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U.S. Passenger Airlines 2013 FInancial and Operational Results
 

U.S. Passenger Airlines 2013 FInancial and Operational Results

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A review of the U.S. passenger airlines' year-to-date 2013 financial and operational results and performance as a green engine of the economy.

A review of the U.S. passenger airlines' year-to-date 2013 financial and operational results and performance as a green engine of the economy.

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  • 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?
  • 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
  • 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.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.
  • Purchases of travel and tourism-related goods and services by international visitors traveling in the United States totaled $67.0 billion during the first half of 2013. These goods and services include food, lodging, recreation, gifts, entertainment, local transportation in the United States, and other items incidental to foreign travel. Fares received by U.S. carriers (and U.S. vessel operators) from international visitors totaled $20.1 billion during the first half of 2013. The United States enjoyed a favorable balance of trade for the month of June in the travel and tourism sector, with a surplus of more than $4.3 billion.
  • 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.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.
  • 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)
  • 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)
  • 1 The College Board (based on beginning of academic year) -- 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.xlsx2 Bureau of Labor Statistics (includes hedonic “quality-change” adjustments).3 National Automobile Dealers Association – www.nada.org (average retail selling price) - http://www.nada.org/Publications/NADADATA/4 Census Bureau – http://www.census.gov/construction/nrs/xls/usprice_cust.xls (median)5 Department of Energy – http://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf, Table 9.4.6 National Association of Theatre Owners – www.natoonline.org (average U.S. ticket prices).7 Postal Service – www.usps.com/postalhistory/welcome.htm, Publication 100.8 A4A via Bureau of Transportation Statistics – www.airlines.org.Disney World - http://allears.net/tix/tixincrease.htm or http://allears.net/tix/tixpix00.htmhttp://www.natoonline.org/statisticstickets.htm
  • From A4A Cost Index2000: AirTran, America West, ATA, Frontier, JetBlue, Midway, National, Southwest, Spirit, Sun Country, Vanguard2005: AirTran, Allegiant, America West, Frontier, JetBlue, Southwest, Spirit, Sun Country, USA 30002010: AirTran, Allegiant, Frontier, JetBlue, Southwest, Spirit, Sun Country, USA 3000, Virgin America2012: Allegiant, Frontier, JetBlue, Southwest, Spirit, Sun Country, Virgin America
  • From A4A Cost Index2000: AirTran, America West, ATA, Frontier, JetBlue, Midway, National, Southwest, Spirit, Sun Country, Vanguard2005: AirTran, Allegiant, America West, Frontier, JetBlue, Southwest, Spirit, Sun Country, USA 30002010: AirTran, Allegiant, Frontier, JetBlue, Southwest, Spirit, Sun Country, USA 3000, Virgin America2012: Allegiant, Frontier, JetBlue, Southwest, Spirit, Sun Country, Virgin America
  • From A4A Cost Index
  • http://www.usatoday.com/money/industries/travel/story/2012-08-20/Regional-airlines-face-closings-bankruptcy/57169432/1
  • “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.”
  • http://www.usatoday.com/money/industries/travel/story/2012-08-20/Regional-airlines-face-closings-bankruptcy/57169432/1
  • 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.
  • 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?
  • 6/23/2005 US/HP http://www.justice.gov/atr/public/press_releases/2005/209709.htm10/29/2008 DL/NW http://www.justice.gov/opa/pr/2008/October/08-at-963.html8/27/2010 UA/CO http://www.justice.gov/atr/public/press_releases/2010/262002.htm4/26/2011 WN/FL http://www.justice.gov/opa/pr/2011/April/11-at-523.html
  • http://articles.chicagotribune.com/2013-02-13/business/ct-biz-0213-phil-20130213_1_american-airlines-legacy-airlines-american-ushttp://www.csmonitor.com/Business/2013/0214/American-US-Airways-11-billion-merger-What-s-in-it-for-travelershttp://online.wsj.com/article/SB10001424127887323511804578296221685366486.html?mod=WSJ_hps_LEFTTopStorieshttp://www.brookings.edu/research/testimony/2013/02/26-airline-merger-winstonhttp://www.brookings.edu/experts/winstonc?view=bio

U.S. Passenger Airlines 2013 FInancial and Operational Results U.S. Passenger Airlines 2013 FInancial and Operational Results Presentation Transcript

  • A4A Media Briefing John P. Heimlich, Vice President and Chief Economist Nancy N. Young, Vice President, Environmental Affairs August 22, 2013 Review of U.S. Passenger Airlines’ Year-to-Date 2013 Financial and Operational Results and Performance as a Green Engine of the Economy
