Consumers 2011 Air Transport Association US Airlines

7/31/2019 Consumers 2011 Air Transport Association US Airlines

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The Economic Climb-Out for U.S. Airlines:Global Competitiveness and Long-Term Viability

ATA Office of Economics

January 29, 2011


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www.airlines.org

The Air Transport Association of America, Inc.

2

AirTran Airways

Alaska Airlines

American Airlines

United Airlines*

Delta Air Lines

Hawaiian AirlinesJetBlue Airways

Southwest Airlines

US Airways

ABX Air

ASTAR Air Cargo

Atlas Air Worldwide Holdings

Evergreen Intl Airlines

FedEx Corporation

UPS Airlines

Air Canada

Air Jamaica

Air transport has become an essential economic and social conduit throughout theworld. Beyond the benefits of fast and inexpensive transcontinental travel, airtransport also has become a vital form of shipping for high-valued items that needto come to market quickly

World Bank (www.worldbank.org/airtransport)

* Includes Continental Airlines


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OVERVIEW

3

Safety of commercial travel exceeds other modes and continues to improve

DOT statutory mission explicitly recognizes importance of airline industry

viability and global competitiveness

A viable, competitive U.S. airline industry is good for the country, fueling jobs and growth

Numerous stakeholders benefit from a financially viable, competitive U.S. airline industry

Competition among airlines remains intense

Battlefield is increasingly global, with a relatively mature domestic market

U.S. airlines are financially weaker than many non-U.S. airlines

To reinvest in product/people, airlines needsubstantiallyimproved finances

Competing in theglobal marketplace is essential for airlines and good for USA


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The State of the IndustryFitch: 2011 Outlook: U.S. Airline

Balance Sheet Repair to Continue

4

Fitch [Ratings] expects ratings for most U.S. airlines to improve in 2011, reflecting a

modest strengthening of industry operating fundamentals and steady progress toward

debt reduction and balance sheet deleveraging. As U.S. carriers look to unwind the

lingering effects of historically weak returns, insufficient cash flow generation, and

constrained liquidity, deployment of cash toward debt repayment will be essential if the

ratings momentum witnessed in 2010 is to continue for another year.* Much like the U.S. economy, U.S. airlines are climbing out of a deep hole and have a long

way to go to be financially strong: (1) attain investment-grade credit and generate a

return on invested capital in excess of cost of capital through a full business cycle

U.S. airlines are focused on shoring up balance sheets to reinvest in product, people and

planes, and to weather the next fuel spike or economic downturn without significantreductions in personnel or service; the global aviation marketplace, where traffic growth

is most promising, is increasingly relevant and intensely competitive

* Fitch Ratings, 2011 Outlook: U.S. Airline Balance Sheet Repair to Continue (Dec. 9, 2010)


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U.S. Carriers: Competing in a Global Marketplace

5

Republic/Shuttle America Air France/KLM

US Airways/America West Copa/AeroRepblica

SkyWest/Atlantic Southeast Lufthansa/Swiss

Lufthansa/JetBlue* Air China/Cathay Pacific*

Delta/Northwest Cathay Pacific/Dragonair

Republic/Midwest Lufthansa/Brussels*/BMI/Austrian

Republic/Frontier Avianca/TACA

United/Continental British Airways/Iberia

SkyWest-ASA/ExpressJet LAN/TAM

Southwest/AirTran LAN/Aires*

Selected M&A and/or Cross-Border Investment: 1995-Present

Source: ATA and Deutsche Bank Global Research * Strategic investment but not full ownership or control


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An Analyst/Investor View

Source: Deutsche Bank Global Research (Jan. 13, 2011)

Consolidation, in our review, represents a later stage for a

mature industry that is seeking ways to address its financial

volatility Our view is that consolidation is part of a longer-term

process that should ultimately allow the global airline industry

to efficiently allocate capital and assets such that a positive

return on invested capital can be achieved

On the surface, airlines pursue mergers as a means to improve

profitabilityand their competitive positioning via an expanded

network. Longer-term, consolidation should improve industryviability while mitigating industry volatility and consequently

lower its cost of capital.

6

Source: Global Airline Sector Laying the Foundation for Global M&A, Deutsche Bank Global Research (Jan. 13, 2011)


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Air Travel Safer Than Other Forms of Intercity Transport

7

Source: National Safety Council Injury Facts 2010 Edition, 1998-2007 averages (most recent available)

1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System

2. Does not include school buses; data from the NSC Fatality Analysis Reporting System

3. Data from the Federal Railroad Administration (FRA)

4. Large and commuter airlines, excluding cargo; data from the National Transportation Safety Board (NTSB)



Each Decade, U.S. Airline Safety Has Improved Markedly

8

Source: ATA analysis of data from the National Transportation Safety Board



DOT Statutory Mission Explicitly Recognizes Importance of

(and Role in) Industry Viability and Competitiveness

(6) placing maximum reliance on competitive market forces and on actual and

potential competition (A) to provide the needed air transportation system; and (B)

, considering any material differences between interstate air

transportation and foreign air transportation.

