Uncertainty and its Impacts on Planning Forecasting Facility Requirements

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1 ATLANTA, GEORGIA 1

2 2 ATLANTA, GEORGIA Uncertainty and its Impacts on Planning Forecasting Facility Requirements Richard Golaszewski Executive Vice President GRA, Incorporated

3 3 Overview Uncertainty Aviation Demand Drivers Example: Fuel Prices and Demand Wrap Up

4 Uncertainty is Inherent in Forecasting Timing When will demand levels be reached? Business cycle Technology trends Example: advent of RJ s changed market potential in terms of size, speed and distance Industry structure What will role of my airport be? Local traffic Connecting traffic Catchment area/alternatives Exogenous shocks September 11 and response to it SAARS (remember that?) Financial meltdown Fuel price shocks Some of this uncertainty can be represented with traditional confidence intervals 4

5 Defining Risk and Uncertainty Uncertainty: The lack of complete certainty, that is, the existence of more than one possibility. The true outcome/state/result/value is not known. Measurement of uncertainty: A set of probabilities assigned to a set of possibilities. E.G., There is a 60% chance this market will double in five years. Risk: A state of uncertainty where some possibilities involve a loss, catastrophe, or other undesirable outcome. Measurement of Risk: A set of possibilities each with quantified probabilities and losses; e.g., There is a 40% chance the proposed oil well will be dry with a loss of $12 million in exploratory drilling costs. Uncertainty can result in risk to airport investments. 5

6 How Uncertainty Affects Airport Activity and Decision-making In practice, airport decision-making often reacts to airline service changes, and is not proactive or forward-looking. Effect of fuel prices on airports depends primarily on airline reactions, which, in turn, are very dependent on many factors, including carrier finances, market competition, fleets, network effects, fuel hedges, etc. Institutional factors are also very important, particularly for smaller airports (e.g., AIP funding levels). Impacts could be different at airports that have significant non-aviation related revenue sources. 6

7 Managing Uncertainty Traditional forecasts based on continuation of trends tempered by changes in drivers Uncertainty in input variables Assume no major structural/technology changes Uncovering what drives bigger changes (shocks) requires different approach Scenario based planning Technology assessment Investment criteria generally deal with trends; hard to foresee shocks and what reaction will be E.G., reaction to 9-11 changed in-airport times for passengers making air less attractive to short-haul passengers 7

8 Demand for What? Some variables change differently and affect facility needs Enplaned passengers Originating Connecting Aircraft operations Average aircraft size Load factors characterize passenger-aircraft size relationships Drivers differ Economic trends Carrier decisions Industry structure 8

9 Common Passenger Aviation Supply/Demand Metrics and Their Connections 9

10 Understanding Demand at an Airport Income and population Input costs (e.g., fuel, labor, etc.); varies by carrier type Available substitutes Other airports Other modes (e.g., auto, train, etc.) Travel choice variables Fares Schedule availability/frequency Amenities Trip time Access time and costs Policy variables can affect demand Subsidies for air service Slots. perimeter rules and other limitations 10

11 GDP is Driver of Commercial Aviation Activity 11

12 Domestic Commercial Aviation Activity: Revenue Passenger Miles 12

13 Recession Periods and Real Jet Fuel Price Per Gallon 13

14 Fuel Price Drives Commercial Aviation Activity 14

15 One Approach: ACRP Uncertainty Model 15 Existing Forecast ACRP 03-15* Risk Model Existing Forecast (TAF; other) Future Enplanements and Operations How Far Off Could The Forecasts Be Based on Past Experience w Key Air Service Drivers? Range of Future Enplanements and Operations Taking Uncertainty Into Account USER CUSTOMIZATION* Macro Air Service Drivers Jet Fuel Prices GDP Growth Local Air Service Drivers Local Income Competition at Airport Competition from Nearby Airports Average Aircraft Size at Airport Inflation * Model incorporates default values for each airport *GRA, Incorporated ARCP Impact of Jet Fuel Price Uncertainty on Airport Planning and Development.

16 Final Observations Forecasts are necessarily built on forecasts of underlying drivers or other factors determining the behavior of interest unanticipated shocks to underlying drivers affect the accuracy of the dependent forecasts Changes in the economic environment lead to changes in service features and other supply side features that may be difficult to anticipate and forecast Future movements in fuel, other resource prices and vigorous economic growth (or decline) can muddle established relationships linking aviation demand and supply Industry structure changes and other exogenous shocks may have largest effects on airline service patterns and airport facility needs 16

17 17 Thank You! Questions?

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