U.S. Airlines: Their Nascent Recovery and the Benefits to the Nation
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U.S. Airlines: Their Nascent Recovery and the Benefits to the Nation

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A financial update on the U.S. airline industry presented to the DOT Advisory Committee on Aviation Consumer Protection

A financial update on the U.S. airline industry presented to the DOT Advisory Committee on Aviation Consumer Protection

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U.S. Airlines: Their Nascent Recovery and the Benefits to the Nation U.S. Airlines: Their Nascent Recovery and the Benefits to the Nation Presentation Transcript

  • U.S. Airlines: Their Nascent Recovery and theBenefits to the NationSecond Meeting of the Advisory Committee on Aviation Consumer ProtectionAug. 7, 2012
  • Overview • The industry is climbing out of a huge financial hole, to modest profitability o Diversification of revenues and improved alignment of revenues generated with costs incurred have been critical elements of the nascent recovery • A heavy dose of new/proposed regulations in 2012 threaten the recovery • A financially healthy airline industry means job growth and service reinvestment • Operational performance is strong and improving, and reflected in a remarkably low complaint rate – especially compared to other industries with smaller volumes 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 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 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
  • Modest Profits in 2010 and 2011 Came on the Heels of Massive LossesCumulative 2001-2011 Net Loss for U.S. Passenger Airlines = $62.3 BillionProfit (Billions) $20 $16.5 $10 $6.3 $2.2 $0.6 $0 ($2.1) ($1.1) ($2.9) ($10) ($8.0) ($11.8) ($10.0) ($20) ($24.5) ($30) ($28.6) ($40) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12 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 4 airlines.org
  • Even With Ancillary Revenues, 2011 Revenues Exceeded Costs by Just 81 Cents (0.4%)Excluding $8.06 in Ancillaries, Revenues Would Have Lagged Costs by $7.26 (-3.4%) 2011 U.S. Airline Financial Results per Enplaned Passenger $212.73 $211.93 Ancillary, $8.06 Airfare $159.53 Cargo & Other $45.14 $0.81 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 5 airlines.org
  • Historically, Airlines Have Been the Least Profitable Segment of the Value ChainFor Airlines, the Cost of Capital Tends to Exceed Returns IATA worked closely with McKinsey & Company to examine the investors’ returns…over a full industry cycle (1996 to 2004)… Computer reservation systems (CRS), a sector dominated by just four major firms, delivered the highest returns, with an annual surplus of $660 million over their cost of capital. Investor Returns on Capital* 20 1996-2000 15.8 15 2001-2004 10.5 10 4.4 3.7 5 0.3 0.5 0 (1.2) (1.6) (0.4) (5) (5.5) (10) Manufacturers Lessors Airlines CRS/GDS Travel Agents* Return on invested capital minus weighted average cost of capital Source: McKinsey & Company as cited in IATA “Value Chain Profitability” Economics Briefing (June 2006) 6 airlines.org
  • The Airline Industry’s Financial Condition Is Improving, But Far From StellarPer S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit Investment Grade1 (>= BBB-) Speculative2 Grade (< BBB-) ExxonMobil, Microsoft AAA Ford Motor Co. BB+ GE AA+ British Airways, TAM BB Wal-Mart AA Alaska, Allegiant BB- Toyota, UPS AA- Avis, GOL, Hertz B+ BP, eBay A Delta, United B Amtrak, Starbucks A- Air Canada, JetBlue, SAS, US Airways B- FedEx, Marriott, QANTAS, Starwood BBB American D Lufthansa, Southwest BBB- Passenger Airline1 Describes issuers with relatively high levels of creditworthiness and credit quality2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Source: Standard and Poor’s as of Jul. 21, 2012; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?” 7 airlines.org
