ITEM NO. 7a_Supp_1 DATE OF MEETING 6/14/2011 International Air Service Growth Seattle-Tacoma International Airport For Port of Seattle Commission Briefing June 14, 2011 Focus Issues  Industry trend and new competitive landscape:  Why alliances, JV, mergers are needed, and what it means to Seattle.  Seattle's International Passenger Growth:  34% growth since 2006 for Europe and Asia. 2010 success has led to nearly 20% capacity growth in Summer 2011 vs. Summer 2010.  Challenges and Opportunities Ahead... 2 Global Commercial Airline Profitability Is Characterized by Boom-and-Bust Cycle Global Commercial Airline Profitability Revenues (Percent) 6 20 EBIT Margin (Left) Net Gains/Losses (Right) 15 4 10 2 5 0 0 -2 -5 -4 -10 -6 -15 -8 -20 US$B 8 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10F '11F Source: IATA January 2011 Forecast, MIT International Center for Air Transportation 3 Airline industry is highly fragmented if compared to other industries Source: Boston Consulting Group 2010 MIT International Center for Air Transportation 100% 80% Top 10 = 85% Top 10 = 76% Top 10 = 63% Top 10 = 36% Toyota 13% Maersk 17% Delta 7% American 4% United 4% Nokia 39% GM 11% MSC 11% Global Share Ford 10% CMA CGM 8% 60% Samsung 16% 40% 20% Hapag-Lloyd Evergreen APL NYK Line Hanjin Etc. Volkswagen Renault Hyundai Honda Fiat Suzuki Etc. LG 8% Sony Ericsson RIM Sharp Motorola Apple Etc. Air France KLM Emirates Lufthansa British Airways Continental Southwest US Airways 15% 24% 37% 64% Mobile Handsets Automotive Container Shipping Airline 0% Top 3 Top 4-10 All Others 4 Airline Industry is Highly Fragmented but Alligned by Alliances The Airline Industry is Highly Fragmented Others Alliances Reduce Fragmented Competition DL UA/CO Others AF/KL AA LH BA QF US SQ CX CZ Source: Airline Business 2010/11 Airline ranking by traffic measured in RPK MIT International Center for Air Transportation 5 Seattle: Delta's Pacific Gateway  Delta needs to fill the void in the Western US but does not have many new aircraft on order.  Partnership with Alaska Airlines allows Delta to substitute organic growth of their own.  Asia is the growth market, for which Seattle is well-positioned to provide less circuitous routing.  Delta operates four international routes out of Seattle successfully (Amsterdam, Beijing, Osaka and Tokyo) and has increased its local presence. 6 Air Service Development Airlines' goals Immediate - not potential - profitability  Minimum risk   Air service development work is highly data- intensive.  Any proposal must be compelled by solid profitability analysis backed by historical traffic data, and not by general economic development discussion. Direct Revenue to the Port and Regional Economic Benefit One international route generates an average of $1.5 million annually in landing fees and terminal revenues to the Port, plus PFC (Passenger Facilities Charge) revenues.  International passengers typically contribute higher amounts in parking, concession and other related passenger revenues.  International routes bring additional traffic in domestic routes via new connections.   Overarching benefit to the regional economic growth 8 Seattle's Nonstop International Services Reykjavik Seoul Beijing Seattle London Frankfurt Heathrow Amsterdam Paris Tokyo Osaka Taipei 2007 2008 New nonstop services In 2007 - 2010 Scheduled for summer 2011 2009 Existing services through 2006 2010 2011 Osaka and Beijing Growth Trend Continues in 2011 Nearly 20% increase in available seats for the 3rd Quarter 2011 vs. same period 2010  Europe +23% seats in summer 2011, compared to Summer 2010 = almost 2,000 more seats per week one way = 43 flights per week, up from 36 flights  Asia +16% increase in seats vs. Summer 2010 = +2,000 more seats per week one way = 51 flights per week, up from 45 flights  Europe and Asia Combined Total 13 additional flights per week, 19% more seats, or 4,000 more seats per week during Jul-Sept Based on 3rd Quarter 2011 scheduled seats vs. 3rd Quarter 2010 10 Seattle - Europe Onboard Passengers 2010: Traffic Up 27% from 2006 2011: Up 14% as of April YTD vs. 2010 same period Annual Scheduled Service Passengers by Carrier 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 810,912 136,968 518,482 164,842 563,163 539,523 619,945 145,969 157,706 164,831 98,852 108,151 67,188 161,417 217,900 733.985 714,837 (-2.7% vs 2009) 63,327 22,234 69,182 128,875 140,920 110,760 122,283 187,905 213,451 169,001 167,811 182,688 168,351 185,829 192,004 237,106 245,371 249,041 220,884 2006 Air France 2007 Lufthansa 2008 Icelandair 2009 2010 Scandinavian 2004 2005 British Airways Delta Source: Port of Seattle data, as reported by carriers. Delta passengers combine pre-merger Northwest Airlines passengers. Icelandair started Seattle service in July 2009 and SAS discontinued in July 2009. Northwest (premerger Delta) operated Seattle-London Heathrow for six months starting in June 2008. 