(14) , , and developing civil aeronautics and a , privately-

owned United States air transport industry.

(15) of air carriers to at least ensure

, including the attainment of the opportunity for air carriers to

maintain and in foreign air transportation.(16) ensuring that consumers in all regions of the United States, including those in

, have to affordable, regularly

scheduled air service.

9



A Viable, Competitive U.S. Airline Industry Is Good for The

Country, Fueling Jobs and Economic Growth

10

Aviation is the glue that keeps the global economy together. Without widely accessible andwell-priced air travel, the global economy will quickly become less global.

Dr. Mark Zandi, Chief Economist & Co-Founder, Moodys Economy.com (August 2008)

$1.225 trillion/year in economic activity

$371 billion/year in personal earnings

10.9 million jobs

$731.5 billion/year to U.S. GDP

5.2% of U.S. GDP

Economic growth and prosperity are determined

in large part by access to the global economy.

And, just as islands require bridges to the

mainland.communities require bridges to theglobal economy. Air transportation is that bridge,

providing the necessary access for U.S. citiesto

enjoy a Virtuous Circle of Economic Growth.

The Plane Truth About Air Service and Economic Development,

Global Aviation Improvement Network, Booz Allen (March 2001)

Every day, the airline industry propels the economic takeoff of our nation. It is the great

enabler, knitting together all corners of the country, facilitating the movement of people and

goods that is the backbone of economic growth. It also firmly embeds us in that awesome

process of globalization that is defining the 21st century.

Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report



Commercial Aviation Drives Nearly 11 Million U.S. Jobs

11

Air Transport3.0

AirportOperations

0.6

AircraftManufacturing

1.1

VisitorExpenditures

5.9

TravelArrangements

0.2

Source: Federal Aviation Administration, The Economic Impact of Civil Aviation on the U.S. Economy, (December 2009)



Numerous and Varied Stakeholders Benefit From a

Financially Viable, Competitive U.S. Airline Industry

12



Inter-Airline Competition Remains Intense

13

The purpose of this study is to examine the competitiveness of the U.S.

domestic airline industry following a period of

and considerable change in industry structure.

.

One area of promise for the network airlines is the

.

Although the airlines (and consumers) have benefited from the international

network development enabled by the liberalization created by open skies

agreements, .

Former DOT officials Randy Bennett, Patrick Murphy and Jack Schmidt,

A Competitive Analysis of An Industry in Transition (July 2007)



Economic Forces Continue Toll on Airline Jobs*

14

46

1.9

430.3

446.8

442.0

426.8

433.1

442.4

454

.8 478.1

509.0 5

30.9

499.3

476.4

431.7

440.6

413.6

403.4

417.9

394.2

379.7

378.1

* Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/)



The Lost Decade: Industry Climbing Out of a Deep Hole

Net Income ($Billions) and Profit Margin (%) for U.S. Airlines*

15

$0.6 $1.6$3.6

($1.5)

$16.3

($53.7)

1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2010E

(0.3%) (~4%)

* All U.S. passenger airlines and cargo airlines reporting to DOT Form 41 P-12 Accounts 9899 and 4999

3.2% 1.9%2.7% 1.6%


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A Quarter or Two of Profit Will Not SufficeMeaningful Profitability Needed to Reinvest, Compete Abroad

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

Source: ATA analysis of DOT Form 41 reports

16

* Earnings before interest, taxes, depreciation, amortization and rents; an approximate measure of a companys operating cash flow based on data from the companys income

statement. Rent is included in the measure to evaluate the financial performance of airlines and other companies (e.g., casinos, restaurants) that have significant rental and

lease expenses derived from business operations.


