U.S. Airlines Economic Review

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U.S. Airlines Economic Review

  1. John P. HeimlichVice President and Chief EconomistAirlines for AmericaMedia BriefingFebruary 28, 2012
  2. The Bottom LineThe Word on the Street“While earnings declined in 2011, we continue to believe current valuations are wellbelow what industry improvement and performance would justify. Perhaps the bestillustration of this improvement was the dramatic difference in fundamentalperformance between 2008 and 2011… We believe this comparison highlights thetransformation the industry has undergone. We believe the business is betterand more adaptable as a result of this transformation. We believe that currentmarket conditions provide an attractive entry point for airline equities, especially giventhe 2012 outlook we expect to materialize.”Gary Chase, Barclays Capital equity research, “U.S. Airlines: 4Q Earnings Should Highlight 2012 Potential,” Jan. 17, 2012 3 airlines.org
  3. 2011 U.S. Airline* Earnings Fell Sharply, Resulting in a 0.3 Percent Net Profit MarginDespite 12.6 Percent Stronger Revenue, Profits Shrank on 15.5 Percent Higher Costs2011 Better/(Worse) Than 2010 for Reporting Carriers* Net Profit Margin (%) $ Millions Percent 2.2 Operating Revenues 15,717 12.6 Operating Expenses (18,277) (15.5) Nonoperating Expenses 76 1.8 0.3 Income Taxes 144 29.3 Net Income (2,341) (85.7) 2010 2011* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, SkyWest, Southwest, Spirit, United and US Airways 4 airlines.org
  4. Airline Energy Costs on the Rise Yet AgainUsing Less but Paying More Translates to Rising Expenses – More than $50B in 2011Using Less Fuel Paying More per Gallon Spending More AnnuallyMillion Gallons per Day Jet-Fuel Price (U.S. Gulf Coast) Billions of Dollars Spent on Fuel $57.8 $3.1354.7 54.5 $3.00 54.0 $50.5 51.5 $2.17 $41.9 48.3 $1.02 $38.8 $38.8 47.4 46.6 $0.58 $0.54 $33.2 $32.3 20072005 2006 2008 2009 2010 2011 1991-1995 1996-2000 2001-2005 2006-2010 2011 YTD 2012 2005 2006 2007 2008 2009 2010 2011Source: BTS for U.S. airlines Source: Energy Information Administration Source: BTS for U.S. airlines 5 airlines.org
  5. With Few Exceptions, U.S. Airline Stocks Plummeted in 2011Change (%) in Closing Price from 31-Dec-2010 to 31-Dec-2011 32.5 35.1 8.3 (0.003) (26.0) (21.3) (20.8) (35.8) (33.9) (49.4) (95.5)Source: Yahoo Finance 6 airlines.org
  6. U.S. Airline Industry Continues to Post ~80 Percent On-Time Arrival PerformanceAlso, 2011 Was Best Year Ever Recorded for Denied Boardings and Mishandled Bags 2007 2008 2009 2010 2011Flight Cancellations 2.16 1.96 1.39 1.76 1.91(as % of scheduled domestic departures)On-Time Arrival Rate 73.4 76.0 79.5 79.8 79.6(% of domestic flights within 00:15)Involuntary Denied Boardings 1.12 1.11 1.19 1.09 0.81(per 10,000 passengers)Mishandled Bags 7.05 5.26 3.91 3.57 3.39(per 1,000 domestic passengers)Customer Complaints 1.38 1.13 0.97 1.20 1.18(per 100,000 systemwide passengers)Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm) 8 airlines.org
  7. Conditions for Travel Demand: A Tale of Two Customer Segments (Part 1)Overall U.S. Economic Growth and Corporate Profits Supporting Business Travel U.S. Gross Domestic Product U.S. Corporate Profits Trillions of Chained 2005 Dollars, SAAR Trillions of Current Dollars, SAAR $13.5 $2.1 $13.4 $1.9 $13.3 $13.2 $1.7 $13.1 $1.5 $13.0 $12.9 $1.3 $12.8 $1.1 $12.7 $12.6 $0.9 1Q11 1Q08 1Q09 1Q10 1Q12 1Q08 1Q09 1Q10 1Q12 1Q11 Source: BEA (http://www.bea.gov/national/index.htm#gdp) Source: BEA National Income and Product Accounts, Table 1.12 9 airlines.org