  • Executive Summary airlines.org2 » In first half of 2013, U.S. airline results began to make the transition from ―razor thin‖ to ―paper thin‖ o Biggest driver of YOY gains was temporary drop in the price of jet fuel, which has risen 26 cents per gallon since the end of June – key because a 20-cent increase in 1H would have wiped out all profits o Otherwise, a modest increase in operating revenues was matched by an increase in non-fuel expenses o Despite progress, airline corporate credit ratings highlight significant room for balance-sheet improvement » Delivering consistent (albeit slim) earnings has enabled airlines to attract new capital (investors), driving greater airline investments in people and technology to enhance the customer experience o Restoring seats domestically and continuing to grow in increasingly competitive international markets o Capital expenditures at highest level in 11 years (in part reflecting several hundred passenger aircraft on order) o Significant new investment in aircraft, operational spares, premium seating, airport terminals, customer lounges, ground equipment, mobile technology, customer kiosks, in-flight entertainment and wireless o Intense focus (and results) on improving baggage handling – equipment, software, staffing, training, internal reporting and communication, airport/agency partnerships, performance incentives, logistics, etc. o Improvements in on-time arrival rate, flight completion rate, customer satisfaction » Air travel remains one of the best bargains in America » Customers, employees, investors and the U.S. economy are vastly better off with a financially strong industry that can cover its costs over the course of an entire business cycle and compete globally
  • Modest Fuel-Price Relief Was Critical to Airline Earnings* Improvement in 1H 2013 All Other Operating Expenses Rose Year Over Year, Keeping Margins Thin * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways airlines.org3 1H 2013 vs. 1H 2012 % Better/(Worse) Operating Revenues ($72.8B) 1.7 Operating Expenses (% of ) (1.6) Fuel (35%) @ average price of $3.17 w/taxes 5.0 Wages & Benefits (24%) (1.7) Landing Fees & Terminal Rents (5%) (6.9) Maintenance, Materials & Repairs (6%) (3.6) Depreciation, Amortization & Rents (7%) (0.7) Other** (25%) (9.2) Non-Op Income / (Expenses) and Tax 8.9 Subtotal Expenses ($71.3B) 1.2 Net Profit ($1,551M) 33.6 1.6 2.1 1H12 1H13 Net Profit Margin Earnings as % of OpRev ** Professional services, food/beverage, insurance, commissions, GDS fees, communications, advertising and promotion, utilities and office supplies, personnel expense
  • Jet Fuel Price Down from 2012 All-Time High But Volatile and on the Rise in 2H 2013 Increase of 20 Cents per Gallon in 1H, Now Observed, Would Have Wiped Out Earnings 2.70 2.75 2.80 2.85 2.90 2.95 3.00 3.05 28-Jun-13 5-Jul-13 12-Jul-13 19-Jul-13 26-Jul-13 2-Aug-13 9-Aug-13 16-Aug-13 23-Aug-13 30-Aug-13 Jet Fuel Up 26¢ Since End of 1H 2013 Source: A4A and Energy Information Administration airlines.org4 $0.54 $0.58 $1.02 $2.17 $3.00 $3.06 1991-1995 1996-2000 2001-2005 2006-2010 2011 2012 Jet Fuel Spot Price per Gallon U.S. Gulf Coast Jet Fuel
  • In 1H13, U.S. Airlines1 Earned a Modest 2.1 Pennies per Dollar of Revenue Generated But Reinvested $5.9 Billion in Operational Improvements and Customer Experience Thin Margin, Unlike Other Fortune 500s, Shows Revenues Barely Exceeding Costs airlines.org5 U.S. Airlines1 1H13 Net Income $1,551M Net Profit Margin 2.1% Capital Expenditures $5,871M Apple2 1H13 Net Income $22,625M Net Profit Margin 23.1% Capital Expenditures $4,325M Ford Motor Co.2 1H13 Net Income $2,844M Net Profit Margin 3.8% Capital Expenditures $3,077M Starbucks2 1H13 Net Income $823M Net Profit Margin 11.2% Capital Expenditures $485M 1. A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways 2. SEC filings for the indicated fiscal period, which for AAPL and SBUX does not coincide with the calendar year
  • International Air Travel to/from USA Rose 3.8 Percent in the First Half of 2013 Including 5.1 Percent Growth in June, Consistent with A4A Summer Travel Forecast airlines.org6 Source: Department of Commerce and DHS Advance Passenger Information System (APIS) 0.8 4.4 4.1 6.9 1.2 8.9 4.9 10.0 7.9 (0.7) Europe Asia Canada Mexico Caribbean S.America C.America MiddleEast Oceania Africa YOY Change (%) by Gateway to/from USA U.S. Citizens 2.4% Non-U.S. Citizens 5.0% YOY Change by Traveler Citizenship U.S. Carriers 2.6% Non-U.S. Carriers 5.3% YOY Change by Airline Citizenship
