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A4A Industry Review and Outlook

A4A Industry Review and Outlook






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  • The College Board (based on beginning of academic year, 4-year undergraduate institution) -- http://trends.collegeboard.org/college-pricing; http://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fee-and-room-and-board-charges-over-time; http://trends.collegeboard.org/sites/default/files/cp-2012-table-2_0.xlsx <br /> Bureau of Labor Statistics (includes hedonic “quality-change” adjustments). <br /> National Automobile Dealers Association – www.nada.org (average retail selling price) - http://www.nada.org/Publications/NADADATA/ <br /> Census Bureau – http://www.census.gov/construction/nrs/xls/usprice_cust.xls (median) <br /> Department of Energy – http://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf, Table 9.4. <br /> National Association of Theatre Owners – www.natoonline.org (average U.S. ticket prices). <br /> Postal Service – www.usps.com/postalhistory/welcome.htm, Publication 100. <br /> A4A via Bureau of Transportation Statistics – www.airlines.org. <br /> Disney World - http://allears.net/tix/tixincrease.htm or http://allears.net/tix/tixpix00.htm <br /> http://www.natoonline.org/statisticstickets.htm <br /> NFL - http://www.fancostexperience.com/; http://www.fancostexperience.com/pages/fcx/blog_pdfs/entry0000018_pdf000.pdf, Team Marketing Report Fan Cost Index <br /> NIPA Table 2.1, Line 38 - http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1 <br /> <br />
  • http://atwonline.com/editorial/editorial-regulation-and-profitability-0
  • CBP: The term “wait time,” as used to describe the delays experienced by individual flights arriving at international airports, does not represent the average delay experienced by all travelers. It represents the total flight processing time from arrival to the time the last passenger completes screening at the primary inspection area. It is the longest time that any passenger on a given flight had to wait. The average passenger on the flight would have a shorter wait and the first passenger off the plane will typically be processed in a fraction of the wait time shown below. <br /> <br /> Over the course of the day, incoming flights may not occur for extended periods of time due to variable flight arrival patterns. Wait times are calculated in hourly time intervals for all flights arriving at the airport/terminal shown. The CBP Airport Wait Times report displays only those time intervals during which at least one flight arrival was recorded. If no flights arrived during a particular time interval, that time interval will not appear in the report. <br />
  • CBP: The term “wait time,” as used to describe the delays experienced by individual flights arriving at international airports, does not represent the average delay experienced by all travelers. It represents the total flight processing time from arrival to the time the last passenger completes screening at the primary inspection area. It is the longest time that any passenger on a given flight had to wait. The average passenger on the flight would have a shorter wait and the first passenger off the plane will typically be processed in a fraction of the wait time shown below. <br /> <br /> Over the course of the day, incoming flights may not occur for extended periods of time due to variable flight arrival patterns. Wait times are calculated in hourly time intervals for all flights arriving at the airport/terminal shown. The CBP Airport Wait Times report displays only those time intervals during which at least one flight arrival was recorded. If no flights arrived during a particular time interval, that time interval will not appear in the report. <br />
  • Also intense focus (and results) on improving baggage handling – through multifaceted approach including equipment (bag carousels/carts/scanners), software (real-time tracking for company and customers, shortest-path routings and real-time gate/status updates for drivers), training, internal reporting and communication, dedicated bag performance personnel, partnerships (e.g., airports, TSA, CBP), financial incentives (i.e., for employees, third-party contractors or interline partners), logistics (e.g., use of freighters in Alaska, improved delivery processes from plane to carousel, new sorting procedures, shuttling of bags twice during unloading of large aircraft, contingency plans if belts down) <br />
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • Payments made in cash or cash equivalents over a period of more than one year. Capital expenditures are used to acquire assets or improve the useful life of existing assets. An example of a capital expenditure is the funding to construct a factory. In accounting, capital expenditures must be capitalized; that is, the expenditure is recognized on a balance sheet gradually over the course of an asset&apos;s useful life. Capital expenditures are recorded as liabilities on a balance sheet. They are also called capital outlays. See also: Capital asset.Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year. CAPEX are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings.[1] In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset&apos;s basis (the cost or value of an asset adjusted for tax purposes). CAPEX is commonly found on the cash flow statement under "Investment in Plant, Property, and Equipment" or something similar in the Investing subsection.
