Airline Industry Economics Advisory Workshop 2016 1
Airline financial
performance 30 March 2017
Brian Pearce
Chief Economist, IATA
www.iata.org/economics
The air transport paradox
IATA Economics www.iata.org/economics Source: McKinsey presentation to IATA
Still very much a growth story
30
35
40
45
50
55
60
65
-12%
-8%
-4%
0%
4%
8%
12%
16%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% year-on-year Diffusion index
Growth in industry RPKs (LHS)
Global manufacturing PMI index (adv. 2 months, RHS)
Sources: IATA Economics, IATA Monthly Statistics, Markit
Global services PMI index (adv. 2 months, RHS)
IATA Economics www.iata.org/economics
Though much variation by travel market
Africa - Europe
Europe- C. AmericaEurope - Asia
Europe - Middle East
Europe - North America
Asia - North AmericaAsia - SW Pacific
Middle East - Asia
Middle East - North America
North - South America
Within Europe
Within Asia
Domestic Australia
Domestic Brazil
Domestic China
Domestic India
Domestic Japan
Domestic Russia
Domestic US
-5%
0%
5%
10%
15%
20%
0% 2% 4% 6% 8% 10% 12% 14% 16%Share of total global RPKs (Year ended Jan 2017)
Sources: IATA Economics, IATA Monthly Statistics by Route
RPK growth by int'l route and dom. market (latest month, % year-on-year*)
*Note: int'l routes data are for January;domestic market data are for February
IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 5
Long-term expansion even in gloomy macro scenario
2
3
4
5
6
7
8
9
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034
Global O-D passenger journeys (billion)
Constant policies scenario
Reflation/open borders scenario
Pick-up in Protectionism scenario
Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 6
Trip frequency still low in many important markets
0 0.5 1 1.5 2 2.5 3 3.5 4
NigeriaIndia
EgyptChina
South AfricaIndonesia
BrazilMexico
Russian FederationColombia
ChileTurkey
ThailandJapan
Korea, Republic OfSaudi Arabia
GermanyFrance
ItalyUnited States
CanadaUnited Kingdom
SpainAustralia
Propensity to fly (total passengers/population)Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics
Large potential in populous but (currently) poor markets
Source: IATA Economics using data from PaxIS+ and Oxford Economics IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 8
Demographics strong in some key markets, adverse in others
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%% change
The UN's projected change in population (2015-2035,%)
UN projections adjusted for demographic factors
Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics
Scope for large price change in short-haul markets
0.05
0.07
0.09
0.11
0.13
0.15
0.17
0.19
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Pass
enge
r yi
eld
s, U
S$ p
er R
PK
Average trip length (kms)
Passenger yields and average trip length
Within Africa
Within South America
Within ASEAN
WithinEurope
Middle East-rest of world
ASEAN-Europe
North Atlantic
Pacific
North-South America
Within East Asia
ASEAN-Africa
China-North America
ASEAN-North America
ASEAN-E Asia
Europe-Australia
IATA Economics www.iata.org/economics Source: IATA PaxIS+
Airline Industry Economics Advisory Workshop 2016 10
China largest increment, US remains important
4.2%
3.0%
6.0%
2.6%
5.2%
8.2%
3.5%
6.7%
2.6%
5.2%
0 100 200 300 400 500 600 700 800
Mexico
Australia
Philippines
Brazil
Turkey
Vietnam
Indonesia
India
United States
China
Change in domestic O-D markets (millions, 2015-2035)
Corresponding CAGR
Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 11
Significant change in top-10 markets over next 20 years
2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
US
China
UK
Japan
Spain
Germany
India
Italy
France
Indonesia
China
US
India
