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; now use net at http://trends.collegeboard.org/college-pricing/figures-tables/net-price, table 7; row 26
    Bureau of Labor Statistics (includes hedonic “quality-change” adjustments).
    National Automobile Dealers Association – www.nada.org (average retail selling price) - http://www.nada.org/Publications/NADADATA/
    Census Bureau – http://www.census.gov/construction/nrs/xls/usprice_cust.xls (median)
    Department of Energy – http://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf, Table 9.4.
    National Association of Theatre Owners – www.natoonline.org (average U.S. ticket prices).
    Postal Service – www.usps.com/postalhistory/welcome.htm, Publication 100.
    A4A via Bureau of Transportation Statistics – www.airlines.org.
    Disney World - http://allears.net/tix/tixincrease.htm or http://allears.net/tix/tixpix00.htm
    http://www.natoonline.org/statisticstickets.htm
    NFL - http://www.fancostexperience.com/; http://www.fancostexperience.com/pages/fcx/blog_pdfs/entry0000018_pdf000.pdf, Team Marketing Report Fan Cost Index
    NIPA Table 2.1, Line 38 - http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1

  • A4A Passenger Airline Cost Index
    http://www.washingtonpost.com/news/business/wp/2015/06/12/how-theme-parks-like-disney-world-left-the-middle-class-behind/
    http://allears.net/tix/tixpix10.htm
  • A4A Passenger Airline Cost Index
    http://www.washingtonpost.com/news/business/wp/2015/06/12/how-theme-parks-like-disney-world-left-the-middle-class-behind/
    http://allears.net/tix/tixpix10.htm
    https://www.teammarketing.com/tmr/81
  • Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes
  • https://research.stlouisfed.org/fred2/series/TWEXBMTH
  • 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)
  • Note: 40cpg at play translates to $7.6B ($0.40 * 19B gallons) annually at risk
    Each penny is $190M, each dime is $1.9B, each dollar is $19B
  • 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).
    Food & Beverage: The cost of purchasing beverages and food, food service uniforms, commissary supplies and outside catering charges.
    Aircraft Insurance: The cost of flight equipment insurance; also referred to as ‘Hull Insurance.’
    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).
    Passenger Commissions: The costs paid to passenger travel agencies for services.
    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.
    Advertising and Promotion: Includes the cost of producing tariffs, schedules, timetables and other promotional and publicity expenses.
    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.
    Transport Related Expenses: Expenses related to the generation of transport related revenues- The cost of expenses (transportation facilities, services, etc.)
    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.
    Employee Business Expense
  • “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's
    CALGARY, 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's Ratings Services.
    "This places us among the very few airlines in the world with an investment grade credit rating," said Vito Culmone, WestJet'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.
     
  • Brent Crude per EIA
    2011 $111.26
    2012 $111.63
    2013 $108.56
    2014 $98.97
  • 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'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'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.
  • http://atwonline.com/editorial/editorial-regulation-and-profitability-0

    “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
  • “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)
    ─ “Regional airlines face closings, bankruptcy,” USA Today (Aug. 20, 2012)
  • 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'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'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.
  • 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.
