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U.S. Airline Industry Summer Air Travel Forecast and First Quarter 2014 Review
1. John P. Heimlich
Vice President & Chief Economist
A4A Media Briefing
May 15, 2014
U.S. Airline Industry Summer Air Travel Forecast &
First Quarter 2014 Review
2. A4A Projects U.S. Airlines to Carry 1.5% More Travelers This Summer
Summer 2014 Forecast Includes a Record 30M Flying Internationally on U.S. Carriers
airlines.org2
179
186
183
192
185
176
177
180
180
179
180
21
22 24
25
26
24 26 26 27 28 30
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014F
Domestic International
Source: A4A and BTS T100 segment data
U.S. Airline Onboard Passengers (Millions)
Scheduled Service, June 1-August 31
210M passengers (2.28M per day)
• Up 1.5% from 2013; on par with 2008
• Remains 3% below 2007 all-time high
• YOY Seats: DOM +0.7%, INT +6.7%
• Average load factor: 85%-87%
30M travelers (~325K per day) on international
flights – a new record
10 of 15 busiest air travel days for U.S. airports
Key drivers:
• Economic expansion
• Accelerating job growth
• Rising personal incomes
• Increased household net worth
• Affordable airfares
• Improved airline financial condition
Summer 2014 Forecast Highlights
3. Key Air-Travel Demand Drivers Trending Positively
airlines.org
0.0
0.5
1.0
1.5
2.0
2.5
3.0
4Q13 1Q14 2QF 3QF 4QF
U.S. Economy (% CAGR) Expanding
3
U.S. Employment (000) Growing
0
100
200
300
400
Dec-13 Jan-14 Feb-14 Mar-14 Apr-14
Sources: BEA, BLS, Federal Reserve and IHS Economics; U.S. GDP real annual average growth rate (%), U.S. nonfarm payroll employment growth (month-over-month,
seasonally adjusted), U.S. disposable personal income per capita (chained 2009 dollars, SAAR); U.S. household net worth in current dollars, not seasonally adjusted
$36.2
$36.4
$36.6
$36.8
$37.0
$37.2
1Q13 2Q13 3Q13 4Q13 1Q14
Personal Incomes ($000) Rising Household Net Worth ($T) Growing
$73
$75
$77
$79
$81
1Q13 2Q13 3Q13 4Q13
4. In Summer 2014, Canada, Mexico and the UK Remain the Best Served Nonstop
Destinations; Norway, Qatar and the UAE Will See the Largest Year-Over-Year Gains
airlines.org4
Top 20 U.S. International Destinations
by Scheduled Seats per Day
47,580
38,917
33,207
20,563
20,104
13,911
12,670
9,724
9,699
9,391
8,970
7,022
6,506
6,414
5,990
5,772
5,222
4,965
4,874
4,767
Canada
Mexico
United Kingdom
Germany
Japan
France
Dominican Rep.
Brazil
South Korea
China
Netherlands
Italy
Jamaica
Spain
Bahamas
UAE
Colombia
Hong Kong
Panama
Ireland
Top 20 U.S. International Destinations
by YOY Change (%) in Seats
81.3
52.6
41.5
39.5
37.1
36.3
35.2
34.3
33.5
32.0
31.4
29.0
25.7
24.8
24.5
20.5
19.3
17.6
17.2
17.1
Norway
Qatar
UAE
Martinique
Denmark
Sweden
Philippines
Hong Kong
Trinidad & Tobago
Austria
Saint Kitts & Nevis
Saudi Arabia
Ethiopia
Antigua & Barbuda
China
Dominican Rep.
