ont performance update august 5 2013

8/22/2019 ONT Performance Update August 5 2013

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August5,2013

OntarioInternationalAirport

AcceleratingPassengerDeclinesImperilFutureRecovery


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OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery August2013

ReportQualifications,Assumptions&LimitingConditions

This

report

provides

an

update

of

Ontario

International

Airports

performance

since

2010

and

an

assessmentofitsfutureprospectsbasedoncurrenttrends.

Information furnished by others, upon which all or portions of this report are based, is believed to be

reliablebuthasnotbeenverified. Nowarranty isgivenastotheaccuracyofsuch information. Public

informationandindustryandstatisticaldataarefromsourceswedeemtobereliable;however,wemake

no representation as to the accuracy or completeness of such information and have accepted the

informationwithoutfurtherverification.

Theopinionsexpressed inthisreportarevalidonlyforthepurposestatedhereinandasofthedateof

thisreport. Noobligationisassumedtorevisethisreporttoreflectchanges,eventsorconditions,which

occursubsequenttothedatehereof.

Thisreport

does

not

represent

legal

advice,

financial

advisory

recommendations,

or

investment

advice.

Thefindingscontainedinthisreportmaycontainpredictionsbasedoncurrentdataandhistoricaltrends.

Anysuchpredictionsaresubjecttoinherentrisksanduncertainties. Inparticular,actualresultscouldbe

impactedbyfutureeventswhichcannotbepredictedorcontrolled,including,withoutlimitation,changes

inbusinessstrategies,thedevelopmentoffutureproductsandservices,changes inmarketand industry

conditions,theoutcomeofcontingencies,changesinmanagement,changesinlaworregulations. Oliver

Wymanacceptsnoresponsibilityforactualresultsorfutureevents.


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TableofContents i

TABLEOFCONTENTS

Chapter Page

EXECUTIVESUMMARY....................................................................................................... ES1

1 INTRODUCTION...................................................................................................................... 11.1 Background .............................................................................................................. 1

2 AIRSERVICECHANGESSINCE2010........................................................................................ 22.1 HistoricalPassengerTrafficLevels............................................................................ 2

2.2 Outlookfor2013....................................................................................................... 3

2.3

ONTCompared

with

Other

Airports

.........................................................................

5

3 AIRSERVICELOOKINGFORWARD.......................................................................................... 8

3.1 IfCurrentTrendsContinue....................................................................................... 8

4 AIRPORTCOSTS...................................................................................................................... 12

4.1 TheImportanceofAirportCosts.............................................................................. 12

4.2 ONTOperatingCosts................................................................................................ 13

4.3 HistoricalONTCPEs.................................................................................................. 15

4.4 FutureONTCPEandImpactonAirService.............................................................. 16

APPENDIX1 PassengerGrowthatMajorU.S.Gateways

APPENDIX2 MediumHubAirportsPeakYearand2012Enplanements


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ExecutiveSummary ES1

EXECUTIVESUMMARY

In September 2010, the City of Ontario issued a white paper entitled Ontario InternationalAirportA Recovery Plan, which examined both the historical performance of OntarioInternationalAirport(ONT)anditsfutureprospects.

ThisreportprovidesanupdateofONTsperformancesince2010andanassessmentofitsfuture

prospectsbasedoncurrenttrends.

From2007through2009,ONTsawapassengerlossof32percentfrom7.2millionpassengers

to4.9million. Sincethereleaseofthepriorreport,ONTexperiencedoneyearwhenitsuffered

only a modest decline in passengers of 1.6% (2010). In 2011, however, ONT suffered a

passenger

loss

of

5.3%

and

in

2012,

a

slightly

greater

loss

of

5.4%.

These

losses

occurred

against

a backdrop of modest overall U.S. passenger growth. For 2013, ONTs rate of decline is

projectedtoincreasetonearly8percent,thelargestdeclinesince2009. ONTsprojected2013

passengerlevelof3.98millionwillbethelowestlevelsince1985,morethanaquartercentury

ago.

Forthelongerperiodbeginningin2000,ONThassufferedapassengerdeclinemorethantwice

as great as any other Los Angeles area airport. For the period from the last report in 2010,

ONTs relative performance has not improved, as ONT continues to lose passengers even as

mostotherareaairportshavestarted toregainpassengers. OnlyBurbankshowsadecline in

passengersduring

this

period.

Ifrecentratesofdeclinecontinue,theywillleadtosubstantialfurtherpassengerlossesforthe

airport, with total passengers falling below the two million mark (ONTs 1980 level) between

2020and2024. Inturn,theselosseswouldleadtothelossofthousandsofjobsandadditional

tensofmillionsofdollarsineconomicactivityintheOntarioarea.

ONTscurrentpath isonaselfreinforcingdownwardcycle, inwhichfewerflights in individual

markets make ONTs airservice less attractive to local travelers, especially business travelers,

whoinsteadflyto/fromLAXand,toalesserextent,otherareaairports. Asaresult,theairlines

cutadditional

flights

at

ONT,

which

further

reduces

the

attractiveness

of

air

service

at

ONT

and

theprofitabilityoftheflightsoperatedthere.

ThedownwardcycleisexacerbatedbecausetheeffortsofLAWA(LosAngelesWorldAirports)to

reduceONToperatingcoststobringdownitshighanduncompetitiveairportcostshavenot

succeeded, as ONTs decline in passengers has far exceeded LAWAs ability to reduce ONTs


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ExecutiveSummary ES2

operating costs. Current projections are that ONTs Cost per Enplaned Passenger, the most

importantmeasureofairportcharges,willincreasesignificantlyoverthenextseveralyears.