  • http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=6&isuri=1&6210=1&6200=51
    http://travel.trade.gov/research/reports/recpay/index.html
  • http://www.irs.gov/irb/2013-47_IRB/index.html
    http://www.irs.gov/irb/2013-47_IRB/ar11.html
    http://www.cbo.gov/publication/44964

    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 FY2016 budget
  • A4A Industry Review and Outlook

    1. 1. Feb. 3, 2016 U.S. Airlines: Allocating Capital to Benefit Customers, Employees and Investors
    2. 2. 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 airlines.org 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Fare Fare + Anc Domestic R/T Airfare as Share (%) of Per-Capita Disposable Personal Income 2 Source: A4A analysis of data from BEA, BLS and BTS (Data Bank 1B – the DOT 10% sample of tickets for all cabins and fare basis codes) $300 $350 $400 $450 $500 $550 $600 $650 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Fare Fare + Anc Domestic R/T Airfare Adjusted for Inflation (in CY2014 Dollars)
    3. 3. Product (Unit) 2000 2014 % ∆ Jet Fuel (Gallon, Price Paid by U.S. Airlines) $0.807 $2.862 254.5 Public College Tuition & Fees (Net of Grant Aid & Tax Benefits) $1,020 $3,079 201.9 Gasoline (Gallon, Unleaded) $1.51 $3.37 123.2 Walt Disney World® (One-Day Pass, Adult) $46 $99 115.2 National Football League Game (Nonpremium Ticket) $48.97 $84.43 72.4 Major League Baseball Game (Nonpremium Ticket) $16.22 $27.93 72.2 Prescription Drugs (BLS Index) 285.4 469.8 64.6 Disposable Personal Income per Capita (Annual) $26,206 $40,461 54.4 Movie Ticket (One Adult) $5.39 $8.17 51.6 Food & Beverage (BLS Index) 168.4 245.585 45.8 Single-Family Home (Existing) $143,600 $208,300 45.1 U.S. Consumer Price Index (CPI-U)1 172.2 236.736 37.5 Vehicle (New) $24,923 $32,618 30.9 Air Travel (R/T Domestic Fare + Ancillary)2 $316.95 $400.47 26.3 Air Travel (R/T Domestic Fare Only)2 $314.46 $377.39 20.0 Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 123.942 (4.4) Television (BLS Index) 49.9 3.561 (92.9) Relative to Most Goods/Services (and Jet Fuel), Air Travel Remains a Bargain This Century, U.S. Inflation and U.S. Personal Incomes Have Outpaced Domestic Airfare 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 – excludes taxes; “ancillary” includes revenue from reservation changes/cancellations and baggage airlines.org3 Real Increase Real Decrease
    4. 4. Within the Travel & Tourism Sector, Airfare Remains One of the Better Bargains airlines.org4 Source: A4A, BTS Data Bank 1B, allears.net and “How theme parks like Disney World left the middle class behind” (Drew Harwell, Washington Post, June 12, 2015) $3.50 $105 $0 $20 $40 $60 $80 $100 $120 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Magic Kingdom® ($/day) 5.54 14.76 0 2 4 6 8 10 12 14 16 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 U.S. Carrier Airfare (¢/mile) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 U.S. CPI Disney Airfare Price Index (1971 = 100) 30X 2.7X 5.8X 1971-1978: 5.7% CAGR 1978-2014: 1.7% CAGR
    5. 5. Americans Have Seen Increases in the Average Price of Food, Shelter, Public Transportation and Entertainment Over The Past Two and a Half Decades airlines.org5 Source: Federal Reserve Bank of St. Louis, National Association of Relators, National Association of Theatre Owners, Team Marketing Report 125 150 175 200 225 250 275 300 1990 1994 1998 2002 2006 2010 2014 Food Transit +94% +83% Food & Public Transit $5 $10 $15 $20 $25 $30 1990 1994 1998 2002 2006 2010 2014 +220% Movie Tickets PriceIndex:1982-84=100 $80 $100 $120 $140 $160 $180 $200 $220 $240 1990 1994 1998 2002 2006 2010 2014 +79% Housing (Existing Home, $000) $2 $4 $6 $8 $10 1990 1994 1998 2002 2006 2010 2014 +94% Baseball (MLB) Tickets
    6. 6. Over the Past 25 Years, the Price of Purchasing Food, Taking the Bus/Train, or Going to the Movies/Ballpark Has Significantly Outpaced the Price of Taking a Trip by Air airlines.org6 Source: A4A, BTS Data Bank 1B, Federal Reserve Bank of St. Louis, National Association of Theatre Owners, Team Marketing Report 75 100 125 150 175 200 225 250 275 300 325 350 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Airfare* Food Transit Baseball (MLB) Movie * Domestic round-trip average, including bag and change fees PriceIndex:1990=100 % Change Baseball Game +220 Public Transit 94 Movie Ticket 94 Food 83 Airfare* 39
