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August5,2013

OntarioInternationalAirport
AcceleratingPassengerDeclinesImperilFutureRecovery

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.Nowarrantyisgivenastotheaccuracyofsuchinformation.Public
informationandindustryandstatisticaldataarefromsourceswedeemtobereliable;however,wemake
no representation as to the accuracy or completeness of such information and have accepted the
informationwithoutfurtherverification.

Theopinionsexpressedinthisreportarevalidonlyforthepurposestatedhereinandasofthedateof
thisreport.Noobligationisassumedtorevisethisreporttoreflectchanges,eventsorconditions,which
occursubsequenttothedatehereof.

Thisreportdoesnotrepresentlegaladvice,financialadvisoryrecommendations,orinvestmentadvice.

Thefindingscontainedinthisreportmaycontainpredictionsbasedoncurrentdataandhistoricaltrends.
Anysuchpredictionsaresubjecttoinherentrisksanduncertainties.Inparticular,actualresultscouldbe
impactedbyfutureeventswhichcannotbepredictedorcontrolled,including,withoutlimitation,changes
inbusinessstrategies,thedevelopmentoffutureproductsandservices,changesinmarketandindustry
conditions,theoutcomeofcontingencies,changesinmanagement,changesinlaworregulations.Oliver
Wymanacceptsnoresponsibilityforactualresultsorfutureevents.

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

TABLEOFCONTENTS

Chapter

Page

EXECUTIVESUMMARY.......................................................................................................ES1
INTRODUCTION......................................................................................................................1
1.1
Background..............................................................................................................1

AIRSERVICECHANGESSINCE2010........................................................................................2
2.1
HistoricalPassengerTrafficLevels............................................................................2
2.2
Outlookfor2013.......................................................................................................3
2.3
ONTComparedwithOtherAirports.........................................................................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

TableofContents

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

EXECUTIVESUMMARY

In September 2010, the City of Ontario issued a white paper entitled Ontario International
AirportA Recovery Plan, which examined both the historical performance of Ontario
InternationalAirport(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
passengerlossof5.3%andin2012,aslightlygreaterlossof5.4%.Theselossesoccurredagainst
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
most other area airports have started to regain passengers. Only Burbank shows a decline in
passengersduringthisperiod.

Ifrecentratesofdeclinecontinue,theywillleadtosubstantialfurtherpassengerlossesforthe
airport, with total passengers falling below the two million mark (ONTs 1980 level) between
2020and2024.Inturn,theselosseswouldleadtothelossofthousandsofjobsandadditional
tensofmillionsofdollarsineconomicactivityintheOntarioarea.

ONTscurrentpathisonaselfreinforcingdownwardcycle,inwhichfewerflightsinindividual
markets make ONTs air service less attractive to local travelers, especially business travelers,
whoinsteadflyto/fromLAXand,toalesserextent,otherareaairports.Asaresult,theairlines
cutadditionalflightsatONT,whichfurtherreducestheattractivenessofairserviceatONTand
theprofitabilityoftheflightsoperatedthere.

ThedownwardcycleisexacerbatedbecausetheeffortsofLAWA(LosAngelesWorldAirports)to
reduceONToperatingcoststobringdownitshighanduncompetitiveairportcostshavenot
succeeded, as ONTs decline in passengers has far exceeded LAWAs ability to reduce ONTs

ExecutiveSummary

ES1

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

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

The current selfreinforcing 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
resources will be required in the millions of dollars. Those funds will be needed to sharply
reduce ONT charges and to provide aggressive marketing support. Without such intervention,
ONT is likely to continue to struggle just to maintain its current uncompetitive airport charge
structureandminimalairportmarketingprogram.

ExecutiveSummary

ES2

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

CHAPTER1

INTRODUCTION
1.1BACKGROUND
In September 2010, the City of Ontario (Ontario) issued a white paper entitled Ontario
InternationalAirportARecoveryPlan(the2010Report),whichexaminedboththehistorical
performanceofOntarioInternationalAirport(ONT)anditsfutureprospects.

The2010Reportfoundthatundertheownership and control oftheCityofLosAngeles (Los


Angeles)anditsDepartmentofAirports,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)LAWAsdecisiontofocusprimarilyonLAXattheexpenseofONTintermsofmanagement,
financial,andmarketingresources.