  • 2000-2004: -81,9442004-2010: -60,5902010-2013: +2,787Cumulative Change: -139,747
  • “Although access to the capital markets improved in recent years as evidenced by our financing transactions, we cannot give any assurances that we will be able to obtain additional financing or otherwise access the capital markets in the future on acceptable terms, or at all. We must sustain our profitability and/or access the capital markets to meet our significant long-term debt and capital lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines.” (United Airlines SEC Form 10-K, Feb. 20, 2014)“…it would be unreasonable to assume that all airline risks have just disappeared… The airline industry has a number of factors that inject above-average levels of risk into the business. Factors including exposure to oil prices, cyclical effects, high capital costs, and vulnerability to world events such as a health pandemic or terrorist attack, mean airlines must still be prepared for a rainy day. Because of this, there’s a need for a sensible balance between ‘shareholder friendly’ initiatives and preserving the health of the airline...Although the industry’s future does look bright, airlines shouldn’t ignore the risks inherent in their industry… While airlines are paying dividends, you shouldn’t expect them to become high-yielding stocks, as the business model requires a large cushion of cash and significant reinvestment.”-- Alexander MacLennan, The Motley Fool, “How ‘Shareholder Friendly’ Should Airlines Be?” (Feb. 3, 2014)
  • “Standard & Poor’s ratings express the agency’s opinion about the ability and willingness of an issuer…to meet its financial obligations in full and on time.”WestJet rated investment grade by Standard & Poor&apos;sCALGARY, Feb. 28, 2014 /CNW/ - WestJet (TSX: WJA) is very pleased to announce that it has been assigned a BBB- corporate credit rating ("investment grade") with a stable outlook by Standard & Poor&apos;s Ratings Services."This places us among the very few airlines in the world with an investment grade credit rating," said Vito Culmone, WestJet&apos;s Executive Vice-President of Finance and CFO. "This rating reflects our strong liquidity, conservative capital structure and solid market position. Combined with 35 consecutive quarters of profitability, driven by our culture of ownership and care, this BBB- Stable rating will provide us with additional forms of cost-effective financing options going forward."
  • The credit rating is somewhat equivalent to getting a physical at the doctor – it’s a snapshot of one’s health – we (the airlines) are digging out of a hole, and this shows that we have a long way to go. Looking at results from one quarter or one year doesn’t tell anyone much – just like losing 10 lbs. in the past year is not enough information to tell me if a person is healthy or not. Or how about this – if the USA ran a federal budget surplus for a year, would that mean we don’t have a large national debt? No – I would call that a good start, not the finish line. Same with airlines.Every single U.S. airport rated by S&P enjoys an investment-grade rating, whereas only one U.S. airline is investment-grade – at the lowest level. In other words, the best-rated airline equals the worst-rated airport.Credit ratings are opinions about relative credit risk. They are just one factor investors may consider in making investment decisions. Companies (and governments) pay S&P to assess their creditworthiness to help raise money in the capital markets. Instead of taking a loan from a bank, these entities sometimes borrow money directly from investors by issuing bonds or notes. Investors and other market participants may use the ratings as a screening device to match the relative credit risk of an issuer or individual debt issue with their own risk tolerance or credit risk guidelines in making investment and business decisions.Better credit ratings signal less credit risk, which means were are more likely to be able to pay our bills, on time, in full – so that often gets us better payment terms, lower interest rates (to borrow money in a downturn or to purchase aircraft, for example). Companies with strong credit ratings (like many airports) an cheaply finance large projects by going to the capital markets and issuing bonds – IN OTHER WORDS THAT DON’T NEED TO RAISE MORE MONEY FROM AIRLINES/PASSENGERS to fund new projects.As stated by S&P: “Issuers including corporations, financial institutions, national