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U.S. Airline Industry Summer Air Travel Forecast and First Quarter 2014 Review
 

U.S. Airline Industry Summer Air Travel Forecast and First Quarter 2014 Review

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A4A's Chief Economist, John Heimlich, details results from the nine publicly traded carriers that have reported first quarter 2014 results.

A4A's Chief Economist, John Heimlich, details results from the nine publicly traded carriers that have reported first quarter 2014 results.

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    U.S. Airline Industry Summer Air Travel Forecast and First Quarter 2014 Review U.S. Airline Industry Summer Air Travel Forecast and First Quarter 2014 Review Presentation Transcript

    • John P. Heimlich Vice President & Chief Economist A4A Media Briefing May 15, 2014 U.S. Airline Industry Summer Air Travel Forecast & First Quarter 2014 Review
    • A4A Projects U.S. Airlines to Carry 1.5% More Travelers This Summer Summer 2014 Forecast Includes a Record 30M Flying Internationally on U.S. Carriers airlines.org2 179 186 183 192 185 176 177 180 180 179 180 21 22 24 25 26 24 26 26 27 28 30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F Domestic International Source: A4A and BTS T100 segment data U.S. Airline Onboard Passengers (Millions) Scheduled Service, June 1-August 31  210M passengers (2.28M per day) • Up 1.5% from 2013; on par with 2008 • Remains 3% below 2007 all-time high • YOY Seats: DOM +0.7%, INT +6.7% • Average load factor: 85%-87%  30M travelers (~325K per day) on international flights – a new record  10 of 15 busiest air travel days for U.S. airports  Key drivers: • Economic expansion • Accelerating job growth • Rising personal incomes • Increased household net worth • Affordable airfares • Improved airline financial condition Summer 2014 Forecast Highlights
    • Key Air-Travel Demand Drivers Trending Positively airlines.org 0.0 0.5 1.0 1.5 2.0 2.5 3.0 4Q13 1Q14 2QF 3QF 4QF U.S. Economy (% CAGR) Expanding 3 U.S. Employment (000) Growing 0 100 200 300 400 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 Sources: BEA, BLS, Federal Reserve and IHS Economics; U.S. GDP real annual average growth rate (%), U.S. nonfarm payroll employment growth (month-over-month, seasonally adjusted), U.S. disposable personal income per capita (chained 2009 dollars, SAAR); U.S. household net worth in current dollars, not seasonally adjusted $36.2 $36.4 $36.6 $36.8 $37.0 $37.2 1Q13 2Q13 3Q13 4Q13 1Q14 Personal Incomes ($000) Rising Household Net Worth ($T) Growing $73 $75 $77 $79 $81 1Q13 2Q13 3Q13 4Q13
    • In Summer 2014, Canada, Mexico and the UK Remain the Best Served Nonstop Destinations; Norway, Qatar and the UAE Will See the Largest Year-Over-Year Gains airlines.org4 Top 20 U.S. International Destinations by Scheduled Seats per Day 47,580 38,917 33,207 20,563 20,104 13,911 12,670 9,724 9,699 9,391 8,970 7,022 6,506 6,414 5,990 5,772 5,222 4,965 4,874 4,767 Canada Mexico United Kingdom Germany Japan France Dominican Rep. Brazil South Korea China Netherlands Italy Jamaica Spain Bahamas UAE Colombia Hong Kong Panama Ireland Top 20 U.S. International Destinations by YOY Change (%) in Seats 81.3 52.6 41.5 39.5 37.1 36.3 35.2 34.3 33.5 32.0 31.4 29.0 25.7 24.8 24.5 20.5 19.3 17.6 17.2 17.1 Norway Qatar UAE Martinique Denmark Sweden Philippines Hong Kong Trinidad & Tobago Austria Saint Kitts & Nevis Saudi Arabia Ethiopia Antigua & Barbuda China Dominican Rep. Taiwan Portugal Cayman Islands Italy Source: Innovata (via Diio Mi) published schedules as of May 2, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations
    • January February March Flight Completion Factor (% of scheduled domestic departures) 93.46 94.49 98.0 On-Time Arrival Rate (% of domestic flights within 00:15) 67.72 70.67 77.6 Mishandled Bags (per 1,000 domestic passengers) 5.54 4.21 3.68 Customer Complaints (per 100,000 systemwide passengers) 2.21 1.50 1.21 Sources: NTSB, BTS and DOT Air Travel Consumer Report (http://www.dot.gov/airconsumer/air-travel-consumer-reports) airlines.org5 When It Comes to Airline Operational Performance, Weather Matters – a Lot January and February Featured Two of the Worst Weather Days for Aviation Ever Recorded, With 22% of Flights Canceled on January 6 and 32% of Flights Canceled on February 13 Worse BetterWEATHER