ThisreportprovidesanupdateofONTsperformancesince2010andanassessmentofitsfuture
prospectsbasedoncurrenttrends.

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

CHAPTER2

AIRSERVICECHANGESSINCE2010

2.1HISTORICALPASSENGERTRAFFICLEVELS
For much of the past three decades, ONT experienced growing passenger demand, with the
annual number of passengers more than tripling from approximately two million in 1980 to
7.2million in 2007. Since then, however, the number of passengers using ONT has declined
sharply. From 2007 to 2012, the annual number of passengers at ONT declined by over 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
LosAngelesarea.

Figure2.1ONTAnnualPassengers,19802012

Source:LAWA

Sincethereleaseofthepriorreport,ONTexperiencedoneyearwhenitsufferedonlyamodest
declineinpassengersof1.6%(2010).In2011,however,ONTsufferedapassengerlossof5.3%
andin2012,aslightlygreaterlossof5.4%.Theselossesoccurredagainstabackdropofmodest
overallU.S.passengergrowth.

OntarioInternationalAirportUpdate

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August2013

Figure2.2ChangeinAnnualPassengersONT,20102012

Changefrom
Year
Passengers
PriorYear
2010
4,808,241
1.6%
2011
4,551,875
5.3%
2012
4,305,426
5.4%

Source:LAWA

2.2OUTLOOKFOR2013
Theoutlookfor2013issubstantiallyworse.Sofar,fromJanuaryJune2013,thenumberofONT
passengershasdeclinedbyover8percentincomparisonwiththesamemonthsin2012.ONTs
sharppassengerdeclinein May2013 of9.3%was theworstsince October2011.Atthesame
time,LAXpassengersincreasedby4.1%fromJanuaryJune2013incomparisonwiththesame
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

IndividualmonthlyfigurestakenfromLAWAstatistics.JanuaryJunetotalsaresumofindividualmonthlystatistics.
LAWAsreportedJanuaryJunepassengertotaldiffersslightlyfromitsreportedmonthlyresults.

Airline seats are a common measure of the amount of air service because they take into account the size of the
aircraftinadditiontothenumberofdeparturesattheairport.

OntarioInternationalAirportUpdate

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August2013

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

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

As a result, based on actual ONT passenger statistics through June 2013 and published airline
schedulesfortheremainderof2013,totalONTpassengersfor2013areprojectedtodeclineby
nearly 8percent, the largest annual decline since 2009. In terms of total passengers, ONTs
projectedpassengerlevelin2013of3.98millionwillbethelowestlevelsince1985,morethana
quartercenturyago.

Withinthepasttendays,SouthwestAirlineshaspublisheditsflightschedulethroughMarch7,
2014,therebyprovidingafirmlookatitscapacityforthefirsttwomonthsof2014.Thisrecent
scheduleshowsSouthwestreducingscheduledseatsatONTby9.2percentinJanuary2014and
11.0 percent in February 2014. As by far the busiest airline at ONT, with over 60% of the
airports scheduled seats, these reductions mean that absent unexpected flight increases by
otherairlines,ONTwillbegin2014withsubstantialfurtherseatreductions.

2.3ONTCOMPAREDWITHOTHERAIRPORTS
The chart below shows the number of passengers at Los Angeles area airports, with changes
from200013shownbasedonthelatestpassengerprojectionsfor2013.Asisclearfromthe
chart, ONTs performance is much worse than any other Los Angeles area airport, with ONT
havingsufferedmorethantwicethepassengerdeclineofanyotherairport.

Figure2.6AnnualPassengersandChangeatLosAngelesAreaAirports,20002013(Projected)

Source:LAWAandOliverWymananalysis

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

For the period from the last report in 2010, ONTs relative performance has not improved, as
ONT continues to lose passengers even as most other airports have started to regain
passengers.OnlyBurbankshowsadeclineinpassengersduringthisperiod.

Figure2.7ChangeinAnnualPassengersatLosAngelesAreaAirports
2010/12and2010/13(Projected)

Ontario
Burbank
JohnWayne
LongBeach
PalmSprings
LAX

2010/2012
10.5%
9.1%
2.2%
7.6%
15.5%
7.8%

2010/2013
17.3%
14.6%
5.1%
0.6%
16.5%
12.5%

Source:LAWAandOliverWymananalysis

TherehasbeenverylittlegrowthatU.S.airportssince2000,andtheaverageMediumHub3
theairportcategoryinwhichONTfitsbasedonitsnumberofpassengershaslostpassengers
duringthisperiod.ONTsexperience,however,isextremecomparedwithotherMediumHub
airports,andotherairportsintheLosAngelesarea.