  • U.S. Airlines Helping to Grow U.S. Exports, Reduce U.S. Trade Deficit, Boost GDP Visitor Spending on U.S. Airlines Helps Drive Additional $67B on U.S. Goods & Services* Source: Bureau of Economic Analysis, U.S. International Transactions, Passenger Fares 7 airlines.org ―The economic contributions of international travel and tourism continue to be a bright spot, with the sector leading services exports both on a monthly basis and year-to-date. The increase in U.S. travel and tourism-related exports, which is supporting the president‘s National Travel and Tourism Strategy, is crucial to supporting and creating jobs and boosting our nation‘s economy.‖ (Under Secretary of Commerce for International Trade Francisco Sánchez, August 8, 2013) 56.3 61.6 67.0 1H11 1H12 1H13 U.S. Travel and Tourism-Related Goods and Services* * Food, lodging, recreation, gifts, entertainment, local transportation in the United States, and other items incidental to foreign travel -------------- International Visitor Spending ($Billions) -------------- 17.3 19.7 20.1 1H11 1H12 1H13 U.S. Airlines 3.3x
  • Given Growing Demand for International Air Travel to/from USA and the Associated Economic Benefits, U.S. Resources Should Be Dedicated to Optimizing U.S. Airports airlines.org8 Source: Department of Commerce, DHS Advance Passenger Information System (APIS) and Customs and Border Protection (http://apps.cbp.gov/awt/index.asp) Each of Top 10 U.S. Gateways Shows YOY Growth in Average Daily International Arrivals 1,853 1,299 599 277 514 592 431 401 429 994 JFK MIA LAX E… O… ATL SFO IAH IAD D… 177 186 118 107 126 88 132 116 101 162 JFK MIA LAX EWR ORD ATL SFO IAH IAD DFW YTD 2013 Maximum Wait Times (in Minutes) Exceed Two Hours at 5 of Top 10 U.S. Gateways
  • airlines.org9 During the First Six Months of 2013, U.S. Airlines Faced Significant Weather Events and the Operational Consequences of Sequestration . . . Month Analysis of Operating Environment (www.masFlight.com) Jan ―Ground delay programs related to snow, low visibility and low ceilings were prevalent in the New York area (LGA, JFK and EWR on 5 separate days, notably January 28) and PHL on 8 days.‖ Feb ―Weather was primary driver of decreased performance…with an abnormally snowy February in Chicago…and in New York (with measurable snow on 5 days including Nemo, a prolonged northeaster that hit the east coast from Philadelphia to Boston on Feb. 8-9.‖ Mar Snow events continued in BOS and NYC on 5 days; a few thunderstorms in ATL and DFW compared to ―abnormally favorable weather in March 2012.‖ Apr ―Sequestration was the primary impact on performance… Ground delay programs and volume management related to sequestration hit most major U.S. hubs…The highest impact was felt for flights into LAX… The eastern seaboard was hit with strong storms on April 10, 18 and 19.‖ May ―There were delays related to thunderstorms at most major U.S. hubs during the month. Secondary impact from runway/taxiway construction at SFO and PHX.‖ Jun ―Poor weather impacted the industry with intense thunderstorm activity. Chicago impacted by a prolonged period of thunderstorms from June 21-29, including a derecho event that caused significant cancellations.‖
  • 2007 2008 2009 2010 2011 2012 1H13 On-Time Arrival Rate (% of domestic flights within 00:15) 73.4 76.0 79.5 79.8 79.6 81.9 78.1 Involuntary Denied Boardings (per 10,000 passengers) 1.12 1.10 1.19 1.09 0.82 0.99 1.03 Mishandled Bags (per 1,000 domestic passengers) 7.05 5.26 3.91 3.57 3.39 3.09 3.23 Flight Cancellations (% of scheduled domestic departures) 2.16 1.96 1.39 1.76 1.91 1.29 1.68 Customer Complaints (per 100,000 systemwide passengers) 1.37 1.13 0.97 1.20 1.18 1.42 1.13 Sources: NTSB, BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports) airlines.org10 . . . But Despite These Operational Challenges Delivered Solid Results for Customers Improvements Enabled Principally by Reinvesting Modest Profits Back into the Business
  • Product (Unit) 2000 2012 Change (%) College Tuition: Public (Annual) $3,508 $8,655 146.7 Gasoline (Gallon, Unleaded) $1.51 $3.64 141.3 Walt Disney World® (One Day Pass, Adult) $46 $89 93.5 MLB Baseball Game (Nonpremium Ticket) $16.22 $26.98 66.3 Prescription Drugs (BLS Index) 285.4 440.2 54.2 Disposable Personal Income per Capita (Annual) $26,206 $38,965 48.7 Movie Ticket $5.39 $7.96 47.7 Single-Family Home $169,000 245,200 45.1 Postage (First-Class Stamp) $0.33 $0.45 36.4 Whole Milk (BLS Index) 156.9 211.3 34.7 U.S. Consumer Price Index (CPI-U)1 172.2 229.594 33.3 Apartment (Monthly Rental Payment per Unit) $842 $1,048 24.5 Vehicle (New) $24,923 $30,910 24.0 Air Travel (R/T Domestic Fare + Ancillary)2 $316.96 $378.62 19.5 Air Travel (R/T Domestic Fare Only)2 $314.46 $355.75 13.1 Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 126.3 (2.6) Television (BLS Index) 49.9 5.4 (89.1) Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a Bargain U.S. Inflation, U.S. Incomes and Airline Costs Have Sharply Outpaced the Price of Air Travel 1. Bureau of Labor Statistics ―measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.‖ 2. A4A analysis of data collected by BTS – excludes taxes; ―ancillary‖ includes revenue from reservation changes and baggage airlines.org11 Real Increase Real Decrease