Thecurrent

self

reinforcing

downward

cycle

of

passenger

loss

and

flight

loss

appears

likely

to

continue unless there is a game changing event to break the cycle. Based on tracking the

performanceofall42MediumHubairportsbeginningin1990,ONTsprospectsofmakingafull

recovery from a serious decline in passengers are daunting, and the longer ONT waits until

gamechangingsolutionsareimplementing,theweakerONTspositionwillbeatthattime.

It seems increasingly likely that to turn around ONTs downward spiral, substantial outside

resourceswill be required in themillionsofdollars. Those funds will be needed tosharply

reduceONT charges and to provide aggressivemarketingsupport.Without such intervention,

ONT is likely to continue to strugglejust to maintain its current uncompetitive airport charge

structureand

minimal

airport

marketing

program.


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1

CHAPTER1

INTRODUCTION

1.1 BACKGROUNDIn September 2010, the City of Ontario (Ontario) issued a white paper entitled OntarioInternationalAirportARecoveryPlan(the2010Report),whichexaminedboththehistoricalperformanceofOntarioInternationalAirport(ONT)anditsfutureprospects.

The2010Report foundthatundertheownershipandcontrolof theCityofLosAngeles (Los

Angeles)and itsDepartmentofAirports,alsoknownasLosAngelesWorldAirports(LAWA),

ONT

has

suffered

a

substantial

decline

in

flights

and

passengers

since

2007,

and

that

ONTs

decline has been much more severe than experienced by other airports in the Los Angeles

region. ThereportidentifiedtwoimportantcontributorstoONTsdecline:(1)ONTsextremely

high operating costs under LAWA management which result in high airport charges, and

(2)LAWAsdecisiontofocusprimarilyonLAXattheexpenseofONT intermsofmanagement,

financial,andmarketingresources.

ThisreportprovidesanupdateofONTsperformancesince2010andanassessmentofitsfuture

prospectsbasedoncurrenttrends.


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2

CHAPTER2

AIRSERVICE

CHANGES

SINCE

2010

2.1 HISTORICALPASSENGERTRAFFICLEVELS

Formuchof the past threedecades,ONT experienced growingpassenger demand,with the

annual number of passengersmore than tripling from approximately twomillion in 1980 to

7.2million in2007. Since then,however, thenumberofpassengersusingONThasdeclined

sharply. From 2007 to 2012, the annualnumber ofpassengers atONTdeclined byover 40

percent, from 7.2 million to 4.3 million. ONTs decline is significantly greater than that

experienced at similar sized U.S. airports, the average U.S. airport, or other airports in the

LosAngeles

area.

Figure2.1ONTAnnualPassengers,19802012

Source: LAWA

Sincethereleaseofthepriorreport,ONTexperiencedoneyearwhenitsufferedonlyamodest

declineinpassengersof1.6%(2010). In2011,however,ONTsufferedapassengerlossof5.3%

andin2012,aslightlygreaterlossof5.4%. Theselossesoccurredagainstabackdropofmodest

overallU.S.passengergrowth.


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3

Figure2.2ChangeinAnnualPassengersONT,20102012

Year

Passengers

Changefrom

Prior

Year

2010 4,808,241 1.6%

2011 4,551,875 5.3%

2012 4,305,426 5.4%

Source: LAWA

2.2 OUTLOOKFOR2013Theoutlookfor2013issubstantiallyworse. Sofar,fromJanuaryJune2013,thenumberofONT

passengershasdeclinedbyover8percentincomparisonwiththesamemonthsin2012. ONTs

sharppassenger

decline

in

May

2013

of

9.3%

was

the

worst

since

October

2011.

At

the

same

time,LAXpassengers increasedby4.1% fromJanuaryJune2013 incomparisonwiththesame

monthsin2012.

Figure2.3ONTPassengers,JanuaryJune2012/13

2012 2013 Change

January 332,936 302,342 9.2%

February 320,012 293,536 8.3%

March 369,726 349,595 5.4%

April

362,708

332,143

8.4%

May 373,975 339,082 9.3%

June 373,652 341,967 8.5%

2,133,009 1,958,665 8.2%

Source: LAWA1

Fortheremainderof2013,airlineschedulesforONTshowcontinuingreductionsinthenumber

ofscheduledairlineseatsintherangeof3.1to10.0percenteachmonth,withfouroftheseven

airlines serving ONT offering fewer seats nearly every month in comparison to the previous

year.2

1IndividualmonthlyfigurestakenfromLAWAstatistics.JanuaryJunetotalsaresumof individualmonthlystatistics.

LAWAsreportedJanuaryJunepassengertotaldiffersslightlyfromitsreportedmonthlyresults.

2Airline seatsare acommon measureof the amount of airservice because they take into account the size of the

aircraftinadditiontothenumberofdeparturesattheairport.


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4

Figure2.4PercentChangeinMonthlyScheduledSeatsatONTbyAirline

ComparedtoSameMonthPriorYear,JulyDecember2013

CARRIER

JUL

AUG

SEP

OCT

NOV

DEC

Aeromexico 25.5 15.8 4.1 78.4 94.7 23.0

Alaska 6.1 0.6 0.2 6.1 9.1 17.4

American 2.9 3.2 2.0 2.9 1.2 0.4

Delta 50.6 44.5 25.5 28.5 36.8 36.5

Southwest 3.0 5.3 4.2 5.2 4.0 2.0

United 40.5 38.9 29.1 35.2 22.8 17.5

USAirways 0.9 5.2 1.1 10.0 0.8 3.6

ONTTotal 9.8 10.4 7.2 7.4 4.8 3.1

Source: Planestats.com,basedonInnovataFlightSchedulesasofJuly29,2013

ThemonthbymonthchangeinscheduledseatsatONTforthefullyear2013isshowninFigure

2.5below.

