Tourism & Air Access:
Economic Outlook
Can we survive the next 12 months? strategic transportation & tourism solutions
Mike Tretheway Executive Vice President & Chief Economist InterVISTAS Consulting Inc.
strategic transportation & tourism solutions
Presentation to TTRA Chapter Conference 17 October 2008
Prepared by InterVISTAS Consulting Inc.
Real GDP Growth – U.S.
Real GDP Growth - Canada As of May 2008
8%
8%
6%
Forecast Data Revised 2009: +0.1%
5%
recession
3% 2% 1%
Historical Data
6% 5% 4%
soft landing ?
4%
7%
3% 2%
Forecast Data near recession ?
Historical Data
no recession
7%
2008 Q1: -0.8% Q2: +0.3%
1%
Sources: Historical Data: U.S.: U.S. Bureau of Economic Analysis Forecast Data: U.S.: Bank of Canada
denotes revised Oct 2 ‘08
Sources: Historical Data: Canada: Statistics Canada Forecast Data: Canada: Bank of Canada
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0% 1997
0%
3
Risk of U.S. Recession
Real GDP Growth - Canada
Bellone Index
8% 7%
Historical Data
6% no recession
4% 3% 2%
RBC revision: 2008 +0.9% 2009: +1.9%
near recession ?
5%
Forecast Data
1%
Sources: Historical Data: Canada: Statistics Canada Forecast Data: Canada: Bank of Canada
1967 credit crunch
has always risen to 100% whenever it jumped to 25%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0% 1997
An average lead of 8 months predicting the last six US recessions correctly predicted every past recession predicted 1967 recession which did not occur
4
As of May 2008
Risk of U.S. Recession
recession
5
US Outlook as of May 2008
leading Index
In first half of 2008
6
it looked as if the US might avoid a recession
7
Revised Recession Risk
Current Recession Risk It is highly likely that the US is in a recession
And that the recession may be long
2nd half of 2008 to mid 2009
However, the signals are still mixed Previous Credit Crises: no recession
1987 1967
8
9
Oil Futures: up but loosing steam
Fuel Prices
Crude Oil Futures Prices $80
One Year Ago
strategic transportation & tourism solutions
May 2007
$70
Nov 2006 Jan 2006 Dec 2005 $50 Apr 2005
Crude Oil Spot Prices
$40
Crude Oil Futures Prices - - - - -
$30 May 2003
Month of Delivery
11
Jul-12
Oct-12
Jan-12
Apr-12
Jul-11
Oct-11
Jan-11
Apr-11
Jul-10
Oct-10
Jan-10
Apr-10
Jul-09
Oct-09
Jan-09
Apr-09
Jul-08
Oct-08
Jan-08
Apr-08
Jul-07
Oct-07
Jan-07
Apr-07
Jul-06
Oct-06
Jan-06
Apr-06
Jul-05
Oct-05
Jan-05
Apr-05
Jul-04
Oct-04
Jan-04
Apr-04
Jul-03
Oct-03
Jan-03
$20 Apr-03
US$ Per Barrel
$60
Crude Oil Futures Prices
One Year Ago
$160
ƒ The market was indicating that oil prices would stabilise around $70/bbl
$140
May 2008 Jun 2008
June 2008: Significant Run-up, losing steam $120
Mar 2008 Nov 2007
US $ per Barre
$100
Oct 2007 Sep 2007
$80
Nov 2006 $60
Crude Oil Spot Prices
$40
Crude Oil Futures Prices
$20
Dec-12
Dec-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
Jan-06
Jul-05
12
Oct-05
Apr-05
Jan-05
Jul-04
Oct-04
Apr-04
Jan-04
Jul-03
Oct-03
Apr-03
Jan-03
$0
13
Month of Delivery
Spot Prices, West Texas Intermediate, Constant 2008 Dollars 1947-2008
Spot Price West Texas Intermediate, Nominal Prices 1947-2008 $140 $140
$120 $120
12
$100
$80
2008 US$/Barre
US$/Barrel
$100
$60
$80
$60
$40
$40
$20
$20
$0
$0 47
52
57
Source: Spot West Texas Intermediate, 1947 to 2008
62
67
72
77 1947-2008
82
87
92
97
2
7
14
47
52
57
62
67
Source: Spot West Texas Intermediate, 1947 to 2008.