  • From 2000 to 2012, in Addition to the Average Price of U.S. Consumer Goods and Services Outpacing the Price of Air Travel, Disposable Personal Incomes Rose 49% Accordingly, Americans‘ Ability to Purchase Air Travel Increased Over This Period Source: A4A, Bureau of Economic Analysis (DPI) – NIPA Table 2.1, Line 38, Bureau of Labor Statistics (CPI), Bureau of Transportation Statistics airlines.org12 48.7 33.3 19.5 13.1 Disposable Personal Income per Capita U.S. Consumer Price Index (CPI) Domestic Air Travel (Fare + Ancillary) Domestic Air Travel (Fare Only) Percent Change: 2012 vs. 2000 2000 2012 Change Disposable Personal Income per Capita $26,206 $38,965 48.7% Domestic Air Travel (Fare Only) $314.46 $355.75 13.1% Domestic Air Travel (Fare + Anc.) $316.96 $378.62 19.5% Potential Domestic Air Trips (Fare Only) 83.3 109.5 31.4% Potential Domestic Air Trips (Fare + Anc.) 82.7 102.9 24.5%
  • During an Extraordinarily Challenging Time Period, Amid Volatile Economic Conditions, Surging Input Costs and Increasing Regulation and Taxation . . . airlines.org13 Sources: A4A analysis of data from the Bureau of Transportation Statistics and from carrier SEC filings Financial Inputs and Results 2000 2007 2012 Special Federal Taxes Collected from Commercial Aviation $11.9B $18.0B $18.9B U.S. Gulf Coast Jet Fuel Price per Gallon $0.85 $2.13 $3.06 Passenger Revenue per Passenger-Mile Flown 13.53¢ 13.12¢ 14.24¢ Operating Revenue per Passenger-Mile Flown 15.11¢ 16.76¢ 19.06¢ Fuel Expense per Passenger-Mile Flown 2.02¢ 4.11¢ 5.35¢ Portion of Airfare Needed to Cover Fuel Expense 15.0% 31.3% 37.6% Average Breakeven Load Factor 69.4% 77.8% 80.9% U.S. Airline Net Profit Margin 2.1% 4.6% 0.2%
  • . . . U.S. Airlines Have Built a Foundation for the Future, Delivering a Better Experience for Customers, Employees, Investors and the U.S. Economy airlines.org14 Sources: A4A analysis of data from the Bureau of Transportation Statistics and from carrier SEC filings Competitiveness and Service Delivery 2000 2007 2012 Low Cost Carrier Share of Domestic Passengers 24.1% 31.3% 37.0% Average Domestic R/T Airfare (in Constant CY2000 $) $314.46 $247.56 $266.82 Average Domestic R/T Airfare + Fees (in Constant CY2000 $) $316.96 $251.60 $283.97 U.S. Passenger Airlines‘ Capital Expenditures (Reinvestment) $16.3B $7.8B $9.8B Average U.S. Passenger Airline Employee Wage ($ per Year) $50,291 $56,228 $66,787 Flight Completion Factor (Percent of Flights Scheduled) 96.7% 97.8% 98.7% On-Time Arrival Rate (Percent of Domestic Arrivals) 72.6% 73.4% 81.9% Mishandled Bag Rate (per Thousand Domestic Passengers) 5.29 7.05 3.09
  • For Every Mile Flown by Paying Passengers, from 2000 to 2007 and Again from 2007 to 2012, Increases in Industry Fuel Expense Dwarfed Increases in Operating Revenue airlines.org15 Sources: A4A analysis of data from the Bureau of Transportation Statistics; fuel expense reflects both price and consumption -3.1% 8.6% 5.2% 10.9% 13.7% 26.1% 103.0% 30.3% 164.5% 2000-2007 2007-2012 2000-2012 Passenger Revenue per Mile Operating Revenue per Mile Fuel Expense per Mile
  • In a Fragmented Airline Industry, Many U.S. Brands Could Not Cope with Volatile Economic Conditions, Namely Surging Fuel Costs and the Great Recession airlines.org16
  • Investment Grade1 (>= BBB-) Source: Standard and Poor‘s as of August 5, 2013; ―Guide to Credit Rating Essentials: What are credit ratings and how do they work?‖ airlines.org17 ExxonMobil, Microsoft AAA GE AA+ Wal-Mart AA Toyota AA- UPS A+ BP, eBay A Amtrak, Starbucks A- FedEx, Marriott, Starwood BBB Lufthansa, Qantas, Southwest BBB- Ford Motor Co. BB+ Alaska, British Airways, Latam BB Allegiant BB- Avis, Delta, Hertz B+ Gol, Hawaiian, United B Air Canada, JetBlue, SAS, US Airways B- American D Speculative2 Grade (< BBB-) 1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Passenger Airline The Airlines’ Financial Condition Has Improved But Remains Far from Stellar Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit
  • Financial Pressures Have Generally Translated to Cuts in Domestic Air Service Relative to Pre-Recession Levels, the USA Continues to See a Smaller Airline Industry Source: Innovata (via Diio Mi) published schedules as of August 16, 2013; an available seat mile (ASM) is one seat flown one mile airlines.org18 (15.6) (11.5) (7.6) 0.3 1.3 2.0 Domestic Flights Domestic Seats Domestic ASMs % Change: 4Q13 vs. 4Q07 % Change: 4Q13 vs. 4Q12 ―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)
  • 1.3 (10.0) (8.0) (6.0) (4.0) (2.0) 0.0 2.0 4.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 As the Economic Climate Improves and Airlines Begin to Generate Modest Returns on Capital, Seats Are Returning to the Marketplace — Including Throughout 2013 airlines.org %ChangeYOYinDailyDomesticSeats 19 Source: Innovata (via Diio Mi) published schedules as of August 16, 2013
  • Improving Balance Sheets Enabling Reinvestment in Product, Customer Experience 2012 Airline Capital Expenditures Highest Since 2001, on Track to Surpass in 2013 airlines.org20 $16.27 $13.92 $7.75 $6.61 $6.12 $5.39 $6.07 $7.83 $8.27 $5.88 $5.16 $6.61 $9.77 $5.87 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1H13 2H13 Source: Cash flow statements of AirTran, Alaska, Allegiant, America West, American, Continental, Delta, Hawaiian, JetBlue, Northwest, Southwest, Spirit, United, US Airways » Aircraft, engines, winglets, spare parts » Ground equipment, loading bridges » Airport facilities, aircraft hangars » Premium seats, new aircraft interiors » Maintenance facilities and machinery » Bag carousels, carts, scanners » In-flight entertainment systems, wireless » Computers, kiosks, mobile technology $ Billions invested ?