AcomparisonofONTsperformanceincomparisonwithotherMediumHubs,otherairportsin
the Los Angeles area, LAX, and the U.S. average is provided in Figure 2.8 below. The chart
comparesthechangeinpassengersatdifferentairportsonayearbyyearbasisusing2000as
thebaseyear.Asshown,ONTisanoutlierusinganymeasure.

AsdefinedbytheFAA,MediumHubshaveatleast0.25%,butlessthan1%shareofU.S.annualpassengerboardings.
Inpractice,thismeansairportswithmorethan3.5millionandlessthan14millionannualpassengers.

OntarioInternationalAirportUpdate

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August2013

Figure2.8ChangeinAnnualPassengers,20002012,Indexedto2000=1.0

Source:LAWAandOliverWymananalysis

Asexplainedinthenextchapter,thereisnodoubtthatrecentgainsindomesticpassengersat
LAXhavecomeattheexpenseofONT.Interestingly,LAXsownperformanceintheareawhere
itshouldexcelinternationalairservicelagsitscompetitors.AsshowninAppendix1,LAXis
the only West Coast gateway to have fewer international passengers in 2012 than in 2007.
Duringthatperiod,LAXinternationalpassengersdeclinedslightly(by0.4%),whileinternational
passengersincreasedby6.1%atSanFranciscoand18.9%atSeattle.AteightofthetoptenU.S.
international gateways, international passengers increased from 2007 to 2012. Only LAX and
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.

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

CHAPTER3

AIRSERVICELOOKINGFORWARD

3.1IFCURRENTTRENDSCONTINUE
Since 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
2007 7,207,150
2008 6,232,761
2009 4,886,695
2010 4,808,241
2011 4,551,875
2012 4,305,426
2013 3,977,876

Change
13.5%
21.6%
1.6%
5.3%
5.4%
7.6%

Source:LAWAandOliverWymananalysis

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
loss of thousands of jobs and additional tens of millions of dollars in economic activity in the
Ontarioarea.4Adeclineinpassengeractivityfromthe2012leveltothetwomillionpassenger
markisestimatedtoresultinafurtherlossof8,000jobsand$430millioninannualeconomic
lossbeyondthe10,100jobsand$540millioninannualeconomiclossalreadysufferedbythe
Ontarioareasince2007.

PrioranalysisfoundthatthelossofairserviceatONThasresultedinthelossof10,100jobsbetween2007and2012,
andanannualeconomiclossof$540millionin2012versus2007.

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

Figure3.2ActualandProjectedONTPassengersatSelectedRatesofDecline

Source:LAWApassengerstatisticsandOliverWymananalysis

Ontheotherhand,ifsomethinghappenstochangethedirectionofONTsdownwardcycle,itis
also possible that ONT air service will reach a plateau and begin to grow again, and that is
certainly the desire of the City of Ontario. However, as shown in the examples below, 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.

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

ThedownwardcycleinwhichONTfindsitselfisillustratedinFigure3.3below.

Figure3.3IllustrationofDownwardFlightLossCycleatONT

Source:OliverWymananalysis

ThefollowingtableprovidesexamplesofdestinationsservedandformerlyservedfromONT
where the reduction in flights since 2007 has resulted in a flight schedule that is much less
attractivetoabusinesstraveler.Thenumberofdailyflightsrequiredtoprovideanattractive
scheduleforthebusinesstravelerdependsinlargepartonwhetherthedestinationisreached
viaashorthauloralonghaulflight.Mostshorthaulmarketsrequireabareminimumofthree
orfourdaily flights toadequatelyservethebusinesstraveler,whereaslonghaulinternational
markets may require only a single daily flight to meet the business travelers needs. When
substantiallymorefrequentserviceisofferedatanothernearbyairport,eventhreeorfourdaily
flights in shorthaul markets may not be considered sufficiently convenient by the business
traveler.