Taiwan
Portugal
Cayman Islands
Italy
Source: Innovata (via Diio Mi) published schedules as of May 2, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations
5. January February March
Flight Completion Factor
(% of scheduled domestic departures)
93.46 94.49 98.0
On-Time Arrival Rate
(% of domestic flights within 00:15)
67.72 70.67 77.6
Mishandled Bags
(per 1,000 domestic passengers)
5.54 4.21 3.68
Customer Complaints
(per 100,000 systemwide passengers)
2.21 1.50 1.21
Sources: NTSB, BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports)
airlines.org5
When It Comes to Airline Operational Performance, Weather Matters – a Lot
January and February Featured Two of the Worst Weather Days for Aviation Ever Recorded,
With 22% of Flights Canceled on January 6 and 32% of Flights Canceled on February 13
Worse BetterWEATHER
6. Healthy Air-Travel Volumes and Fuel-Price Relief Drive Margin Gains* in Early 2014
Lower Fuel Expense Largely Offsets Sharp Increases in Labor, Airport and Aircraft Costs
* A4A analysis of reports by Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
airlines.org6
Operating Revenues ($35.6B) 3.7
Operating Expenses ($34.1B) 0.5
Fuel (33% of Operating Expenses) (4.3)
Wages & Benefits (25%) 7.3
Maintenance, Materials & Repairs (6%) (5.2)
Landing Fees & Terminal Rents (5%) 7.1
Aircraft Rent (2%) (2.9)
Depreciation & Amortization (5%) 6.9
Other** (20%) (0.2)
Interest & Other Non-Operating Expenses 6.4
Income Tax & Other Expense / (Benefit) nmf
Net Profit: $401M (1.1% of Op. Revenues) + 2.7 pts.
** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals
% Change YOY
1Q13 1Q14 Change
Passenger Yield1 16.07¢ 16.21¢ +0.8%
Passenger Traffic2 186.5B 190.4B +2.1%
1. Average airfare paid per mile flown, excluding taxes
2. Revenue passenger miles (RPMs) flown
1Q13 1Q14 Change
U.S. Inflation3 231.740 234.997 +1.4%
Personal Income4 $38,961 $40,045 +2.8%
3. U.S. Consumer Price Index (1982-84 = 100)
4. U.S. disposable personal income per capita
7. The Airline Industry Remains a Low-Margin Business, Lagging S&P 500 Average
airlines.org
18.0
16.5
13.2
11.0
9.4
5.24.73.93.42.91.81.1(0.9)(3.4)
McDonald´s
WaltDisney
CSX
Starbucks
S&P500
Marriott
Boeing
Walgreens
Walmart
Ford
Costco
Airlines*
Safeway
Sears
7
Sources: Standard & Poor’s and company SEC filings
* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
“Although it may seem like it’s becoming more popular to invest in airlines, data would show that
it’s not. Optimism appears confined to a small group… [T]here still isn’t a lot of long-term capital
invested in the space… Conclusion: still more room for improvement.”
“Who owns airline stocks? You might be surprised…,” Hunter Keay, CFA, Wolfe Research (March 17, 2014)
Net Profit Margin (%), 1Q 2014
9. Improving Finances Enabling Significant Reinvestment in Customer Experience
Airline Capital Spending Continues at Robust Clip of Approximately $1 Billion per Month
airlines.org9
5.2
6.6
9.8
12.4
3.0
2010 2011 2012 2013 1Q14
* SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
U.S. Airline* Capital Expenditures ($ Millions)
» Aircraft, engines, winglets, spare parts
» Ground equipment, loading bridges
» Airport facilities, aircraft hangars
» Premium seats, new aircraft interiors
» Maintenance facilities and machinery
» Bag carousels, carts, scanners
» In-flight entertainment and Wi-Fi
» Computers, kiosks, mobile technology
Planned 2014 Capital Expenditures: $12B
For these nine carriers: 1,751 aircraft on firm
order, of which 255 are being delivered in 2014
– the equivalent of one aircraft being received
every weekday of the year.
10. airlines.org10
Years of Staggering Losses Have Left U.S. Airlines* Saddled With Debt…
* SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
$79.5
$71.9
0
10
20
30
40
50
60
70
80
90
2012 2013
Total Debt ($ Billions, Dec. 31)
“…it would be unreasonable to assume that
all airline risks have just disappeared… [T]he
business model requires a large cushion of
cash and significant reinvestment.”
Alexander MacLennan, The Motley Fool (Feb. 3, 2014)
“The industry is still subject to U.S. and
global economic cycles, oil price (the largest
operating expense) fluctuations, and
unforeseen events such as global terrorist
events and disease outbreaks.”