Figure2.5PercentchangeinMonthlyScheduledSeatsatONTin2013

Source: Planestats.com,basedonInnovataFlightSchedulesasofJuly29,2013


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5

Asaresult,basedonactualONTpassengerstatistics through June2013andpublishedairline

schedulesfortheremainderof2013,totalONTpassengersfor2013areprojectedtodeclineby

nearly 8percent, the largest annualdecline since 2009. In termsof totalpassengers,ONTs

projectedpassenger

level

in

2013

of

3.98

million

will

be

the

lowest

level

since

1985,

more

than

a

quartercenturyago.

Withinthepasttendays,SouthwestAirlineshaspublisheditsflightschedulethroughMarch7,

2014,therebyprovidingafirmlookatitscapacityforthefirsttwomonthsof2014.Thisrecent

scheduleshowsSouthwestreducingscheduledseatsatONTby9.2percentinJanuary2014and

11.0 percent in February 2014. As by far the busiest airline atONT,with over 60% of the

airports scheduled seats, these reductionsmean that absent unexpected flight increases by

otherairlines,ONTwillbegin2014withsubstantialfurtherseatreductions.

2.3ONT

COMPARED

WITH

OTHER

AIRPORTS

The chartbelow shows thenumberofpassengersatLosAngelesareaairports,with changes

from200013shownbasedonthe latestpassengerprojections for2013. As isclear fromthe

chart,ONTsperformance ismuchworse than anyother LosAngeles area airport,withONT

havingsufferedmorethantwicethepassengerdeclineofanyotherairport.

Figure2.6AnnualPassengersandChangeatLosAngelesAreaAirports,20002013(Projected)

Source: LAWAandOliverWymananalysis


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6

For theperiod from the lastreport in2010,ONTs relativeperformancehasnot improved,as

ONT continues to lose passengers even as most other airports have started to regain

passengers. OnlyBurbankshowsadeclineinpassengersduringthisperiod.

Figure2.7ChangeinAnnualPassengersatLosAngelesAreaAirports

2010/12and2010/13(Projected)

2010/2012 2010/2013

Ontario 10.5% 17.3%

Burbank 9.1% 14.6%

JohnWayne 2.2% 5.1%

LongBeach 7.6% 0.6%

PalmSprings 15.5% 16.5%

LAX

7.8%

12.5%


Therehasbeenvery littlegrowthatU.S.airportssince2000,andtheaverageMediumHub3

theairportcategoryinwhichONTfitsbasedonitsnumberofpassengershaslostpassengers

duringthisperiod. ONTsexperience,however, isextremecomparedwithotherMediumHub

airports,andotherairportsintheLosAngelesarea.

AcomparisonofONTsperformance incomparisonwithotherMediumHubs,otherairports in

the

Los

Angeles

area,

LAX,

and

the

U.S.

average

is

provided

in

Figure

2.8

below.

The

chartcomparesthechange inpassengersatdifferentairportsonayearbyyearbasisusing2000as

thebaseyear. Asshown,ONTisanoutlierusinganymeasure.

3AsdefinedbytheFAA,MediumHubshaveatleast0.25%,butlessthan1%shareofU.S.annualpassengerboardings.

Inpractice,thismeansairportswithmorethan3.5millionandlessthan14millionannualpassengers.


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7

Figure2.8ChangeinAnnualPassengers,20002012,Indexedto2000=1.0


Asexplainedinthenextchapter,thereisnodoubtthatrecentgainsindomesticpassengersat

LAXhavecomeattheexpenseofONT. Interestingly,LAXsownperformanceintheareawhere

itshouldexcelinternationalairservicelagsitscompetitors. AsshowninAppendix1,LAXis

the onlyWest Coast gateway to have fewer international passengers in 2012 than in 2007.

Duringthat

period,

LAX

international

passengers

declined

slightly

(by

0.4%),

while

international

passengersincreasedby6.1%atSanFranciscoand18.9%atSeattle. AteightofthetoptenU.S.

internationalgateways, internationalpassengers increased from2007 to2012. OnlyLAXand

ChicagoOHaredidnotgainduringthisperiod. Forthelongerperiodfrom2000to2012,LAXis

the only major U.S. international gateway that did not gain international passengers. One

conclusionfromthesestatisticsisthatLAXsgainindomesticpassengersattheexpenseofONT

may be masking LAXs overall underperformance in terms of traffic growth and regional

economicimpact.


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8

CHAPTER3

AIRSERVICELOOKINGFORWARD

3.1 IFCURRENTTRENDSCONTINUESince 2007, the number of ONT passengers has declined at a compound annual rate of

9.5percentperyear. SettingasideONTsdoubledigitpassengerdeclinesin2008and2009on

thetheorythattheymayhavebeendrivenlargelybythe2008fuelpricesurgeandrecession

ONT passengers still declined at the rate of 6.1 percent per year between 2010 and 2013

(projected). It is unknown at what rate ONT will decline over the next several years. Will it

continue to decline at the 7.6% rate of decline experienced in 2013, the lesser rate of 6.1%

experiencedsince2010,oracceleratetoagreaterdeclineof10%peryearormore?