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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

Destination

Airline

Dallas/FortWorth
Portland
Seattle/Tacoma
NewYorkKennedy
Atlanta
SaltLakeCity
Denver
Houston

American
Alaska
Alaska
JetBlue
Delta
Delta
United
United

2007

Departures/DayinSeptemberofeachYear
2008
2009
2010
2011
2012

4.9
4.9
4.0
1.0
2.5
5.5
4.7
3.0

4.9
2.9
3.7
0.1
1.9
3.7
3.6
3.0

4.9
2.7
2.8
0.0
1.0
3.8
3.7
3.0

4.8
2.9
2.8
0.0
1.0
3.8
3.8
2.0

3.9
2.9
2.9
0.0
1.0
3.8
2.7
2.0

3.8
3.0
2.8
0.0
0.1
3.7
2.0
2.0

2013
3.8
2.6
2.9
0.0
0.0
3.6
1.9
1.7

Source:PublishedairlineschedulesandOliverWymananalysis

While the airlines serving ONT have 0 to 3.8 daily flights to the above destinations, the same
airlinesservingLAXhave4.9to17.0dailyflightstothesamedestinations.SeeFigure3.5below.
Inotherwords,atLAX,thetraveler,especiallythebusinesstraveler,continuestohavethetravel
flexibilityneededforbusiness.Thissituation,whereoneairporthasamuchlessattractiveflight
scheduleforbusinesstravelers,leadstothedownwardcycledescribedpreviously.

Figure3.5DailyDeparturesfromONTandLAXtoSelectedDestination,Sept.2007andSept.2013

Departures/DayinSeptember
Destination
Dallas/FortWorth
Portland
Seattle/Tacoma
NewYorkKennedy
Atlanta
SaltLakeCity
Denver
Houston

Airline
American
Alaska
Alaska
JetBlue
Delta
Delta
United
United

ONT
2007
4.9
4.9
4.0
1.0
2.5
5.5
4.7
3.0

2013
3.8
2.6
2.9
0.0
0.0
3.6
1.9
1.7

LAX
Change
21%
47%
28%
100%
100%
34%
61%
42%

2007
16.9
6.0
13.0
0.0
10.9
9.2
11.2
10.6

2013
Change
17.0
1%
5.0
16%
11.3
13%
4.9
n/a
9.7
11%
6.7
28%
33%
7.5
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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CHAPTER4

AIRPORTCOSTS

4.1THEIMPORTANCEOFAIRPORTCOSTS
Inmajormetropolitanareaswithmultipleairports,theeconomicsoftheairlinebusinessfavor
largescaleoperationsattheprimaryairport,inthiscaseLAX.Successfulsecondaryairportsin
metropolitanareaswithmultipleairportsalmostinvariablyshareseveralcharacteristics:
1. Substantiallylowercoststhantheprimaryairport.Especiallywhenprimaryairportsare
notoperatingatfullcapacity,itisimportantthatsecondaryairportsmaintaintheircost
advantage;
2. Costsinlinewithorlowerthancompetingsecondaryairports;and
3. Aggressive marketing campaigns for air service that recognize the secondary airport is
competingwiththeprimaryairportandotherairportsintheregionforpassengersand
flights.
ThemostcommonlyusedmeasureofairportchargespaidbyairlinesisCostperEnplanement
(CPE), which is calculated by dividing the rents, landing fees, and other charges paid by the
airlines serving 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
The2010ReportreviewedhowLAWAhadburdenedONTwiththehighestcostsintheregion
andamongthehighestinthecountry.Thischapterreviewschangessincethen.

Seefollowingdiscussioninsection4.3andcitationsbyconsultantsretainedbyLosAngeles.

TowardGlobalCompetitiveness,EconomicEmpowerment,andSustainedProfitability,AirlinesforAmerica,July13,
2013,p.20.

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4.2ONTOPERATINGCOSTS
ONTs 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
operating budget for ONT has declined only modestly in recent years. 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.7Thatfigureisapproximately60%
higher$10moreperenplanementthanatcompetingairports.ONTshighoperatingcosts
consist largely of high personnel costs and an administrative fee paid to LAWA calculated at
15percentofoperatingcosts.

