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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; now use net at http://trends.collegeboard.org/college-pricing/figures-tables/net-price, table 7; row 26 <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
  • http://atwonline.com/editorial/editorial-regulation-and-profitability-0
  • Professional Services: The cost of legal fees and expenses, professional and technical fees and expenses; as well as general services purchased outside (aircraft and general interchange service charges). <br /> Food & Beverage: The cost of purchasing beverages and food, food service uniforms, commissary supplies and outside catering charges. <br /> Aircraft Insurance: The cost of flight equipment insurance; also referred to as ‘Hull Insurance.’ <br /> Non-Aircraft Insurance: The cost of insurance unrelated to the hull itself. This category is broken down by two categories: general insurance (i.e., buildings and contents, materials and supplies, third party liability, passenger baggage and personal property) and traffic liability insurance (i.e., passenger baggage and personal property, cargo liability and provisions for self-insurance). <br /> Passenger Commissions: The costs paid to passenger travel agencies for services. <br /> Communication: The total cost of equipment and intercommunication rental and installation charges, telephone and teletype equipment, telegraph and cable message charges and navigation facility charges. <br /> Advertising and Promotion: Includes the cost of producing tariffs, schedules, timetables and other promotional and publicity expenses. <br /> Utilities & Office Supplies: The cost of light, heat, power and water, stationary, printing and office supplies and ‘other’ supplies including cleaning compounds, safety, electrical, and photographic supplies. <br /> Transport Related Expenses: Expenses related to the generation of transport related revenues- The cost of expenses (transportation facilities, services, etc.) <br /> Other Operating Expenses: Includes the cost of miscellaneous expenses such as personnel expense, outside flight equipment, excess of losses over insurance recoveries, interrupted trips expense, memberships, corporate and fiscal expenses, uncollectible accounts, clearance customs and duties. <br /> Employee Business Expense <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 />
  • 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 />
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • 2000-2004: -81,944 <br /> 2004-2010: -60,590 <br /> 2010-2013: +2,787 <br /> Cumulative Change: -139,747
  • “We’ve lost a lot of markets that were served only with the 50-seat (aircraft). We’d like more flights. But you’re not going to have any flights if the airlines don’t make money, so we understand their predicament.” (Larry Cox, president and CEO of the Memphis-Shelby County Airport Authority) <br /> ─ “Regional airlines face closings, bankruptcy,” USA Today (Aug. 20, 2012) <br />
  • “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) <br /> <br /> “…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... <br /> 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.” <br /> -- Alexander MacLennan, The Motley Fool, “How ‘Shareholder Friendly’ Should Airlines Be?” (Feb. 3, 2014) <br />
  • http://atwonline.com/editorial/editorial-regulation-and-profitability-0 <br /> http://www.ideaworkscompany.com/wp-content/uploads/2012/08/A-la-Carte-Shopping-is-Good-for-Consumers.pdf <br />
  • 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

  • U.S. Airlines and the Quest to Reinvest Putting Improved Finances to Work for Customers, Employees, Investors and the U.S. Economy Sept. 5, 2014
  • With Personal Incomes Outpacing the Price of Air Travel, Americans Can Purchase ~2.5 Times the Amount of Air Travel They Could at the Outset of Deregulation Adjusted for Inflation, Domestic Air Travel Remains ~40 Percent Below 1980 Levels Fare Fare + Ancillary airlines.org 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Domestic R/T Airfare as Share (%) of Per-Capita Disposable Personal Income 1979 1983 1987 1991 1995 1999 2003 2007 2011 Fare Fare + Ancillary 2 Source: A4A analysis of data from BEA, BLS and BTS (Data Bank 1B) $650 $600 $550 $500 $450 $400 $350 $300 1979 1983 1987 1991 1995 1999 2003 2007 2011 Domestic R/T Airfare Adjusted for Inflation (in CY2013 Dollars)
