U.S. Airline Industry First Half 2014 Review Putting ......Hunter Keay, CFA, Wolfe Research (March 17, 2014) Net Profit Margin (%), 1H 2014 . Jan Polar vortexes brought extremely cold
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John P. Heimlich
Vice President & Chief Economist
A4A Media Briefing
August 21, 2014
U.S. Airline Industry First Half 2014 Review
Putting Improving Finances to Work
With Personal Incomes Outpacing the Price of Air Travel, Americans Can Purchase
~2.5 Times the Amount of Air Travel They Could at the Outset of Deregulation
Adjusted for Inflation, Domestic Air Travel Remains ~40 Percent Below 1980 Levels
airlines.org
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1979
1983
1987
1991
1995
1999
2003
2007
2011
Fare Fare + Ancillary
Domestic R/T Airfare as Share (%) of
Per-Capita Disposable Personal Income
2
Source: A4A analysis of data from BEA, BLS and BTS (Data Bank 1B)
$300
$350
$400
$450
$500
$550
$600
$650
1979
1983
1987
1991
1995
1999
2003
2007
2011
Fare Fare + Ancillary
Domestic R/T Airfare Adjusted for
Inflation (in CY2013 Dollars)
This Decade, U.S. Airline Flights Need to Be ~80 Percent Full to Avoid Losing Money
Over Multiple Decades, the Rising Costs of Running an Airline – Without a Commensurate
Increase in Fares – Have Meant That Airlines Have Had to Fill More Seats to Break Even
airlines.org
Source: A4A Passenger Airline Cost Index
56.7
62.6
66.2
81.3 79.8
50
55
60
65
70
75
80
85
1971-1980 1981-1990 1991-2000 2001-2010 2011-2013
Bre
ake
ve
n L
oa
d F
acto
r (%
)
3
Key Air-Travel Demand Drivers Trending Positively
airlines.org
(4.0)
(2.0)
0.0
2.0
4.0
6.0
2011 2012 2013 1Q14 2Q14
U.S. Economy (% CAGR) Expanding
4
U.S. Generating > 200K Jobs per Month
0
100
200
300
400
Jan Feb Mar Apr May Jun Jul
Th
ou
san
ds
Sources: BEA, BLS, Federal Reserve and IHS Economics; U.S. GDP real annual average growth rate (%), U.S. nonfarm payroll employment growth (month-over-month, in
000s, seasonally adjusted), U.S. disposable personal income per capita (chained 2009 dollars, SAAR); U.S. household net worth in current dollars, not seasonally adjusted
$36.0
$36.5
$37.0
$37.5
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Th
ou
san
ds
Real Personal Incomes ($000) Rising Household Net Worth ($T) Growing
$73
$75
$77
$79
$81
$83
1Q13 2Q13 3Q13 4Q13 1Q14
Mil
lio
ns
Healthy Air-Travel Volumes and Fuel-Price Relief Drive Margin Gains* in 1H 2014
Lower Fuel Expense Largely Offsets Increases in Labor, Airport and Aircraft Costs
* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
airlines.org 5
Operating Revenues ($77.2B) 6.0
Operating Expenses ($70.4B) 2.2
Fuel (33% of Operating Expenses) (2.4)
Wages & Benefits (24%) 6.5
Maintenance, Materials & Repairs (5%) (4.1)
Landing Fees & Terminal Rents (5%) 5.3
Aircraft Rent (2%) (4.4)
Depreciation & Amortization (5%) 6.9
Other** (25%) (5.4)
Interest & Other Non-Operating Expenses 6.4
Income Tax & Other Expense / (Benefit) nmf
Net Profit: $3.8B (5.0% of Op. Revenues) + 2.8 pts.
** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals
% Change YOY 1H13 1H14 Change
Passenger Yield1 16.00¢ 16.46¢ +2.9%
Passenger Traffic2 399.3B 409.7B +2.6%
1. Average airfare paid per mile flown, excluding taxes
2. Revenue passenger miles (RPMs) flown
1H13 1H14 Change
Enplanements 353.7M 360.0M +1.8%
U.S. Inflation3 232.366 236.384 +1.7%
Personal Income4 $39,273 $40,465 +3.0%
3. U.S. Consumer Price Index (1982-84 = 100)
4. U.S. disposable personal income per capita
The Airline Industry Remains a Low-Margin Business, Lagging S&P 500 Average
For Every Dollar of Revenue Collected, U.S. Airlines Keep Just a Nickel as Profit
airlines.org
18.7
15.7 14.8 13.6
11.9 9.9 9.5
6.2 5.0 4.9 4.2 4.0 3.8 3.3 3.1
McD
on
ald
´s
Wa
lt D
isn
ey
CS
X
Com
ca
st
Sta
rbucks
Chip
otle
S&
P 5
00
Bo
ein
g
Air
lines*
Ma
rrio
tt
Royal C
ari
bb
.