Figure4.1OperatingCostsperEnplanementforLosAngelesAreaAirports,FY2011
Airport
Ontario
PalmSprings
LongBeach
OrangeCounty
Burbank
SanDiego

Operating
Costs
$26.37
$19.51
$18.37
$16.45
$15.43
$13.63

Source:OliverWymananalysisofFY2011operatingcosts,basedonfinancialinformationreportedtotheFAAbyeach
airportonForm127

EstimateoftheFairValueofOntarioInternationalAirport,preparedforLosAngelesWorldAirports,byLeighFisher,
September12,2012,p.39.

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LAWAs operating expenses for ONT for fiscal years 2011, 2012, 2013, and 2014 are listed in
Figure4.2below.AllfiguresaretakenfromLAWAbudgetinformation.8

Figure4.2LAWAReportedOperatingExpensesforONT

Salaries&Benefits
Materials,Supplies&Services
AdministrativeCharge
TotalOperatingExpenses

Expenditures Expenditures
FY2011
FY2012
$30,027,000 $29,612,000
$24,275,000 $23,735,000
$8,129,000
$7,868,000
$62,431,000 $61,215,000

Estimated
Appropriated
FY2013
BudgetFY2014
$24,440,000
$26,050,000
$23,076,000
$23,579,000
$7,127,000
$7,444,000
$54,643,000
$57,073,000

Source:LAWAbudgetinformationreleasedJune2013andJune2012s

BecauseONTsannualexpensebudgetconsistsofbothfixedcosts,suchas$7millioninannual
debtservice,andvariablecosts,suchastheoperatingexpensesaslistedinFigure4.2,ONTmust
reduce its operating expenses at a greater rate than its passenger decline just to maintain its
CPEatthecurrenthighlevel.TomakeanyrealprogressinreducingitscurrenthighCPE,ONT
mustreduceitsoperatingexpensesataratesubstantiallyinexcessofthedeclineinpassengers
andthatisnotoccurring.

As shown in Figure 4.3 below, over the threeyear period from FY2011 to FY2014, ONTs
operatingcostsareprojectedtodeclinebyatotalof8.6%,whilethenumberofONTsenplaning
passengersareprojectedtodecreaseby18.9%,ormorethandoubletherateofoperatingcost
decline.9Asaresult,Ontariosoperatingcostsperenplanementareexpectedtoincreaseinthe
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
operating cost declines, and therefore the rate of decline of ONTs total expenses, taking into
account fixed costs, is less than the projected 8.6% operating cost decline. The result is that
ONTsCPEisprojectedtoincreasesignificantlymorethan13%.

FY2013isestimatedandsubjecttorevision;FY2014isthebudgetedfigure.

ProjectedONTpassengersforFY2014,basedontheprojectedpassengerdeclineofapproximately8percentforJuly
December2013overthesameperiodtheprioryear,andaprojecteddeclineofapproximately7percentforJanuary
June2014overthesameperiodin2013.

14

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

Figure4.3ComparisonofONTOperatingExpenseChangeandPassengerChangeFY11/FY2014

OperatingExpense

Appropriated
Budget
Expenditures
FY2014
FY2011
$62,431,000 $57,073,000

Passengers(M)
IncreaseinOperatingExpense
perPassenger

4.75
$14,617,053

Change
8.6%

3.85

18.9%

$16,642,338

12.8%

Source:OliverWymananalysis

4.3HISTORICALONTCPE
LAWAsconsultantLeighFisherreportedthatONTsCPEforFY2011was$12.28.10Becausethe
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.

10

EstimateoftheFairValueofOntarioInternationalAirport,preparedforLosAngelesWorldAirports,byLeighFisher,
September 12, 2012, p.33. Different figures have been reported elsewhere. For example, Fitch Ratings review of
ONT,datedMarch11,2013,states:CPEisreportedtobe$11.12in2012,aslightdeclinefrom$11.76in2011.

11

LAWAconsultantLeighFisherprovidedanevenhigherONTCPEestimateof$16for2010initsreport,Alternatives
forManagementandOperationLA/OntarioInternationalAirport,August2,2010,p.9.

12

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

15

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

Figure4.4CPEsforLosAngelesAreaAirports,FY2011

Airport
Ontario
LosAngles
OrangeCounty
SanDiego
LongBeach
PalmSprings
Burbank

CPE
$12.28
$11.29
$9.65
$7.18
$6.85
$3.50
$2.01

Source:OliverWymananalysisofFY2011CPEs,basedonfinancialinformationreportedtotheFAAbyeachairporton
Form127.