    7. 7. Even in 2015, U.S. Flights Need to Fill 2 of Every 3 Seats 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 Source: A4A Passenger Airline Cost Index and U.S. Bureau of Transportation Statistics 56.7 62.6 66.2 81.3 81.0 80.9 77.5 75.6 66.9 83.4 82.9 50 55 60 65 70 75 80 85 90 1971-1980 1981-1990 1991-2000 2001-2010 2011 2012 2013 2014 1H15 Breakeven Actual LoadFactor(%) 7
    8. 8. Key U.S. Air-Travel Demand Drivers A Mixed Bag airlines.org 1.6 2.2 1.5 2.4 2.4 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2011 2012 2013 2014 2015 Real GDP Growth Rate (% CAGR) 8 Monthly Employment Growth (000) 173 188 199 260 221 0 50 100 150 200 250 300 2011 2012 2013 2014 2015 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 $36.0 $36.5 $37.0 $37.5 $38.0 $38.5 2011 2012 2013 2014 2015 Thousands Real ($2009) Personal Incomes ($000) Household Net Worth ($ Trillion, NSA) $60 $65 $70 $75 $80 $85 $90 2011 2012 2013 2014 1Q15 2Q15 3Q15 Millions
    9. 9. airlines.org9 30 40 50 60 70 80 90 100 110 120 130 140 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20 Source: Board of Governors of the Federal Reserve System (https://research.stlouisfed.org/) Strengthening U.S. Dollar Is a Headwind for U.S. Carrier International Revenues Puts Downward Pressure on Foreign Point-of-Sale and Passenger YieldU.S.DollarIndex:Jan.1997=100* * Trade-weighted
    10. 10. Sources: BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports) airlines.org10 U.S. Airlines Seeing Improvements in DOT Core Operational Metrics in YTD* 2015 Gains Driven by More Benign Weather and Investments in Systems, Procedures, Staffing 97.75 98.47 2014 2015 Flight Completion Factor (%) 99.65 99.68 2014 2015 Properly Handled Bag Rate (%) 1.04 0.77 2014 2015 Oversales** per 10,000 Customers On-Time Arrival Rate (%) 76.34 80.11 2014 2015 * January through November ** Involuntary denied boardings: Jan-Sep
    11. 11. Recent Relief in Oil and Jet-Fuel Prices Boosting Seats, Wages and Reinvestment Every Penny per Gallon per Year Equates to $190M in Annual Fuel Expenses EIA Spot Price of Crude Oil/Barrel (Brent) airlines.org11 0.61 0.85 2.15 3.00 3.06 2.92 2.69 1.52 0.92 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 1991 2000 2010 2011 2012 2013 2014 2015 2016 EIA Spot Price of Jet Fuel/Gallon (U.S. Gulf) 20 29 80 111 112 109 99 52 $0 $20 $40 $60 $80 $100 $120 1991 2000 2010 2011 2012 2013 2014 2015 Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)
    12. 12. In 2015, Amid Competitive Pressures, Domestic Air Fares Fell Almost Every Month Latin and Pacific Markets Seeing Even Larger Declines, in Part Due to Stronger Dollar airlines.org12 Source: A4A revenue report, containing data from Alaska, American, Delta, JetBlue, Southwest and United and regional affiliates % Change YOY in Domestic Passenger Yield (Fare per Mile) * January through November 0.6 (0.8) 0.6 (1.9) (3.6) (5.5) (3.5) (6.8) (5.6) (6.4) (4.3) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD* Chg. by Region Domestic (3.8) Atlantic (5.1) Latin (10.1) Pacific (10.3) System (4.9) Ex.Delta Ex.Delta
    13. 13. Lower Fuel More Than Offsets Flat Revenues to Drive YTD 3Q15 Airline Profitability* Higher Traffic Matched by Higher Capacity; Lower Fares; Higher Labor Cost, Lower Fuel * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America airlines.org13 Operating Revenues ($120.7B) 0.3 Operating Expenses ($99.3B) (8.8) Wages & Benefits (29% of Op. Expenses) 11.2 Fuel (24%) (35.8) Landing Fees & Terminal Rents (6%) 2.1 Maintenance, Materials & Repairs (6%) (0.5) Depreciation & Amortization (5%) 7.0 Aircraft Rent (2%) (4.5) Other Operating Expenses** (28%) 0.9 Interest & Other Non-Operating Expenses 17.0 Pre-Tax Profit: $18.8B (15.6% of Revenues) +7.9 pts. Net Profit: $17.9B (14.8% of Revenues) +9.1 pts. ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals % Change YOY YTD14 YTD15 Chg. Passenger Traffic1 644.2B 669.3B +3.9 Seating Capacity2 767.6B 797.9B +3.9 Load Factor3 83.9 83.9 0.0 Passenger Yield4 16.37¢ 15.65¢ (4.4) Fuel Consumption5 11,907M 12,169M +2.2 Fuel Price6 $3.07 $1.93 (37.1) 1. Revenue passenger miles (RPMs) flown 2. Available seat miles (ASMs) operated 3. Utilization of capacity: RPMs divided by ASMs 4. Average airfare paid per mile flown, excluding taxes 5. Gallons consumed 6. Average price paid per gallon U.S. Inflation7 236.938 236.945 0.0 Personal Income8 $40,287 $41,427 +2.8 7. U.S. Consumer Price Index (CPI): 1982-84 = 100 8. U.S. disposable personal income per capita, in current dollars