Figure3.1ONTPassengersandRateofDecline

ONTPassengers Change

2007 7,207,150

2008 6,232,761 13.5%

2009 4,886,695 21.6%

2010 4,808,241 1.6%

2011 4,551,875 5.3%

2012

4,305,426

5.4%

2013 3,977,876 7.6%


As shown below, any of these three rates of decline (6.1%, 7.6%, or 10%) would lead to

substantialfurtherpassengerlossesfortheairport,withtotalpassengersfallingbelowthetwo

millionmark(ONTs1980level)between2020and2024. Inturn,theselosseswouldleadtothe

lossof thousandsofjobsand additional tensof millionsofdollars in economic activity in the

Ontarioarea.4 Adeclineinpassengeractivityfromthe2012leveltothetwomillionpassenger

mark

is

estimated

to

result

in

a

further

loss

of

8,000

jobs

and

$430

million

in

annual

economic

lossbeyondthe10,100jobsand$540million inannualeconomic lossalreadysufferedbythe

Ontarioareasince2007.

4PrioranalysisfoundthatthelossofairserviceatONThasresultedinthelossof10,100jobsbetween2007and2012,

andanannualeconomiclossof$540millionin2012versus2007.


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9

Figure3.2ActualandProjectedONTPassengersatSelectedRatesofDecline

Source: LAWApassengerstatisticsandOliverWymananalysis

Ontheotherhand,ifsomethinghappenstochangethedirectionofONTsdownwardcycle,itis

also possible thatONT air servicewill reach a plateau and begin to grow again, and that is

certainly thedesireof theCityofOntario. However,asshown in theexamplesbelow,ONTs

currentpathisonaselfreinforcingdownwardcycle,inwhichfewerflightsinindividualmarkets

make ONTs air service less attractive to local travelers, especially business travelers, who

insteadflyto/fromLAXand,toalesserextent,otherareaairports. Asaresult,theairlinesdrop

additionalflightsatONT,whichfurtherreducestheattractivenessofairserviceatONTandthe

profitabilityoftheflightsoperatedthere.


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10

ThedownwardcycleinwhichONTfindsitselfisillustratedinFigure3.3below.

Figure3.3IllustrationofDownwardFlightLossCycleatONT

Source: OliverWymananalysis

ThefollowingtableprovidesexamplesofdestinationsservedandformerlyservedfromONT

where the reduction in flights since 2007 has resulted in a flight schedule that ismuch less

attractivetoabusinesstraveler. Thenumberofdaily flightsrequiredtoprovideanattractive

scheduleforthebusinesstravelerdepends in largepartonwhetherthedestination isreached

viaashorthauloralonghaulflight. Mostshorthaulmarketsrequireabareminimumofthree

or fourdaily flights toadequatelyservethebusinesstraveler,whereas longhaul international

marketsmay require only a single daily flight tomeet the business travelers needs. When

substantiallymorefrequentserviceisofferedatanothernearbyairport,eventhreeorfourdaily

flights in shorthaulmarkets may not be considered sufficiently convenient by the business

traveler.


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11

As illustrated below, a number of destinations served from ONT have lost one or more daily

flights over the past several years and are now served at lessthandesirable levels from the

perspectiveofthebusinesstraveler.

Figure3.4DailyDeparturesfromONTtoSelectedDestinations,Sept.2007Sept.2013

Departures/DayinSeptemberofeachYear

Destination Airline 2007 2008 2009 2010 2011 2012 2013

Dallas/FortWorth American 4.9 4.9 4.9 4.8 3.9 3.8 3.8

Portland Alaska 4.9 2.9 2.7 2.9 2.9 3.0 2.6

Seattle/Tacoma Alaska 4.0 3.7 2.8 2.8 2.9 2.8 2.9

NewYorkKennedy JetBlue 1.0 0.1 0.0 0.0 0.0 0.0 0.0

Atlanta Delta 2.5 1.9 1.0 1.0 1.0 0.1 0.0

SaltLakeCity Delta 5.5 3.7 3.8 3.8 3.8 3.7 3.6

Denver United 4.7 3.6 3.7 3.8 2.7 2.0 1.9

Houston United 3.0 3.0 3.0 2.0 2.0 2.0 1.7

Source: PublishedairlineschedulesandOliverWymananalysis

While theairlines serving ONT have0 to 3.8 daily flights to theabovedestinations, thesame

airlinesservingLAXhave4.9to17.0dailyflightstothesamedestinations. SeeFigure3.5below.

Inotherwords,atLAX,thetraveler,especiallythebusinesstraveler,continuestohavethetravel

flexibilityneededforbusiness. Thissituation,whereoneairporthasamuchlessattractiveflight

scheduleforbusinesstravelers,leadstothedownwardcycledescribedpreviously.

Figure3.5DailyDeparturesfromONTandLAXtoSelectedDestination,Sept.2007andSept.2013

Departures/DayinSeptember ONT LAX

Destination Airline 2007 2013 Change 2007 2013 Change

Dallas/FortWorth American 4.9 3.8 21% 16.9 17.0 1%

Portland Alaska 4.9 2.6 47% 6.0 5.0 16%

Seattle/Tacoma Alaska 4.0 2.9 28% 13.0 11.3 13%

NewYorkKennedy JetBlue 1.0 0.0 100% 0.0 4.9 n/a

Atlanta Delta 2.5 0.0 100% 10.9 9.7 11%

SaltLakeCity Delta 5.5 3.6 34% 9.2 6.7 28%

Denver

United

4.7

1.9

61%

11.2

7.5

33%

Houston United 3.0 1.7 42% 10.6 11.5 8%

Source: PublishedairlineschedulesandOliverWymananalysis

Unless something happens to change the direction of this downward cycle, ONT is likely to

continuetolosepassengerstoLAXandotherareaairports,andinturntoloseadditionalflights,

ultimatelyleadingtothelossofallnonstopservicetomoredestinations.


