A4A Industry Review and Outlook

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  • Here’s the yoy change in scheduled seats for the top 10 airports over the forecast period:

    ATL 2.4%
    ORD -0.7%
    DFW -1.4%
    LAX 7.2%
    DEN 6.1%
    CLT 3.0%
    PHX 1.0%
    SFO 7.7%
    LAS 5.3%
    JFK 5.1%
  • 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
  • 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://www.nytimes.com/2016/02/28/business/disney-introduces-demand-based-pricing-at-theme-parks.html
    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
  • 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)
  • https://research.stlouisfed.org/fred2/series/TWEXBMTH
  • 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
  • “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
    2015
  • 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.
  • Free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure. It can also be calculated by taking operating cash flow and subtracting capital expenditures.
  • 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.census.gov/foreign-trade/Press-Release/ft920_index.html
    https://usatrade.census.gov/
  • 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. April 21, 2016 U.S. Airlines: Allocating Capital to Benefit Customers, Employees and Investors
    2. 2. A4A Projects Spring* 2016 Air Travel to Rise 3% to All-Time High of 140M Passengers Airlines Adding Commensurate Number of Seats to Accommodate Record-High Demand airlines.org2 118.8 119.6 107.8 110.6 123.5 131.4 131.8 135.1 133.7 123.0 124.2 126.8 128.4 128.2 132.2 136.2 140.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: A4A and BTS T100 segment data – U.S. carriers only; scheduled and nonscheduled services U.S. Airline Onboard Passengers (Millions) – All Services, March 1 through April 30  140 million passengers or about 2.3 million/day • Up ~63K/day from 2015; up ~81K/day from 2007 • Includes 17M+ (285K/day) traveling internationally • Projected average load factor: 83%-85% + 3% * For this purpose, defined as March 1 through April 30 FORECAST  Key drivers of growth include: • Rising employment, personal incomes • Air travel affordability • Improved airline operations
    3. 3. Key U.S. Air-Travel Demand Drivers Still Showing Growth airlines.org 1.6 2.2 1.5 2.4 2.4 1.2 2.6 2.7 2.9 0 1 2 3 4 2011 2012 2013 2014 2015 1Q 2Q 3Q 4Q Real GDP Growth Rate (% CAGR) 3 Monthly Employment Growth (000) 174 179 193 251 229 168 245 215 0 100 200 300 2011 2012 2013 2014 2015 Jan Feb Mar 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 37 38 39 2011 2012 2013 2014 2015 Thousands Real ($2009) Personal Incomes ($000) Household Net Worth ($ Trillion, NSA) 60 70 80 90 2011 2012 2013 2014 2015 Millions IHS Forecast
    4. 4. Amid Competitive Pressures, U.S. Carrier Air Fares* Continue to Fall in 2016 Systemwide, Fares* Down 5.2% in 2015 and 6.3% Thus Far in 2016 airlines.org4 Source: A4A analysis of data from Alaska, American, Hawaiian, JetBlue, Southwest, United, Virgin America and regional affiliates % Change YOY in Domestic Yield* 1.0 (1.1) 0.3 (2.5) (3.7) (5.6) (3.8) (7.1) (5.4) (6.3) (4.1) (8.9) (6.4) (4.4) (4.0) Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-16 Feb Mar (4.3) (2.4) (4.3) (6.0) (9.1) (10.4) (8.6) (11.3) (11.7) (10.4) (12.1) (9.9) (11.8) (10.4) (11.2) Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-16 Feb Mar % Change YOY in International Yield* 2015 vs. 2014: (4.1%); YTD16 vs. YTD15: (4.9%) * Fare per mile (cents per RPM) 2015 vs. 2014: (8.6%); YTD16 vs. YTD15: (11.2%)
    5. 5. 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 2019 Fare Fare + Anc Domestic R/T Airfare as Share (%) of Per-Capita Disposable Personal Income 5 Source: A4A analysis of data from BEA, BLS and BTS Data Bank 1B (10% sample of tickets for all cabins and fare basis codes); 2015 based on first three quarters $300 $350 $400 $450 $500 $550 $600 $650 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 Fare Fare + Anc Domestic R/T Airfare Adjusted for Inflation (in CY2015 Dollars)