    • Healthy Air-Travel Volumes and Fuel-Price Relief Drive Margin Gains* in Early 2014 Lower Fuel Expense Largely Offsets Sharp Increases in Labor, Airport and Aircraft Costs * A4A analysis of reports by Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United airlines.org6 Operating Revenues ($35.6B) 3.7 Operating Expenses ($34.1B) 0.5 Fuel (33% of Operating Expenses) (4.3) Wages & Benefits (25%) 7.3 Maintenance, Materials & Repairs (6%) (5.2) Landing Fees & Terminal Rents (5%) 7.1 Aircraft Rent (2%) (2.9) Depreciation & Amortization (5%) 6.9 Other** (20%) (0.2) Interest & Other Non-Operating Expenses 6.4 Income Tax & Other Expense / (Benefit) nmf Net Profit: $401M (1.1% of Op. Revenues) + 2.7 pts. ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals % Change YOY 1Q13 1Q14 Change Passenger Yield1 16.07¢ 16.21¢ +0.8% Passenger Traffic2 186.5B 190.4B +2.1% 1. Average airfare paid per mile flown, excluding taxes 2. Revenue passenger miles (RPMs) flown 1Q13 1Q14 Change U.S. Inflation3 231.740 234.997 +1.4% Personal Income4 $38,961 $40,045 +2.8% 3. U.S. Consumer Price Index (1982-84 = 100) 4. U.S. disposable personal income per capita
    • The Airline Industry Remains a Low-Margin Business, Lagging S&P 500 Average airlines.org 18.0 16.5 13.2 11.0 9.4 5.24.73.93.42.91.81.1(0.9)(3.4) McDonald´s WaltDisney CSX Starbucks S&P500 Marriott Boeing Walgreens Walmart Ford Costco Airlines* Safeway Sears 7 Sources: Standard & Poor’s and company SEC filings * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United “Although it may seem like it’s becoming more popular to invest in airlines, data would show that it’s not. Optimism appears confined to a small group… [T]here still isn’t a lot of long-term capital invested in the space… Conclusion: still more room for improvement.” “Who owns airline stocks? You might be surprised…,” Hunter Keay, CFA, Wolfe Research (March 17, 2014) Net Profit Margin (%), 1Q 2014
    • (10.0) (8.0) (6.0) (4.0) (2.0) 0.0 2.0 4.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 As Airlines Generate Modest Returns on Capital, Customers Are Seeing More Seats Scheduled to Depart from U.S. Airports – Two Years’ of Growth airlines.org Year-Over-Year Change (%) in Scheduled Seats at U.S. Airports 8 Source: Innovata (via Diio Mi) published schedules as of May 9, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations Fuel Spike and Recession Economic Recovery Record-High Fuel Price Economic Recovery and Modest Fuel-Price Relief
    • Improving Finances Enabling Significant Reinvestment in Customer Experience Airline Capital Spending Continues at Robust Clip of Approximately $1 Billion per Month airlines.org9 5.2 6.6 9.8 12.4 3.0 2010 2011 2012 2013 1Q14 * SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United U.S. Airline* Capital Expenditures ($ Millions) » Aircraft, engines, winglets, spare parts » Ground equipment, loading bridges » Airport facilities, aircraft hangars » Premium seats, new aircraft interiors » Maintenance facilities and machinery » Bag carousels, carts, scanners » In-flight entertainment and Wi-Fi » Computers, kiosks, mobile technology Planned 2014 Capital Expenditures: $12B For these nine carriers: 1,751 aircraft on firm order, of which 255 are being delivered in 2014 – the equivalent of one aircraft being received every weekday of the year.
    • airlines.org10 Years of Staggering Losses Have Left U.S. Airlines* Saddled With Debt… * SEC filings of Alaska, Allegiant, American/US Airways, Delta, Hawaiian, JetBlue, Southwest, Spirit and United $79.5 $71.9 0 10 20 30 40 50 60 70 80 90 2012 2013 Total Debt ($ Billions, Dec. 31) “…it would be unreasonable to assume that all airline risks have just disappeared… [T]he business model requires a large cushion of cash and significant reinvestment.” Alexander MacLennan, The Motley Fool (Feb. 3, 2014) “The industry is still subject to U.S. and global economic cycles, oil price (the largest operating expense) fluctuations, and unforeseen events such as global terrorist events and disease outbreaks.” Betsy Snyder, Standard & Poor’s (Mar. 25, 2014)
