed included the criticality of sector costs which must be matched with revenue potential. “I wonder whether that potential will be there in key markets such as long haul,” he said, adding that revenue quality shifts such as the move away from the front of the cabin is another uncertainty.

“What are the competitive imperatives in an age of global alliances,” he asked. “If Star orders the A350 does that mean oneworld will feel it has to match? Does it mean, if the alliances maximize their aircraft as they say they will with metal neutral scheduling, that demand for aircraft will drop. And what will the possibility of joint purchasing do to aircraft demand? In addition, capital costs come into question especially with respect to in-fleet costs in which fuel costs can be offset by cheap lease rates in older aircraft…sometimes.”

Fuel is perhaps the biggest driver of fleet demand changes. “There is ‘mission obsolescence,’” he said. “A lot of missions don’t work at $70 oil and a 70% crack spread. Fuel costs have already torpedoed some super long-haul flying and decimated premium-passenger feed to carriers across the globe. The original regional jets at less than 70 seats are seeing major retirements, not replacements. I said last year that the collapse of the premium cabin traffic equals a financial neutron bomb. Well, it has already been dropped. The conclusion? Technological improvements, not one-for-one capacity, will drive both replacement and net new airliner demand.”

As for regional jets with less than 51-seat capacity, he said it is no longer an issue of needed capacity but one of fuel costs shrinking the economic range of the aircraft. “They simply cannot do what they once were able to do,” he said. “If the market ceases to produce to the bottom line, it’s going to have to go. At $1.85 cent jet-A, most markets over 600 miles start to produce lots of red ink. There is no substantial secondary market for 50-seat jets and it has become a matter of economics, not age or other issues that has become the driver.” He predicted that those that have already been cut for capacity reasons are permanently out of the fleet, destined for the desert and ultimately for beer cans.

However, a regional panel which included Great Lakes President Chuck Howell and Delta Connection Vice President Don Bornhorst suggested there will be plenty of demand for the regional jets being spun out and parked because the high supply will make the much cheaper which could mean they could ultimately end up serving even Essential Air Service communities.

Boyd noted that between 2007 – before the oil price spikes – and 2010, as currently scheduled, capacity nose dived with enplanements down 5.5% between 2007 and 2010, passengers down 4.5%, seats down 10.1% and departures down by 12.9%.

He sees no changes in the top 25 airport rankings although he noted uncertainties surrounding LAX, JFK, Las Vegas, Detroit and BWI. At LAX, he said, local capacity decisions could reduce both traffic and flights while the fate of JFK is totally dependent on Delta’s expansion plans.

Depending on the speed of the recovery, Boyd expects LAS to sky rocket but called into question Detroit’s future because of uncertainties about the Midwest/Ontario industrial centers which may impact its international flows. He expects Cincinnati to continue its slide finally concluding by losing its full connecting hub status and ending as a high fare, regional airline airport. The same questions surround Milwaukee while the fate of Memphis continues to depend on the continued industrial investment in the South. He also expects the near-term bubble at BWI to continue through next year but face a possible deflation in 2012.

“Have we hit the bottom of the recession,” he asked, discussing the traffic drivers to watch. “Probably not. If you really want to know if the recession is ending, don’t call the Fed, don’t listen to Obama, just watch enplanements at Las Vegas. It is the harbinger of the future of travel demand. When traffic begins to turn around at Las Vegas, it’s the real sign of an economic turnaround. Fuel remains a hurdle even at $60 a barrel plus a huge crack spread. There will be far fewer RJs than can be supported. The 70- to 120-seat capacity/cost gap is still in place at most carriers. As for airline consolidation, there will be some but it won’t come from mergers. LCC’s will move more toward revenue aggregation through hubbing. The route decisions will be alliance driven, particularly in the Deep South. Montgomery and Chattanooga could be potential contributors to SkyTeam, Star and oneworld.”

He noted that if you look at the Northeast, more communities are connected to the Star and SkyTeam alliances whereas oneworld has no connections there.