11 Seattle - Asia Onboard Passengers 2010: Record year with 29% additional traffic vs. 2009 2011: Up 14% as of April YTD vs. 2010 same period Annual Scheduled Service Passengers by Carrier 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 882,835 64,668 717,797 678,603 567,479 583,620 626,388 683,666 133,690 128,994 71,013 26,890 64,517 102,783 119,616 46,615 121,523 87,526 95,075 102,052 93,827 86,683 101,928 62,676 77,565 79,734 43,246 69,078 78,725 84,681 85,956 138,798 136,857 138,281 126,771 127,925 221,291 165,460 171,091 185,173 198,245 183,623 2004 2005 United 2006 Korean 2007 Asiana 2008 China Airlines 2009 Hainan 37,390 80,150 81,192 143,597 Delta EVA 110,161 138,455 306,867 2010 Source: Port of Seattle data and US-DOT Database T100 for EVA and China Airlines in 2003 - 2008. Passengers on EVA and China Airlines are adjusted to exclude Newark and Houston domestic through-passengers for the period. Delta passengers combine pre-merger Northwest Airlines passengers. China Airlines started Taipei service in June 2004 and discontinued in September 2008; Korean Airlines started Seoul in June 2005; Hainan Airlines started Beijing in June 2008; Delta added Beijing and Osaka services in June 2010. 12 Profitable International Operation Requires Connecting Traffic Feed   Delta Seattle-Tokyo Route Sample Need connecting support on both ends of the line Alaska Canada and Pacific NW Cities Seattle Tokyo Japanese cities (Nagoya, Okinawa) Hong Kong Manila, Singapore Shanghai Las Vegas Phoenix California Delta Air Lines Seattle-Tokyo NRT Flight On-board Passenger Composition 195,000 Estimated On-Board Passengers in CY2010 Top Beyond-Tokyo Cities • • • • • • • • • • Manila Nagoya Seoul Hong Kong Singapore Taipei Osaka Shanghai Busan Guam Top Behind-Seattle Cities • • • • • • • • • • Las Vegas Anchorage Vancouver Salt Lake City Fairbanks Spokane San Diego Minneapolis Phoenix Calgary Sources: MIDT- unadjusted booking data CY2010, non-directional. On-board passengers - Port of Seattle Carrier Reports CY2010. 14 Delta Air Lines Seattle-Amsterdam Flight On-board Passenger Composition 213,000 Estimated On-Board Passengers in CY2010 Top Beyond-Amsterdam Cities • • • • • • • • • • Delhi Kiev Nairobi Moscow Bucharest Paris Teheran Dublin Mumbai London Top Behind-Seattle Cities • • • • • • • • • • Anchorage Vancouver, BC Spokane Portland San Francisco San Diego Victoria Pasco Eugene Sacramento Sources: MIDT- unadjusted booking data CY2010, non-directional. On-board passengers - Port of Seattle Carrier Reports CY2010. 15 2011 - 2020 Potential Fragmentation of the route network is not effective. Reinforcing strong route system with existing carriers or alliance partners leads to more sustainable growth. Looking ahead for:  Hong Kong nonstop  Shanghai nonstop  Additional reinforcement to large hub markets such as Tokyo, Seoul and London  Emerging markets of Middle East (which provides effective connections to India) and Southeast Asia 16 Challenges Airlines are cautious of further development in the environment where competition tends to create over-capacity.  Fuel takes up the highest portion of airlines' cost and its price hike is eroding profitability.  Peak time scheduling will likely to remain due to our geographical location and optimized connectivity on both ends.  17 17 Strategies Going Forward Focused efforts need to be made on key markets and key carriers, based on alliance synergy and hub alignment.  Maximize the benefit of the Commissionapproved New Air Service Incentive Program.  Provide effective and customer-friendly facilities to be the premiere West Coast Gateway of travelers' choice.  18