    • Investment Grade1 (>= BBB-) Source: Standard and Poor’s as of May 12, 2014; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?” airlines.org11 ExxonMobil, Microsoft AAA GE, United States Government AA+ Wal-Mart AA Toyota AA- UPS A+ BP, eBay A Amtrak, Starbucks A- FedEx, Marriott, Starwood BBB Ford, Lufthansa, Southwest, WestJet BBB- Alaska, Qantas BB+ British Airways, Latam BB Avis-Budget, Delta BB- Hertz, Sabre B+ Air Canada, American, GOL, Hawaiian, JetBlue, United B SAS B- Speculative2 Grade (< BBB-) 1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Passenger Airline Airline Creditworthiness Remains Far From Stellar Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit
    • U S Passenger Airline BOS HOU* LAS LAX MSP NYC* OKC OMA PDX PHX SEA SNA WAS* + U.S.A. ABQ ATL AUS BDL BNA BUR BWI CHS CLE CLT CMH CVG DAY DEN DFW DSM DTW ELP FLL GEG GSO HNL IND JAX LIT MCI MCO MDW MEM MIA MSY MYR OAK ONT ORD PBI PHL PIT RSW SAN SAT SDF SFO SJC SMF STL TPA TYS ALB COS CRP FAT FNT GRR GUM MHT MOB PNS PVD PWM TUL VPS Southwest Alaska, Delta American, Hawaiian, JetBlue United AA ± A ± BBB ± BB ± B ± Airline Creditworthiness Lags Airports & USA, Which Tout Stronger Balance Sheets All S&P-Rated U.S. Airports and the U.S. Government Enjoy Investment-Grade Credit airlines org12 Source: Standard and Poor’s Investment Grade Speculative Grade * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD
    • In 1Q 2014, U.S. Personal Incomes, Inflation and Air Passengers Outpaced Airfare In Real Terms, Airfares Fell While Incomes Rose, Further Enhancing Air Travel Affordability airlines.org 2.8 1.4 1.1 0.8 Personal Income U.S. Inflation (CPI) Passengers Enplaned Price to Fly a Mile 13 Sources: BEA for U.S. disposable personal income per capita , BLS for U.S. Consumer Price Index and A4A analysis of airline earnings releases % Change: 1Q 2014 vs. 1Q 2013 ~21,000 more per day
    • U.S. Ticket Taxes on $300 One-Stop Domestic Round Trip* Keep on Rising Growing Governmental Take Leaves Less Revenue for Carriers to Reinvest July 1, 2014 9/11 Fee Hike 21% ($63)* 1971-1972 AATF Begins 7% ($22)* 1992-1993 PFC Begins 13% ($38)* Taxes Airfare Source: A4A analysis of federal tax code, including IRS Revenue Bulletin 2013-47, Rev. Proc. 2013-35, Bipartisan Budget Act of 2013, and President’s FY2015 budget * Sample itinerary is a domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; total ticket price includes taxes airlines.org14 POTUS-Proposed FY15 Budget 26% ($77)* AATF = Airport and Airway Trust Fund 2002 9/11 Fee Begins 19% ($58)*
    • By Baking Taxes in With Airfares, DOT’s So-Called “Full Fare Advertising Rule” Has Made it Easier for the Federal Government to Raise Taxes on Air Travelers airlines.org15
    • Recap airlines.org16 » Despite commencing 2014 with $72 billion in debt, the top airlines’ modest financial progress has allowed them to continue to accelerate investments in people, products and technology to enhance the customer experience and to cope more effectively with extreme weather o In addition to seat growth, stable employment and rising wages, airlines are investing ~$12 billion more in 2014, including 255 new aircraft, larger overhead bins, premium seating, airport terminals and lounges, ground equipment, mobile technology, customer kiosks, in-flight entertainment and WiFi o Airlines have focused intently on improving baggage handling – equipment, software, staffing, training, internal reporting/communication, airport/agency partnerships, performance incentives and logistics » Commercial air travel remains one of the best bargains in America, with overall U.S. inflation and U.S. disposable personal income per capita again outpacing the price of flying » Millions of U.S. workers have benefited from improving airline finances — through enhanced job security, higher wages and benefits and repayment of debt, as the airlines continue to pursue investment-grade creditworthiness to minimize painful cuts during the next downturn » The carriers continue to demonstrate that the flying public, employees, investors and the U.S. economy all are vastly better off with a financially strong U.S. airline industry that can cover its full costs over an entire business cycle and compete effectively on the global stage