governments, states, cities and municipalities, use credit ratings to provide independent views of their creditworthiness and the credit quality of their debt issues. Issuers may also use credit ratings to help communicate the relative credit quality of debt issues, thereby expanding the universe of investors. In addition, credit ratings may help them anticipate the interest rate to be offered on their new debt issues. As a general rule, the more creditworthy an issuer or an issue is, the lower the interest rate the issuer would typically have to pay to attract investors. The reverse is also true: an issuer with lower creditworthiness will typically pay a higher interest rate to offset the greater credit risk assumed by investors.”United is currently rated “B,” which indicates that it “More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.” LAX Int’l Airport, on the other hand, is currently rated “AA,” which suggests a “Very strong capacity to meet financial commitments.” Therefore LAX is not only in superior financial condition relative to United but also has a far better ability to raise capital to fund projects at reasonable rates/terms.Airports do not need a PFC increase to fund necessary capital projects as they enjoy investment-grade credit and all have access to capital market. (To our knowledge no airport has been prevented from proceeding with a necessary capital project because it couldn’t issue bonds.)Airlines understand that the issuance of bonds is repaid through their rates and charges; therefore, if airlines are telling airports that airlines want to use rates and charges (vs. PFCs) to fund a project, airports should not object (especially since a PFC increase would increase the cost of air travel and hurt demand).Airlines are considering the big picture (the overall revenue impact) and telling them that they prefer that the airports use bonds. 
  • http://www.irs.gov/irb/2013-47_IRB/index.htmlhttp://www.irs.gov/irb/2013-47_IRB/ar11.htmlhttp://www.cbo.gov/publication/44964
  • http://atwonline.com/editorial/editorial-regulation-and-profitability-0http://www.ideaworkscompany.com/wp-content/uploads/2012/08/A-la-Carte-Shopping-is-Good-for-Consumers.pdf
  • Endless debate about movements in airfares and ancillary services misses the key consumer question – are fares in line with costs and are they adequate to sustain air service and enable reinvestment?

A4A Industry Review and Outlook A4A Industry Review and Outlook Presentation Transcript

  • July 22, 2014 U.S. Airlines and the Quest to Reinvest Putting Improved Finances to Work for Customers, Employees, Investors and the U.S. Economy
  • Product (Unit) 2000 2013 Change (%) Public College Education: Undergraduate (Annual) $3,508 $8,893 153.5 Gasoline (Gallon, Unleaded) $1.51 $3.53 133.8 Cable TV (Monthly) $31.22 $65.07 108.4 Walt Disney World® (One Day Pass, Adult) $46 $95 106.5 Major League Baseball Game (Nonpremium Ticket) $16.22 $27.48 69.4 National Football League Game (Nonpremium Ticket) $48.97 $81.54 66.5 Prescription Drugs (BLS Index) 285.4 442.58 55.1 Movie Ticket (One Adult) $5.39 $8.13 50.8 Disposable Personal Income per Capita (Annual) $26,206 $39,424 50.4 Food & Beverage (BLS Index) 168.4 236.966 40.7 Single-Family Home (Existing) $143,600 $197,100 37.3 U.S. Consumer Price Index (CPI-U)1 172.2 232.957 35.3 Air Travel (R/T Domestic Fare + Ancillary)2 $316.96 $385.32 21.6 Air Travel (R/T Domestic Fare Only)2 $314.46 $362.85 15.4 Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 127.411 (1.7) Television (BLS Index) 49.9 4.581 (90.8) Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a Bargain U.S. Inflation, U.S. Incomes and Airline Costs Have Sharply Outpaced the Price of Air Travel 1. Bureau of Labor Statistics “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” 2. A4A analysis of data collected by BTS for the year ended 3Q 2013 – excludes taxes; “ancillary” includes revenue from reservation changes/cancellations and baggage airlines.org2 Real Increase Real Decrease
  • 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Fare Fare + Ancillary From 2.5 Percent of Average Personal Income at the Outset of Deregulation, Round- Trip Domestic Airfare Has Fallen Below 1 Percent in Every Year Since 2001 airlines.org Domestic Round-Trip Airfare as Share (%) of Per-Capita Disposable Personal Income 3 Source: A4A analysis of data from the U.S. Bureau of Transportation Statistics and the U.S. Bureau of Economic Analysis