4.4FUTUREONTCPEANDIMPACTONAIRSERVICE
Based on a combination of factors, including (1) the continuing decline in passengers at ONT,
(2)the associated decline in nonairline revenues at ONT, and (3) the limited decline in ONT
operating expenses, ONTs CPE for the current fiscal year is estimated to be materially higher
thanreportedforFY2011,andthatfigureisexpectedtocontinuetoincrease.

Inarecentratingsreport,FitchRatingsmadethefollowingobservationsaboutONT:

Fitch'sbasecasescenarioassumescontinuedtrafficdeclinesin2013and2014to
2million enplanements along with slight expense growth. In order to maintain
debtservicecoverageof1.5xundersuchscenario,CPEin2013willlikelyreturn
to 2010 level of $13 and increase to $15 by 2018. Absent any further cost
reductions,CPEisexpectedtoremainelevated.

Given the prospect of stagnant traffic growth at the airport, Fitch believes that
furthercostreductioniscriticaltoavoidanincreaseinCPEwhichcouldresultin
serviceretrenchment.13[Emphasisadded.]

Declining passenger numbers in combination with airport operating costs that are either not
declining or doing so very slowly leads inevitably to increasing airport costs per enplanement,
whicharepassedontotheairlines,therebymakingairservicetoONTlesseconomic.ForONT,
whichisalreadystrugglingtodealwithadownwardselfreinforcingcycleoffewerpassengers
and fewer flights, the added impact of steadily increasing airport costs is the worst possible
scenario.
13

FitchRatingsreportforOntarioInternationalAirport,March11,2013.

16

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

The Fitch Ratings estimate of increasing CPE referenced above is based on an assumption of
stagnanttrafficgrowthatONTandthatassumptionisalreadyprovingtoooptimistic.Asa
result,ONTsCPEislikelytobehigherthanFitchpredicts.OuranalysissuggeststhataCPEof
$16$18 or higher is likely to result over the next several years if LAWA is unable make
aggressivecostreductions.

LosAngelesownconsultants,inSeptember2012,drewsimilarconclusions,asfollows:

WhileLAWAhasreducedthenumberofemployeesatLA/ONTandisexploring
other operational efficiencies, 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
partiestoimprovetheairportsmanagementandoperations,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
must be implemented on an expedited basis to turn around the downward
spiral.15[Emphasisadded.]

AlthoughLosAngelesconsultantshavenotidentifiedthegamechangingsolutionsrequiredto
turnaroundONTsdownwardspiral,itisclearfromtheirreport,theFitchRatingsreport,and
otheranalysesofONTthatanysolutionwillrequireasharpreductioninairportcharges.

Giventhefollowingsituation:
ONTpassengerdeclinesfaroutpacingONTairportoperatingcostreductions
ONTCPEalreadywellmorethandoublethe$5CPEwhichtheCityofOntariohassetas
areasonablegoalforONT;
it seems increasingly likely that to turn around ONTs downward spiral, substantial outside
resources will be required in the millions of dollars. Those funds will be needed to sharply
14

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

15

Ibid,p.62

17

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

reduce ONT charges and to provide aggressive marketing support. Without such intervention,
ONT is likely to continue to struggle just to maintain its current uncompetitive airport charge
structureandminimalairportmarketingprogram.

Goingbackto1990,onlythreemediumhubairportshavesufferedagreaterdeclinefromtheir
peakpassengerlevelsthanONTCincinnati,Reno,andMemphis,eachofwhichwasanairline
hubthatlostitsconnectinghubstatus.16Basedontrackingtheperformanceofall42Medium
Hubairportsbeginningin1990,ONTsprospectsofmakingafullrecoveryfromaseriousdecline
in passengers are daunting, and the longer ONT waits until game changing solutions are
implemented,theweakerONTspositionwillbeatthattime.

RAH8/5/2013

16

SeeAppendix1.

