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Midyear Economic Review and Outlook
 

Midyear Economic Review and Outlook

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Aug. 29, 2012 Economic Press Briefing

Aug. 29, 2012 Economic Press Briefing

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    Midyear Economic Review and Outlook Midyear Economic Review and Outlook Presentation Transcript

    • Midyear Economic Review and OutlookJohn P. Heimlich, VP and Chief EconomistMedia BriefingAug. 29, 2012
    • Overview• The value proposition for U.S. air travelers is strong o Airlines achieving record operational performance on several fronts o Customer satisfaction is reflected in a remarkably low complaint rate – especially compared to other industries with smaller volumes• The industry has done a lot of work to return to modest profitability o Diversification of revenues and improved alignment of revenues generated with costs incurred have been critical elements of the nascent recovery• Airlines still face a difficult tax and regulatory environment, curbing growth• A financially healthy airline industry means job growth and service reinvestment 2 airlines.org
    • The Value Proposition for U.S. Air Travelers Is Alive and WellIt’s Safer, It’s Greener, It’s ~80 Percent On-Time and It’s Still a Bargain Index (1990 = 100) 180 Fuel Efficiency 160 140 120 100 On-Time 80 Fares ($2011) Exposure 60 40 Noise 20 Fatal Accidents* 0 2004 2014 1990 1992 1994 1996 1998 2000 2002 2006 2008 2010 2012 2016 2018 2020 * 5-year-moving-average fatal accident rate for U.S. air carriers operating under 14 CFR 121 scheduled service (http://www3.ntsb.gov/aviation/Table6.htm) 3 airlines.org
    • U.S. Airline Operations Have Improved Substantially Over Past Five YearsRecord Performance Enabled by Reinvestment in Product, Cooperative Weather, Etc. 2007 1H 2012 Improvement (%)On-Time Arrival Rate(% of domestic flights within 00:15) 73.4 83.7 → 14Involuntary Denied Boardings(per 10,000 passengers) 1.12 0.98 → 13Mishandled Bags(per 1,000 domestic passengers) 7.05 2.97 → 58Flight Cancellations(as % of sched. domestic departures) 2.16 1.07 → 50Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm) 4 airlines.org
    • Hence, the Rate of Customer Complaints Against Airlines is Remarkably LowRail Customers Express Far Greater Levels of Dissatisfaction Complaints received per 100,000 customers, CY2011 632 U.S. Passenger Airlines 1.18 Sample Route Rate Capitol Corridor (Cal.) 15.5Millions of Customers 0.466 Capital Metro (Austin, TX) 2.50 Keystone 78.9 Acela 204.3 362 Los Angeles Metrobus 2.92 NE Regional 248.6 Chicago-Carbondale 419.7 Chicago-St. Louis 487.2 97 U.S. Cable Companies 6.56 California Zephyr 6,138.2 367 WMATA (Wash., DC) 12.50 83 Metro North RR (NYC) 16.28 30 AMTRAK 627.54Sources: U.S. Department of Transportation, Federal Communications Commission, National Cable & Telecommunications Association, WMATA, Capital Metro (Austin),Los Angeles County Metropolitan Transportation Authority, American Public Transportation Association, AMTRAK 5 airlines.org
    • Boston-Los Angeles Air Travel, 70 Years After the Evening Post38 Percent of the Journey Time, 11 Percent of the Price (in Real* Terms)Average Round-Trip BOS-LAX Airfare and One-Way Block Time $281.56 1941 Actual (15hrs 15mins, 12 stops) $4,308.36 1941 Inflation-Adjusted* $471.93 2011 Actual (5hrs 52mins)* Adjusted using 2011 constant dollars from the Bureau of Labor Statistics (http://www.bls.gov/cpi/#tables) Source: DOT Data Bank 1B via Diio Mi; “Air Travel Is Not Expensive,” The Saturday Evening Post (Mar. 22, 1941), p. 59; Campbell-Hill Aviation Group 6 airlines.org