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Doing Better and Doing Well Are Not the Same Thing

17

3

4

5

6

7

8

9

10

11

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Sources: Bureau of Labor Statistics (http://www.bls.gov/cps) and Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp)

(9.4%)Percent

$12.5

$12.6

$12.7

$12.8

$12.9

$13.0

$13.1

$13.2

$13.3

$13.4

$13.5

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

Trillions of Chained 2005 Dollars, SAAR


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DOT Airline Customer Service Metrics

18

(as % of sched. domestic departures)

(per 10,000 domestic departures)

(% of domestic flights within 00:15)

(per 10,000 passengers)

(per 1,000 domestic passengers)

(per 100,000 systemwide passengers)

* Time elapsed between departure from the origin airport gate and wheels off

Sources: Bureau of Transportation Statistics and DOTAir Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

** Effective October 2008, BTS monthly reports on tarmac times included, for the first time, data from flights which were subsequently cancelled, diverted,

and/or had multiple gate departures (see http://www.bts.gov/help/about_tarmac.html)
http://www.bts.gov/help/about_tarmac.htmlhttp://www.bts.gov/help/about_tarmac.html


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Breakeven Load Factor Finally Below 80% Again

19

Source: ATA Passenger Airline Cost Index


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Airline Energy Costs Are High and Poised to Rise

Source: Energy Information Administration, including Short-Term Energy Outlook (Jan. 11, 2011) forecast of Jet Fuel Refiner Price to End Users

20
http://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htm


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Jet Fuel Prices: Not Just a Crude Story

Source: ATA and Energy Information Administration

21

Crack

Spread

Jet Fuel (Gulf Coast)

Crude Oil (WTI)
http://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htm


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For U.S. Passenger and Cargo-Only Airlines, Fuel

Expenditures Trending Up Despite Lower Consumption

22

Sources: ATA, Energy Information Administration, Department of Transportation

Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs; YE = year ended

16.815.0

12.8

15.5

22.7

33.2

38.841.9

57.8

32.337.4

16

17

18

19

20

21

$10

$20

$30

$40

$50

$60

2000($0.82)

2001($0.78)

2002($0.72)

2003($0.85)

2004($1.16)

2005($1.66)

2006($1.97)

2007($2.11)

2008($3.07)

2009($1.90)

YE 9/10($2.19)

Billion Gallons

Billion Dollars


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Tax Bite on a $300 One-Stop Round Trip*

23

Source: ATA analysis of federal tax code

* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees.

2011 Taxes

20% ($61)*

1972 Taxes

7% ($22)*

1992 Taxes

13% ($38)*

TAX

AIRFARE


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Special Aviation Tax Burden* Exceeded $16B in 2010

24

$2,787

$1,808 $282$599 $291

$460

$7,261

$2,324$395 $351 $16,558

* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers; PFCs reflect FAA estimate as of Nov. 2010

Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA


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Demand for Domestic Air Travel Has NotRecovered

25

Source: ATA analysis of BEA and BTS data

Shortfall=

$34B


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The Price of Air Travel Has NotKept Pace With U.S. Inflation

26

Grade-A Large Eggs (Dozen) $0.91 $1.66 82.9

Unleaded Gasoline (Gallon) $1.51 $2.35 55.6

Movie Ticket $5.39 $7.50 39.1

Prescription Drugs (Index) 285.4 391.1 37.0

First-Class Domestic Stamp $0.33 $0.44 33.3New Single-Family Home $169,000 $216,700 28.2

Whole Milk (Index) 156.9 183.2 16.7

New Vehicle $24,923 $28,966 16.2

Television (Index) 49.9 10.6 (78.7)

1. BLS measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

2. BTS average airfare and ancillary fees generated per passenger enplaned, excluding government-imposed charges.

3. BTS National-Level Average Fare Series, the average domestic airfare paid per round-trip itinerary, including government-imposed charges.


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The Price* of Air Travel Has NotKept Pace With U.S. Inflation

27

Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm)

$296.8

0

$275.7

8

$289.4

4

$300.9

7

$32

9.3

4

$339.1

6

$32

8.6

7

$317.93

$314.5

2

$309.4

5

$306.6

8 $

341.5

8

$325

.39

$346.1

0

$301.2

6 $340.7

2

$425.2

1

2Q95

2Q96

2Q97

2Q98

2Q99

2Q00

2Q01

2Q02

2Q03

2Q04

2Q05

2Q06

2Q07

2Q08

2Q09

2Q10

* BTS reports average fares based on domestic itinerary fares (round-trip or one-way for which no return is purchased). [Averages do not include frequent-flyer or zero fares.]

Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase.

$84.4

9


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2009 Domestic Seating Capacity Fell Most Since 1942

28

Sources: ATA, BTS (T1 Scheduled Service)

(16.2) (6

.9)

(40)

(20)

0

20

40

60

80

100

1932

1934

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

* An available seat mile (ASM) is one seat flown one mile


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Capacity Being Re-Balanced With Size of U.S. Economy

29

Sources: BTS (T1 Domestic, All Services) and Bureau of Economic Analysis * An available seat mile (ASM) is one seat flown one mile

** Chained 2005 dollars


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Capacity Over the Past Decade: A Tale of Two Markets