  • Recap airlines.org21 » Delivering consistent (albeit slim) earnings has enabled airlines to attract new capital (investors), allowing them to make greater investments in people and technology to enhance the customer experience o The industry remains highly susceptible to the volatile nature of jet fuel prices, on the rise again » Airline workers, too – and the millions of additional American workers whose jobs depend on a financially secure airline industry – are major beneficiaries » Air travel remains one of the best bargains in America » Consumers, employees, investors and the U.S. economy all are vastly better off with a financially strong industry that can cover its costs over the course of an entire business cycle and compete effectively on the global stage
  • APPENDIX Perspectives on Airline Industry Restructuring and Right-Sizing airlines.org22 “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, Managing Director, Deutsche Bank, “Takeaways from read-through of DOJ complaint blocking AA-US,” Aug. 14, 2013
  • U.S. Antitrust Authorities: Recent Airline Mergers Found to Benefit Consumers Democratic and Republican Administrations Have Reached Similar Conclusions 23 Transaction Excerpt from U.S. Department of Justice Antitrust Division Statement Amer. West US Airways (6/23/2005) The…proposed merger…would not reduce competition… [I]ntegration of airlines with complementary, end-to-end networks…can achieve efficiencies that benefit consumers. The consolidation of America West and US Airways…will enable the merged airline to offer U.S. consumers more and better service to more destinations throughout the country. Delta Northwest (10/29/2008) [T]he proposed merger…is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition. The two airlines currently compete with a number of other legacy and low cost airlines in the provision of scheduled air passenger service on the vast majority of nonstop and connecting routes… In addition, the merger likely will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines‘ networks. United Continental (8/27/2010) The proposed merger would combine the airlines‘ largely complementary networks… The transfer of slots and other assets…resolves the…principal competition concerns and will likely significantly benefit consumers on overlap routes as well as on many other routes. Southwest AirTran (4/26/2011) The merged firm will be able to offer new service on routes that neither serves today, including new connecting service through Atlanta…from cities currently served by Southwest to cities currently served by AirTran. Although there are overlaps on certain nonstop routes, the division did not challenge the acquisition after considering the consumer benefits from the new service... airlines.org
  • Thoughts on Airline Restructuring from a Leading Scholar of Deregulation Cliff Winston, Senior Fellow in the Brookings Institution‘s Economic Studies Program airlines.org24 ―[R]etrospective empirical assessments of airline mergers have generally found that the presence of a merged air carrier in a market does not lead to higher fares. At the same time, travelers benefit from the merged carrier‘s more extensive network and from more opportunities to use frequent flier miles… [R]eal yields have been consistently below the Standard Industry Fare Level (SIFL) that was used by the Civil Aeronautics Board to determine regulated fares…‖ (Testimony, Subcommittee on Regulatory Reform, Commercial and Antitrust Law, Committee on the Judiciary, House of Representatives, Feb. 26, 2013) ―There‘s really very little evidence, historically, that mergers have done anything to raise fares [overall because competition remains] very intense.‖ (Wall Street Journal, Feb. 10, 2013) ―An inevitable outcome of deregulation (is) the reallocation of capital to its most efficient uses. Those people who owned capital — planes and routes — and managed employees, and weren‘t good at it, had to be driven out of the industry. The only question is the mechanism by which that is done… It could have been through liquidation…‖ (Chicago Tribune, Feb. 13, 2013) Brookings.edu: Clifford Winston… is an applied microeconomist who specializes in the analysis of industrial organization, regulation, and transportation. ―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.‖ (Christian Science Monitor, Feb. 14, 2013)