UK
Indonesia
Japan
Spain
Germany
Brazil
Turkey
Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics
Centre of gravity of air travel shifting fast towards China
Source: IATA Economics using data from PaxIS+
1914 2004 2015 2035
IATA Economics www.iata.org/economics
The GFC precipitated one key divergence
Source: ICAO, IATA
Passenger RPKs
2,000
3,000
4,000
5,000
6,000
7,000
80
130
180
230
280
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
RP
Ks
bill
ion
FTK
s b
illio
n
Air travel and cargo volumes
Cargo FTKs
IATA Economics www.iata.org/economics
Retreat from globalization
Source: IMF World Economic Outlook and the World Trade Organization
-15
-10
-5
0
5
10
15
2000 2002 2004 2006 2008 2010 2012 2014 2016
% c
han
ge o
ver
pre
vio
us
year
World GDP and cross-border trade growth
World trade growth
World GDP growth
IATA Economics www.iata.org/economics
Supply chains have been shortened
30
32
34
36
38
40
42
44
46
48
50
52
50
60
70
80
90
100
110
120
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Index (Oct 2008=100)
World trade/IP ratio vs. measure of global supply chainsShare (%)
World trade/IP ratio
Ratio of foreign value added to domestic value added in world gross exports
IATA Economics www.iata.org/economics Source: Netherlands CPB, UNCTAD
But growth has returned to cargo
IATA Economics www.iata.org/economics Source: Markit, IATA Statistics
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-30%
-20%
-10%
0%
10%
20%
30%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
% year-on-year % year-on-year
Growth in industry FTKs Global PMI new export orders component (adv. 2 months)
Sources: IATA Economics, IATA Monthly Statistics, Markit
Implied PMI series if the index remains flat at its
February 2017 level over the coming months
Despite sluggish world trade
IATA Economics www.iata.org/economics Source: IATA Statistics, Netherlands CPB
60
70
80
90
100
110
120
130Indices (Jan 2012=100, seasonally adjusted)
Global FTKs
World trade volumes
90
95
100
105
110
115
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Sources: IATA Economics, IATA Monthly Statistics, CPB
Rising FTK share
Ratio of global FTKs to world trade volumes
Airline Industry Economics Advisory Workshop 2016 18
Traffic accelerating ahead of capacity growth
Source: IATA using data from The Airline Analyst IATA Economics www.iata.org/economics
0%
2%
4%
6%
8%
10%
12%
14%
2011 2012 2013 2014 2015 2016 2017
% c
han
ge o
n y
ear
earl
ier
RPKs and ASKs growth
ASKs 6.2% => 5.6%
RPKs 5.9% => 5.1%
Airline Industry Economics Advisory Workshop 2016 19
Margin squeeze signs of easing?
Source: IATA using data from The Airline Analyst IATA Economics www.iata.org/economics
60
65
70
75
80
85
90
95
100
105
110
0
20
40
60
80
100
120
140
2011 2012 2013 2014 2015 2016 2017
Ind
exed
to
eq
ual
l 1
00
in J
nau
ary
20
11
US$
per
bar
rel
Airline passenger yield (constant fx) and crude oil prices, indexed
Oil price 44.6 => 55 $/b
Pax yield-8% => 0%
Airline Industry Economics Advisory Workshop 2016 20
Industry profitability declining but how fast?
Source: IATA Economic Performance of the Airline Industry – end year 2016 report IATA Economics www.iata.org/economics
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 2015 2016 2017
EBIT
as
% r
even
ues
Quarterly profile for airline industry operating profits (EBIT)
Operating margin 8.3% => 6.6%Net profits$39.6bn => $29.8bn
At last investors are getting a ‘normal’ return
Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
% o
f in
vest
ed c
apit
al
Return on capital invested in airlines
Cost of capital (WACC)
Return on capital (ROIC)
IATA Economics www.iata.org/economics
Ending decades of investor capital destruction (?)