  • Improving Airline Finances Translating to Customer Benefits airlines.org4 “The recent wave of consolidation has meant higher profits and more stability…, which has led airlines to invest in technology, new airplanes and better customer service… ‘A healthy airline industry means a better flying experience overall.’” -- “Rick Seaney, FareCompare.com, in “AMR Stands to Gain Vast Route Network,” Wall Street Journal, Feb. 7, 2013 “We see no significant change to our broader industry investment thesis, i.e. management teams focused on: 1) achieving sustainable profitability; 2) improving product/service; 3) deleveraging; and 4) enhancing shareholder returns.” -- Michael Linenberg, Deutsche Bank, “Takeaways from read-through of DOJ complaint blocking AA-US,” Aug. 14, 2013 “What we’re seeing in airlines is what we’ve seen in railroads, telecom, and trucking... You’ll have fewer crises, fewer bankruptcies, more predictability, more stability.” -- Clifford Winston, Senior Fellow, Brookings Institution, Christian Science Monitor, Feb. 14, 2013
  • Improving Airline Finances Translating to Customer Benefits (Cont’d) airlines.org5 “With airlines in the U.S. now generating acceptable returns, their ability to reinvest in their products has been greatly enhanced. Today’s traveler is likely to check in via smart phone, monitor the upgrade list in real time, board and enjoy a sufficiently sized overhead, and pass the time en route surfing the Internet. There is no way any of this would have been possible had the industry not found its way to firmer financial footing. For those in premium cabins, long gone are the EZ-boy recliners requiring a ‘double excuse me’ in order to get to the aisle. Today’s business traveler is likely to enjoy direct aisle access and a lie-flat seat suitable for sleeping, even on transcon flights. Absent the industry’s financial turnaround, these benefits simply would not be available.” -- Jamie Baker, Managing Director, Global Equity Research, J.P. Morgan, Feb. 28, 2014 Jamie Baker is a Research Analyst at J.P. Morgan. His views may not be representative of others at the Company. For disclosures related to companies that Mr. Baker covers, please see https://jpmm.com/research/disclosures
  • Key Air-Travel Demand Drivers Trending Positively airlines.org (4.0) (2.0) 0.0 2.0 4.0 4Q13 1Q14 2QF 3QF 4QF U.S. Economy (% CAGR) Expanding 6 U.S. Employment (000) Gaining Steam 0 100 200 300 400 Jan Feb Mar Apr May Jun Thousands 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 Thousands Personal Incomes ($000) Rising Household Net Worth ($T) Growing $73 $75 $77 $79 $81 $83 1Q13 2Q13 3Q13 4Q13 1Q14 Millions
  • 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, Delta, Hawaiian, JetBlue, Southwest, Spirit and United airlines.org7 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 Enplanements 167.1M 169.0M +1.1% U.S. Inflation3 231.740 234.997 +1.4% Personal Income4 $38,961 $40,017 +2.7% 3. U.S. Consumer Price Index (1982-84 = 100) 4. U.S. disposable personal income per capita
  • 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 2.7 1.4 1.1 0.8 Personal Income U.S. Inflation (CPI) Passengers Enplaned Price to Fly a Mile 8 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
  • 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 McDonald´s WaltDisney CSX Starbucks S&P500 Marriott Boeing Walgreens Walmart Ford Costco Airlines* Safeway Sears 9 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
  • Running Like a Business Means Generating Economic Value Added (EVA) Being Economically Profitable Entails Covering Cost of Capital, Not Just Cost of Operation airlines.org10 » In accounting, profit is the difference between the purchase and the component costs of delivered goods and/or services and any operating or other expenses. » Economic profit is similar to accounting profit but smaller because it reflects the total opportunity costs (both explicit and implicit) of a venture to an investor. » In corporate finance, Economic Value Added or EVA, is an estimate of a firm’s economic profit – being the value created in excess of the required return of the company’s investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm’s capital. The idea is that value is created when the return on the firm’s economic capital employed is greater than the cost of that capital. » In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit. » Investors typically demand that airlines generate a 10 percent after-tax return on their capital.