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12

CHAPTER4

AIRPORTCOSTS

4.1 THEIMPORTANCEOFAIRPORTCOSTSInmajormetropolitanareaswithmultipleairports,theeconomicsoftheairlinebusinessfavor

largescaleoperationsattheprimaryairport, inthiscaseLAX. Successfulsecondaryairportsin

metropolitanareaswithmultipleairportsalmostinvariablyshareseveralcharacteristics:

1. Substantiallylowercoststhantheprimaryairport. Especiallywhenprimaryairportsarenot

operating

at

full

capacity,

it

is

important

that

secondary

airports

maintain

their

cost

advantage;

2. Costsinlinewithorlowerthancompetingsecondaryairports;and3. Aggressive marketing campaigns for air service that recognize the secondary airport is

competingwiththeprimaryairportandotherairports intheregionforpassengersand

flights.

Themostcommonlyusedmeasureofairportchargespaidbyairlines isCostperEnplanement

(CPE), which is calculated by dividing the rents, landing fees, and other charges paid by the

airlinesserving

the

airport

by

the

number

of

departing

passengers

or

enplanements.

Among

Medium Hub airports, ONTs CPE is the highest.5 Airlines report that ONTs high CPE is a

significant impediment to initiating, maintaining, or expanding air service at ONT. While the

airlinesincursubstantiallygreaterairportchargesatONT,theycannotrealizehigherairfaresat

ONT than at competing airports such as Burbank, John Wayne, and Long Beach. As a result,

theirONTflightprofitabilitysuffers. Althoughadifferenceinairportcostsofseveraldollarsper

enplanement may not appear great, it is important in the context of overall U.S. airline

profitability. In 2011, U.S. passenger airlines earned an average profit of only $0.76 per

passenger;in2012,thefigurewasevenlower,at$0.37perpassenger.6

The

2010

Report

reviewed

how

LAWA

had

burdened

ONT

with

the

highest

costs

in

the

region

andamongthehighestinthecountry. Thischapterreviewschangessincethen.

5Seefollowingdiscussioninsection4.3andcitationsbyconsultantsretainedbyLosAngeles.

6TowardGlobalCompetitiveness,EconomicEmpowerment,andSustainedProfitability,AirlinesforAmerica,July13,

2013,p.20.


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13

4.2 ONTOPERATINGCOSTSONTs high CPE is largely the result of high operating costs which are distributed among a

declining number of passengers. Despite LAWA reports of substantial reductions in ONT

staffing, as well as anecdotal reports of cuts in maintenance and other activities, LAWAs

operatingbudget for ONThas declinedonly modestly in recentyears. More importantly, the

modest rate of decline in ONTs operating costs is much less than the rate of decline in the

number of ONT passengers. As a result, ONT operating costs per enplanement continue to

increase.

ONTs operating expenses per enplanement were $26.37 in FY2011 (the fiscal year ending in

June2011),asreportedbyLAWAsconsultantLeighFisher.7 Thatfigure isapproximately60%

higher$10moreperenplanementthanatcompetingairports. ONTshighoperatingcosts

consist

largely

of

high

personnel

costs

and

an

administrative

fee

paid

to

LAWA

calculated

at

15percentofoperatingcosts.

Figure4.1OperatingCostsperEnplanementforLosAngelesAreaAirports,FY2011

Airport

Operating

Costs

Ontario $26.37

PalmSprings $19.51

LongBeach $18.37

OrangeCounty $16.45

Burbank $15.43

SanDiego $13.63

Source:OliverWymananalysisofFY2011operatingcosts,basedonfinancialinformationreportedtotheFAAbyeach

airportonForm127

7EstimateoftheFairValueofOntarioInternationalAirport,preparedforLosAngelesWorldAirports,byLeighFisher,

September12,2012,p.39.


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14

LAWAs operating expenses for ONT for fiscal years 2011, 2012, 2013, and 2014 are listed in

Figure4.2below. AllfiguresaretakenfromLAWAbudgetinformation.8Figure

4.2

LAWA

Reported

Operating

Expenses

for

ONT

Expenditures

FY2011

Expenditures

FY2012

Estimated

FY2013

Appropriated

BudgetFY2014

Salaries&Benefits $30,027,000 $29,612,000 $24,440,000 $26,050,000

Materials,Supplies&Services $24,275,000 $23,735,000 $23,076,000 $23,579,000

AdministrativeCharge $8,129,000 $7,868,000 $7,127,000 $7,444,000

TotalOperatingExpenses $62,431,000 $61,215,000 $54,643,000 $57,073,000

Source: LAWAbudgetinformationreleasedJune2013andJune2012s

Because

ONTs

annual

expense

budget

consists

of

both

fixed

costs,

such

as

$7

million

in

annual

debtservice,andvariablecosts,suchastheoperatingexpensesaslistedinFigure4.2,ONTmust

reduce itsoperating expensesat a greater rate than itspassengerdeclinejust to maintain itsCPEatthecurrenthigh level. Tomakeanyrealprogress inreducing itscurrenthighCPE,ONTmustreduceitsoperatingexpensesataratesubstantiallyinexcessofthedeclineinpassengers

andthatisnotoccurring.

