Biography for William Swan

Chief Economist, Seabury-Airline

Planning Group. Visiting Professor,
Cranfield University. Retired Chief
Economist for Boeing Commercial
Aircraft 1996-2005 Previous to
Boeing, worked at American
Airlines in Operations Research
and Strategic Planning and United
Airlines in Research and
Development. Areas of work
included Yield Management, Fleet
Planning, Aircraft Routing, and
Crew Scheduling. Also worked for
Hull Trading, a major market maker
in stock index options, and on the
staff at MIT’s Flight Transportation
Lab. Education: Master’s,
Engineer’s Degree, and Ph. D. at
MIT. Bachelor of Science in
Aeronautical Engineering at
Princeton. Likes dogs and dark © Scott Adams
beer. (bill.swan@cyberswans.com)
 5 Surprises & One Wish
• Consolidation is a myth
– Airlines a Birth-and-Death process
• Hubs are here to stay
– Heaven or Hell? connect in FRA first
• Bigger is not better
– No trend, no reason driving to bigger planes
• Smaller is better
– Quieter and maybe Cheaper
• Fares declining gracefully
– Yields plunge, Fares decline
• Trust the trends
– But make a Forecast
 Consolidation is a myth
• Venerable Heritage Carriers Dying
– 40% of 1981 airlines gone in 2001
• Vital Start-up Carriers Rising
– 30% of current ASKs on new airlines
• Lots of new Routes
– 40% of growth is added airport pairs
• Diverted Travel off Old Routes
– Secondary hubs bypassing Gateway hubs
Herfinadahl Number of Competitors Increasing Regional Competition

35

30

25
20

15
10 Europe
5
0
1970 1975 1980 1985 1990 1995 2000 2005
Rising Competition in Long-Haul Flows
25
Herfinadahl Number of Competitors

20

15

10

Atlantic
5
Pacific
Asia-Europe
0
1970 1975 1980 1985 1990 1995 2000 2005
 Hubs are Here to Stay
• Half of air travel is connecting
– Long-haul often more than once
• Growth is higher is small markets
– Stimulated by direct and cheaper service
• Small markets pay premium fares
– Covering cost of connecting services
• Evolution of Networks:
– Gateway hubs
– Regional hubs
– Rolling hubs?
 Half of Travel is in Connecting Markets
16%
14%
Share of World RPKs

12%
Connecting Markets
10%
8%
6%
4%
Nonstop Markets
2%
0%

O&D Passengers per Day

 Fares Higher in Small Markets
$220
Average Fare 2q04 (adjusted to 1100mi)

Connecting
$200

$180

$160

$140

HCCs without LCCs

$120 HCCs with LCCs
LCC fares

$100
1 3 5 7 9 13 20 30 41 61 86 122 172 281 479
Market Size, Log Scale
 Three Kinds of Hubs
• International hubs driven by long-haul
– Gateway cities
– Many European hubs: CDG, LHR, AMS, FRA
– Some evolving interior hubs, such as Chicago
– Typically one bank of connections per day
• Regional hubs connecting smaller cities
– Most US hubs, with at least 3 banks per day
– Some European hubs, with 1 or 2 banks per day
• High-Density hubs without banking
– Continuous connections from continuous arrivals and
departures
– American Airlines at Chicago and Dallas
– Southwest at many of its focus cities
 Hub Concepts
• Hub city should be a major regional center
– Connect-only hubs have not succeeded
– Early hubs are centers of regional commerce

• Early Gateway Hubs get Bypassed

– Early International hubs form at coastlines
– Interior hubs have regional cities on 2 sides

• Later hubs duplicate & compete with early hubs

– Many of the same cities served
– Which medium cities become hubs is arbitrary
– Often better-run airport or airline determines success
– Also the hub that starts first stays ahead
 Bigger is not better
• Trend is no growth in airplane size
• Big markets do not mean big airplanes
• Markets with big airplanes do not stay big
• New markets do not use small airplanes
• Bigger airports do not use bigger airplanes
 Forecasters in 1990 Were Confused
230
1990
220 FORECAST
210
200
Seats Per Airplane

