Minutes Exhibit A

Port of Seate Commission Special
Meeting of May 27,2014

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Impact of Terminal Financing Options
on Demand at Sea-Tac


May 27, 2014

Presentation Overview

1.   Overview and Summary of Findings

2.   Review of Economic Literature on Elasticity of Demand for Air Travel
(International vs. Domestic)

3.   Potential Impact of Port's Funding Decision on Traffic at Sea-Tac

4.   Conclusions

5.   Appendix: International Flights Between Sea-Tac & Asia Already
Enjoy Substantial Cost Savings vs. Other West Coast Gateways



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1.   Overview and Summary of Findings




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Overview

> CompassLexecon is a leading international economic
consulting firm, providing analysis and advice to clients in
both the private and public sectors around the world.

>  Dan Kasper has been a recognized expert on airline and
aviation economics for over 30 years and has frequently
consulted with government agencies and aviation clients.
He has served on the faculty of the Harvard Business
School and the Univ. of Southern California, as a senior
executive at the U.S. Civil Aeronautics Board, and as a
Member of the U.S. National Airline Commission.

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Overview (cont.)

> We were asked to assess the impact on domestic
traffic at Sea-Tac International Airport ("SEA") of
two alternative terminal financing options for
improvements under consideration to the
international (IAF) and domestic (Northstar)
terminal facilities.

> In particular, we were asked to assess the likely
effects on traffic in light of the elasticity of
demand for air travel.

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Overview (cont.)

>  For comparison purposes, we analyzed two hypothetical financing
approaches.
- One approachthe "unequal" approachwould require that Northstar
improvements be financed with a higher percentage of bond financing and a
lower percentage of "equity" (e.g., PFC) funding than would be used for IAF.

.    Under the "equalized" approach, Northstar would be financed using the same
proportions of debt and equity as proposed for IAF under the "unequal"
approach.

>  The "unequal" approach would raise the cost per domestic passenger
by $0.67 compared to an alternative ("equalized") approach that
utilized the same percentages of bond and "equity" financing for
these projects.


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Summary of Findings

>  It is well-established in the economic literature that
demand for domestic air travel is both price elastic and
more price elastic than the demand for international air
travel.

> As a consequence, higher airport costs resulting from the
"unequal" financing option can be expected to reduce
domestic traffic at SEA by proportionally more than a
comparable increase would reduce international traffic.


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Summary of Findings (cont.)
> Our analysis shows that after taking account of demand
elasticities:
- The reduction in domestic demand caused by the increase in domestic
passenger costs under the "unequal" financing method would
significantly reduce domestic traffic at SEA compared to the
"equalized" financing approach.
- The loss in domestic traffic at SEA would be substantially greater than
the loss in traffic caused by a comparable cost increase for
international traffic.




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2.  Results of Economic Research on Airline
Demand Elasticity




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It Is Well-Documented That Domestic Demand Is
More Price-Elastic Than International Demand

>  Demand elasticity measures consumers responsiveness to a change in
price.
- In this context, an elasticity estimate can be interpreted as the percent
reduction in traffic for a one percent increase in price (other things
equaU.
- Larger (more negative) elasticity values indicate that consumers are more
responsive to changes in price.

Demand elasticity often reflects the availability of alternate options.
- Domestic passengers in the US. typically have more optionsincluding low
cost carriers and surface transportationthan passengers traveling
internationally.
- Similarly, short-haul passengers tend to have more elastic demand, in part
because of more competing options (including surface transportation).


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Numerous Studies Demonstrate That Demand for Domestic Air Travel Is
More Price-Elastic Than Demand for International Air Travel

>  Peer reviewed studies have consistently found that the demand for
domestic air travel is more price elastic than the demand for
international air travel.
.   In other words, domestic travelers are, on average, considerably more price
sensitive than are  international travelers.