  • In 2013, U.S. Airlines’ Fuel Bill Exceeded $50 Billion for Third Consecutive Year Average Price Paid for Jet Fuel Rose 272% in 2000-2013, Including 32% in 2010-2013 airlines.org $16.4 $33.2 $38.8 $41.9 $57.9 $32.3 $39.3 $53.5 $53.9 $51.0 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 ... Incurring Higher Costs Billion USD per Year Source: BTS (Form 41 P-12(a) for U.S. airlines) $0.81 $1.66 $1.97 $2.11 $3.07 $1.90 $2.27 $3.05 $3.16 $3.01 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 Due to Rising Prices ... USD per Gallon (Avg. Price Paid) Source: BTS (Form 41 P-12(a) for U.S. airlines) 56.2 55.9 50.2 2000 2005 2013 Source: BTS (T2: 921) for U.S. airlines Using Less Fuel But ... Million Gallons per Day PRELIM 11
  • 0 10 20 30 40 50 60 70 80 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 After Building to Its 2008 Peak, Jet Fuel Price Volatility Moderated in 2010-2013 airlines.org Annual Standard Deviation of U.S. Jet Fuel Spot Price (Cents per Gallon) 12 Source: U.S. Energy Information Administration
  • Jet-Fuel Prices Remain Volatile and Continue to Exceed Gasoline Prices Every Penny per Gallon per Year Equates to $190M in Annual Fuel Expenses $2.70 $2.80 $2.90 $3.00 $3.10 $3.20 28-Jun-13 28-Jul-13 28-Aug-13 28-Sep-13 28-Oct-13 28-Nov-13 28-Dec-13 28-Jan-14 28-Feb-14 31-Mar-14 30-Apr-14 31-May-14 30-Jun-14 31-Jul-14 Jet Fuel Price Volatility Daily Average Spot Price per Gallon Source: A4A and Energy Information Administration (U.S. Gulf Coast) airlines.org13 $2.25 $2.45 $2.65 $2.85 $3.05 $3.25 28-Jun-13 28-Aug-13 28-Oct-13 28-Dec-13 28-Feb-14 30-Apr-14 30-Jun-14 31-Aug-14 Gasoline Jet Jet Fuel vs. Motor Gasoline Weekly Average Spot Price per Gallon “[A]irline revenues remain sensitive to events out of their control – natural disasters, diseases like SARS or bird flu, geopolitical events, government taxes… Fuel price volatility is, by far, the biggest risk…” (Glenn Engel, Bank of America Merrill Lynch, “Industry Overview,” Jan. 10, 2014)
  • Jet Fuel Crack Spread* High Relative to U.S. Benchmark Crude Oil 2011-2014 WTI-Brent Spread and Jet Refining Margin Limited Efficacy of Fuel Hedging $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: A4A and Energy Information Administration * Refining margin (difference between jet-fuel price and crude-oil price) Brent WTI airlines.org14 1991-2000 $3.29 16% $4.77 25% 2001-2010 $10.83 19% $12.19 22% 2011 $31.07 33% $14.67 13% 2012 $34.31 36% $16.72 15% 2013 $24.68 25% $14.11 13% BrentWest Texas
  • International Air Travelers to/from USA Reached a Record 185.4 Million in 2013 Up 4.4 Percent from 2012, Including 5.1 Percent Growth among Non-U.S. Citizens airlines.org15 Source: Department of Commerce (National Travel & Tourism Office) and DHS Advance Passenger Information System (APIS) 2,010 1,687 1,432 1,975 515 1,764 637 942 459 (33) Europe Asia Canada Mexico Caribbean S.America C.America MiddleEast Oceania Africa YOY Change in Daily Passengers Each Way Sorted left to right by 2013 passenger volume USA Non-USA Travelers 3.6 5.1 Airlines 3.3 5.7 YOY Change (%) by Citizenship / Flag 43.7% 56.3% 53.1%46.9% Traveler Citizenship Airline Flag USA Non-USA
  • The Top 10 U.S. Air Gateways Accounted for 70 Percent of International Arriving Passengers, Led by New York (JFK), Miami (MIA) and Los Angeles (LAX) London Heathrow, Toronto Pearson and Tokyo Narita Generated 40 Percent of Arrivals airlines.org16 Source: Department of Commerce, DHS Advance Passenger Information System (APIS) and Customs and Border Protection Top 10 U.S. Gateways (2013) Average Daily Passenger Arrivals from Abroad 37,189 27,450 24,636 15,947 15,555 14,169 13,581 12,392 9,654 9,247 JFK MIA LAX EWR ORD ATL SFO IAH IAD DFW 19,720 15,256 13,462 9,259 9,026 8,505 8,091 6,956 6,541 6,176 LHR YYZ NRT FRA CDX CUN MEX KIX AMS YVR Top 10 Foreign Gateways (2013) Average Daily Passenger Departures to USA