    6. 6. 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.org6 Real Increase Real Decrease
    7. 7. Within the Travel & Tourism Sector, Airfare Remains One of the Better Bargains In Contrast to Air Travel, the Price of a Day at Disney Has Increased 31-Fold Since 1971 airlines.org7 Sources: A4A, BTS Data Bank 1B, allears.net, “How theme parks like Disney World left the middle class behind” (Drew Harwell, The Washington Post, June 12, 2015) and “Disney Introduces Demand-Based Pricing at Theme Parks” (Brooks Barnes, The New York Times, Feb. 27, 2016) $3.50 $110 $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 1000 1500 2000 2500 3000 3500 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
    8. 8. Americans Have Seen Increases in the Average Price of Food, Shelter, Public Transportation and Entertainment Over The Past Two and a Half Decades airlines.org8 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
    9. 9. 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.org9 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
    10. 10. Sources: BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports) airlines.org10 U.S. Airlines Saw Improvements in DOT Core-Four Operational Metrics in 2015 Gains Driven by More Benign Weather and Investments in Systems, Procedures, Staffing 97.82 98.46 2014 2015 Flight Completion Factor (%) 99.64 99.68 2014 2015 Properly Handled Bag Rate (%) 0.92 0.76 2014 2015 Oversales per 10,000 Customers On-Time Arrival Rate (%) 76.25 79.92 2014 2015
    11. 11. U.S. Passenger Airlines Set Multiple Traffic and Capacity Records in 2015 airlines.org11 466 452 475 489 529 548 581 595 613 636 666 622 614 647 704 739 745 770 743 704 720 731 737 743 763 798 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Passengers Enplaned (Millions) – All-Time High Revenue Passenger Miles Flown (Billions) – All-Time High Source: U.S. Bureau of Transportation Statistics T1, Systemwide Scheduled Service 458 448 479 490 519 541 579 603 618 652 693 652 642 657 734 779 797 829 812 769 798 814 823 840 863 902 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Available Seat Miles Operated (Billions) – All-Time High 733 715 753 772 784 807 835 857 873 918 957 931 895 895 972 1,003 1,006 1,038 1,021 957 973 993 995 1,011 1,034 1,077 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Load Factor Realized (Percent) – All-Time High 62.4 62.6 63.6 63.5 66.2 67.0 69.3 70.4 70.7 71.0 72.4 70.0 71.8 73.5 75.5 77.6 79.2 79.9 79.5 80.4 82.1 82.0 82.8 83.1 83.4 83.8 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
    12. 12. 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 67.1 83.4 83.8 50 55 60 65 70 75 80 85 90 1971-1980 1981-1990 1991-2000 2001-2010 2011 2012 2013 2014 2015P Breakeven Actual LoadFactor(%) 12
    13. 13. airlines.org13 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
    14. 14. 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.org14 0.61 0.85 2.15 3.00 3.06 2.92 2.69 1.52 1.01 $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) Note: 2016 reflects year-to-date average
    15. 15. 2015 Airline Operating Revenues* Were Flat As Lower Fares Offset Traffic Gains Passenger Revenue Fell $1.3B (1.0%) on 4.4% Higher Traffic and 5.1% Lower Yield $158.6 $6.0 $7.4 $0.2 $1.6 $158.6 Operating Revenues* ($ Billions) airlines.org15 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America Revenue Gain Revenue Loss ** Sale of frequent flyer award miles to airline business partners, pet transportation, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc. +4.4% (5.1%) (7.9%) +9.6% +0.04%
    16. 16. 2015 Airline Operating Expenses* Fell $14B (9.5%) As Lower Fuel Offset Higher Labor Airlines Also Saw Increases in Landing Fees, Terminal Rents and Aircraft Costs $145.2 $18.6 $4.4 $0.1 $0.1 $0.3 $0.1 $131.4 Operating Expenses* ($ Billions) airlines.org16 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals Cost Reduction Cost Increase (38.3%) +12.2% +1.8% +0.3%+2.9% (1.8%) (9.5%)