>  Our figures are taken from a comprehensive review of airline demand
elasticity studies by Gillen, Morrison and Stewart" and show the
median elasticity estimates from a large number of airline elasticity
studies.
- Their review finds a median long-haul international elasticity of -0.79 and a
domestic elasticity of -1.15.
.   Other studies find similar results. For example, a 2007 Intervistas study** finds a
trans-Pacific elasticity of -0.84 versus a domestic elasticity between -1.4 and -
1.54, while Berry and Jia (2010)*** find a domestic elasticity of -1.67.
*D. Gillen, W.G. Morrison and C. Stewart, Air Travel Demand Elasticities: Concepts, Issues and Measurement, in Advances in Airline Economics, Vol. 2, ed. Darin Lee, 2007. p 390 .
"lnteerSTAS Consulting (prepard for IATA), Estimating Air Travel Demand Elasticities, Final Report, 2007. p v.  Route/Market level elasticities.
""Steven Berry and Panle Jia, "Tracing the Woes: An Empirical Analysis of the Airline Industry", American Economic Journal: Microeconomics, Vol. 2, N0. 3 (August 2010), pp. 1-43

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Airline Demand Elasticities from Gillen, et al

All long-haul         All long-haul domestic   All short/medium haul
All long haul estimates   international estimates         estimates                estimates
Elasticity
Own-price
Median 4. 0
.L N                                              -1.15             -1.15

-1.4 -

Source: D. Gillen, W.G. Morrison and C. Stewart, Air Travel Demand Elasticities: Concepts, Issues and Measurement, in Advances in Airline
Economics, Vol 2, ed. Darin Lee, 2007. p 390
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3.  Impact of Alternative Financing Options on
Domestic Passenger Traffic at SEA




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Comparison of Terminal Financing Alternatives

Unequal Financing                 Equalized Financing
o  Improvement-5.1.10                           0 Usest'le samepercentage
International Arrival Facility          of fmancmg from bonds,
(IAF) funded through a              PFCS and ADF for both IAF
combination of PFCs, the            and NorthSTAR.
Airport Development Fund                    '
.
'gAngggggm           mistsgixsifm
or        improvementS            Assuning 85% of the
are funded prircipally by
reduction is from domestic
bonds With little or no ADF
carriers, domestic CPE
and PFC funding.
would decrease by $0.67
. 2020 FIS rate estimated to           compared 30 unequal
be $11.55 per passenger.            financmg option.


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Airport Fees Constitute A Higher Proportion of Total Ticket
Costs For Domestic Than International Passengers

$800 -                                                                      $752. 62
1 .396



$247.07


Domestic 0&D      Domestic Connect   International Connect   lnternationalO&D

I Remainder of Fare   I SEA airport fees


Source: US DOT 0&D Survey YE 2013-Q3. FAA Form 127 data, 2012; US DOT t100; airport annual and financial reports.
Note: Average one-way fares to/from or connecting at SEA.  Includes taxes and fees. Passengers connecting to!from international flights at SEA are
international connect passengers. International 0&D passengers are 0&D passengers at SEA with an international segment to/from SEA. Airport fees per
ticket based on passenger airline cost per enplanement at SEA 2012, with FIS fees allocated to international passengers.

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Airport Fees Constitute A Higher Proportion of Total Ticket
Costs For Domestic Than International Passengers

>  Because airport costs constitute a lower proportion of
total ticket costs for international than for domestic
travelers, an increase in airport costs imposed on
domestic traffic will have a greater adverse impact on
domestic demand than a comparable increase in airport
costs would have on international traffic.




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The Unequal Financing Option Would Reduce Demand at SEA By Between
36,000 and 52,000 Passengers Compared to the Equalized Financing
Ontinn

>  The increase of $0.67/enplanement under the unequal financing
approach would increase the average domestic fare at SEA by 0.14%.
- Based on the median domestic airline price elasticity of -1.15 from
Gillen, et al, this would lead to a reduction in domestic passenger
demand of 36,000 passengers compared to an equalized approach.
- Using more recent domestic elasticity estimate of -1.67 from Berry and
Jia, a $0.67 fare increase resulting from the higher financing cost of the
unequal financing option would reduce passenger demand at SEA by
52,000 passengers compared to the equalized approach.
- In comparison, a $5 increase in international CPE would be expected to
reduce international traffic at SEA by approximately 5,700
passengers/year.


