SITA Aviation ICT Forum Oct-2015 centreforaviation.com Euro Aviation ICT Forum Thursday 29 October, 2015 Divani Caravel Hotel, Athens Jonathan Wober, Chief Financial Analyst Aviation industry outlook
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
Euro Aviation ICT Forum Thursday 29 October, 2015
Divani Caravel Hotel, Athens
Jonathan Wober, Chief Financial Analyst
Aviation industry outlook
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
The leading independent supplier of global aviation knowledge
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
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Operating margin Net Margin
Airline margins: cyclical and thin World airline operating and net margins (% of revenue) 1947 to 2014
Source: CAPA – Centre for Aviation, ICAO, A4A, IATA
1966
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Margin cycle reflects supply & demand
World airline operating margin versus RPK growth less fleet growth 1971 to 2014
Source: CAPA – Centre for Aviation, ICAO, Airline Monitor
Positive supply/demand balance has become more common
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CAPA world airline operating margin model
2013 2014 2015f 2016f Note/source
Brent crude USD/barrel 108.6 98.7 62.0 70.8 Reuters consensus poll 30-Jun-2015
World real GDP growth % 2.5 2.6 2.7 3.2 IMF forecast Jul-2015
Fleet growth % 3.0 3.9 3.9 4.1 CAPA model
World RPK growth % 5.5 6.0 6.1 7.0 CAPA model
World airline operating
margin % 3.5 4.6 5.9 5.2 CAPA model
Margins set to grow in 2015, mainly due to lower fuel cost…
…but may dip once more in 2016 if oil price rises again
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0
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1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015e
2016e
High
Base case
Low
Geopoliticalcrisis/recession
Nearing a peak, will cyclicality dampen? World airline operating margin (% of revenue) 1979 to 2016e
Source: CAPA – Centre for Aviation, ICAO, A4A, Airline Monitor
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Ancillaries’ growing share of revenue World airlines: ancillary revenue and operating margin as % of total revenue 2010 to 2014
Source: CAPA – Centre for Aviation analysis; IdeaWorksCompany/CarTrawler for ancillary revenue; ICAO for operating margin (CAPA estimate for 2014)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2010 2011 2012 2013 2014
% o
f to
tal re
venue
Ancillary revenue
Operating margin
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Different ancillaries outside US vs in US, distorted by FFP mile sales
Baggage fees, 25%
Other a la carte
services, Onboard
retail, 15%
Travel retail, 5%
Sale of FFP miles,
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US major
Baggage fees, 20%
Other a la carte
services, 30%
Onboard retail,
20%
Travel retail, 20%
Sale of FFP miles,
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Outside US (non LCC)
Ancillary revenue components 2013 (% of ancillary revenue)
Source: CAPA – Centre for Aviation using data from IdeaWorksCompany/CarTrawler
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Ex FFP sales, vast bulk of ancillaries are from unbundling of core product
Baggage fees, 56%
Other a la carte
services, Onboard
retail, 33%
Travel retail, 11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US major
Unbundling of
core product, 89%
New products, 11%
Ancillary revenue components excluding sale FFP miles 2013 (% of ancillary revenue ex FFP miles)
Source: CAPA – Centre for Aviation using data from IdeaWorksCompany/CarTrawler
Baggage fees, 22%
Other a la carte
services, 33%
Onboard retail,
22%
Travel retail, 22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Outside US (non LCC)
Unbundling of
core product, 78%
New products, 22%
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Cash flow is exceeding capital investment currently
* Estimated on-balance sheet capex as % of EBITDA.
Source: CAPA – Centre for Aviation, Airline Monitor, IATA
World airline capital expenditure as a percentage of operating cash flow 1979 to 2016E*
0%
50%
100%
150%
200%
250%
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015e
2016e
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Uses for surplus cash?
Debt repayment
Shareholder returns: dividends, buybacks
But
Consolidation: mergers and acquisitions?
