Minutes Exhibit A
Minutes Exhibit A Port of Seate Commission Special Meeting of May 27,2014 COMPASS LEXECON 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 COMPASS LEXECON 2 1. Overview and Summary of Findings COMPASS Lexscou 3 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. COMPASS LEXECON 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. COMPASS LEXECON 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. COMPASS LEXECON 6 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. COMPASS LEXf-CON 7 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. COMPASS LEXECCN 8 2. Results of Economic Research on Airline Demand Elasticity COMPASS thecpN 9 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). COMPASS LEXECON 10 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 COMPASS LEXECON 11 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 COMPASS [EXECQN 12 3. Impact of Alternative Financing Options on Domestic Passenger Traffic at SEA COMPASS '3 LEXESQN 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. COMPASS LEXECON 14 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. COMPASS thecou 15 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. COMPASS LEXECON 16 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. COMPASS LEXECON 17 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. COMPASS LEXECON 18 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. COMPASS LEXEFON 19 4. Conclusions COMPASS 20 LEXEFON 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. COMPASS LEXECON 21 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. COMPASS LEX: ' 23 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. COMPASS LEXECON 24 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. COMPASS LEXECON 25
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