Source: McKinsey, IATA
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
US$
bill
ion
Difference between investing in airlines and investing in similar assets elsewhere
IATA Economics www.iata.org/economics
Other sectors do better
IATA Economics www.iata.org/economics Source: McKinsey for IATA
0%
5%
10%
15%
20%
25%
30%%
RO
ICReturn on capital across the air transport supply chain
1996-2014 2007-2014
But this is not the main issue for airline earnings
Source: McKinsey for IATA
0.8
(2.5) 0.3 0.7 0.4 2.0
TOTAL
(16.7) –
(18.0)
Freight
Forwarders
1.2
Travel
Agents
0-2.0
CRS
GDS
0.5
Airlines
(19.4)
ANSPAirportsCateringGroundMROLessors
(0.7) - (2.0)
Manufac-
turers
Estimate
Average yearly economic profit, USD billion, 2007-2014
IATA Economics www.iata.org/economics
Aircraft fuel efficiency has improved dramatically
IATA Economics www.iata.org/economics Source: Lee
But costs typically passed through to prices
IATA Economics www.iata.org/economics
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1950 1960 1970 1980 1990 2000 2010
US
$ in
20
13
price
s p
er
ton
ne
kilo
me
ter
US
$ in
20
13
price
s t
o f
ly a
to
nn
e k
ilom
ete
r
Unit cost and the price of air transport
Price(US$/RTK)
Unit cost(US$/ATK)
US deregulation
EU deregulation
Boeing 707
1973 oil crisis
Source: ICAO, IATA
In fact prices have fallen further than costs
IATA Economics www.iata.org/economics
45%
50%
55%
60%
65%
70%
1970 1975 1980 1985 1990 1995 2000 2005 2010
% A
TK
s
Breakeven and actual load factors
Breakeven load factor
Load factor achieved
+15%points
Source: IATA, ICAO
Consumers have been the major beneficiaries
Source: ICAO, Boeing, OAG, IATA
0.5
1
1.5
2
2.5
3
3.5
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
US$
/RTK
in 2
01
4U
S$
Nu
mb
er o
f u
niq
ue
city
-pai
rs
Unique city-pairs and real transport costs
Unique city pairs
Real cost of air transport
IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 29
Structural change?
58
59
60
61
62
63
64
65
66
67
68
2000 2002 2004 2006 2008 2010 2012 2014 2016
% A
TKs
Breakeven and achieved weight load factor
Achieved LF
Breakeven LF
Source: IATA Economic Performance of the Airline Industry – end year 2016 report IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 30
High fuel prices not always bad for airlines
Source: IATA, Platts IATA Economics www.iata.org/economics
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Jet
fuel
pri
ce, U
S$/b
arre
l
RO
IC, %
of
inve
sted
cap
ital
Airline industry ROIC and jet fuel prices
ROIC
Jet fuel price
Airline Industry Economics Advisory Workshop 2016 31
Solid improvement in capital productivity
0.8
0.9
1.0
1.1
1.2
1.3
1.4
-6
-4
-2
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
Cap
ital
pro
du
ctiv
ity,
rev
enu
e/in
vest
ed
cap
ital
, US$
Op
erat
ing
mar
gin
, % r
even
ue
Airlines' operating or EBIT margin and capital productivity
Capital productivity
Operating margin
Source: IATA Economic Performance of the Airline Industry – end year 2016 report IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 32
Very wide variety of business models
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.00 0.50 1.00 1.50 2.00 2.50
EBIT
mar
gin
, ad
just
ed E
BIT
/rev
enu
e
Capital productivity ($ revenue per $ invested capital)
2015 ROIC = adjusted EBIT/revenue * revenue/invested capital
WALMART
PFIZER
Allegiant
Lufthansa
Easyjet
Southwest
Alaska
Spirit
Ryanair
Jazeera
Delta
IAG
AF-KLM
Hawaiian
AMR JAL
Qantas
United
Thai
Volaris
Mesa
Spring
Air CanadaPIA
GOLKorean
SIA
Air China
Cathay
Aeromexico
JetBlue
LATAMANA
Increasing return on capital (ROIC)
Comair
Source: IATA using data from The Airline Analyst IATA Economics www.iata.org/economics
US performance dominating industry totals
-10%
-5%
0%
5%
10%
15%
N America Europe Asia Pacific Midle East L America Africa
Net post-tax profit margins
2015 2016
Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report IATA Economics www.iata.org/economics
Wide variation in balance sheet performance
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2011 2012 2013 2014 2015
Ad
just
ed n
et d
ebt/
EBIT
DA
R
Adjusted net debt/EBITDAR by region
North America
Europe
Asia Pacific
Latin America
Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report IATA Economics www.iata.org/economics
Airline Industry Economics Advisory Workshop 2016 35