  8. Conditions for Travel Demand: A Tale of Two Customer Segments (Part 2)Declining U.S. Personal Income and Household Worth Crimping Leisure Demand U.S. Disposable Personal Income U.S. Household Net Worth Trillions of Chained 2005 Dollars, SAAR Trillions of Current Dollars, NSA $10.3 $64 $62 $10.2 $60 $10.1 $58 $10.0 $56 $54 $9.9 $52 $9.8 $50 1Q08 1Q09 1Q10 1Q12 1Q11 1Q10 1Q11 1Q08 1Q09 1Q12 Source: BEA National Income and Product Accounts, Table 2.1 Source: Federal Reserve Flow of Funds Account Z.1, B.100 10 airlines.org
  9. Jet Fuel at Highest Level Since May 2011 High Crude-Oil Price Plus Refining Crack Spread* $140 Jet Fuel $135Price per Barrel (5-Day Avg.) $130 $125 Brent Crude $120 $115 $110 $105 WTI Crude $100 $95 $90 15-Dec- 25-Dec- 14-Jan- 24-Jan- 13-Feb- 23-Feb- 14-Mar- 24-Mar- 13-Apr- 23-Apr- 4-Jan-12 3-Feb-12 4-Mar-12 3-Apr-12 12 12 12 12 12 12 12 12 11 11 Source: A4A and EIA (for WTI and Brent crude oil and U.S. Gulf Coast jet fuel) * Refining margin (difference between jet-fuel and crude-oil price) 11 airlines.org
  10. Rising Costs Forcing Airlines to Continue Capacity Reductions in 2012Year-Over-Year Change (%) in Scheduled Domestic Available Seat Miles (ASMs) 2.5 2.3 1.1 (0.4) (1.1) (1.6) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12Source: Innovata (via Diio Mi) published schedules as of Feb. 24, 2012 12 airlines.org
  11. ExxonMobil AAA Microsoft AAA GE AA+ Wal-Mart AA Source: Standard and Poor’s Toyota AA- BP A eBay A Starbucks A- QANTAS BBB Lufthansa BBB- Southwest BBB-13 Alaska BB- Allegiant BB- British Air BB- GOL BB- TAM B+ Only One U.S. Passenger Airline Has Investment-Grade Credit Delta B United B Air Canada B- JetBlue B- SAS B- US Airways B- < BBB- (speculative grade) >= BBB- (investment grade) American Dairlines.org
  12. Improved Balance Sheets Allow Airlines to Preserve/Grow Jobs, Acquire New AircraftU.S. Passenger Airlines Beginning to Hire Workers and Purchase PlanesAirline Payrolls Stabilizing Aircraft Capital Spending on the RiseFull-Time Equivalent Employees (Thousands) Average Annual Estimated Aircraft/Engine CapEx (Billions) 532 $16.9 475 471 $9.7 $9.2 439 430 419 $6.6 411 $5.8 $5.8 $5.7 404 $4.8 $4.2 392 389 $3.4 Nov… 379 Nov… 379 Nov… Nov… Nov… Nov… Nov… Nov… Nov… Nov… Nov… Nov… 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) 14 airlines.org
  13. U.S. Passenger Airlines: Economic ReviewThe Bottom Line in Early 2012» Looking Back • Net profit margin fell from 1.6 percent in 2010 to 0.3 percent (prelim. per 11 carriers) in 2011 o Second year of modest profitability after recording an average margin of -6.3 percent in 2001-2009 o All but three U.S. airline stocks took a beating in 2011, especially relative to S&P 500 o Spot price of U.S. jet fuel hit all-time high in 2011; thus far (through Feb. 22), running 16 percent higher in 2012 • 2011 was a stellar year on many operational fronts o Second consecutive year of zero passenger fatalities o Best year ever recorded for baggage handling and denied boardings; best 4Q ever recorded for on-time arrivals o All-time high for U.S. exports of air-travel services ($36.7B) and for U.S. merchandise exported by air ($424.3B)» Looking Ahead • Fuel remains largest and most volatile cost – continuing threat to GDP and earnings • Airlines reacting to increasing (and volatile) marginal costs and uncertain revenues with conservative volumes, high utilization of existing assets, “variabilization” of cost structure, avoidance of costs incurred without sufficient revenues generated, product diversification • Major focus on debt reduction, fleet renewal and product enhancement • Improved financial wherewithal translating to uptick in employment and fleet upgrades • Increasing governmental/regulatory costs creating potential barrier to entry for start-ups 15 airlines.org
  14. www.airlines.org

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