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Overall, the Unequal Financing Approach Would Reduce Traffic
To/From/Through Sea-Tac by between 36,000 and 52,000 Passengers/Year
Compared to the Equalized Financing System
Passenger Loss, Unequalized vs. Equalized            Passenger Loss, Unequalized vs. Equalized
(- (-
1.67 Elasticity)
1.15 Elasticity)
I
I                                                         I              l
0                                                                     I
SEA    -5,000  
at -10,000 
Demand 45,000  
-20,000 
Passenger -25,000  
-30,000 
-35,000 
n
__
Change -40,000  
-45,000 
-43,984
-50,000 
Domestic 0&D         Domestic Connect        Domestic 0&D2        Domestic Connect3


Source:  US DOT 0&0 Survey YE 2013-Q3. Alaska Airlines cost forecasts; Gillen et al elasticity study.
Note:  Based on an increase in domestic CPE of $0.67 under the unequalized proposed charges relative to equalized charges.

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A Much Larger Share of International Than Domestic
Passengers Make Connections at SEA_

60% -                                                          56.9%
to/from/through    50% ,
SEA
332 i
at
Passengers connecting 8as  'l
of    NO39
SEA        'I'
Percentage    L O39  I
O39
Domestic                                International


Source: US DOT 0&0 Survey YE 2013-Q3.
Note: Passengers connecting to/from international flights at SEA are international connect passengers.  lntemational 0&D passengers are 0&D
passengers at SEA with an international segment to/from SEA.


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4.  Conclusions




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Conclusions

>  Demand for domestic airline service is significantly more price sensitive
than is the demand for international service.
- As a result, an increase in airport costs can be expected to have a greater
impact on domestic demand than on international demand.

>  Moreover, because average international fares are substantially higher
than average domestic fares, airport costs constitute a larger
proportion of domestic than international fares.
- Hence, the impact of airport cost increases is magnified for domestic
travel.

>  Overall, the cost increases that would result from adoption of the
unequal financing approach can be expected to cause a significant
reduction in domestic traffic at SEA compared to an equalized
financing approach.
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APPENDIX: International Flights Between SEA
& Asia Enjoy Substantial Operating Cost
Savings vs. Other West Coast Gateways

In some markets,
the reduced travel                     NRT average block hours
time from SEA                       from SEA: 10.1
enables the
carrier to serve
the route with
only a single
aircraft vs. two
aircraft required
at LAX and SFO,
resulting in
significant further                               [rde'liSi
savings for                     NRT average block hours
international                  from SFO: 10.9, LAX: 11.5
carriers.



Source:  US DOT T100, Jan-Oct 2013.  Map from gcrnap.com.
Note: Block hours for destinations served by U.S. carriers to Asia from SEA.  US. carrier average block hours from the U.S. to Asia.

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SEA's Geographic Position Already Offers Significant
Time & Cost Savings vs. Other Gateways to Asia

16

.3 A  i                                                                                                                                          3.6
12.5
12.0                                      111512.1               1
_L N                                                                                                                                           i
i                        11.2  1,1.'                  10.911'5              7
Hours              10.4                                                  10.1
:
.A O                                                                            ,
I
Block    00
Average   O'  i
A 1

N i                                        i
i
1                                  1
1
,,_1                                                       1-;
_
i
Tokyo, Japan:        Osaka, Japan     Tokyo, Japan: Narita     Beijing, China       Shanghai, China
Haneda
ISEA ISFO ILAX
Source:  US DOT T100, Jan-Oct 2013.
Note: Block hours for destinations served by U.S. carriers to Asia from SEA.  US. carrier block hours from the U.S. to Asia.

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SEA's Location Already Offers Airlines Operating
Cost Savings That Far Exceed Airport Costs

> At typical direct operating costs per block hour of ~
$1 1 ,000/ hour for a Boeing 777, operating cost savings
from SEA amount to between $15,400 and $17,600 per
flight to Tokyo compared to other W. Coast gateways.
- For a daily round-trip service, these annual operating cost
savings from using SEA rather than SFO or LAX range from $5.6
million $6.4 million.
- In short, airlines have strong incentives to use SEA as an
international gateway.



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