    • Per Enplaned Passenger, 2011 Revenues Exceeded Costs by Just 77 Cents (0.4%)Excluding $8.06 in Ancillaries, Revenues Would Have Lagged Costs by $7.29 (-3.4%) 2011 U.S. Airline Financial Results per Enplaned Passenger $213.14 $212.37 Ancillary, $8.06 Airfare Combined Industry and $159.93 Customer Taxes Equate to Approximately $25 per Enplaned Passenger Cargo & Other $45.15 $0.77 Revenues Costs Net Income Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues 7 airlines.org
    • 1H U.S. Airline* Losses PersistNegative Profit Margin Prevails, in Stark Contrast to Other Fortune 500s U.S. Airlines* 1H 2012 U.S. Airlines* ex. AMR 1H 2012 Net Income ($ Millions) (1,065) Net Income ($ Millions) 835 Net Margin (Percent) (1.5) Net Margin (Percent) 1.4 Ford Motor Co. 1H 2012 Apple Inc. 1H 2012 Net Income ($ Millions) 2,436 Net Income ($ Millions) 20,446 Net Margin (Percent) 3.7 Net Margin (Percent) 27.6* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways 8 airlines.org
    • 1H 2012 U.S. Passenger Airline* Losses Worsened, Constituting -1.5% of RevenuesDespite 8.2% Stronger Revenue, Margins Deteriorated on 9.4% Higher Costs First Half 2012 % Better/(Worse) Net Profit Margin (%) Operating Revenues 8.2 Operating Expenses (7.3) (0.4) Fuel (13.1) Wages and Benefits (6.2) Other (3.6) (1.5) Other Income/(Expenses) (77.1) Subtotal Expenses (9.4) 1H 2011 1H 2012* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways 9 airlines.org
    • Price of Jet Fuel Running Slightly Higher in 2012 Than in Record 2011At Highest Level Since Early May Price per Gallon (Gulf Coast Jet Fuel) Price per Barrel (Five-Day Moving Average) $140 $3.05 $3.00 $130 $120 $2.17 $110 $100 $1.02 $0.58 $0.54 $90 $80 $70 10-May 26-May 8-Apr 19-Jan 27-Jun 20-Feb 3-Jan 23-Mar 11-Jun 30-Aug 24-Apr 13-Jul 29-Jul 14-Aug 7-Mar 4-Feb 2011 YTD 2012 1991-1995 1996-2000 2001-2005 2006-2010 WTI Brent Jet Source: A4A and EIA (for WTI and Brent crude oil and U.S. Gulf Coast jet fuel) 10 airlines.org
    • Sample of New Regulations on U.S. Airlines Will Add $3.3 Billion in Annual CostsEstimated Annual Costs of Selected Existing or Proposed Regulations Existing ≈ $2.8B Proposed ≈ $0.5B 150M $3.3B 330M 787M 143M 804M ? 1.04BSource: A4A and Federal Aviation Administration 11 airlines.org
    • Rising Costs and Constraints on Revenue Production Translate to Air Service CutsDomestically, the United States Has a Smaller Industry Than Five Years Ago “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) Scheduled Domestic U.S. Air Service: 4Q 2012 vs. 4Q 2007 (15.2) Flights (12.0) Seats (9.2) ASMsSource: Innovata (via Diio Mi) published schedules as of Aug. 24, 2012; an available seat mile (ASM) is one seat flown one mile 12 airlines.org
    • Improved Airline Finances Have Translated to 18 Consecutive Months of Job GrowthAfter Years of Losses, U.S. Passenger Airlines Have Also Been to Reinvest in EquipmentAirline Jobs Added in 18 Months in a Row Aircraft Capital Spending on the RiseYOY Change (%) in Full-Time Equivalent Employees Average Annual Estimated Aircraft/Engine CapEx (Billions) 4 $16.9 2 0 $9.7(2) $9.2(4) $6.6 $5.8 $5.8 $5.7 $4.8 $4.2(6) $3.4(8) 2011 2012 2007 2008 2009 2010 13F 12F 02 03 04 05 10 11 00-01 06-09 Source: BTS for U.S. scheduled passenger airlines Source: Bank of America Merrill Lynch airline equity research (Jan. 5, 2012) 13 airlines.org
    • Conclusion• The value proposition for U.S. air travelers is strong• The industry has done a lot of work to return to modest profitability• Airlines still face a difficult tax and regulatory environment, curbing growth• A financially healthy airline industry means job growth and service reinvestment 14 airlines.org
    • www.airlines.org