  • 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 Product (Unit) 2000 2013 % Δ Public College Tuition & Fees (Net of Grant Aid and Tax Benefits) $1,020 $3,120 205.9 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 $39,515 50.8 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 $316.95 $385.54 21.6 Air Travel (R/T Domestic Fare Only)2 $314.46 $363.07 15.5 Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 127.411 (1.7) Television (BLS Index) 49.9 4.581 (90.8) 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 3 airlines.org Real Increase Real Decrease
  • This Decade, U.S. Airline Flights Need to Be ~80 Percent Full to Avoid Losing Money Over Multiple Decades, the Rising Costs of Running an Airline – Without a Commensurate Increase in Fares – Have Meant That Airlines Have Had to Fill More Seats to Break Even airlines.org 56.7 85 80 75 70 65 60 55 Source: A4A Passenger Airline Cost Index 62.6 66.2 81.3 79.8 50 1971-1980 1981-1990 1991-2000 2001-2010 2011-2013 Breakeven Load Factor (%) 4
  • Improving Airline Finances Translating to Customer Benefits “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 “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 “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 5 airlines.org
  • Improving Airline Finances Translating to Customer Benefits (Cont’d) “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 6 airlines.org
  • Key Air-Travel Demand Drivers Trending Positively airlines.org 6.0 4.0 2.0 0.0 (2.0) (4.0) U.S. Economy (% CAGR) Expanding 2011 2012 2013 1Q14 2Q14 7 U.S. Generating > 200K Jobs per Month 400 300 200 100 0 Jan Feb Mar Apr May Jun Jul Aug Thousands $37.5 $37.0 $36.5 $36.0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 $83 $81 $79 $77 $75 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, in 000s, seasonally adjusted), U.S. disposable personal income per capita (chained 2009 dollars, SAAR); U.S. household net worth in current dollars, not seasonally adjusted Thousands Real Personal Incomes ($000) Rising Household Net Worth ($T) Growing $73 1Q13 2Q13 3Q13 4Q13 1Q14 Millions
  • Healthy Air-Travel Volumes and Fuel-Price Relief Drive Margin Gains* in 1H 2014 Lower Fuel Expense Largely Offsets Increases in Labor, Airport and Aircraft Costs % Change YOY Operating Revenues ($77.2B) 6.0 Operating Expenses ($70.4B) 2.2 Fuel (33% of Operating Expenses) (2.4) Wages & Benefits (24%) 6.5 Maintenance, Materials & Repairs (5%) (4.1) Landing Fees & Terminal Rents (5%) 5.3 Aircraft Rent (2%) (4.4) Depreciation & Amortization (5%) 6.9 Other** (25%) (5.4) Interest & Other Non-Operating Expenses 6.4 Income Tax & Other Expense / (Benefit) nmf Net Profit: $3.8B (5.0% of Op. Revenues) + 2.8 pts. Passenger Yield1 16.00¢ 16.46¢ +2.9% Passenger Traffic2 399.3B 409.7B +2.6% 1. Average airfare paid per mile flown, excluding taxes 2. Revenue passenger miles (RPMs) flown Enplanements 353.7M 360.0M +1.8% U.S. Inflation3 232.366 236.384 +1.7% Personal Income4 $39,273 $40,465 +3.0% 3. U.S. Consumer Price Index (1982-84 = 100) 4. U.S. disposable personal income per capita * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 1H13 1H14 Change 1H13 1H14 Change ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals 8 airlines.org
  • The Airline Industry Remains a Low-Margin Business, Lagging S&P 500 Average For Every Dollar of Revenue Collected, U.S. Airlines Keep Just a Nickel as Profit “Although it may seem like it’s becoming more popular to invest in airlines, data would show that it’s not... [T]here still isn’t a lot of long-term capital invested in the space… “Who owns airline stocks? You might be surprised…,” Hunter Keay, CFA, Wolfe Research (March 17, 2014) 18.7 airlines.org 14.8 15.7 13.6 11.9 9.5 9.6 9.9 6.2 Net Profit Margin (%), 1H 2014 4.0 4.2 4.9 5.0 3.1 3.3 3.8 McDonald´s Walt Disney CSX Comcast Starbucks Chipotle Samsonite S&P 500 Boeing Airlines* Marriott Royal Caribb. Whole Foods Walgreens Walmart Ford * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 9 Sources: Standard & Poor’s and company SEC filings; S&P is trailing twelve months
  • Significant Progress, But Risks Remain “Industry remains very cyclical and highly competitive, vulnerable to exogenous shocks; carriers have high degree of leverage, low margins.” -- Craig Fraser, Joe Rohlena and Ilya Ivashkov, Fitch Ratings, “Concerns Remain,” July 30, 2014 “Leverage progress slowed, big capital spending needs ahead; demand is still cyclical; rising labor costs…” -- Philip Baggaley and Betsy Snyder, Standard & Poor’s, “Potential Risks,” July 30, 2014 10 airlines.org
  • Running Like a Business Means Generating Economic Value Added (EVA) Being Economically Profitable Entails Covering Cost of Capital, Not Just Cost of Operation » 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. 11 airlines.org
