Northwest Regional Air Service Initiative Steering Committee Meeting Market Analysis/Strategies

1. Northwest Regional Air Service InitiativeSteering Committee MeetingMarket Analysis/Strategies June 6, 2007

2. Report topics • Northwest Regional Air Service Initiative (NWRASI) background • Market analysis • True market estimates • Pro forma forecasts • Discussion/input

3. IssuesGoalsProject scope • NWRASI Background

4. Air service issues • Service in secondary markets is deteriorating • Regional airline relationships and fleet trends are increasing small community service issues • Industry trends making future service improvements difficult • Many leaders in small communities have little understanding of the issues and/or how to address them

5. Goals • Improve air service to the OR and WA traveling community • Provide better access from secondary markets in OR and WA to the national air transportation system • Engage smaller communities in OR and WA in finding solutions to regional air service issues

6. Project scope Educate Analyze Strategize • Phase I: Small community air service development tool kit • Mentor Program • Air service DVD • Small Community Air Service Handbook • Phase II: Small community air service market analysis • True market estimates • Pro forma analyses • Phase III: Small community air service strategy • Potential air service markets • Service provider options • Service strategies • Recommendations  

7. NWRASI airports 12 Oregon and Washington communities participated in the NWRASI

8. True market estimatesPro forma forecasts • Market Analysis

9. Market analysis - questions • Where are air travelers traveling to/from today? • How many by origin and destination market? • Does it make economic sense to serve these communities?

10. Market analysis - steps Phase III – Small community air service strategies • Identification of airport catchment areas (ACA) • Collection of air travel data (MIDT) • Model air travel markets where data does not exist • Analyze and summarize market information (total passenger volume by destination) • Complete pro forma analyses on potential markets

11. Estimating air service demand (true market) • Methodology • Each NWRASI airport has its own unique air service market • ACA population defined for each market by zip code • Economics and demographics considered for proxy markets • Competing (alternate) airport service considered • Data sources • YE 10/2006 MIDT for zip codes included in each catchment area • Airports with existing service combined MIDT and DOT airline data by destination • Airports without existing service estimated using travel factors based on several factors including proximity to larger airports

12. Example – true market estimate w/ air service • Like many NWRASI communities, isolated from large population centers • Current scheduled air service • Airport catchment area population of ~78,368 • True market estimate of 119,334 origin and destination passengers annually • Portland is the #1 market

13. Example – true market estimate w/o air service • No current scheduled air service • Airport catchment area population of ~96,724 • Used travel factor proxy (Wenatchee) to estimate the true market • True market estimate of 114,371 origin and destination passengers annually • Seattle is the #1 market

14. True market estimates Passenger estimates form baseline for pro forma forecasts

15. Pro forma market screening • Each pro forma is stand alone • Frequency: Minimum service in a new market is 2 roundtrips to be viable • Aircraft size: 19-, 30-, or 37-seat turboprop aircraft (74-seat if demand permits) and 50-seat regional jets • Appropriate destinations and connecting hubs • Codeshares with dominant hub carrier: PDX=AS/QX, SLC=DL, DEN/SFO=UA, PHX=US, BOI/GEG=universal codeshare • Best case scenario for NWRASI participants

16. Markets selected for pro forma analyses Highlighted markets form core for strategies 25 pro forma analyses completed

17. Key pro forma forecast elements • Passengers forecast based on connecting opportunities and stimulation • Average fares based on reported fares where service exists and reported fares in proxy market where no service exists • Segment revenue determined by pro-rating connecting market revenue based on square root of the miles • Estimated operating costs based on Form 41 carrier costs reported to the US DOT and manufacturer cost curves PUW Segment 1 Beyond SLC Segment profit/ loss a key consideration by airlines

18. Results - Boise Only one market, PUW, was profitable on a system basis though marginal

19. Results – Denver/Phoenix Only one market, RDM, was analyzed for Denver and Phoenix service Although segment negative, both Denver and Phoenix would provide ample system profits Note: Load factor capped at 80 percent.

20. Results - Portland All six were positive on a system basis; negative segment basis Note: Load factor capped at 65 percent.

21. Results – Salt Lake City Both Wenatchee and Pullman are profitable on a system basis

22. Results – San Francisco Only Klamath Falls is positive on a segment basis; 2 airports are negative on a system basis, Pullman and Yakima Note: Load factor capped at a 70 percent load factor for 30-seat aircraft and 80 percent for 50-seat aircraft.

23. Results – Seattle All 6 pro formas were negative on a segment basis but positive on a system basis Note: Load factor capped at a 65 percent load factor for 19-seat aircraft and 70 percent for 37-seat aircraft.

24. Key strategy considerations • No point-to-point service • With one exception, short-haul service does not pay for itself • All service will require either cross-subsidy or direct subsidy All markets require codeshare at the hub to survive Service provided by multiple airlines are required to meet NWRASI hub and aircraft requirements

25. IssuesShort-term strategiesLong-term strategies • Discussion/input

26. Issues • Short-haul air service operating economics • Source and availability of appropriate aircraft • Airfares that are acceptable to the market

27. Issue – Short-haul service operating economics Cost of operating short-haul NWRASI flights does not pay for itself on a segment basis

28. Issue – Sources of appropriate aircraft Airlines operating 19-, 30-, and 37-seat aircraft in the western US 19-seat B-1900s getting very old No new technology short-haul aircraft

29. Issue – Acceptable short-haul market airfares • Must be low enough to limit passenger diversion to larger airports and low-fare carriers • Requires codeshare to allow publishing of through fares rather than two local fares • Low fares require some type of subsidy • Cross subsidy by carrier (pro-rate adjustment) • “Seat-buy” by carrier • Non-airline direct subsidy

30. Strategy - discussion • Narrow the scope of the NWRASI initial program by focusing on high utility hubs that can be served with the same aircraft type • PDX and SEA service with 19- or 30-seat aircraft offer the greatest utility to the largest number of NWRASI airports

31. Strategy - steps Step 1: Engage Alaska Airlines/Horizon Air in high level discussions about NWRASI code-share needs at SEA and PDX Step 2: Issue RFP seeking expressions of interest on operating 19-37 seat aircraft in designated Portland and Seattle markets • RFP sponsors: State Economic Development Agency/State DOTs Step 3: Solicit proposals for respondents in Step 2 (offer a payment to offset the cost of preparing a proposal) • Will provide insight into potential subsidy needed Step 4: A. Investigate/lobby for sources of needed subsidy dollars (federal, state, local) B. If no response to RFP, make presentations to potential service providers Step 5: Develop a plan to address individual NWRASI service needs at DEN, SFO, PHX, and SLC

32. Questions & discussion • Thank you