  • Sample of New Regulations on U.S. Airlines Will Add $3.3 Billion in Annual CostsWith More Rules Looming, That Sum Equates to Approximately 39,000 Airline Industry Jobs TOTAL BURDEN 38,793 ($3.3B) Existing Full-Fare Advertising 12,407 ($1.04B) Flight and Duty Time 9,580 ($804M) Other Consumer Mandates 9,379 ($787M) Fuel-Tank Inerting 1,703 ($143M) Proposed Training 3,935 ($330M)Airport Hydrant Fueling Systems 1,789 ($150M) Lithium Batteries (TBD)Source: A4A and Federal Aviation Administration 8 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 $16.920 $9.7(2) $9.2 $6.6(4) $5.8 $5.8 $5.7 $4.8 $4.2(6) $3.4(8) 2007 2008 2009 2010 2011 2012 05 00-01 02 03 04 06-09 10 11 12F 13F Source: BTS for U.S. scheduled passenger airlines Source: Bank of America Merrill Lynch airline equity research (Jan. 5, 2012) 9 airlines.org
  • Rising Costs and Constraints on Revenue Production Translate to Air Service CutsDomestically, the United States Has a 9 Percent Smaller Industry Than Five Years Ago Scheduled Domestic Seating Capacity: Five-Year Comparison 190 Available Seat Miles (Billions) 186.2 185 180 175 170 169.0 165 160 4Q07 4Q12Source: Innovata (via Diio Mi) published schedules as of Aug. 3, 2012; an available seat mile (ASM) is one seat flown one mile 10 airlines.org
  • Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a BargainThe U.S. Consumer Price Index (CPI) Has Risen at Twice the Rate of Domestic Air TravelProduct (Unit) 2000 2011 Change (%)College Tuition: Public (Year) $3,508 $8,244 135.0Gasoline (Gallon, Unleaded) $1.51 $3.53 133.8Costs Faced by U.S. Passenger Airlines (Index) 100.0 195.0 95.0Eggs (Dozen, Grade A, Large) $0.91 $1.77 94.5College Tuition: Private (Year) $16,072 $28,500 77.3Baseball Game (Nonpremium MLB Ticket) $16.22 $26.91 65.9Movie Ticket $5.39 $7.92 46.9Single-Family Home (New) $169,000 $227,200 34.4U.S. CPI (All Urban Consumers)1 172.2 224.9 30.6Vehicle (New) $24,923 $30,659 23.0Air Travel (Round-Trip Domestic Fare + Ancillary)2 $316.95 $365.23 15.2Air Travel (Round-Trip Domestic Fare Only)2 $314.46 $343.46 9.2Apparel: Clothing/Footwear/Jewelry (Index) 129.6 122.1 (5.8)Television (Index) 49.9 6.6 (86.8)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 the Bureau of Transportation Statistics – excludes taxes; “ancillary” includes revenue from reservation changes and baggage 11 airlines.org
  • Even With Ancillaries Included, Price of Domestic Air Travel Lags U.S. InflationFrom 2000 to 2011, Price in Key States Either Decreased or Rose Less Than U.S. CPI % Change (2011 vs. 2000) Less Than U.S. CPI More Than U.S. CPIU.S. Domestic Average 15.2 U.S. CPI: +30.6% California 16.8 Illinois 7.7 Massachusetts (2.9)Sources: A4A analysis of BTS Data Bank 1B (from the Department of Transportation) 12 airlines.org
  • U.S. Airline Operations Have Improved Substantially Over Past Five YearsRecord Performance Enabled by Reinvestment in Product, Cooperative Weather, Etc. 2007 YTD 2012 Better Success Rate On-Time Arrival Rate 73.4 84.3 ~11 pts. 84.3% (% of domestic flights within 00:15) Involuntary Denied Boardings 1.12 0.91 ~19% 99.991% (per 10,000 passengers) Mishandled Bags 7.05 3.01 ~57% 99.699% (per 1,000 domestic passengers) Flight Cancellations 2.16 1.06 ~51% 98.940% (as % of sched. domestic departures)Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm) 13 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.) 15.5 Keystone 78.9Millions of Customers 0.466 Capital Metro (Austin, TX) 2.50 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: DOT, Federal Communications Commission, National Cable & Telecommunications Association, WMATA, Capital Metro (Austin), Los Angeles CountyMetropolitan Transportation Authority, American Public Transportation Association, AMTRAK 14 airlines.org
  • Conclusion • The industry is climbing out of a huge financial hole, to modest profitability • New/proposed/looming regulations in 2012 alone threaten the recovery, jobs • A financially healthy airline industry means job growth and service reinvestment • Operational performance is strong and improving, and reflected in a remarkably low complaint rate – especially compared to other industries with smaller volumes 15 airlines.org
  • www.airlines.org