  • 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 ... Incurring Higher Costs Billion USD per Year 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 Source: BTS (Form 41 P-12(a) for U.S. airlines) Due to Rising Prices ... USD per Gallon (Avg. Price Paid) $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 Source: BTS (Form 41 P-12(a) for U.S. airlines) Using Less Fuel But ... Million Gallons per Day 56.2 55.9 51.7 2000 2005 2013 Source: BTS (T2: 921) for U.S. airlines 12
  • 80 70 60 50 40 30 20 10 0 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) 13 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 “[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 Price Volatility Daily Average Spot Price per Gallon $3.20 $3.10 $3.00 $2.90 $2.80 $2.70 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 31-Aug-14 30-Sep-14 31-Oct-14 Source: A4A and Energy Information Administration (U.S. Gulf Coast) Jet Fuel vs. Motor Gasoline Weekly Average Spot Price per Gallon $3.25 $3.05 $2.85 $2.65 $2.45 $2.25 28-Jun-13 28-Aug-13 28-Oct-13 28-Dec-13 Gasoline Jet 28-Feb-14 30-Apr-14 30-Jun-14 31-Aug-14 31-Oct-14 31-Dec-14 14 airlines.org
  • 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 $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan-00 Jan-01 West Texas Brent Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 WTI Jan-11 Brent 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) 15 airlines.org 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%
  • 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 YOY Change in Daily Passengers Each Way Sorted left to right by 2013 passenger volume YOY Change (%) by Citizenship / Flag Traveler Citizenship Airline Flag Source: Department of Commerce (National Travel & Tourism Office) and DHS Advance Passenger Information System (APIS) 16 airlines.org 2,010 1,687 1,432 1,975 515 1,764 637 942 459 (33) Europe Asia Canada Mexico Caribbean S. America C. America Middle East Oceania Africa USA Non-USA Travelers 3.6 5.1 Airlines 3.3 5.7 43.7% 56.3% 53.1% 46.9% 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 Top 10 Foreign Gateways (2013) Average Daily Passenger Departures to USA Source: Department of Commerce, DHS Advance Passenger Information System (APIS) and Customs and Border Protection 17 airlines.org 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 CDG CUN MEX KIX AMS YVR
  • 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* “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) International Visitor Spending ($ Billions) Source: BEA U.S. International Transactions, Table 1 18 airlines.org $150 $125 $100 $75 $50 $25 $0 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 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 Imports Exports 308.6 284.4 509.4 430.9 $1,000 $800 $600 $400 $200 $0 2000 2013 Source: USA Trade® Online, Census Bureau (FT920 - U.S. Merchandise Trade) and research by Foreign Trade Division/Data Dissemination Branch 19 Value of Trade by Air ($ Billions) airlines.org Value per Kilogram Exports Imports $132.04 $135.74 $1.03 $1.70
  • In 1H14, Extreme Weather Took a Significant Toll on Airline Operations… Jan Polar vortexes brought extremely cold temperatures to the Midwest and East plus a series of snow and ice storms caused extensive delays and operational challenges. Feb The first three weeks of February saw a series of winter storms with multi-day impacts as they moved across the Midwest to the East Coast. The final week of the month was close to normal with only minor disruptions. February 13 was the single worst day for flight cancellations this winter with more than 7,500 as a massive winter storm affected operations at airports from Atlanta to Boston. Mar The biggest impact was March 2-4 as Winter Storm Titan brought snow and ice to the Midwest and Mid-Atlantic regions. March 12-13 saw more limited cancellations due to Winter Storm Vulcan, which primarily affected airports on the Great Lakes including ORD, DTW, CLE and upstate NY. Apr April was finally a reprieve from the challenging winter. The biggest impact was April 29-30 when nearly 1,900 flights were cancelled as severe thunderstorms moved through TX, the SE, and the DC-NY corridor. April 14-15 saw thunderstorms, snow/ice, and wind affect airports from TX to NY. May May saw an increase in thunderstorm activity compared to the previous year, with twice as many days with 500 or more cancellations. The biggest impact was May 8-16 when nearly 8,300 flights were cancelled as severe thunderstorms moved through the Midwest and Northeast. Jun Thunderstorm season was in full force. The biggest impact was June 9-13 with almost 5,000 flight cancellations as severe thunderstorms moved through the Midwest and Northeast. Runway construction also caused numerous delays, particularly at EWR and SFO. Source: masFlight 20 airlines.org