18

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

APPENDIX1PASSENGERGROWTHATMAJORU.S.GATEWAYS

Airport

International
passengers

Longhaul
international
passengers*

Domestic
passengers

2000
2012

2007
2012

2000
2012

2007
2012

2000

2007

2012

CAGR

CAGR

Change

Change

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%

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%

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%

CAGRCompoundannualgrowthrate
*LonghaulinternationalexcludesMexicoandCanada;CAGRisCompoundAnnualGrowthRate
Source:DOTT100viaplanestats.com

Appendix

A1

OntarioInternationalAirportUpdate

AcceleratingPassengerDeclinesImperilFutureRecovery

August2013

APPENDIX2MEDIUMHUBAIRPORTSPEAKYEAR
AND2012ENPLANEMENTS

Code
CVG
RNO
MEM
ONT
SJC
BUR
OAK
DAY
CLE
BDL
ELP
MKE
TUS
SJU
PBI
ABQ
SYR
TUL
CMH
SMF
JAX
ROC
MCI
ORF
IND
MSY
SNA
LIH
RDU
OGG
RSW
ANC
BUF
DAL
PDX
BNA
SAT
AUS
FLL
HOU
MDW
OKC

City
Cincinnati
Reno
Memphis
Ontario
SanJose
Burbank
Oakland
Dayton
Cleveland
Hartford
ElPaso
Milwaukee
Tucson
SanJuan
WestPalmBeach
Albuquerque
Syracuse
Tulsa
Columbus
Sacramento
Jacksonville
Rochester
KansasCity
Norfolk
Indianapolis
NewOrleans
OrangeCounty
Lihue
Raleigh/Durham
Maui
FortMyers
Anchorage
Buffalo
Dallas
Portland
Nashville
SanAntonio
Austin
Ft.Lauderdale
Houston,Hobby
Chicago,Midway
OklahomaCity

State
Ohio
Nevada
Tennessee
California
California
California
California
Ohio
Ohio
Connecticut
Texas
Wisconsin
Arizona
PuertoRico
Florida
NewMexico
NewYork
Oklahoma
Ohio
California
Florida
NewYork
Missouri
Virginia
Indiana
Louisiana
California
Hawaii
N.Carolina
Hawaii
Florida
Alaska
NewYork
Texas
Oregon
Tennessee
Texas
Texas
Florida
Texas
Illinois
Oklahoma

PeakYear
Enplanements
11,244,332
3,175,340
5,593,443
3,465,307
6,141,163
2,947,205
7,121,243
1,844,671
6,005,226
3,611,395
1,867,729
4,719,681
2,155,049
5,254,614
3,493,478
3,279,012
1,189,420
1,631,645
3,815,939
5,377,131
3,126,475
1,445,814
5,821,593
1,950,247
4,185,976
4,835,445
4,943,910
1,435,897
4,959,435
3,147,244
3,982,193
2,367,192
2,735,239
4,016,958
7,275,178
4,876,156
3,999,411
4,595,898
11,341,222
5,031,731
9,418,687
1,788,124

Peak
Year
2005
1997
2005
2007
2000
2007
2007
1990
2000
2005
1994
2010
2007
2005
2005
1996
2005
2000
2007
2007
2007
2005
2007
2005
2005
2000
2007
2007
2007
2007
2007
2008
2008
2008
2007
2007
2012
2012
2012
2012
2012
2012

Enplanements 2012
1990
vs.Peak
3,900,776
74.1%
1,337,343
47.1%
3,885,399
40.1%
2,633,457
38.5%
3,163,859
33.8%
1,697,516
31.4%
2,639,089
31.3%
1,844,671
30.4%
3,814,670
28.5%
2,310,882
26.9%
1,670,988
25.1%
1,905,488
21.7%
1,313,059
20.8%
3,769,006
20.5%
2,610,618
20.4%
2,382,622
19.9%
1,164,620
19.1%
1,482,145
19.1%
1,683,243
19.1%
1,736,506
19.1%
1,265,667
17.8%
1,152,404
17.1%
3,349,625
16.7%
1,254,386
15.6%
2,544,392
15.4%
3,392,108
11.6%
2,198,935
11.4%
1,322,313
10.3%
4,357,851
9.8%
2,161,170
9.1%
1,704,459
9.0%
1,269,336
6.9%
1,620,201
5.8%
2,879,758
3.2%
3,041,872
1.9%
3,402,438
1.9%
2,655,393
0.0%
2,052,435
0.0%
3,851,736
0.0%
3,965,949
0.0%
3,566,720
0.0%
1,517,999
0.0%

Source:DOTT100viaplanestats.com.Note:DOTpassengerstatisticsvaryslightlyfromstatisticscompiledby
airportsduetodifferentdatasources.

Appendix

A2

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