30

Source: Innovata (via APG) published schedules as of Jan. 21, 2011

13.99 14.39

12.6512.92

13.6

9 14.05

13.62 14.02

14.02

12.56

12.5112.76

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

2.232.41

1.94 2

.052.10

2.42 2.4

92.662.85

2.74

2.64

2.89

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

* U.S. airlines only; an available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector


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www.airlines.org 31

Source: Innovata (via APG) published schedules as of Jan. 21, 2011

29,673

29,953

25,947

26,07726,826 28,000

26,359

26,895

26,282

23,991

23

,299

23,452

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1,75

9

1,898

1,541

1,654

1,669

1,811

1,806 1

,864 1

,921

1,816

1,816

1,836

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations

Departures Over the Past Decade: A Tale of Two Markets


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The Future Lies Across the Ponds

Thinking Outside the [Domestic] Box

2.0

4.0 4.2

6.8

DomesticUS

US-Europ

e

Japan-US

China-US

2.5

4.6 4.7 4.9

WithinNorthAm

NorthAtlantic

N

orthAmtoLatAm

Transpacific

Annual Traffic Growth: 2009-2028 Annual Traffic Growth: 2009-2028

32


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Healthy Investment Requires Healthy Equity

Equity Market Capitalization (Billions) as of Jan. 5 at 1800 EST

$376.7

$306.4

$239.6

$198.4

$193.8

$145.6

$125.8

$89.0

$50.9

$40.9

$37.5

ExxonMobil

Apple

Microsoft

GE

Wal-Mart

Toyota

BP

Goldman Sachs

Deutsche Bank

U.S. airline industry*

eBay

* AAI, ALGT, ALK, AMR, DAL, HA, JBLU, LCC, LUV, PNCL, RJET, SKYW, UAL

33


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Healthy Investment Requires Healthy CreditNo Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P

34

< BBB- (speculative or junk)

>= BBB- (investment-grade)

ExxonMobil

Microsoft GE

Toyota

Wal-Mart BP

eBay

GoldmanSachs

QANTAS

Southwest

Lufthansa

BritishAir

Alaska

TAM

Delta

United

AirCanada

AirTran

American

JetBlue

SAS

USAirways

AAA

BBB

B

B

BBB-

BB-

B+

B+

BBB

B-

B-

B-

AAA

AA+

AA

AA

A A A B-

B-

B-


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S&P Corporate Credit Ratings (July 12, 2010) for North

American Transportation Companies, Strongest to Weakest

1. Union Tank Car

2. UPS

3. TTX

4. AMTRAK

5. Canadian

National

Railway

6. Kirby Corp.

7. Burlington Northern

8. Enterprise Holdings

9. Norfolk Southern

10. Ryder System

11. Alexander & Baldwin

12. GATX

13. Union Pacific

14. FedEx

15. Hunt (J.B.) Transport

16. Brink's Co.

17. Aviation Capital Group

18. Canadian Pacific Railway

20. CSX

21. Con-way

22. ILFC

23. AWAS Aviation Capital

24. Teekay Corp.

25. AMERCO

26. Kansas City Southern

27. Mobile Mini Inc.

28. Overseas Shipholding Group

29. Kenan Advantage Group

30. RailAmerica

31. Avis Budget Group

32. US Xpress Enterprises

33. Hertz Global Holdings

35. Global Aviation Holdings

36. Marquette Transportation

37. United Maritime Group

39. Ozburn-Hessey Holding Co.

40. American Commercial Lines

41. Horizon Lines

42. General Maritime Corp.

44. Dollar Thrifty Automotive

46. Coach America Holdings

48. AirTran Holdings

49. JHCI Acquisition Inc.

50. Quality Distribution Inc.

51. Trailer Bridge Inc.

52. Western Express Inc.

56. Swift Corp.

57. Evergreen International

58. YRC Worldwide

35


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Whats Wrong With This Picture?The Investors View

. The balance between positions which seek to socialize

aspects of the airline industry versus those that promote growth in the

free market will contribute to how the market prices airline capital risk

and measures the required rate of return to justify growth.

.

Statement of David R. Strine before the House Subcommittee on Aviation, Consolidation In The Aviation Industry,

With A Focus On The Proposed Merger Between United Airlines And Continental Airlines A Perspective From Within

The Financial Markets (June 16, 2010)

36


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Global Context: Airlines Challenged to Cover Cost of Capital

37

Source: IATA (1993-2004 from McKinsey study) and Deutsche Bank Global Research (for 2010-2012 estimates)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011F

2012F

2013

2014

2015

Return (ROIC)

Cost (WACC)

ROIC Below WACC Translates to Loss of Investor Wealth


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Where Do We Go From Here?

38


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When America Flies, It Works

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Consumers 2011 Air Transport Association US Airlines

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