Wh
ole
Fo
od
s
Wa
lgre
en
s
Wa
lma
rt
Fo
rd
6
Sources: Standard & Poor’s and company SEC filings; S&P is trailing twelve months
* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
“Although it may seem like it’s becoming more popular to invest in airlines, data would show that
it’s not... [T]here still isn’t a lot of long-term capital invested in the space…
“Who owns airline stocks? You might be surprised…,” Hunter Keay, CFA, Wolfe Research (March 17, 2014)
Net Profit Margin (%), 1H 2014
Jan Polar vortexes brought extremely cold temperatures to the Midwest and East plus a series of
snow and ice storms caused extensive delays and operational challenges.
Feb
The first three weeks of February saw a series of winter storms with multi-day impacts as they
moved across the Midwest to the East Coast. The final week of the month was close to normal with
only minor disruptions. February 13 was the single worst day for flight cancellations this winter with
more than 7,500 as a massive winter storm affected operations at airports from Atlanta to Boston.
Mar
The biggest impact was March 2-4 as Winter Storm Titan brought snow and ice to the Midwest
and Mid-Atlantic regions. March 12-13 saw more limited cancellations due to Winter Storm Vulcan,
which primarily affected airports on the Great Lakes including ORD, DTW, CLE and upstate NY.
Apr
April was finally a reprieve from the challenging winter. The biggest impact was April 29-30 when
nearly 1,900 flights were cancelled as severe thunderstorms moved through TX, the SE, and the
DC-NY corridor. April 14-15 saw thunderstorms, snow/ice, and wind affect airports from TX to NY.
May
May saw an increase in thunderstorm activity compared to the previous year, with twice as
many days with 500 or more cancellations. The biggest impact was May 8-16 when nearly 8,300
flights were cancelled as severe thunderstorms moved through the Midwest and Northeast.
Jun
Thunderstorm season was in full force. The biggest impact was June 9-13 with almost 5,000
flight cancellations as severe thunderstorms moved through the Midwest and Northeast. Runway
construction also caused numerous delays, particularly at EWR and SFO.
Source: masFlight
airlines.org 7
In 1H14, Extreme Weather Took a Significant Toll on Airline Operations…
Source: BTS
airlines.org 8
…Massive Winter Storms Pummeled 1Q Operations, Bringing Down 1H Performance
Notwithstanding Increase in May Thunderstorms, 2Q Operations Were Comparable to 2013
93
94
95
96
97
98
99
Jan Feb Mar Apr May Jun
2013
2014
Fli
gh
t C
om
ple
tio
n (
%)
2013 2014 Chg.
1Q 98.2 95.4 (2.8)
2Q 98.4 98.3 (0.1)
67
69
71
73
75
77
79
81
Jan Feb Mar Apr May Jun
2013
2014
On
-Tim
e A
rriv
al
Ra
te (
%)
2013 2014 Chg.
1Q 80.1 72.2 (8.0)
2Q 76.2 76.1 (0.1)
airlines.org 9
After Years of Staggering Losses, U.S. Airlines* Are Tackling the Mountain of Debt
* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United; includes capitalized operating leases at 7x annual aircraft rents
$79.5
$71.9 $70.2
0
10
20
30
40
50
60
70
80
90
YE12 YE13 1H14
Total Debt* ($ Billions)
“…it would be unreasonable to assume that
all airline risks have just disappeared… [T]he
business model requires a large cushion of
cash and significant reinvestment.”