    17. 17. In 2015, U.S. Airlines* Posted Respectable Margins, Approaching 15% Before Taxes U.S. Passenger Airline* Profitability Was Just Under Half That of Apple and Altria airlines.org 31.830.9 27.426.625.8 18.517.917.1 14.614.114.1 11.6 8.7 Altria Apple Disney CSX McDonald´s Starbucks Comcast Chipotle Airlines* S&P500 MIllerCoors Starwood Marriott 17 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America 2015 Pre-Tax Profit Margin (% of Operating Revenues) $23.2B $72.7B Note: S&P 500 excludes unusual items
    18. 18. Airlines Continue to Strive for Solid Profitability Across the Business Cycle In Current U.S. Business Cycle, Airline Margins Are Less Than Half the S&P 500 Average airlines.org 31.1 28.3 23.0 17.4 13.8 4.6 0 5 10 15 20 25 30 35 AAPL MCD DIS SBUX SPX* U.S. Airlines 18 Sources: Standard & Poor’s (S&P) and A4A Passenger Airline Cost Index plus company SEC filings Apple McDonald’s Starbucks S&P500 * Excludes unusual items and reflects 2011-2015 Pre-Tax Profit Margin (%) for 2010-2015 Disney
    19. 19. Six Years Post-Recession, Airlines Finally Achieving Average U.S. Profitability In the Current U.S. Business Cycle, Airline Margins Are Less Than Half the S&P 500 Avg. airlines.org 0.6 0.4 3.2 5.8 14.6 5.0 13.1 13.4 14.1 14.0 14.1 13.8 0 2 4 6 8 10 12 14 16 2011 2012 2013 2014 2015P 2011-2015P U.S. Airlines S&P 500* 19 Sources: Standard & Poor’s (S&P) and A4A Passenger Airline Cost Index plus company SEC filings Pre-TaxProfitMargin(%ofOp.Revenues) * Excludes unusual items
    20. 20. Investment Grade1 (>= BBB-) Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?” airlines.org20 ExxonMobil, Microsoft AAA GE, United States Government AA+ Google, Wal-Mart AA Toyota AA- UPS A+ McDonald’s, PepsiCo, Target A BP, Amtrak, Starbucks A- Ryanair, eBay BBB+ FedEx, Ford, Marriott, SWA, Starwood BBB ALK, Lufthansa, Qantas, WestJet BBB- Delta, Turkish BB+ British Airways BB ALGT, AAL, JBLU, LATAM, UAL, Avis 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
    21. 21. 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 org21 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
    22. 22. From 2000-2015, U.S. Airlines’ Fuel Bill Doubled Despite Reducing Consumption Average Systemwide Price Paid by U.S. Carriers Rose 130% from 2000 to 2015 airlines.org $16.4 $32.2 2000 2015 ... Incurring More Costs Billion USD per Year Source: BTS (Form 41 P-12(a) for U.S. airlines) $0.81 $1.86 2000 2015 But Due to Higher Prices ... Avg. Price Paid per Gallon Systemwide Source: BTS (Form 41 P-12(a) for U.S. airlines) 56.2 53.3 2000 2015 Source: BTS (T2: 921) for U.S. airlines Using Less Fuel ... Million Gallons per Day 22 PRELIMINARY
    23. 23. 15.3 43.2 60.2 61.4 0 10 20 30 40 50 60 70 80 1994-2000 2001-2005 2006-2010 2011-2015 After Its Post-2008 Decline, Jet Fuel Price Volatility Resumed in 2014-2015 airlines.org Annual Standard Deviation of U.S. Gulf Coast Jet Fuel Spot Price (Cents per Gallon) 23 Source: U.S. Energy Information Administration
    24. 24. Like Other Responsible Businesses, Airlines Are Focused on Balanced Allocation of Capital to Benefit All Stakeholders: Customers, Employees and Investors airlines.org24  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)
    25. 25. U.S. Airlines Are Putting More Than Half of Cash Flow* Right Back Into the Product Primary Uses of Operating Cash from 2010-2015 Included $65B of Capital Reinvestment airlines.org25 $17.0B Enhance Product $10.5B Reward Shareholders $8.0B Retire Debt * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; denominator is net cash provided by operating activities 2015 2010-2015 $64.9B Enhance Product $17.4B Reward Shareholders $54.3B Retire Debt