As shown in Figure 4.3 below, over the threeyear period from FY2011 to FY2014, ONTs

operatingcostsareprojectedtodeclinebyatotalof8.6%,whilethenumberofONTsenplaning

passengersareprojectedtodecreaseby18.9%,ormorethandoubletherateofoperatingcost

decline.9

As

aresult,

Ontarios

operating

costs

perenplanementareexpectedtoincreaseinthe

range of 13% and to reach $30 in FY2014. (See Figure 4.1 for comparison with other area

airports.) As explained above, ONT also incurs fixed costs which do not decline along with

operatingcostdeclines,and thereforetherateofdeclineofONTs totalexpenses,taking into

account fixed costs, is less than the projected 8.6% operating cost decline. The result is that

ONTsCPEisprojectedtoincreasesignificantlymorethan13%.

8FY2013isestimatedandsubjecttorevision;FY2014isthebudgetedfigure.

9ProjectedONTpassengersforFY2014,basedontheprojectedpassengerdeclineofapproximately8percentforJuly

December2013overthesameperiodtheprioryear,andaprojecteddeclineofapproximately7percentforJanuary

June2014overthesameperiodin2013.


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15

Figure4.3ComparisonofONTOperatingExpenseChangeandPassengerChangeFY11/FY2014

Expenditures

FY2011

Appropriated

Budget

FY2014

Change

OperatingExpense $62,431,000 $57,073,000 8.6%

Passengers(M) 4.75 3.85 18.9%

IncreaseinOperatingExpense

perPassenger $14,617,053 $16,642,338 12.8%

Source:OliverWymananalysis

4.3 HISTORICALONTCPE

LAWAsconsultant

Leigh

Fisher

reported

that

ONTs

CPE

for

FY2011

was

$12.28.

10

Because

the

2010 Report estimated ONTs CPE for the prior year, FY2010, to be in the range of $14.50,11

LAWAs reported reduction of more than $2 in ONTs CPE for FY2011 would appear to be

progress. For FY2013, however, Los Angeles consultants noted that ONTs costs had again

increasedtotheextentthattheAirportsCPEforthefiscalyear(FY)2013budgetis$13.07,

thehighestofanyairportintheMediumHubcategory.12

Unfortunately,muchoftheapparentshorttermreductioninONTsCPEhasbeentheresultof

LAWAsactiontodrawdownONTsoperatingreservefundoveratwoyearperiod. Thattactic

willnotbeanoptioninthefutureduetotheminimumfundingrequirementforthefund. And

despite

the

shortterm

reduction

in

ONTs

CPE,

it

continues

to

be

much

higher

than

other

secondary airports in the Los Angeles area, as well as San Diego. Figure 4.4 lists ONTs CPE

basedonthemostrecentfinancialdatafiledwiththeFAA.

10EstimateoftheFairValueofOntarioInternationalAirport,preparedforLosAngelesWorldAirports,byLeighFisher,

September 12,2012, p.33.Different figureshave been reported elsewhere. For example,FitchRatingsreview of

ONT,datedMarch11,2013,states:CPEisreportedtobe$11.12in2012,aslightdeclinefrom$11.76in2011.

11LAWAconsultantLeighFisherprovidedanevenhigherONTCPEestimateof$16for2010initsreport,Alternatives

forManagementandOperationLA/OntarioInternationalAirport,August2,2010,p.9.

12ReporttoCityofLosAngelesRegardingOntarioInternationalAirportBenchmarkingofCurrentAirportOperations,

WilliamBlair,AxisConsulting,andAcaciaFinancialGroup,September21,2012,p.1.


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16

Figure4.4CPEsforLosAngelesAreaAirports,FY2011

Airport CPE

Ontario $12.28

LosAngles $11.29

OrangeCounty $9.65

SanDiego $7.18

LongBeach $6.85

PalmSprings $3.50

Burbank $2.01

Source: OliverWymananalysisofFY2011CPEs,basedonfinancialinformationreportedtotheFAAbyeachairporton

Form127.

4.4 FUTUREONTCPEANDIMPACTONAIRSERVICEBased on a combinationof factors, including (1) the continuingdecline in passengersat ONT,

(2)the associated decline in nonairline revenues at ONT, and (3) the limited decline in ONT

operatingexpenses,ONTsCPE for thecurrent fiscalyear isestimated to bematerially higher

thanreportedforFY2011,andthatfigureisexpectedtocontinuetoincrease.

Inarecentratingsreport,FitchRatingsmadethefollowingobservationsaboutONT:

Fitch'sbasecasescenarioassumescontinuedtrafficdeclinesin2013and2014to

2million

enplanements

along

with

slight

expense

growth.

In

order

to

maintain

debtservicecoverageof1.5xundersuchscenario,CPE in2013will likelyreturn

to 2010 level of $13 and increase to $15 by 2018. Absent any further cost

reductions,CPEisexpectedtoremainelevated.

Given the prospectof stagnant traffic growth at the airport,Fitchbelieves that

furthercostreductioniscriticaltoavoidanincreaseinCPEwhichcouldresultin

serviceretrenchment.13 [Emphasisadded.]

Declining passenger numbers in combination with airport operating costs that are either not

decliningor

doing

so

very

slowly

leads

inevitably

to

increasing

airport

costs

per

enplanement,

whicharepassedontotheairlines,therebymakingairservicetoONTlesseconomic. ForONT,

which isalreadystrugglingtodealwithadownwardselfreinforcingcycleof fewerpassengers

and fewer flights, the added impact of steadily increasing airport costs is the worst possible

scenario.

13FitchRatingsreportforOntarioInternationalAirport,March11,2013.