While praising the Delta/Northwest merger, Boyd said airlines are resisting mergers because of the pilot merger issue in favor of alliances. “I doubt other mergers will work as well but if you have global alliances that could work just as well,” he said. “I see the consolidation of revenues streams which are easier to merge than the corporate entity or mess with the labor brain damage you get.”

Speaking of labor, Boyd said it can no longer be the shock absorber for high costs. “They’ve already given back and labor is getting militant in what they need to do,” he said. “It is not all economics. It is lifestyle issues and they will not give away any more. However, you will see more organization drives because they see such things as what happened to retiree health benefits and are looking for protection. It may not be there when they need it but they are still looking for it. I also see unions going more internationally focused.”

He derided last week’s EU report of objections to the AA/BA/Iberia question for anti-trust immunity since “the EU doesn’t like anything.”

More Isolation for Small Communities
Boyd predicted far less access to the national transportation system as hub reach declines. “The point where RJ operating costs cross RJ revenue generation is now much closer to the hub site,” he said. “The result is less access, particularly in the upper Midwest region.”

He cited the emergence of what he called “impulse” enplanements that now account for 7.3% of traffic which come not from demand but the “introduction of an alternative application for discretionary dollars,” he said, citing DirectAir and Allegiant as prime examples. “Other than impulse traffic created by charters or tour carriers, for most airports under 500,000 enplanements, typically there is no one single nonstop market where local O&D can support the costs,” he said. “Add to this the fact that airlines are less interested in off-hub flying, even where there is local O&D traffic, simply because there’s more return in feeding a hub than grabbing local market share that is non-contributory to the airline’s network.”

Boyd also discussed wild cards in the future such as “environmental jihadism,” which ignore how little airlines pollute in favor of just seeing airlines as polluters, period. Cap and Trade is another wild card. “It is the tax-‘em-to-death mentality in which legislation has supporters who are not interested in economic facts,” he said.

As for NextGen, he called it a myth. “There is no NextGen,” he stated. “In fact, if you believe in NextGen, then I have a bridge in Brooklyn I’d like to talk to you about. The air traffic control system will still be a limiter and that can only mean less air service all around the country. Airlines are quite content with the current delays, congestion and non-results from the FAA. This is already being seen with reduced access for regional airports due to RJ economics and ATC deterioration.”

He criticized the industry over arguing about who will pay for NextGen. “Arguing over who will pay for the FAA is like arguing of the bar tab on the Hindenberg,” he said. “It really makes no nevermind. NextGen is like computerizing the buggy whip. What the industry needs is for airline presidents to form a conga line inside FAA and Congress to tell them how much ATC is costing them and they won’t stand for it anymore.”

Boyd also sees vast changes in rural air service where cost is increasingly an issue. “Air is just not an economically viable transportation mode where there is low demand, particularly where access to a hub site involves considerable ‘hang time,’” he said. “Changes in cost and operational issues have relegated small airliners from eight to 40 seats to the scrap heap. Regional jets were never designed for ‘small airport service’ but were designed as growth airplanes for the 1980s regional airline industry. Aircraft are increasingly unsuited to small/mid-sized airports, and have reduced mission applications. Essential air service is out of date, and, in many cases, due to financial constraints, just pays for aircraft operations, not air service. You may see triage performed to ensure truly rural communities have service.”

As for international service, he still sees open skies as a non-starter citing the death of independent trans-Atlantic carriers such as Silver Jet, EOS and MaxJet as well as the questionable success for British Airways experiment with all-business class services at London City Airport. “There is some potential for secondary U.S. metro areas which may get low-density flights to carrier’s alliance-partner hubs in the EU,” he said. “As for more competition and lower fares, there is not going to be much of anything. The key points are the fact that the airline industry is not in a growth/expansion mode. The dynamic will make the quality of revenue much more important than the volume of passengers.”

He expects the future metric for airports will not lie in the “number of people wearing out the carpet,” or in passenger access to the national air transportation system. “It will be how easy it will be for Mr. Zhou from China to get to your city,” he said yesterday to an audience of airport leaders. “The international airline industry is changing to a global industry which flows people from one continent to another. The real future is global portals such as what Middle Eastern carriers are creating or that could be created to connect Latin America to China over Panama. The U.S. is no longer the center of the universe. It is no longer the driver in the global economy. China will be the new driver and global alliances is where it is going to be.”