  • Perspectives on Restructuring (Cont’d) airlines.org25 ―We view the merger as a very positive development… Regarding the DOJ process, the anticipated level of concentration of the US airline industry post-merger would still be less than what it is for other major transportation/travel sectors such as air cargo, car rentals, and railroads… We think the news will be a catalyst to bring new investors to the space.‖ -- Michael Linenberg, Deutsche Bank, ―Airlines Alert - Introducing the new American Airlines,‖ Feb. 14, 2013 ―The recent wave of consolidation has meant higher profits and more stability for the industry, 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, chief executive, FareCompare.com) -- Jack Nicas, ―AMR Stands to Gain Vast Route Network,‖ Wall Street Journal, Feb. 7, 2013
  • Perspectives on Restructuring (Cont’d) airlines.org26 ―From our read-through of the [DOJ] complaint, it appeared that the authors took a ‗guilty until proven innocent approach,‘ ignored the macroeconomic backdrop of the past several years, and told only one side of the story in order to make their case. For example, why does the DOJ complaint fail to highlight the fact that the U.S. airline industry has produced one of the worst financial track records of any industry and has resorted to ‗self help‘ via alliances, code shares, and mergers, among other initiatives, as a means to address its financial predicament? Why does the DOJ complaint fail to mention that the past round of airline consolidation from 2005-2010 coincided with an almost 400% rise in the price of jet fuel prices? With fuel representing close to one-third of total costs, airlines had no choice but to engage in capacity discipline and raise fares/fees in order to offset the significantly higher cost of doing business. Not responding would have resulted in massive losses and potential bankruptcies (and, indeed, AMR did file for Chapter 11 bankruptcy). Why does the complaint fail to consider U.S. airline consolidation within the context of a global airline industry? Foreign competitors have become much stronger, and in some cases, are supported by their states. Other DOJ/FTC merger approvals for other industries have not only recognized the evolution of predominantly domestic sectors into global ones, but they have been willing to accept higher HHI levels in some markets given the overall consumer benefits achieved by having a stronger, more global competitor. In that regard, how will US Airways fare as a global competitor? Furthermore, does the DOJ complaint overstate the impact of an AA-US merger? For example, the majority of the 1,000 city-pairs where the ‗merger is presumptively illegal‘ are miniscule (some generate less than one passenger per day). It appears to us that the DOJ is making a much broader philosophical call on industry consolidation. And investors/consumers are already feeling the pain with $4 billion in equity value destruction on yesterday‘s news. 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, ―Take-aways from read-through of DOJ complaint blocking AA-US,‖ Aug. 14, 2013
  • Perspectives on Restructuring (Cont’d) airlines.org27 ―Personally, this lawsuit bothers me a lot. Why is that? Because when I see the government delve into something that I actually know about, and I see how absolutely amateurish and inaccurate the arguments are, it makes me lose faith in our government‘s ability to do anything… It really does appear that DOJ has gone off the rails. The best way to sum up the argument is that airlines should all be punished for trying to be successful enterprises. The complaint is filled with talk about how capacity has shrunk and fares have risen. They think this merger will result in more of the same. But what they‘ve failed to recognize is that the airline industry of the past was a sickly mess. You had too many cooks in the kitchen and some of them had the cooking skills of a 12-year-old. So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money. It was a mess. Apparently the DOJ likes that plan. 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… Regardless of the motivation, what the DOJ has done is shameful. It has put together some half-assed arguments that are not supported by fact… [W]hen the government decides to cut and paste screenshots from a specific flight search on a single day as evidence that fares are lower on one airline, it‘s not even trying. (And it‘s way worse than that, since the truth is the complete opposite when you look at DOT fare data.)‖ -- The Cranky Flier, ―US Department of Justice Gets a Cranky Jackass Award for Its Lawsuit to Stop the US Airways/American Merger,‖ Aug. 14, 2013
  • Perspectives on Restructuring (Cont’d) airlines.org28 ―This has not been skyway robbery. Airlines are still making pitiful profits compared with other industries.‖ -- George Hobica, president of AirfareWatchdog, ―Analysis: Merged American Airlines-US Airways would offer more, could charge more,‖ Reuters, Aug. 16, 2013 ―Our work shows that legacy mergers don‘t generate large fare effects. The benefits of mergers - larger networks, greater ease in going places - probably dominate in determining the outcome. I was looking forward to my airline being the world‘s biggest and getting me to more places that I need to go, especially overseas.‖ -- Jan Brueckner, professor of economics at the University of California-Irvine, ―Analysis: Merged American Airlines-US Airways would offer more, could charge more,‖ Reuters, Aug. 16, 2013