72
77 1947-2008
82
87
92
97
2
7
15
Spot Prices, West Texas Intermediate, Constant 2008 Dollars 1947-2008
Spot Prices, West Texas Intermediate, Constant 2008 Dollars 1947-2008
As of June 2008
$140
$140
$120
$120
$100
$100
5-7 years ?
2008 US$/Barre
2008 US$/Barre
5-7 years
$80
$60
$80
$60
$40
$40
$20
$20
$0
$0 47
52
57
62
67
72
77
82
87
92
97
2
Source: Spot West Texas Intermediate, 1947 to 2008.
7
16
1947-2008
16 Oct 2008
47
52
57
62
67
72
Source: Spot West Texas Intermediate, 1947 to 2008.
77
82
87
92
97
2
7
17
1947-2008
The Future
Crude Oil Spot Prices January 2003 to November 2008
View 1: This is a bubble about to burst
$160
$140
$120
$80
$60
$40
$20
Jul-08
Nov-08
Sep-08
May-08
Jan-08
Mar-08
Nov-07
Jul-07
Sep-07
May-07
Jan-07
Mar-07
Jul-06
Nov-06
Sep-06
May-06
Jan-06
Mar-06
Nov-05
Jul-05
Sep-05
May-05
Jan-05
Mar-05
Nov-04
Jul-04
Sep-04
May-04
Jan-04
Mar-04
Nov-03
Sep-03
Jul-03
May-03
Jan-03
$Mar-03
U.S. $ per barrel
$100
18
declining US demand loaded tankers with unsold oil transactions are paper purchases -- not real buyers May 2008
19
The Future
The Future
View 2: Demand will continue to exceed supply US had reduced its demand by 400,000 barrels per day by mid 2008 But China and India were increasing theirs by 600,000 – in spite of high prices
driven by new investment in cars, electric production, …
While expectations are that the oil price bubble will burst …. There is a non-trivial probability of continuing high oil prices in the medium term
thus a high oil price scenario must be part of business planning with corresponding contingency plans
20
Impact on Air Travel
North American Carrier near term Capacity
Less than you might think
air travel is thought of as ‘price elastic’
strategic transportation & tourism solutions
10% price increase typically reduces travel by 13%
but when price increase affects all routes, carriers, destinations and modes
air travel is observed to be price inelastic 10% price increase reduces travel by only 6%
21
22
Impact of Fuel Price
American
As of May 2008 NY-Los Angeles
$125 per pax fuel cost for NY-Los Angeles (A320)
for 4th quarter 2008
April seat price: $149 it was more economical for some airlines to park aircraft
United 17% cut in domestic
25
Cutting all service to 15 cities
Retire
but delivery after 2012, largely replacement, not suited to transborder
Continental
Plans to cut mainline capacity in 2009
40-45 mainline (A300s, MD-80s) 35-40 RJs 35 Saab (entire fleet)
Oct 2008 – ordered 787s 24
reduced 11-12% reduced 10-11%
retire aircraft
one way
mainline capacity: RJ capacity:
CLE hub: IAH hub:
loses 23 routes loses 12 routes
Retire 67 planes Total US capacity: -11%
80 aircraft in 2008, 20 in 2009 94 737s 6 747s
26
27
Southwest
Canada
Deferred delivery of aircraft But retaining some aircraft scheduled for retirement Has reduced capacity for 1st time in its history Poised to restore capacity in 2009 Code share with WestJet: 2009Q4
WJ: no reductions at this time AC:
retire 4 767s cut overall capacity 7% cut transborder 13% cut domestic 3%
street’s expectation: WJ does the flying SW adds it code 28
Capacity Cuts
2008 vs 2001-03
2008 is first anticipatory capacity cut by carriers
should induce load factor and yield increases load factor increases will mitigate pax traffic loss will reduce GHGEs capacity restoration not assured
29
US carriers have inadequate replacement aircraft on order Recovery of transborder market may take years 30
By 2003, most major US network carriers were out of cash
restructured through bankruptcy
In 2008, most major US carriers have sufficient cash to weather at least a year
and there may be little to gain from a 2nd round of bankruptcy 31
Future Scenarios strategic transportation & tourism solutions
Difficult to make predictions of the future Consider and prepare for alternate scenarios
33
Scenario A: Bleak
Hard Landing
Fuel prices continue run up Economy slips into recession Consequences
pax drops by 10% over 2 years
2000-02: 1979-81:
-9.3% -9.8%
recovery 4 years recovery 4 years
some carriers read chapter 11 or 7
Hard Landing
34
35
Scenario B: Rapid Recovery Fuel price bubble bursts
return to $80-100
Economy avoids recession Carriers cut domestic capacity 8%
yields rise seat management systems respond to reduced capacity and increase yields costs reduced (fuel, operations, capacity) some capacity restored
SOFT LANDING
36
37
The 2011 Eurasian Capacity Glut
Will There Be a Eurasian Capacity Glut by 2011?