Betsy Snyder, Standard & Poor’s (Mar. 25, 2014)
11. Investment Grade1 (>= BBB-)
Source: Standard and Poor’s as of May 12, 2014; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”
airlines.org11
ExxonMobil, Microsoft AAA
GE, United States Government AA+
Wal-Mart AA
Toyota AA-
UPS A+
BP, eBay A
Amtrak, Starbucks A-
FedEx, Marriott, Starwood BBB
Ford, Lufthansa, Southwest, WestJet BBB-
Alaska, Qantas BB+
British Airways, Latam BB
Avis-Budget, Delta BB-
Hertz, Sabre B+
Air Canada, American, GOL, Hawaiian,
JetBlue, United B
SAS B-
Speculative2 Grade (< BBB-)
1 Describes issuers with relatively high levels of creditworthiness and credit quality
2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk
Passenger Airline
Airline Creditworthiness Remains Far From Stellar
Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit
12. U S Passenger Airline
BOS HOU* LAS LAX MSP NYC* OKC OMA PDX PHX SEA SNA WAS* + U.S.A.
ABQ ATL AUS BDL BNA BUR BWI CHS CLE CLT CMH CVG DAY
DEN DFW DSM DTW ELP FLL GEG GSO HNL IND JAX LIT MCI
MCO MDW MEM MIA MSY MYR OAK ONT ORD PBI PHL PIT RSW
SAN SAT SDF SFO SJC SMF STL TPA TYS
ALB COS CRP FAT FNT GRR GUM MHT
MOB PNS PVD PWM TUL VPS
Southwest
Alaska, Delta
American,
Hawaiian, JetBlue
United
AA ±
A ±
BBB ±
BB ±
B ±
Airline Creditworthiness Lags Airports & USA, Which Tout Stronger Balance Sheets
All S&P-Rated U.S. Airports and the U.S. Government Enjoy Investment-Grade Credit
airlines org12
Source: Standard and Poor’s
Investment Grade
Speculative Grade
* HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD
13. In 1Q 2014, U.S. Personal Incomes, Inflation and Air Passengers Outpaced Airfare
In Real Terms, Airfares Fell While Incomes Rose, Further Enhancing Air Travel Affordability
airlines.org
2.8
1.4
1.1
0.8
Personal Income
U.S. Inflation (CPI)
Passengers Enplaned
Price to Fly a Mile
13
Sources: BEA for U.S. disposable personal income per capita , BLS for U.S. Consumer Price Index and A4A analysis of airline earnings releases
% Change: 1Q 2014 vs. 1Q 2013
~21,000 more per day
14. U.S. Ticket Taxes on $300 One-Stop Domestic Round Trip* Keep on Rising
Growing Governmental Take Leaves Less Revenue for Carriers to Reinvest
July 1, 2014
9/11 Fee Hike
21% ($63)*
1971-1972
AATF Begins
7% ($22)*
1992-1993
PFC Begins
13% ($38)*
Taxes Airfare
Source: A4A analysis of federal tax code, including IRS Revenue Bulletin 2013-47, Rev. Proc. 2013-35, Bipartisan Budget Act of 2013, and President’s FY2015 budget
* Sample itinerary is a domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; total ticket price includes taxes
airlines.org14
POTUS-Proposed
FY15 Budget
26% ($77)*
AATF = Airport and Airway Trust Fund
2002
9/11 Fee Begins
19% ($58)*
15. By Baking Taxes in With Airfares, DOT’s So-Called “Full Fare Advertising Rule” Has
Made it Easier for the Federal Government to Raise Taxes on Air Travelers
airlines.org15
16. Recap
airlines.org16
» Despite commencing 2014 with $72 billion in debt, the top airlines’ modest financial progress
has allowed them to continue to accelerate investments in people, products and technology to
enhance the customer experience and to cope more effectively with extreme weather
o In addition to seat growth, stable employment and rising wages, airlines are investing ~$12 billion more in
2014, including 255 new aircraft, larger overhead bins, premium seating, airport terminals and lounges,
ground equipment, mobile technology, customer kiosks, in-flight entertainment and WiFi
o Airlines have focused intently on improving baggage handling – equipment, software, staffing, training,
internal reporting/communication, airport/agency partnerships, performance incentives and logistics
» Commercial air travel remains one of the best bargains in America, with overall U.S. inflation
and U.S. disposable personal income per capita again outpacing the price of flying
» Millions of U.S. workers have benefited from improving airline finances — through enhanced
job security, higher wages and benefits and repayment of debt, as the airlines continue to
pursue investment-grade creditworthiness to minimize painful cuts during the next downturn
» The carriers continue to demonstrate that the flying public, employees, investors and the U.S.
economy all are vastly better off with a financially strong U.S. airline industry that can cover its
full costs over an entire business cycle and compete effectively on the global stage