U.S. Airlines and the Quest to Reinvest
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The document provides a financial review of the U.S. airline industry for 2013 and forecasts air travel for the Thanksgiving period. Key points include: 1) Jet fuel prices were down from 2012 highs but volatile in the second half of 2013, and small increases would have eliminated airline profits. 2) Lower fuel costs and higher air travel demand helped airlines improve margins in 2013 compared to 2012, though profits remained low. 3) The document forecasts 25.1 million passengers will travel during the Thanksgiving period, a 1.5% increase from 2012, with the busiest days being the Sunday return and Wednesday before Thanksgiving.
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U.S. Airlines and the Quest to Reinvest
- 1. U.S. Airlines and the Quest to Reinvest Year-to-Date 2013 Financial Review and Thanksgiving Air Travel Forecast John P. Heimlich Vice President & Chief Economist November 7, 2013
- 2. Jet Fuel Price Down from 2012 All-Time High But Highly Volatile in 2H 2013 Increase of 20 Cents in 1H, or 39 Cents in YTD 3Q, Would Have Wiped Out Earnings 29-Nov-13 15-Nov-13 1-Nov-13 18-Oct-13 4-Oct-13 20-Sep-13 6-Sep-13 23-Aug-13 9-Aug-13 26-Jul-13 12-Jul-13 28-Jun-13 $3.06 3.15 3.10 3.05 3.00 2.95 2.90 2.85 2.80 2.75 2.70 2012 2006-2010 $1.02 $0.58 1996-2000 2001-2005 $0.54 1991-1995 $2.17 $3.00 Jet Fuel Price Volatility Since 1H13 2011 Jet Fuel Spot Price per Gallon U.S. Gulf Coast Jet Fuel Source: A4A and Energy Information Administration 2 airlines.org
- 3. Fuel-Price Relief and Air-Travel Demand Drive Margin Gains in YTD 3Q 2013 Lower Fuel Expense Offsets Increases in All Other Operating Expense Categories YTD 3Q13 vs. YTD 3Q12 % Change Operating Revenues ($113.0B) 3.4 Operating Expenses (% of ) Net Profit Margin 0.2 Fuel (35%) at average of $3.11 w/taxes Earnings as % of OpRev 4.0 (3.4) Wages & Benefits (24%) 2.7 Landing Fees & Terminal Rents (5%) 5.9 Maintenance, Materials & Repairs (6%) 1.6 Depreciation & Amortization (4%) 6.1 Other** (26%) 0.5 Non-Op Income / (Expenses) and Tax (16.9) Subtotal Expenses ($108.5B) 0.3 (0.5) Net Profit ($4.5B) 1,354.3 YTD 3Q12 YTD 3Q13 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways ** Professional services, food/beverage, insurance, commissions, GDS fees, communications, advertising and promotion, utilities and office supplies, personnel expense 3 airlines.org
- 4. Airline Industry Profitability in 2013 Equals Half That of the S&P 500 Composite Net Profit Margin (%), Fiscal YTD 3Q 2013 Apple 27.8 Burger King 18.9 Walt Disney 15.3 Starbucks 11.2 Royal Carribean 8.8 S&P 500 Avg. 8.0 Marriott 5.0 U.S. Airlines 4.0 Ford Avis 3.7 0.7 Sources: FactSet and SEC filings for the indicated period; airlines include Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways 4 airlines.org
- 5. Airline Credit Ratings Continue to Lag Airports, Which Enjoy Stronger Balance Sheets All S&P-Rated U.S. Airports Enjoy Investment-Grade Credit AA ± BOS HOU* LAS LAX MSP NYC* OKC OMA PDX PHX SEA SNA WAS* 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 BBB ± ALB COS CRP FAT FNT GRR GUM MHT MOB PNS PVD PWM TUL VPS Southwest Investment Grade Alaska, Allegiant BB ± B± Delta, Hawaiian, JetBlue United, US Airways D Speculative Grade AMR Source: Standard and Poor’s * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD 5 U S Passenger Airline airlines org
- 6. Even Modest Financial Recovery Enabling Significant Reinvestment in Customer At a Rate of Nearly $1B per Month, 2013 Capital Expenditures Are Highest Since 2001 » » » » Maintenance facilities and machinery Bag carousels, carts, scanners In-flight entertainment systems, wireless Computers, kiosks, mobile technology U.S. Airline* Capital Expenditures ($ Millions per Month) $965 $814 YTD 3… 201 2 $551 2011 $430 201 0 $490 $689 200 8 200 9 $653 200 7 $505 200 6 $449 $510 200 4 200 5 $551 200 3 $646 Up 125% 200 2 200 1 200 0 Aircraft, engines, winglets, spare parts Ground equipment, loading bridges Airport facilities, aircraft hangars Premium seats, new aircraft interiors $1,160 $1,356 $ Billions invested » » » » * Cash flow statements of AirTran, Alaska, Allegiant, America West, American, Continental, Delta, Hawaiian, JetBlue, Northwest, Southwest, Spirit, United, US Airways 6 airlines.org
- 7. A4A Projects U.S. Airlines to Carry 25M Thanksgiving-Period Passengers in 2013 Up 31,000 Passengers per Day, or 1.5 Percent, from 2012 2012 2013 Change Forecast Period Nov. 16-Nov. 27 Nov. 22-Dec. 3 Passengers: Total 24.7M estimated 25.1M projected 1.5% Passengers: Daily 2.06M estimated 2.09M projected 31K Busiest Day Sunday return Sunday return None Load Factor >85% on busiest days >85% on busiest days None n/a Source: A4A, selected sample carriers and DOT T100 segment data 7 airlines.org
- 8. A4A Projects Daily Thanksgiving Passenger Volumes to Range from 1.44M to 2.56M Sunday Return, Wednesday Before, Monday Return Expected to Be Three Busiest Days Projected Onboard Passengers (Millions) 2.35 2.28 2.07 1.87 2.56 2.42 2.36 2.12 2.04 1.94 1.60 HOLIDAY 1.44 Source: A4A, selected sample carriers and DOT T100 segment data Tue., 12/03 #3 Mon., 12/0 2 Sun., 12/01 Sat., 11/30 Fri., 11/29 Thu., 11/28 #1 Wed., 11/2 7 Tue., 11/26 Mon., 11/2 5 Sun., 11/24 Sat., 11/23 Fri., 11/22 #2 * Friday, Nov. 22 through Tuesday, Dec. 3 8 airlines.org
- 9. 4.0 1.5 2.0 0.0 (2.0) (4.0) (6.0) (8.0) 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 1Q09 4Q08 3Q08 2Q08 (10.0) 1Q08 % Change YOY in Seats from U.S. Airports As Airlines Begin to Generate Modest Returns on Capital, Seats Are Returning to U.S. Airports — Including Throughout 2013 and into 2014 Source: Innovata (via Diio Mi) published schedules as of Nov. 1, 2013 for all airlines providing scheduled passenger service from U.S. airports to all destinations 9 airlines.org
- 10. Recap » 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 » Airline workers, too – and the millions of additional American workers whose jobs depend on a financially secure airline industry – are major beneficiaries » 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 10 airlines.org
- 11. www.airlines.org
Editor's Notes
- 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
- 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?