new capacity may exceed strategic transportation & tourism solutions
replacement needs consumer demand
main impact will be on Asia-Europe may result in Euro and Asian carriers redeploying capacity to N America
39
Aircraft Orders: 1995-2007
Aircraft Orders: 1995-2008 3,000
Total Aircraft Orders
2,500 2,000 1,500 1,000 500
?
1,500 1,000 500
Airbus 40
Aircraft deliveries increasing, large to Middle East, Asia, Europe
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Boeing
Boeing
Source: Airbus and Boeing websites
41
Conclusions
Aircraft Deliveries: 1995-2015 Total Aircraft Deliveries
2,000
1995
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Airbus Source: Airbus and Boeing websites
1,400
2,500
0 1995
0
2008 may be another strong year for aircraft orders
1996
Total Aircraft Orders
3,000
Increased capacity in M East, Europe, Asia
Å Projected Æ
1,200 1,000
800
600
will exceed demand will put downward pressure on yields
European and Asia/Pacific carriers may need to shift focus to NA,
400 200
Airbus Source: Airbus and Boeing websites The Airline Monitor, July 2007
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
where resident carriers have been slow to renew/modernize their fleet
Boeing 42
43
But … Canadian Policy is an Obstacle The increased capacity of Asian carriers is an opportunity for Canada But Canada’s implementation of air transport policy is an obstacle
The Issue The Challenge Air transport delivers Canada’s highest spending tourists Air Access to Canada from some key markets is impeded by
federal policy border and other regulations costs
44
Key Issues
, an w i a ,T , , ea pore aris r K o nga , P nc e Si anila Fra g M ile, Kon Ch n g Ho
Key Issues
Example: YVR has viable routes and additional frequencies that are blocked by policy
45
This blocked capacity is the equivalent of 8 daily 747 flights, reducing 2008 tourism spend by $100 million per annum. By 2015 this may represent over $225 million in foregone tourism revenue YVR will be primary gateway to 2010 Olympics/Paralympics 46
Canada’s 2006 Blue Sky policy is an excellent policy but is not being implemented
Fast enough With the right priorities Without using loopholes
Most treaties since 2006 have been restrictive ! 47
New Singapore ‘Treaty’
New Singapore ‘Treaty’
Canada concluded treaty with Singapore in Oct 2007
Restrictive: not Blue Sky or Open Sky Singapore still confined to 3x weekly service via Seoul Singapore cannot serve via Japan or Taipei
The Singapore agreement was a critical test case
note that no Canadian carrier serves Taipei
would Canada place the interests of tourism, communities and shippers on equal par with carrier interest? The Singapore outcome manifests a hollow policy
The only positive element:
SQ now has a treaty, no longer needs annual exemption 48
49
Other Issues: Milking Air Transport
$700
Costs to operate Mirabel $600
Canada is not cost competitive for air carriers
Higher Canadian Safety Standards EAS and SCASDP Subsidies
$500
Airport rents, PILT have no equivalent in US Various taxes higher in Canada US airports receive subsidies and interest rate advantages
NAV CANADA Asset Purchase
$40 per originating YVR pax $400
Must pay GILT/PILT Due to Terminal 3 Purchase – Interest GST paid by leisure passengers Other US Aviation subsidies (non-AIP) Airline Fuel Tax not reinvested
$million
Annual Costs Imposed on Canadian Air Transport That are not imposed on US airports
$300
Excess Interest due to deferred spending No Provision for Tax-Free Bonds No AIP Funding (subsidy portion only) Must pay Ground Rent
$200
$100
$-
50
Montréal
Vancouver
Toronto
U.S. airports
51
Source: InterVISTAS study for gateway airports and ATAC
State of the Airline Industry Thank You
Not so Good
www.InterVISTAS.com
52
Real GDP Growth - Mexico 8% 7%
Historical Data
6%
Forecast Data
2008 +2.3% 2009: +1.6%
5% 4% 3% 2% 1%
Sources: Historical Data: Mexico: OECD Statistics Forecast Data: Mexico: The Economist website
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0%
denotes revised Oct ‘08 54
strategic transportation & tourism solutions