    14. 14. For Now, U.S. Airline Profitability is Finally in Line With the Average U.S. Company For Every Dollar of Revenue Collected, U.S. Airlines Keeping ~15 Cents as Pre-Tax Profit airlines.org 31.0 26.525.4 23.5 20.420.219.0 15.6 9.89.29.08.4 6.45.5 Apple CSX McDonald´s Coca-Cola Starbucks Verizon Chipotle Airlines* RoyalCaribb. ExxonMobil Marriott Boeing Ford CVS 14 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America YTD 3Q 2015 Pre-Tax Profit Margin (Pre-Tax Income as % of Operating Revenues)
    15. 15. Six Years Post-Recession, Airlines Finally Achieving Average U.S. Profitability Pre-Tax Profit Margin: Pre-Tax Income as Percent of Operating Revenues airlines.org 0.6 0.4 3.2 5.8 14.5 13.4 13.3 14.0 13.9 14.6 0 2 4 6 8 10 12 14 16 2011 2012 2013 2014 1H15 U.S. Airlines S&P 500 15 Sources: Standard & Poor’s (S&P) and A4A Passenger Airline Cost Index plus company SEC filings; S&P data excludes unusual items
    16. 16. Investment Grade1 (>= BBB-) Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?” airlines.org16 ExxonMobil, Microsoft AAA GE, United States Government AA+ Google, Wal-Mart AA Toyota AA- UPS A+ BP, McDonald’s, PepsiCo, Target A Amtrak, Starbucks A- Ryanair, eBay BBB+ FedEx, Marriott, Southwest, Starwood BBB ALK, Ford, Lufthansa, Qantas, WestJet BBB- Delta, Turkish BB+ British Airways, LATAM BB ALGT, AAL, JBLU, UAL, Avis, Chrysler BB- AC, Virgin Australia, Hertz, Sabre B+ Hawaiian B GOL, 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 Airline Creditworthiness Remains Far From Stellar Per S&P, Only Two U.S. Passenger Airlines Have Investment-Grade Credit “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.” Passenger Airline
    17. 17. BOS HOU* LAS LAX MSP NYC* 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 OKC 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, WestJet Delta, Allegiant, AAL, JBLU, UAL Air Canada, Hawaiian AA ± A ± BBB ± BB ± B ± Strong Credit Ratings Allow Airports to Access Capital Markets at Preferred Rates airlines org17 Source: Standard and Poor’s Investment Grade1 Speculative Grade2 * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD 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
    18. 18. In 2014, U.S. Airlines’ Fuel Bill Totaled $48 Billion Average Price Paid for Jet Fuel Rose 255% in 2000-2014, Including 26% in 2010-2014 [In 2011-2014, the Average Annual Price of Crude Oil Ranged From $99 to $112 per Barrel] airlines.org $16.4 $33.2 $39.3 $48.1 2000 2005 2010 2014 ... Incurring Higher Costs Billion USD per Year Source: BTS (Form 41 P-12(a) for U.S. airlines) $0.81 $1.66 $2.27 $2.86 2000 2005 2010 2014 Due to Rising Prices ... Avg. Price Paid per Gallon Systemwide Source: BTS (Form 41 P-12(a) for U.S. airlines) 56.2 55.9 50.7 51.6 2000 2005 2010 2014 Source: BTS (T2: 921) for U.S. airlines Using Less Fuel But ... Million Gallons per Day 18
    19. 19. 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 2014 After Its Post-2008 Decline, Jet Fuel Price Volatility Returned in 2014 airlines.org Annual Standard Deviation of U.S. Jet Fuel Spot Price (Cents per Gallon) 19 Source: U.S. Energy Information Administration
    20. 20. Like Other Responsible Businesses, Airlines Are Focused on Balanced Allocation of Capital to Benefit All Stakeholders: Customers, Employees and Investors airlines.org20  Renewing fleets, improving the product at all stages of travel  Boosting operational reliability, advancing environmental objectives  Restoring/increasing air service levels (capacity)  Adding staff  De-risking (reducing debt)  Returning cash to shareholders  Buying back stock  Issuing dividends  Increasing job security  Restoring/increasing employee wages and benefits  Shoring up pensions (or comparable retirement accounts)