190
180
170 2004 data
1990 data
160
150
140
130
1970 1975 1980 1985 1990 1995 2000 2005 2010
Seat Count is -4% of World ASK Growth

Smaller Airplanes - 4%

Longer Ranges 13%

New
Markets
41%
Added
Frequency
50%
 Largest Routes are Not Growing
as bypass flying diverts traffic
60%

50%
World, 1993-2003
40%
Top 100 Routes
30%

20%

10%

0%

-10% ASK growth Frequency Airplane size

-20%
growth growth
 Big Routes Do Not Mean Big Airplanes
450

400

350
Seats Per Departure

300

250

200

150 Average

100

50

0
0 2000 4000 6000 8000 10000 12000 14000 16000 18000
Seats Per Day

All Airport Pairs under 5000km and over 1000 seats/day

 Big Aircraft Markets Do Not Stay Big
450
Seats/Departure Aug 2001, Same Pair

400

350

300

250

200

150
150 200 250 300 350 400 450
>5000km, 5+deps/week Seats/Departure Aug 1991
 Small Airplanes Not in New Markets
450

400
Seats/Departure, Aug 2001

350

300

250

200

150
5000 6000 7000 8000 9000 10000 11000 12000 13000
>5000km, 5+dep/week Distance (Km)
 Big Airports Do Not Mean Big Airplanes
350

300
Seats per Departure

250

200

150

100

50

0
0 200 400 600 800 1000 1200 1400
Jet Departures Per Day

Top 12 Airports in 12 World Regions

 Congestion is Not Driving 747 Shares UP
80%
NRT
70% HKG
747 Share of Departures

HND
60%
JFK
50% PEK
LHR
40% AMS
CDG
30%
FRA
20% LGW
LAX
10% SFO
ORD
0%

9 85 987 989 990 993 995 997 999 001 003

1 1 1 1 1 1 1 1 2 2
 Smaller is better

• Small Airplanes are Quieter

• Big Airplanes turn Slower

 Noise Per Seat Lowest for Small Airplanes

3
Incremental Noise Contribution per

2
Seat (index)

0
0 100 200 300 400
Airplane Seat Count
 Big Planes Turn Slower
Define S = airplane seat count, as provided by airline and airplane type
D = the distance in kilometers of the flight segment preceding the turn
T = the turn time, in minutes
Then
T = 24 + 0.115 · S + 0.0088 · D

Results from regression of same-flight number through flight ground times

This says that turn times are equal to 24 minutes, plus 11.5 minutes for every 100
airplane seats, and 9 minutes for each 1000 km of average stage length. This
means a 100-seat airplane with a 1000-km inbound flight turns in 44 minutes. A
200-seat airplane on the same route would seem to need 56 minutes, and a 400-seat
airplane would require 79 minutes. A 4000-km transcon would require almost half
an hour more time.
 Fares are declining gracefully
• Yields ($/km) plummet at 2-3% a year
• Discount fares declining 1%+ per year
• Unrestricted fares flat with inflation
• Discount mix increasing
– Stimulation with fare declines
– More leisure demand
• Long Haul share increasing
– With lower “yields”
 Cost Reductions Keep Coming
Jets for Better Airplanes,
0.16
Props Higher Bypass,
Hotter Turbines Revenue Lower
0.14 Management, Distributiion Airport
International Yield, 2003$/Mi

Higher Load costs, Lower Costs,

LCCs,
0.12 Facors commissions
nonunion pilots,
Lower ATC
costs?
faster turns? Future Cost
0.10 Improvements
reported
0.08 Estimated
yields
Yield trend Fares -1%/yr
0.06 -2.4%/year

0.04

0.02

0.00
1970 1980 1990 2000 2010 2020 2030
 One Wish
• A trend is a projection of past growth
Lots of “forecasts” are trend projections
Look at the trends

• A forecast includes reasons why

When reasons change, forecast changes
Do not change trend without reason why

• The future includes acts of will

For example, some hubs are made, not born
If you build it, they might come
William Swan:

Data Troll

Story Teller

Economist