  • U.S. Airlines: Key Contributors to Sustainability Three Synergistic Elements airlines.org30 Economic Good Social Good Environmental Good Significant Social Contributions through Passenger & Cargo Mobility Critical Enabler of Commerce See The Case for a National Airline Policy Focus for Today‘s Briefing
  • Environmental Objectives: Critical to Sustainability Interwoven with the Business & within the National Airline Policy 31 » Strong Environmental Record . . . • 2% of man-made CO2, while 5% of the GDP • 95% reduction in significant noise exposures 1975 to 2012, while enplanements rose 259% • Newly initiated voluntary program for aircraft deicing • Carbon monoxide and smoke virtually eliminated, and oxides of nitrogen from aircraft continually reduced • Extensive recycling initiatives » And We Are Focused on Continuing and Improving on that Record . . . Focus for today‘s briefing
  • Fuel Efficiency = Emissions Efficiency Airlines‘ Excellent Fuel Efficiency Record airlines.org32 » US Airlines Improved Fuel Efficiency ~120% Between 1978 and 2012* • 3.4 billion metric tons of CO2 savings = taking ~22 million cars off the road each of those years* • From 2000 to 2012 • Reduced absolute fuel burn and emissions ~ 10%* • Increased passengers and cargo 16%* » Committed to Even More • Must be able to invest *Fuel/savings/traffic source: U.S. DOT Form 41; automobile equivalent calculations from www.epa.gov/cleanenergy/energy-resources/calculator.html
  • Means of Enhancing Fuel/Emissions Efficiency 33 » Technology • Invest in newer aircraft/fleet enhancements (e.g., winglets) • R&D for breakthroughs in engines and airframes • Sustainable alternative aviation fuels » Operations • Weight reduction; maintenance (e.g., engine wash) • Operational procedures within existing ATM » Infrastructure • ATM modernization/NextGen Economic & Environmental Interests in Pursuing These Measures Align Fuel is airlines‘ #1 cost center airlines.org
  • Positive Incentives Can Help . . . airlines.org34 » By Stimulating Research, Development and Technology Deployment » But Harmful, Punitive Economic Measures Have Been Proliferating . . . • Proliferation of taxes and charges • European Union Emissions Trading Scheme (EU ETS)
  • Aviation Has a Better Way Forward Global Sector-Specific Approach Framework airlines.org35 » Collective Aviation-Specific Emissions Targets • Premised on government investment and airline ability to invest so technology, operations & infrastructure improvements flourish » Rules on a Market-Based Measure (MBMs) to Serve as a ―Gap-Filler‖ if Needed » Agreement at the International Civil Aviation Organization (ICAO) See http://www.airlines.org/Pages/A4A-Climate-Change-Commitment---A-Global,-Sectoral-Approach.aspx
  • Our Targets Are Aggressive And Address the Key Concern: Potential Growth in Emissions airlines.org36 2010 2020 2050 1.5% annual fuel efficiency improvement (average) Working towards CNG Carbon Neutral Growth (CNG) from 2020 50% reduction in net CO2 emissions over 2005 levels
  • How Do We Meet Our Targets? Technology & Alternative Fuels, Operations & Infrastructure airlines.org37 Notional Example Potential Role for Carbon Credits to Bridge Potential role for carbon credits
  • The 2013 ICAO Assembly: What We Aim to Achieve Agreement Building on the 2010 ICAO Assembly Resolution » Reconfirm Emissions Goals: Fuel Efficiency through 2020; CNG2020+ » Confirm and Advance Pieces of ICAO Work on Technology, Operations & Infrastructure • Developing CO2 Standard for New Aircraft (to be finalized in 2016) • Air Traffic Management – Aviation System Block Upgrades (ASBUs) • Sustainable Alternative Aviation Fuels – ICAO ―SUSTAF‖ Group » Expand Country-Specific Action Plans » Commitment to Reach Full Agreement on MBMs • Commitment to develop a single, global measure • Confirm and apply principles on MBMs in the meantime (in 2010 Resolution) 38 airlines.org
  • Industry Support for Development of a Global MBM Properly Designed, to Serve as a Gap Filler 39 » The 38th ICAO Assembly Should Agree . . . • A roadmap for developing an offsetting mechanism to be agreed at the next Assembly in 2016, for implementation from 2020; • To the principles on which the mechanism will be based; • A work program for monitoring, reporting & verification and offset quality; • Means for ensuring the MBM is in a package with technology, operations and infrastructure improvements and government and industry partnership airlines.org
  • We Have the Ingredients for Global Agreement 38th ICAO Assembly: September 24-October 4, 2013 airlines.org40  Unity across the aviation industry  We‘re building on pieces in place  Governments have stated their commitment to working this through ICAO See www.atag.org  Shuttle diplomacy on potential agreement terms underway
  • www.airlines.org If You Want to Feel Good About the Future, Look Up!