    21. 21. U.S. Airlines Are Putting Half of Operating Cash Flow* Right Back Into the Product Uses of Cash in First Nine Months of 2015 airlines.org21 $12.1B Enhance the Product $7.7B Reward Shareholders $6.1B Retire Debt * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; denominator is net cash provided by operating activities
    22. 22. Improving Finances Enabling Significant Reinvestment in Customer Experience U.S. Airline* Capital Expenditures ($ Millions per Month) airlines.org22 1,288 1,148 644 540 430 551 816 1,036 1,162 1,340 2000 2001 2002 2003-2009 2010 2011 2012 2013 2014 YTD15 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America » YTD 3Q 2015 outlays highest in at least 15 years:  Averaged $1.3B per month or ~$20 per passenger  Constituted half of operating cash flow » Outlays in part reflect 367 aircraft deliveries in 2015 » At 12/31/2014, firm orders for 1,800+ aircraft worth $94B
    23. 23. Improving Airline Finances Translating to Customer Benefits airlines.org23 “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
    24. 24. The Increasing Ability to Hire, Train and Retain High-Quality Talent and to Lure Long- Term Investors is Translating Directly to Palpable Benefits for Airline Customers airlines.org24 » New or refurbished aircraft, larger overhead bins for luggage » Availability of lie-flat seating with AC power and USB, proliferation of Wi-Fi and inflight entertainment » Expanded route networks (scope and frequency) and schedules (seat growth) » Improved airport check-in areas, lounges, gate amenities, baggage systems, ground equipment » Continued development and roll-out of mobile technology and website/kiosk functionality » Increasing operational reliability (controlled for weather conditions) » Enhanced tools (computers, tablets, software) and training for customer-contact employees
    25. 25. 2.55 2.45 2.29 2.28 2.29 2.26 2.27 2.29 2.37 2.48 2.20 2.25 2.30 2.35 2.40 2.45 2.50 2.55 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 As Airlines Generate Normal Returns on Capital, Customers Are Seeing More Seats Domestic Supply at Highest Point in Eight Years; International Supply at All-Time High airlines.org Domestic USA (Million Daily Seats) 25 Source: Innovata (via Diio Mi) published schedules as of Jan. 29, 2016, for all airlines providing scheduled passenger service from U.S. airports to all destinations 288 292 275 282 292 299 310 330 351 371 260 280 300 320 340 360 380 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 International (Thousand Daily Seats) Exceeding 2008 Highest Ever
    26. 26. In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Biggest Driver of 13.5% Jump airlines.org26 110.9 150.0 96.3 93.7 112.6 146.9 132.9 133.2 153.0 83.3 138.1 102.0 117.1 168.7 101.7 112.3 169.5 151.5 132.8 146.8 174.0 95.1 141.6 115.8 Alaska Allegiant American Delta Frontier Hawaiian JetBlue Southwest Spirit United Virgin Average 2010 2016 Average Domestic Aircraft Size (Seats per Scheduled Departure) Source: Innovata (via Diio Mi) as of Jan. 8, 2016
    27. 27. Heard on the Street… airlines.org27 “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
    28. 28. After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again November 2015 Was 24th Consecutive Month of YOY Employment Gains at U.S. Airlines airlines.org28 Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 520.6 378.3 384.5 394.8 2000 2010 YTD Nov-2014 YTD Nov-2015 Employment at U.S. Passenger Airlines Thousand Full-Time Equivalents Down142,300(27%) Up>10,000YOY
    29. 29. U.S. Airlines* Are Pumping More Wages and Benefits into the Economy Airlines* Spending ~$3.2 Billion per Month on the Workforce airlines.org29 2,546 2,608 2,733 2,762 2,987 3,202 2010 2011 2012 2013 2014 YTD15 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America Employee Wages and Benefits* per Month (in $ Millions)