“Internationally generated traffic is now one in four enplanements and international passengers are 10.2% of the total,” said Boyd. “But on average each one generates at 1.5 additional domestic enplanements, most of which is business travel, meaning international passengers create 114,584 additional domestic enplanements for a total of 190,973.

He pointed to the growing concentration of traffic around hubs. “Excluding Las Vegas, LAX, ORD, ATL, DEN, PHX, SEA, SFO, DFW, BOS, LGA, JFK, EWR, FLL, PHL and SAN account for 56% of the U.S. O&D traffic generation,” he said. “Access to these 15 markets is a key indicator of air service quality. Geographic location is affecting accessibility, but not necessarily the core demand, at many smaller communities. That means business connectivity is critical. And it means that there has been a significant shift in strategy and airports have to meet that changed strategy. Airlines are no longer looking at local markets, they have their sights set on global markets because that is where the money is. The money is in matching Dayton to Dusselfdorf and Chattanooga to Wuhan. Airports have to think inbound, not just outbound. The needs of the globe in getting to your community are as important as the needs of Main Street. More, actually.

“The communities that have easy – at least minimal flying – to an airline hub site will have the advantage,” he continued. Forget the nonstop to NonHubsville. The fact is, in the vast majority of cases most mid-size and smaller airports no longer have the traffic that can support nonstops to any non-leisure city without the support of connecting traffic at the destination. There are also no magic bullets. The air taxis, VLJs, semi-charter service to non-leisure destinations and community capacity purchase schemes are not going to happen. They simply have bad economics and cannot provide viable air service access, particularly from the rest of the globe. You’re either going to be connected to the air transportation system or you’re out of the global economy.”

He noted the increasing coverage questioning the viability of hubs, given what has happened to St. Louis and Pittsburgh and what is happening at Cincinnati. “Hubs are going to get stronger,” he said. “There will be more, not less, dependence on hubs. There will be few airline hub sites, yes, but will there be less hubbing? No. Those one-off nonstops on point-to-point missions don’t fully meet the hurdles for revenue contribution any more. They just don’t make money.”

Boyd suggested that airlines are beginning to refocus their efforts to revenue quality not passenger volume. “The low-yield traffic to MCO is becoming for ‘seat fill’ than revenue objective today. Bozeman and Beijing are more important,” he said.

Che, Che, Che Changes
Airports must also understand the new airline directions with fleet reductions, capacity cuts, coupled with rising costs. “The hurdles for regaining and recruitment of airlines services are higher,” he said, adding the goal is no longer air service but access. “The traditional approach of airports these airports has been to chase LCCs, get low fares and more nonstops to New York, for instance. You don’t need lots of nonstops to wherever. You want nonstop services to a hub. That’s what will matter. Today, that can only be a partial approach. The new dynamic is making access from the rest of the globe the priority and that will take care of local needs as well. Local consumers, frankly, are, well, already here and are going elsewhere to spend their money. It’s getting consumers and businesses into the region that creates jobs.”

Boyd said demand is no longer the issue. “One business class passenger may be worth eight people in economy,” he said, adding the issue is now revenue quality – the levels of international feed, the percentage of business (close-in booking) travelers, premium flow traffic and business traffic to mid-size, high-yield points. “Limited hub room, ATC congestion, taxi-time additions due to more RJ departures, limited peak-bank gate and staffing. These and other factors have airline strategies looking at highest and best use of aircraft and facilities. Spill and displacement are now major concerns. The key is analyzing how to take advantage of accessible connecting hubs. That’s the first step.”

He discussed open skies saying that the EU remains balkanized largely because “the Italian flier doesn’t look at LOT as their airline. The British flyer is the same. Whereas in the United States we are really do have one market.”

Boyd also said the passenger rights legislation making its way through Congress was a done deal because there is a jihad in Washington against the airlines.