Alexander MacLennan
The Motley Fool
Feb. 3, 2014
“The industry is still subject to U.S. and
global economic cycles, oil price (the largest
operating expense) fluctuations, and
unforeseen events…” Betsy Snyder
Standard & Poor’s
Mar. 25, 2014
Improving Finances Are Helping Airlines Hire/Train/Retain High-Quality Employees
airlines.org 10
» Job growth and security
» Attractive wages and benefits
» Tools and training to serve customers
» Profit sharing
» Accelerated contributions to employee retirement accounts
Earnings Momentum and Debt Reduction Are Attracting New Investors
airlines.org 11
» De-risking (e.g., paying down debt)
» Share buybacks
» Issuance of dividends
» Stock price appreciation
» Value creation (ROIC > WACC)
…and the Increasing Ability to Hire, Train and Retain High-Quality Talent and to Lure
Long-Term Investors is Translating Directly to Palpable Benefits for Our Customers
airlines.org 12
» New or refurbished aircraft
» Expanded route networks (scope and frequency) and schedules (seat growth)
» Enhanced tools (computers, tablets, software) and training for customer-contact employees
» Improved airport check-in areas, lounges, gates
» Continued development and roll-out of mobile technology and website/kiosk functionality
» Increasing operational reliability (controlled for weather conditions)
» Larger overhead bins for luggage
» Availability of lie-flat seating with AC power and USB (incl. on select transcon flights)
» Proliferation of domestic and international WiFi and inflight entertainment options
After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again
May 2014 Was Sixth Consecutive Month of YOY Employment Gains at U.S. Airlines
airlines.org 13
Source: BTS
520.6
378.1 380.8 383.5
2000 2010 2013 2014
Employment at U.S. Passenger Airlines
Thousand Full-Time Equivalents (FTEs)
YT
D M
ay
Improving Finances Enabling Significant Reinvestment in Customer Experience
Airline Capital Spending Continues at Robust Clip of More Than $1 Billion per Month
airlines.org 14
5.2 6.6
9.8
12.4
7.0
2010 2011 2012 2013 1H14
* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
U.S. Airline* Capital Expenditures ($ Billions)
» Aircraft (317 deliveries in 2014), spare engines, winglets
» Premium seats, new aircraft interiors
» Ground equipment, loading bridges
» Airport (gates/lounges) and maintenance facilities
» Bag carousels, carts, scanners
» In-flight entertainment and Wi-Fi
» Computers, kiosks, mobile technology
U.S. Passenger Airlines* Taking Delivery of 317 Aircraft in 2014 – Almost 1 per Day
149 Units Received in First Six Months; 168 Units Slated for Delivery in Second Half
41 19 1
56 9
41
128 8 6 8 317
235 Narrowbody Jets 22 Widebody Jets
airlines.org 15
* Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
60 Small Jets
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
As Airlines Generate Modest Returns on Capital, Customers Are Seeing More Seats
Scheduled to Depart from U.S. Airports – Two Years’ of Growth
airlines.org
Year-Over-Year Change (%) in Scheduled Seats at U.S. Airports
16
Source: Innovata (via Diio Mi) published schedules as of Aug. 15, 2014 for all airlines providing scheduled passenger service from U.S. airports to all destinations
Fuel Spike and Recession
Economic
Recovery
Record-High
Fuel Price
Economic Recovery and
Modest Fuel-Price Relief
Investment Grade1 (>= BBB-)
Source: Standard and Poor’s; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”
airlines.org 17
ExxonMobil, Microsoft AAA
GE, United States Government AA+
Wal-Mart AA
Toyota AA-
UPS A+
BP, eBay, Union Pacific A
Amtrak, Starbucks A-
FedEx, Marriott, Starwood BBB
Ford, Lufthansa, Southwest, WestJet BBB-
Alaska, Qantas BB+
British Airways, Latam BB
Avis-Budget, Chrysler, Delta BB-
Hertz, Sabre B+
AC, AAL, GOL, HA, JBLU, UAL B
SAS B-
Speculative2 Grade (< BBB-)
1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk
Passenger Airline
Airline Creditworthiness Remains Far From Stellar
Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit
Significant Progress, But Risks Remain
airlines.org 18
“Industry remains very cyclical and highly competitive, vulnerable to exogenous
shocks; carriers have high degree of leverage, low margins.”
-- Craig Fraser, Joe Rohlena and Ilya Ivashkov, Fitch Ratings, “Concerns Remain,” July 30, 2014
“Leverage progress slowed, big capital spending needs ahead; demand is still
cyclical; rising labor costs…”
-- Philip Baggaley and Betsy Snyder, Standard & Poor’s, “Potential Risks,” July 30, 2014
U.S. Ticket Taxes on $300 One-Stop Domestic Round Trip* Just Went Up Again
Growing Governmental Take Leaves Less Revenue for Carriers to Reinvest
July 21, 2014
9/11 Fee Hike
21% ($63)*
1971-1972
AATF Begins
7% ($22)*
1992-1993
PFC Begins
13% ($38)*
Taxes Airfare
Source: A4A analysis of federal tax code, including IRS Revenue Bulletin 2013-47, Rev. Proc. 2013-35, Bipartisan Budget Act of 2013, and President’s FY2015 budget
* Sample itinerary is a domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; total ticket price includes taxes
airlines.org 19
POTUS-Proposed
FY15 Budget
26% ($77)*
AATF = Airport and Airway Trust Fund
2002
9/11 Fee Begins
19% ($58)*
Don’t you want to know where your
airfare taxes are going?
Learn more about the government’s new tax on passengers, and why it’s bad for
consumers and the economy as a whole. Visit StopAirTaxNow.com
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