    26. 26. airlines.org26 Following Enormous Losses of 2001-2009, U.S. Airlines Have Retired $54.3B in Debt Adjusted Net Debt Now Just 32% of Operating Revenues, Down from 45% in 2010 Source: SEC filings of AAL/ALGT/AAL/DAL/HA/JBLU/LUV/SAVE/UAL/VA $0 $2 $4 $6 $8 $10 $12 2010 2011 2012 2013 2014 2015 Thousands Payments on Debt* (Billions) Debt** as % of Operating Revenues Average = $9B per year 45.3 31.6 25 30 35 40 45 50 2010 2011 2012 2013 2014 2015 ** Includes 7x annual aircraft rents (capitalized operating leases) * Payments on long-term debt and capital lease obligations
    27. 27. Improving Finances Enabling Significant Reinvestment in Customer Experience U.S. Airline* Capital Expenditures ($ Millions per Month) airlines.org27 1,288 1,148 644 470 430 551 816 1,038 1,162 1,414 2000 2001 2002 2003-2009 2010 2011 2012 2013 2014 2015 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America » 2015 outlays of $17B were highest in at least 16 years:  Averaged $1.4B per month or ~$22 per passenger  Constituted 60% of operating cash flow  Included receipt of 388 new aircraft » At YE15, $86B in firm orders to be delivered in 2016 and beyond, including an average of a plane a day in 2016
    28. 28. Improving Airline Finances Translating to Customer Benefits airlines.org28 “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
    29. 29. 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.org29 » 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
    30. 30. 2.55 2.45 2.29 2.28 2.29 2.26 2.27 2.29 2.37 2.46 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) 30 Source: Innovata (via Diio Mi) published schedules as of Apr. 15, 2016, for all airlines providing scheduled passenger service from U.S. airports to all destinations 288 292 275 282 292 299 310 330 351 369 260 280 300 320 340 360 380 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 International (Thousand Daily Seats) Exceeding 2008 Highest Ever
    31. 31. In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Biggest Driver of 14% Jump airlines.org31 110.9 150.0 96.3 93.7 112.6 146.9 132.9 133.2 153.0 83.3 138.1 102.0 118.3 168.6 101.8 112.2 173.6 148.2 133.3 147.3 173.6 96.0 142.2 116.1 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 Mar. 4, 2016
    32. 32. Heard on the Street… airlines.org32 “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
    33. 33. After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again February 2016 Was 27th Consecutive Month of YOY Employment Gains at U.S. Airlines airlines.org33 Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 520.6 378.3 384.6 395.3 403.1 2000 2010 2014 2015 2016 Employment at U.S. Passenger Airlines Thousand Full-Time Equivalents
    34. 34. U.S. Airlines* Are Pumping More Wages and Benefits into the Economy Airlines* Spending $3.35 Billion per Month on the Workforce – Up ~$800M from 2010 airlines.org34 2.55 2.61 2.73 2.76 2.99 3.35 2010 2011 2012 2013 2014 2015 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America Total Employee Wages and Benefits* per Month (in $ Billions)
    35. 35. In the Deregulated Period, U.S. Airline “Earnings” Have Been Cyclical and Volatile Cumulatively, Airlines Have Recorded Net Losses of $7B (or -0.2% of Revenues) airlines.org Source: A4A Passenger Airline Cost Index 1.8 (11.4) 20.6 (65.1) 46.8 (80) (60) (40) (20) 0 20 40 60 80 1979-1989 1990-1994 1995-2000 2001-2009 2010-2015 NetIncome($Billions) 35 0.4%Net Margin: (3.3%) 3.8% (6.3%) 5.0%
    36. 36. airlines.org36 As U.S. Airlines Generate More Cash from Operations, They Are Better Positioned Not Only to Fund Capital Improvements But Also to Enhance Shareholder Value Source: SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America CashFlow(Billions) $4.5 $3.0 ($0.0) $0.6 $2.5 $11.1 $28.1 -$5 $0 $5 $10 $15 $20 $25 $30 2010 2011 2012 2013 2014 2015 Free* (FCF) Operating * Operating cash flow minus capital expenditures
    37. 37. airlines.org37 In 2015 U.S. Airlines Redoubled Their Efforts to Retain and Lure New Equity Investors, Returning $10.5B to Shareholders Via Stock Buybacks ($9.5B) and Dividends ($981M) Source: SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America Stock Repurchases (Billions) Dividends (Millions) $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 2010 2011 2012 2013 2014 2015 $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 2010 2011 2012 2013 2014 2015