– Impeded by ownership & control restrictions
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2007 2008 2009 2010 2011 2012 2013 2014 2015f
N America Europe Asia Pacific Global Middle East Lat Am Africa
N America
Global
Asia PAcific
EuropeL America
Mid East
Africa
N America airline margin leads, Europe lags
Source: CAPA – Centre for Aviation, IATA
Airline EBIT margin (%) by region 2007 to 2015f
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Europe margins under-perform post recession
Source: CAPA – Centre for Aviation, IATA
Airline average EBIT margin (%) by region 2010 to 2015f
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
N America Asia Pacific Global Lat Am Middle East Europe Africa
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0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0 200 400 600 800 1000 1200 1400
Market concentration (HHI based on share of seats)
Ave
EB
IT m
arg
in 2
01
0-2
01
5f
Europe
Asia Pacific
N America
Lat America
Middle East
Africa
Europe airline profits held back by market structure
Source: CAPA – Centre for Aviation, OAG (seat data for week of 9-Jun-2014), IATA margin forecasts
Average airline EBIT margin 2010-2015F versus market concentration (horizontal axis) by region
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Ownership & control in practice • Many ways to circumvent the restrictions
– Minority stakes
– Holding company structures
– Global alliances
– Revenue or profit sharing joint ventures
• These methods continue to grow, but are less efficient than merger
• Why should airlines be a special case? – Banks, telecoms, utilities, media
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Aviation is still a growth industry…
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Historic growth
CAGR 1970 to 2014: 6.1% pa
CAGR 2000 to 2014: 4.2% pa
Only 3 years with negative growth
Forecast CAGR 2014 to 2034
4.9% pa (Boeing)
4.6% pa (Airbus)
Source: CAPA – Centre for Aviation, ICAO, Boeing, Airbus
World airline traffic in revenue passenger kilometres (RPK, million) 1970 to 2014
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…but Europe will grow less rapidly Forecast CAGR in Europe revenue passenger kilometres (RPK, million) 2014 to 2034
Source: CAPA – Centre for Aviation, Boeing, Airbus
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Aircraft in service/on order
Source: CAPA Fleet Database as at 23-Oct-2015
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Widebodies in service/on order
Source: CAPA Fleet Database as at 23-Oct-2015
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Centre of gravity is moving east
Source: CAPA Fleet Database
as 18-May-2015
Widebodies
on order
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Summary • Airline profits still cyclical
– Cost and capacity discipline may reduce cyclicality
• Ancillary revenue is growing – Will see more new revenue generation
• Europe’s airline profits held back by fragmentation – Ownership & control restrictions will reduce, slowly
– Partnerships and alliances will continue to grow
• Aviation is still a growth industry – Europe’s growth will be slower
– Europe will have to solve problems of infrastructure & taxes
• Centre of gravity is moving eastwards
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
Summary • Airline profits still cyclical
– Cost and capacity discipline may reduce cyclicality
• Ancillary revenue is growing – Will see more new revenue generation
• Europe’s airline profits held back by fragmentation – Ownership & control restrictions will reduce, slowly
– Partnerships and alliances will continue to grow
• Aviation is still a growth industry – Europe’s growth will be slower
– Europe will have to solve problems of infrastructure & taxes
• Centre of gravity is moving eastwards
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
Summary • Airline profits still cyclical
– Cost and capacity discipline may reduce cyclicality
• Ancillary revenue is growing – Will see more new revenue generation
• Europe’s airline profits held back by fragmentation – Ownership & control restrictions will reduce, slowly
– Partnerships and alliances will continue to grow
• Aviation is still a growth industry – Europe’s growth will be slower
– Europe will have to solve problems of infrastructure & taxes
• Centre of gravity is moving eastwards
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
Summary • Airline profits still cyclical
– Cost and capacity discipline may reduce cyclicality
• Ancillary revenue is growing – Will see more new revenue generation
• Europe’s airline profits held back by fragmentation – Ownership & control restrictions will reduce, slowly
– Partnerships and alliances will continue to grow
• Aviation is still a growth industry – Europe’s growth will be slower
– Europe will have to solve problems of infrastructure & taxes
• Centre of gravity is moving eastwards
SITA Aviation ICT Forum Oct-2015
centreforaviation.com
Summary • Airline profits still cyclical
– Cost and capacity discipline may reduce cyclicality
• Ancillary revenue is growing – Will see more new revenue generation
• Europe’s airline profits held back by fragmentation – Ownership & control restrictions will reduce, slowly
– Partnerships and alliances will continue to grow
• Aviation is still a growth industry – Europe’s growth will be slower
– Europe will have to solve problems of infrastructure & taxes
• Centre of gravity is moving eastwards