  • ADDITIONAL/BACKUP SLIDES ON INDUSTRY CLIMATE CHANGE & ENERGY INITIATIVES
  • U.S. Airline Greenhouse Gas Emissions Less than Two Percent of the U.S. Inventory airlines.org43 Non-Aviation Transportation 25.1% Commercial Aircraft 1.7% General Aviation 0.3% Military 0.2% Electric Power Industry 32.8% Industry 19.9%Agriculture 8.2% Commercial 5.6% Residential 5.3% U.S. Territories 0.9% Source: U.S. EPA Inventory (April 12, 2013)
  • Examples of U.S. Airline Fuel Efficiency/Emissions Savings Measures – All A4A Carriers airlines.org44 » Technology • Working with manufacturers toward ever more fuel- efficient aircraft • Purchase of new aircraft • Investing in winglets to reduce aircraft drag • Adopting airplane paint schemes that minimize heat absorption (which requires additional cooling) • Sustainable alternative aviation fuels (see later slides) Public & Private R&D Investment Continues to Be Critical! See http://www.airlines.org/Pages/21st-Century-Aviation---A- Commitment-to-Technology,-Energy-and-Climate- Solutions.aspx
  • Examples (continued) airlines.org45 » Operations – On the Ground/Taxiing • Single-engine taxi procedures • Selective engine shutdown during ground delays • Employing self-imposed ground delays to reduce airborne holding • Implementing weight-reduction programs (lighter-weight materials) • Aircraft engine wash programs • Optimizing fuel loads to reduce the cost of carrying extra fuel • Minimizing the use of auxiliary power units (APUs) on the ground by using airport electrical power
  • Examples (continued) airlines.org46 » Operations – In Flight • Optimizing flight planning for the most efficient routes and altitudes • Minimizing inefficient low-altitude maneuvering • Working with FAA to change enroute fuel-reserve requirements to reflect state-of-the-art navigation, communication, surveillance and wind forecast systems • Pioneering fuel-saving departure & arrival procedures (e.g., continuous descent arrivals; performance-based navigation) • Key participants in ASPIRE & AIRE with FAA & other countries NOTE: Limits to What Can Be Achieved in Today’s Air Traffic System; Need Business-Case Based Implementation of NextGen
  • Examples (continued) airlines.org47 » Infrastructure • Working with FAA on business-case based NextGen implementation • Redesigning hubs and schedules to minimize congestion • Advocating expanded and improved airfield capacity • Installation of airport gate power for aircraft
  • A4A & Sustainable Alternative Aviation Fuels Working Within Coalitions to Achieve Success airlines.org48 » Co-Founded and Co-Lead the Commercial Aviation Alternative Fuels Initiative® (CAAFI) • Four Teams Aimed at Addressing Key Questions – Over 300 Participants • Certification/Qualification (e.g., jet fuel specs) • Research and Development (e.g., suitable fuels) • Environment (e.g., methodologies and case studies) • Business & Economics (e.g., finance/commercial terms)
  • A4A Initiatives/Coalitions (continued) airlines.org49 » Strategic Alliance with the U.S. Military (Defense Logistics Agency) • Combining experience and potential demand (market signals) » Farm to Fly with the U.S. Department of Agriculture and Boeing (and other partners) • Primary focus on linking feedstock supply chain with fuel production and end users; leverage agricultural programs • Regional initiatives (Pacific Northwest, Hawaii, Midwest)
  • Why Aviation Is the Ideal Candidate airlines.org50 » We Are Organized & Committed & Have a Strong Track Record of Accomplishments in Developing & Deploying Sustainable Alternative Fuels » Concentrated Demand » Drop-In Fuels Require No New Infrastructure » Unlike Other Modes of Transport, Aviation Does Not Have Alternatives Beyond Liquid Fuels • e.g., automobiles can plug in