    38. 38. U.S. Airlines Help Grow U.S. Exports, Reduce Trade Deficit, Boost GDP U.S. Travel/Tourism Exports Exceed $200 Billion, Fueled by Air Transportation Source: U.S. BEA and NTTO 38 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 2015 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)
    39. 39. In 2015, the USA Traded a Record $996 Billion of High-Value Merchandise by Air The Value of a Kilogram Exported by Air Was 157X the Value of a Kilogram Moved by Sea 284.4 438.9 308.6 556.8 $0 $200 $400 $600 $800 $1,000 $1,200 2000 2015 Imports Exports Source: USA Trade® Online, Census Bureau (FT920 - U.S. Merchandise Trade) and research by Foreign Trade Division/Data Dissemination Branch 39 Value of Trade by Air ($ Billions) airlines.org Value per Kilogram Exports Imports $135.54 $128.65 $0.86 $1.57
    40. 40. 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.org40 ~$62M/Day Dept. of Homeland Security U.S. Airports FAA (Airport & Airway Trust Fund)
    41. 41. The Administration Is Pushing to Increase the Government’s Share of Each Ticket Growing Take of $300* Itinerary 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 FY2017 budget * Sample itinerary is a $300 domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; total ticket price includes taxes airlines.org41 Proposed** POTUS FY2017 26.5% ($80)* AATF = Airport and Airway Trust Fund 2002 9/11 Fee Begins 19% ($58)*
    42. 42. U.S. Airports Have Ample/Multiple Resources from Which to Fund Improvements airlines.org42 9.2 9.1 8.7 9.2 10.4 10.5 11.5 12.0 10.7 10.6 11.6 12.6 12.9 13.5 14.3 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 AATF* Revenues ($ Billions) – All-Time High AATF* Unobligated Balance ($ Billions) – Nearly $6B 7.3 4.8 3.9 2.4 1.9 1.8 1.5 1.4 0.3 0.7 1.4 2.8 4.9 5.8 5.8 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: A4A, FAA, Standard & Poor’s; PFC collections exclude any compensation received for collecting/handling/remitting U.S. Airport Revenues ($ Billions) – All-Time High U.S. Airport Credit Ratings (per S&P) – Investment Grade * Airport and Airway Trust Fund 1.6 1.9 2.1 2.0 2.2 2.5 2.8 2.6 2.5 2.7 2.7 2.8 2.8 2.9 3.0 19.4 19.0 18.6 18.2 19.6 21.0 22.6 23.9 20.9 20.7 21.3 21.4 22.7 23.9 21.0 20.9 20.6 20.2 21.8 23.5 25.5 26.5 23.4 23.4 24.1 24.2 25.5 26.8 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 PFC (net) Non-PFC TBD 16 49 14 0 AA ± A ± BBB ± Lower
    43. 43. 2015 Operational and Financial Recap: U.S. Passenger Airlines airlines.org43 » 2015 constituted the 6th consecutive year of consummate airline safety performance » Like all responsible businesses, U.S. airlines serve multiple stakeholders; accordingly, they are reinvesting cash flows to benefit customers, employees and investors  More reliable operations, lower airfares, more seats in the marketplace, a steady stream of new and larger aircraft, expansion of inflight Wi-Fi and entertainment options – all translated in to an improving experience for airline customers, who traveled in record numbers (798.4M)  Despite flattish operating revenues, employees and investors, too, are benefiting as falling operating expenses steadily improve the industry’s financial wherewithal » Nearly seven years post-recession, U.S. airlines are finally achieving profitability in line with the overall U.S. corporate (i.e., S&P 500) average and, in turn:  retiring expensive debt, reducing leverage and increasing creditworthiness  acquiring new aircraft and ground equipment and enhancing IT systems  boosting employee staffing as well as wages and benefits  launching new routes and enhancing airport and inflight amenities  offering domestic flyers the highest number of seats since the Great Recession  returning cash to shareholders through stock buybacks and dividends
    44. 44. www.airlines.org

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