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17

The Fitch Ratings estimate of increasing CPE referenced above is based on an assumption of

stagnanttrafficgrowthatONTandthatassumption isalreadyprovingtoooptimistic. Asa

result,ONTs

CPE

is

likely

to

be

higher

than

Fitch

predicts.

Our

analysis

suggests

that

aCPE

of

$16$18 or higher is likely to result over the next several years if LAWA is unable make

aggressivecostreductions.

LosAngelesownconsultants,inSeptember2012,drewsimilarconclusions,asfollows:

WhileLAWAhasreducedthenumberofemployeesatLA/ONTand isexploring

otheroperationalefficiencies, insufficient cost reductions or increased revenues

havebeenachievedthusfartobringitscostsmoreinlinewithitspeers,asofthe

mostrecentlyavailabledata.14

[T]he downward spiral of lower activity and higher CPE has continued since

reaching a peak in 2007. Despite the public scrutiny and the desire among all

partiesto improvetheairportsmanagementandoperations,themeasuresthat

have been taken, chiefly in the area of budget management, have not been

enough to reduce the CPE to the levels that would help stimulate increased air

service. Enplaned Passengers, and the related nonaeronautical (nonairline)

revenues from concessions, parking and rental cars, have continued to decline.

Indeed,theairportsoperationsandfinancialchallengesaresoseverethatthe

Acaciateamisofthebeliefthatmoresignificantandgamechangingsolutions

mustbe

implemented

on

an

expedited

basis

to

turn

around

the

downward

spiral.15[Emphasisadded.]

AlthoughLosAngelesconsultantshavenotidentifiedthegamechangingsolutionsrequiredto

turnaroundONTsdownwardspiral, it isclear fromtheirreport,theFitchRatingsreport,and

otheranalysesofONTthatanysolutionwillrequireasharpreductioninairportcharges.

Giventhefollowingsituation:

ONTpassengerdeclinesfaroutpacingONTairportoperatingcostreductions ONTCPEalreadywellmorethandoublethe$5CPEwhichtheCityofOntariohassetas

areasonablegoalforONT;

it seems increasingly likely that to turn around ONTs downward spiral, substantial outside

resourceswill be required in themillionsofdollars. Those funds will be needed tosharply

14 ReporttoCityofLosAngelesRegardingOntarioInternationalAirportBenchmarkingofCurrentAirportOperations,

WilliamBlair,AxisConsulting,andAcaciaFinancialGroup,September21,2012,p.45.

15Ibid,p.62


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18

reduceONT charges and to provide aggressive marketingsupport.Without such intervention,

ONT is likely to continue to strugglejust to maintain its current uncompetitive airport charge

structureandminimalairportmarketingprogram.

Goingbackto1990,onlythreemediumhubairportshavesufferedagreaterdeclinefromtheir

peakpassengerlevelsthanONTCincinnati,Reno,andMemphis,eachofwhichwasanairline

hubthat lost itsconnectinghubstatus.16 Basedontrackingtheperformanceofall42Medium

Hubairportsbeginningin1990,ONTsprospectsofmakingafullrecoveryfromaseriousdecline

in passengers are daunting, and the longer ONT waits until game changing solutions are

implemented,theweakerONTspositionwillbeatthattime.

RAH8/5/2013

16

SeeAppendix1.