  • …Massive Winter Storms Pummeled 1Q Operations, Bringing Down 1H Performance Notwithstanding Increase in May Thunderstorms, 2Q Operations Were Comparable to 2013 99 98 97 96 95 94 Source: BTS 81 79 77 75 73 71 69 2013 2014 21 airlines.org 93 2013 2014 Jan Feb Mar Apr May Jun Flight Completion (%) 2013 2014 Chg. 1Q 98.2 95.4 (2.8) 2Q 98.4 98.3 (0.1) 67 Jan Feb Mar Apr May Jun On-Time Arrival Rate (%) 2013 2014 Chg. 1Q 80.1 72.2 (8.0) 2Q 76.2 76.1 (0.1)
  • The Rate of Customer Complaints DOT Receives About Airlines is Remarkably Low Taxi, Train, Bus and Cable Customers Express Far Greater Levels of Dissatisfaction 3,125.46 Complaints per 100,000 customers, CY2011 627.54 1.18 2.32 2.50 2.92 4.91 6.56 12.50 15.23 16.28 U.S. Airlines (per DOT) Chicago Transit Authority Capital Metro (Austin, TX) Los Angeles Metrobus Metra (NE Illinois Rail) U.S. Cable Companies WMATA (Wash., DC) King County Metro (WA) Metro North RR (NYC) AMTRAK NYC Taxicabs 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 22 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
  • Gradually Improving Finances Are Aiding Airline Employees… 23 airlines.org » Rising wages and benefits » Job growth and security » Tools and training to serve customers » Profit sharing » Accelerated pension contributions
  • Gradually Improving Finances Are Attracting New Investors… 24 airlines.org » De-risking (e.g., paying down debt) » Share buybacks » Issuance of dividends » Stock price appreciation » Value creation (ROIC > WACC)
  • …and the Increasing Ability to Hire, Train and Retain High-Quality Talent and to Lure Long-Term Investors is Translating Directly to Palpable Benefits for Our Customers » New or refurbished aircraft » Expanded route networks (scope and frequency) and schedules (seat growth) » Enhanced tools (computers, tablets, software) and training for customer-contact employees » Improved airport check-in areas, lounges, gates » Continued development and roll-out of mobile technology and website/kiosk functionality » Increasing operational reliability (controlled for weather conditions) » Availability of lie-flat seating with AC power and USB (incl. on select transcon flights) » Proliferation of domestic and international WiFi and inflight entertainment options 25 airlines.org
  • After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again June 2014 Was Seventh Consecutive Month of YOY Employment Gains at U.S. Airlines YTD June 26 airlines.org Employment at U.S. Passenger Airlines Thousand Full-Time Equivalents (FTEs) 520.6 Source: BTS 378.1 380.8 383.8 2000 2010 2013 2014
  • Improving Finances Are Helping Airlines Hire/Train/Retain High-Quality Employees » Job growth and security » Attractive wages and benefits » Tools and training to serve customers » Profit sharing » Accelerated contributions to employee retirement accounts 27 airlines.org
  • Earnings Momentum and Debt Reduction Are Attracting New Investors 28 airlines.org » De-risking (e.g., paying down debt) » Share buybacks » Issuance of dividends » Stock price appreciation » Value creation (ROIC > WACC)
  • …and the Increasing Ability to Hire, Train and Retain High-Quality Talent and to Lure Long-Term Investors is Translating Directly to Palpable Benefits for Our Customers » New or refurbished aircraft » Expanded route networks (scope and frequency) and schedules (seat growth) » Enhanced tools (computers, tablets, software) and training for customer-contact employees » Improved airport check-in areas, lounges, gates » Continued development and roll-out of mobile technology and website/kiosk functionality » Increasing operational reliability (controlled for weather conditions) » Larger overhead bins for luggage » Availability of lie-flat seating with AC power and USB (incl. on select transcon flights) » Proliferation of domestic and international WiFi and inflight entertainment options 29 airlines.org
  • Improving Finances Enabling Significant Reinvestment in Customer Experience Airline Capital Spending Continues at Robust Clip of More Than $1 Billion per Month » Aircraft (317 deliveries in 2014), spare engines, winglets » Premium seats, new aircraft interiors » Ground equipment, loading bridges » Airport (gates/lounges) and maintenance facilities » Bag carousels, carts, scanners » In-flight entertainment and Wi-Fi » Computers, kiosks, mobile technology 30 airlines.org U.S. Airline* Capital Expenditures ($ Billions) 5.2 6.6 9.8 12.4 7.0 2010 2011 2012 2013 1H14 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