    30. 30. In the Deregulated Period, U.S. Airline “Earnings” Have Been Cyclical and Volatile Cumulatively, Airlines Have Recorded Net Losses of $32B (or -1% of Revenues) airlines.org Source: A4A Passenger Airline Cost Index 1.8 (11.4) 20.6 (65.1) 22.5 (80) (60) (40) (20) 0 20 40 1979-1989 1990-1994 1995-2000 2001-2009 2010-2014 NetIncome($Billions) 30 0.4%Margin: (3.3%) 3.8% (6.3%) 2.9%
    31. 31. airlines.org31 Following Enormous Losses of 2001-2009, U.S. Airlines* Have Retired $52.5B in Debt and Returned $14.6B in Cash to Shareholders, Helping Lure New Equity Investors * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; payments on long-term debt and capital lease obligations $0 $10 $20 $30 $40 $50 $60 2010 2011 2012 2013 2014 YTD15 Thousands Annual Cumulative Payments on Debt* (Billions) Returns to Shareholders* (Billions) $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 2010 2011 2012 2013 2014 YTD15 Dividends Stock Buybacks ~$9B/year
    32. 32. U.S. Airlines Help Grow U.S. Exports, Reduce Trade Deficit, Boost GDP U.S. Travel/Tourism Exports Reach All-Time High, Fueled by Air Transportation Source: U.S. BEA and NTTO 32 airlines.org “Total travel and tourism exports is by far the largest service export for the United States. Travel is now 31% of all services exports and 9% of all goods and services exports… Travel exports are larger than our agricultural, automotive and consumer goods exports.” -- U.S. Department of Commerce (December 17, 2014) $0 $50 $100 $150 $200 $250 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Other Travel & Tourism* Passenger Air Transportation * Food, lodging, recreation, gifts, entertainment, local transportation in the United States, and other items incidental to foreign travel U.S. Travel and Tourism Exports (Billions)
    33. 33. In 2014, the USA Traded a Record $986 Billion of High-Value Merchandise by Air The Value of a Kilogram Exported by Air Was 137X the Value of a Kilogram Moved by Sea 284.4 442.8 308.6 543.3 $0 $200 $400 $600 $800 $1,000 $1,200 2000 2014 Imports Exports Source: USA Trade® Online, Census Bureau (FT920 - U.S. Merchandise Trade) and research by Foreign Trade Division/Data Dissemination Branch 33 Value of Trade by Air ($ Billions) airlines.org Value per Kilogram Exports Imports $134.00 $133.19 $0.98 $1.71
    34. 34. U.S. Federal Commercial Aviation Tax Burden* Reached Record-High $22.6B in 2015 FY 2015 Receipts Rose in Part on Higher TSA September 11th Fee* Sources: A4A, CBP, EPA, FAA, OMB and TSA * Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers; 9/11 fee rose effective July 21, 2014 3,526 773 576 584 2,964 9,838 3,311 497 411 96 22,575 FY 2015 Collections ($Millions) from Airlines and their Customers airlines.org34 ~$62M/Day Dept. of Homeland Security U.S. Airports FAA (Airport & Airway Trust Fund)
    35. 35. Federal Tax-and-Fee Approach to a $300 One-Stop Domestic Round Trip* Over Time Growing Governmental Take Leaves Less Revenue for Carriers to Reinvest 2014-2015 9/11 Fee Hike 21% ($63)* 1971-1972 AATF Begins 7% ($22)* 1992-1993 PFC Begins 13% ($38)* Taxes Airfare ** Based on proposed increases in President’s FY2016 budget and as sought by U.S. airports (via ACI-NA and AAAE) * 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.org35 Proposed** 26% ($79)* AATF = Airport and Airway Trust Fund 2002 9/11 Fee Begins 19% ($58)*
    36. 36. Recap airlines.org36 » With operations improving, airfares falling and new aircraft entering the fleet at a steady pace, 2015 translated to an improving experience for airline customers » Despite flattish operating revenues, employees and investors, too, are benefiting as falling operating expenses steadily improve the industry’s financial wherewithal » Six-and-a half years post-recession, U.S. airlines are finally achieving profitability in line with the overall U.S. corporate average and, in turn:  boosting staffing and wages  acquiring new aircraft and ground equipment  launching new routes and enhancing airport and inflight amenities  offering domestic flyers the highest number of seats since the Great Recession  reducing debt and returning cash to shareholders  working their way toward investment-grade creditworthiness
    37. 37. www.airlines.org

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