  • U.S. Airlines Help Grow U.S. Exports, Reduce Trade Deficit, Boost GDP Visitor Spending on Airlines Drives 3.4X $$$ on Other U.S. Goods & Services* Source: BEA U.S. International Transactions, Table 1 17 airlines.org “The economic contributions of international travel and tourism continue to be a bright spot... The increase in U.S. travel and tourism-related exports…is crucial to supporting and creating jobs and boosting our nation’s economy.” (Under Secretary of Commerce Francisco Sánchez, August 8, 2013) $0 $25 $50 $75 $100 $125 $150 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 U.S. Airlines Other U.S. Travel & Tourism* * Food, lodging, recreation, gifts, entertainment, local transportation in the United States, and other items incidental to foreign travel International Visitor Spending ($ Billions) 3.4x All-Time Highs
  • In 2013, the USA Traded a Record $940 Billion of High-Value Merchandise by Air The Value of a Kilogram Exported by Air Was 129X the Value of a Kilogram Moved by Sea 284.4 430.9 308.6 509.4 $0 $200 $400 $600 $800 $1,000 2000 2013 Imports Exports Source: USA Trade® Online, Census Bureau (FT920 - U.S. Merchandise Trade) and research by Foreign Trade Division/Data Dissemination Branch 18 Value of Trade by Air ($ Billions) airlines.org Value per Kilogram Exports Imports $132.04 $135.74 $1.03 $1.70
  • 2007 2008 2009 2010 2011 2012 2013 Flight Safety (fatal accidents per million departures) 0.000 0.000 0.010 0.000 0.000 0.000 0.000 Flight Completion Factor (% of scheduled domestic departures) 97.84 98.04 98.61 98.24 98.09 98.71 98.49 On-Time Arrival Rate (% of domestic flights within 00:15) 73.42 76.04 79.49 79.79 79.62 81.85 78.34 Mishandled Bags (per 1,000 domestic passengers) 7.05 5.26 3.91 3.57 3.39 3.09 3.22 Involuntary Denied Boardings (per 10,000 passengers) 1.12 1.10 1.19 1.09 0.82 0.99 0.92 Customer Complaints (per 100,000 systemwide passengers) 1.37 1.13 0.97 1.20 1.18 1.42 1.13 Sources: NTSB, BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports) airlines.org19 2013 Another Solid Year for Operations and Customer Service Reinvestment of Modest Profits Helped Offset Effects of Sequestration and Bad Weather
  • Sources: TSA and DOT Air Travel Consumer Report airlines.org20 Over Past Three Years, Despite Rising Rate of Checked Bags, Bag-Handling Has Improved Materially; DOT Complaints Averaged Just 1.13 per 100,000 Customers Note: 2012 Among Best Years on Record in Terms of Favorable Weather Conditions 3.22 3.0 3.1 3.2 3.3 3.4 3.5 3.6 2010 2011 2012 2013 Mishandled Bags per 1,000 Customers2 0.677 0.660 0.664 0.668 0.672 0.676 0.680 2010 2011 2012 2013 Checked Bags per Customer1 Complaints per 100,000 Customers2 1.13 1.00 1.10 1.20 1.30 1.40 1.50 2010 2011 2012 2013 1 Number of persons screened at U.S. airport checkpoints 2 Number of passengers enplaned on U.S. airlines in domestic service Integration,DOTRulemaking Great weather
  • The Rate of Customer Complaints DOT Receives About Airlines is Remarkably Low Taxi, Train, Bus and Cable Customers Express Far Greater Levels of Dissatisfaction Sources: DOT, FCC, National Cable & Telecommunications Association, Washington Metropolitan Area Transit Authority, Capital Metro (Austin), L.A. County Metropolitan Transportation Authority, King County DOT, American Public Transportation Association, AMTRAK, NYC Taxi and Limousine Commission , Chicago Transit Authority 3,125.46 627.54 16.28 15.23 12.50 6.56 4.91 2.92 2.50 2.32 1.18 NYC Taxicabs AMTRAK Metro North RR (NYC) King County Metro (WA) WMATA (Wash., DC) U.S. Cable Companies Metra (NE Illinois Rail) Los Angeles Metrobus Capital Metro (Austin, TX) Chicago Transit Authority U.S. Airlines (per DOT) Complaints per 100,000 customers, CY2011 21 Sample Route Rate Capitol Corridor (Cal.) 15.5 Keystone 78.9 Acela 204.3 NE Regional 248.6 Chicago-Carbondale 419.7 Chicago-St. Louis 487.2 California Zephyr 6,138.2 airlines.org