  • U.S. Passenger Airlines* Taking Delivery of 317 Aircraft in 2014 – Almost 1 per Day 149 Units Received in First Six Months; 168 Units Slated for Delivery in Second Half 60 Small Jets 41 19 1 56 9 41 128 8 6 8 317 235 Narrowbody Jets 22 Widebody Jets 31 airlines.org * Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
  • As Airlines Generate Modest Returns on Capital, Customers Are Seeing More Seats Scheduled to Depart from U.S. Airports – Two-and-a-Half Years of Growth 4.0 2.0 0.0 (2.0) (4.0) (6.0) (8.0) (10.0) 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 1Q15 Source: Innovata (via Diio Mi) published schedules as of Aug. 29, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations airlines.org Year-Over-Year Change (%) in Scheduled Seats at U.S. Airports 32 Fuel Spike and Recession Economic Recovery Record-High Fuel Price Economic Recovery and Modest Fuel-Price Relief
  • 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 20 18 16 14 12 10 8 6 4 2 0 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 0 (10) (20) (30) (40) (50) (60) (70) IAH SNA SAT MCO STL PIT BWI DEN SLC DTW MCI IND SMF SJU PHL IAD CLE CVG MKE MEM Source: Innovata (via Diio Mi) published schedules as of July 19, 2014 for all airlines providing scheduled passenger service to all destinations 33 airlines.org
  • After Years of Staggering Losses, U.S. Airlines* Are Tackling the Mountain of Debt Total Debt* ($ Billions) $79.5 $71.9 $70.2 90 80 70 60 50 40 30 20 10 0 YE12 YE13 1H14 “…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 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United; includes capitalized operating leases at 7x annual aircraft rents 34 airlines.org “The industry is still subject to U.S. and global economic cycles, oil price (the largest operating expense) fluctuations, and unforeseen events…” Betsy Snyder Standard & Poor’s Mar. 25, 2014
  • …But Material Contractual Cash Obligations and Commitments Continue In Billions USD, as of December 31, 2013* 35 airlines.org $11.2 $16.2 $9.2 $87.2 $100.2 $55.1 Aircraft & Engines Debt & Lease Payments Other 2014 2015 & Beyond * SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
  • Airline Creditworthiness Remains Far From Stellar Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit Investment Grade1 (>= BBB-) Grade (< BBB-) Passenger Airline Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?” 36 airlines.org ExxonMobil, Microsoft AAA GE, United States Government AA+ Wal-Mart AA Toyota AA-UPS A+ BP, eBay, Union Pacific A Amtrak, Starbucks A-FedEx, Marriott, Starwood BBB Ford, Lufthansa, Southwest, WestJet BBB-Alaska, Qantas BB+ British Airways, Latam BB Avis-Budget, Chrysler, Delta BB-Hertz, Sabre B+ AC, AAL, GOL, HA, JBLU, UAL B SAS B-Speculative2 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
  • 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 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 ± 37 airlines org Source: Standard and Poor’s Investment Grade Speculative Grade * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD
  • The Investment Community Perspective “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) 38 airlines.org
  • U.S. Federal Commercial Aviation Tax Burden* Reached Record-High $19.3B in 2013 Tax Revenues Likely to Grow in FY2014 Due in Part to Higher TSA September 11th Fee FY2013 Collections ($Millions) from Airlines/Customers $2,815 DHS = $3.79B $1,879 $372 $672 $345 $525 $8,769 FAA = $12.68B $2,911 $619 $377 $19,284 * Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, A4A 39 airlines.org 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* Just Went Up Again 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 POTUS-Proposed FY15 Budget 26% ($77)* * 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 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 40 airlines.org AATF = Airport and Airway Trust Fund 2002 9/11 Fee Begins 19% ($58)*
  • Perspectives on Regulation, Profitability and Consumers “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) “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) 41 airlines.org
  • 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 Rental Cars 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      42 airlines.org
  • Recap » 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 more than $1 billion per month in 2014, including 317 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 43 airlines.org
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