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Appendix A1

APPENDIX1PASSENGERGROWTHATMAJORU.S.GATEWAYS

Airport 2000 2007 2012

2000

2012

2007

2012

2000

2012

2007

2012

CAGR CAGR Change Change

International

passengers

ATL 6,113,827 8,911,992 9,563,976 3.8% 1.4% 56.4% 7.3%

DFW 4,812,559 5,037,246 5,816,037 1.6% 2.9% 20.9% 15.5%

EWR 8,793,837 10,567,829 11,154,603 2.0% 1.1% 26.8% 5.6%

IAD 3,895,757 5,822,562 6,491,697 4.3% 2.2% 66.6% 11.5%

IAH 5,356,852 7,475,607 8,555,236 4.0% 2.7% 59.7% 14.4%

JFK 18,445,053 21,460,061 24,785,645 2.5% 2.9% 34.4% 15.5%

LAX 17,182,987 16,868,875 16,797,676 0.2% 0.1% 2.2% 0.4%

MIA 16,629,125 15,585,925 19,353,011 1.3% 4.4% 16.4% 24.2%

ORD

10,185,108

11,539,445

10,382,884

0.2%2.1%

1.9%

10.0%

SEA 2,202,421 2,547,530 3,029,143 2.7% 3.5% 37.5% 18.9%

SFO 7,897,910 8,600,911 9,121,606 1.2% 1.2% 15.5% 6.1%

Longhaul

international

passengers*

ATL 4,699,537 7,315,037 7,731,710 4.2% 1.1% 64.5% 5.7%

DFW 2,023,672 2,159,738 3,019,386 3.4% 6.9% 49.2% 39.8%

EWR 7,516,844 9,169,152 9,176,132 1.7% 0.0% 22.1% 0.1%

IAD 3,765,334 5,199,323 5,916,526 3.8% 2.6% 57.1% 13.8%

IAH 2,670,053 3,874,900 4,829,002 5.1% 4.5% 80.9% 24.6%

JFK 17,530,893 19,971,919 23,411,206 2.4% 3.2% 33.5% 17.2%

LAX 12,504,030 11,949,410 12,518,881 0.0% 0.9% 0.1% 4.8%

MIA

14,732,894

13,854,959

17,380,961

1.4%

4.6%

18.0%

25.4%

ORD 6,973,989 7,936,160 7,338,074 0.4% 1.6% 5.2% 7.5%

SEA 1,333,758 1,383,637 1,930,073 3.1% 6.9% 44.7% 39.5%

SFO 6,053,469 6,623,500 6,988,249 1.2% 1.1% 15.4% 5.5%

Domestic

passengers

ATL 73,500,579 78,145,692 82,260,667 0.9% 1.0% 11.9% 5.3%

DFW 52,634,868 52,713,039 50,880,530 0.3% 0.7% 3.3% 3.5%

EWR 25,657,505 25,886,923 22,989,959 0.9% 2.3% 10.4% 11.2%

IAD 11,882,864 18,169,457 15,321,291 2.1% 3.4% 28.9% 15.7%

IAH 27,909,891 34,177,450 29,826,853 0.6% 2.7% 6.9% 12.7%

JFK 14,801,616 25,964,831 24,571,475 4.3% 1.1% 66.0% 5.4%

LAX 48,190,573 44,857,730 47,194,800 0.2% 1.0% 2.1% 5.2%

MIA 16,836,807 17,187,726 18,699,080 0.9% 1.7% 11.1% 8.8%

ORD 57,201,379 62,305,686 54,612,569 0.4% 2.6% 4.5% 12.3%

SEA 25,918,161 28,852,946 29,332,308 1.0% 0.3% 13.2% 1.7%

SFO 30,664,460 26,637,419 33,859,640 0.8% 4.9% 10.4% 27.1%

CAGR Compoundannualgrowthrate

*LonghaulinternationalexcludesMexicoandCanada;CAGRisCompoundAnnualGrowthRate

Source:DOTT100viaplanestats.com


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APPENDIX2MEDIUMHUBAIRPORTSPEAKYEAR

AND2012ENPLANEMENTS

PeakYear

Peak

Enplanements

2012

Code City State Enplanements Year 1990 vs.Peak

CVG Cincinnati Ohio 11,244,332 2005 3,900,776 74.1%

RNO Reno Nevada 3,175,340 1997 1,337,343 47.1%

MEM Memphis Tennessee 5,593,443 2005 3,885,399 40.1%

ONT Ontario California 3,465,307 2007 2,633,457 38.5%

SJC SanJose California 6,141,163 2000 3,163,859 33.8%

BUR Burbank California 2,947,205 2007 1,697,516 31.4%

OAK Oakland California 7,121,243 2007 2,639,089 31.3%

DAY Dayton Ohio 1,844,671 1990 1,844,671 30.4%

CLE Cleveland Ohio 6,005,226 2000 3,814,670 28.5%

BDL Hartford Connecticut 3,611,395 2005 2,310,882 26.9%

ELP

ElPaso

Texas

1,867,729

1994

1,670,988

25.1%

MKE Milwaukee Wisconsin 4,719,681 2010 1,905,488 21.7%

TUS Tucson Arizona 2,155,049 2007 1,313,059 20.8%

SJU SanJuan PuertoRico 5,254,614 2005 3,769,006 20.5%

PBI WestPalmBeach Florida 3,493,478 2005 2,610,618 20.4%

ABQ Albuquerque NewMexico 3,279,012 1996 2,382,622 19.9%

SYR Syracuse NewYork 1,189,420 2005 1,164,620 19.1%

TUL Tulsa Oklahoma 1,631,645 2000 1,482,145 19.1%

CMH Columbus Ohio 3,815,939 2007 1,683,243 19.1%

SMF Sacramento California 5,377,131 2007 1,736,506 19.1%

JAX Jacksonville Florida 3,126,475 2007 1,265,667 17.8%

ROC Rochester NewYork 1,445,814 2005 1,152,404 17.1%

MCI KansasCity Missouri 5,821,593 2007 3,349,625 16.7%

ORF

Norfolk

Virginia

1,950,247

2005

1,254,386

15.6%IND Indianapolis Indiana 4,185,976 2005 2,544,392 15.4%

MSY NewOrleans Louisiana 4,835,445 2000 3,392,108 11.6%

SNA OrangeCounty California 4,943,910 2007 2,198,935 11.4%

LIH Lihue Hawaii 1,435,897 2007 1,322,313 10.3%

RDU Raleigh/Durham N.Carolina 4,959,435 2007 4,357,851 9.8%

OGG Maui Hawaii 3,147,244 2007 2,161,170 9.1%

RSW FortMyers Florida 3,982,193 2007 1,704,459 9.0%

ANC Anchorage Alaska 2,367,192 2008 1,269,336 6.9%

BUF Buffalo NewYork 2,735,239 2008 1,620,201 5.8%

DAL Dallas Texas 4,016,958 2008 2,879,758 3.2%

PDX Portland Oregon 7,275,178 2007 3,041,872 1.9%

BNA

Nashville

Tennessee

4,876,156

2007

3,402,438

1.9%SAT SanAntonio Texas 3,999,411 2012 2,655,393 0.0%

AUS Austin Texas 4,595,898 2012 2,052,435 0.0%

FLL Ft.Lauderdale Florida 11,341,222 2012 3,851,736 0.0%

HOU Houston,Hobby Texas 5,031,731 2012 3,965,949 0.0%

MDW Chicago,Midway Illinois 9,418,687 2012 3,566,720 0.0%

OKC OklahomaCity Oklahoma 1,788,124 2012 1,517,999 0.0%

Source:DOTT100viaplanestats.com.Note:DOTpassengerstatisticsvaryslightlyfromstatisticscompiledby

airportsduetodifferentdatasources.

ont performance update august 5 2013

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