  • On Average, U.S. Airline Flights Need to Be Nearly 80% Full to Break Even airlines.org Source: A4A Passenger Airline Cost Index 69.4 78.9 78.5 0 10 20 30 40 50 60 70 80 90 100 2000 2010 2013 …More Seats Must Be Filled to Break Even BreakevenLoadFactor(%) On Average, Planes Are Fuller But... 72.4 82.1 83.2 0 10 20 30 40 50 60 70 80 90 100 2000 2010 2013 AverageLoadFactor(%) 22
  • After a Decade of Sharp Workforce Reductions, U.S. Airline Employees Saw Jobs Grow and Compensation Rise From 2010 to 2013; Job Growth Continuing in 2014 airlines.org23 Source: BTS and A4A Passenger Airline Cost Index 520.6 378.1 380.8 383.5 2000 2010 2013 2014 Employment at U.S. Passenger Airlines Thousand FTEs +1%(27%) Wages $62,677 Wages $69,959 Benefits $22,695 Benefits $24,003 2010 2013 Wages & Benefits Annual Average per FTE Total = $85,372 Total = $93,962 YTDMay
  • Improving Finances Enabling Significant Reinvestment in Customer Experience Airline Capital Spending Continues at Robust Clip of Approximately $1 Billion per Month airlines.org24 5.2 6.6 9.8 12.4 3.0 2010 2011 2012 2013 1Q14 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United U.S. Airline* Capital Expenditures ($ 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.
  • (10.0) (8.0) (6.0) (4.0) (2.0) 0.0 2.0 4.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 As Airlines Generate Modest Returns on Capital, Customers Are Seeing More Seats Scheduled to Depart from U.S. Airports – Two Years’ of Growth airlines.org Year-Over-Year Change (%) in Scheduled Seats at U.S. Airports 25 Source: Innovata (via Diio Mi) published schedules as of July 19, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations Fuel Spike and Recession Economic Recovery Record-High Fuel Price Economic Recovery and Modest Fuel-Price Relief
  • 0 2 4 6 8 10 12 14 16 18 20 HOU SFO MDW LAX AUS HNL JFK MSY PDX SEA BNA CLT MIA LGA SAN SJC BOS DFW FLL RDU DCA DAL LAS ATL EWR ORD MSP OAK PHX TPA Among the 50 Largest U.S. Airports, 30 Have Gained Seats Over the Past Four Years Percent Change in Scheduled-Service Seats from 2010 to 2014 airlines.org26 Source: Innovata (via Diio Mi) published schedules as of July 19, 2014 for all airlines providing scheduled passenger service to all destinations (70) (60) (50) (40) (30) (20) (10) 0 IAH SNA SAT MCO STL PIT BWI DEN SLC DTW MCI IND SMF SJU PHL IAD CLE CVG MKE MEM
  • airlines.org27 Years of Staggering Losses Have Left U.S. Airlines* Saddled With Debt… * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United; includes capitalized operating leases at 7x annual aircraft rents $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)
  • airlines.org28 $11.2 $16.2 $9.2 $87.2 $100.2 $55.1 Aircraft & Engines Debt & Lease Payments Other 2014 2015 & Beyond …But Material Contractual Cash Obligations and Commitments Continue In Billions USD, as of December 31, 2013* * SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
  • 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.org29 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+ AC, AAL, GOL, HA, JBLU, UAL 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
  • 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 org30 Source: Standard and Poor’s Investment Grade Speculative Grade * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD
  • The Investment Community Perspective airlines.org31 “This past year we observed a significant uptick in investor interest toward the group as airlines posted strong financial results. Combined with balance sheet deleveraging and the return of capital to shareholders, most airlines are on track to exceed ROIC targets. Equity investors clearly approve...” -- Michael Linenberg, Deutsche Bank, “Outlook 2014” (Jan. 9, 2014) “[A]irline revenues remain sensitive to events out of their control – natural disasters, diseases like SARS or bird flu, geopolitical events, government taxes… Fuel price volatility is, by far, the biggest risk…” -- Glenn Engel, Bank of America Merrill Lynch, “Industry Overview” (Jan. 10, 2014)
  • U.S. Federal Commercial Aviation Tax Burden* Reached Record-High $19.3B in 2013 Tax Revenues Likely to Grow in FY2014 Due in Part to Higher TSA September 11th Fee Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, A4A * Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers $2,815 $1,879 $372 $672 $345 $525 $8,769 $2,911 $619 $377 $19,284 FY2013 Collections ($Millions) from Airlines/Customers DHS = $3.79B FAA = $12.68B airlines.org32 Rate rose from $2.50 per flight segment to $5.60 per one-way trip eff. July 21, 2014
  • 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 21, 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.org33 POTUS-Proposed FY15 Budget 26% ($77)* AATF = Airport and Airway Trust Fund 2002 9/11 Fee Begins 19% ($58)*
  • Perspectives on Regulation, Profitability and Consumers airlines.org34 “Passengers have rights, but airlines aren’t cash cows… [T]hey must fight hard for every reservation. The best thing that regulators could do this year on behalf of passengers is to step back and allow airlines to use their hard-won profitability to invest in better customer service products.” (Karen Walker, Editor-in-Chief, Air Transport World, “Regulation and Profitability,” January 2014) “Regulators sometimes forget how the process of selling travel has changed since the arrival of the Internet... To burden the industry with requirements for the airfare to include all ancillary services would be similar to requiring a resort to specify that room rates include dining, drinks, and golf... a clear absurdity… Travel remains one of the great consumer bargains, as the price of air travel hasn’t kept pace with other consumer goods and services. [À] la carte shopping is good for consumers.” (Jay Sorensen, IdeaWorksCompany, “À la Carte Pricing is Good for Consumers,” April 30, 2012) “ [W]hat they’ve failed to recognize is that the airline industry of the past was a sickly mess… It’s sad to think this is how the government looks at private industry. If you want to decide that the airline industry is a public utility, then go all-in and fully regulate it. (Fares will rise, but I would respect the argument.) Otherwise, this nanny-state-style semi-regulation will keep the industry from ever becoming truly healthy… (Brett Snyder, President, Cranky Flier, “US Department of Justice Gets a Cranky Jackass Award for Its Lawsuit to Stop the US Airways/American Merger,” Aug. 14, 2013)
  • In the United States, Airline Marketing and Customer Service Are Subject to a Greater Degree and Scope of Government Regulation than Other Key Service Industries Airlines Hotels RentalCars Cruises Amtrak Buses Cable Telecom Service Delivery Reporting  No No No No No No No Full-Fare Advertising (incl. taxes)  No No No No No No No Ancillary Revenue Reporting  No No No No No No No 24-Hour Purchase Refundability  No No No No No No No Detailed Reporting of Demand  No No  No No No No Detailed Reporting of Costs  No No No No    Reporting of Average Prices Paid  No No No No No   Operational Contingency Plans   No      airlines.org35
  • Recap airlines.org36 » 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
  • www.airlines.org