Air Service and Airline Economics in 2018 Growing, Competing and Reinvesting

Transcription

1 Air Service and Airline Economics in 2018 Growing, Competing and Reinvesting John P. Heimlich, VP & Chief Economist Presentation to the CAAFI Biennial General Meeting December 5, 2018

2 The ~720,000 Employees* of U.S. Passenger and Cargo Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods 27,000 daily flights to/from 800+ airports in nearly 80 countries 2.3 million passengers per day 55,000 tons of cargo per day Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines * Headcount as of July

3 U.S. Airlines Are Moving More People and More Goods Over Longer Distances Significant Growth of Demand for Air Transportation Services in the Deregulated Era 1,200 Passenger Traffic Up 4.1x Revenue Passenger Miles (Billions) 45 Cargo Traffic Up 5.6x Revenue Ton Miles (Billions) 1, Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines) 3

4 In , Domestic Airline Capacity Grew at Twice the Rate of the U.S. Economy 6 (Airlines 4.8%, Economy 2.3%) (Airlines 1.3%, Economy 2.0%) Domestic Airline Capacity (ASMs) Real US GDP Source: Bureau of Economic Analysis and published airline schedules via Diio Mi 4

5 Customers Will See All-Time High of 3.07M Daily Seats Departing U.S. Airports Daily Seats (000) Departing U.S. Airports: Up 4.2% YOY in 2018 and 3.6% in 1H ,500 3,000 2,500 2,000 2,584 2, , ,274 2,289 2,366 2, ,454 2, ,542 3,056 3, ,651 2,618 3, ,713 1,500 1, H18 1H19 Domestic International Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations 5

6 Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the Fastest Different Types of Carriers Market Their Prices and Services Differently Spirit % Change in Capacity* Since Allegiant Alaska JetBlue Sun Ctry AA/DL/UA Hawaiian Frontier (50) Southwest Source: Innovata (via Diio Mi) schedules as of Oct. 5, 2018, for selected marketing airlines including predecessors * Systemwide scheduled available seat miles 6

7 From , Global Network Carrier Domestic Share Fell From 73% to Just 53% Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model H18 Global Network (AA, DL, UA) Southwest Other Source: DOT Data Bank 1B (each airline shown on a marketing-carrier basis and tracked with its respective merged/acquired predecessors [e.g., UA/CO] 7

8 Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition* Increased From (Real Fares Down 20%, Passengers Up 78%) 2007 O&D Passenger Share 2017 O&D Passenger Share 64% 17% 8% 7% 52% 19% 8% 7% 7% 5% Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi * Defined as carrying at least 5 percent of O&D passengers between BUR/LAX/LGB and SEA 8

9 Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which Competition* Increased From (Real Fares Down 20%, Passengers Up 23%) 2007 O&D Passenger Share 2017 O&D Passenger Share 63% 30% 47% 28% 12% 6% Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi * Defined as carrying at least 5 percent of O&D passengers between BOS and CAK/CLE 9

10 YTD 3Q18 Expenses Rose Faster Than Revenues, Reducing Profitability Yet Again Carriers Under Cost Pressure in Every Major Category, Driving Margins Lower in 2018 Change (%) in Operating Revenues and Expenses First Nine Months 2018 vs. First Nine Months 2017 Pre-Tax Profit Margin (%) YTD 3Q Four-Year Trend $2.20 vs. $ Pax Rev (1) Cargo Rev Other Rev (2) Total OpRev Labor Fuel Maintenance Airports Aircraft Other (3) Total OpExp $18.7B 2015 $18.3B 2016 $14.9B 2017 $10.8B Traffic (revenue passenger miles) up 4.8 percent; yield (revenue per passenger-mile flown) up 1.6 percent; U.S. CPI up 2.5 percent 2. Sale of frequent flyer award miles to airline business partners, transportation of pets, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc. 3. Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 10

11 Airlines Recovered $0.68 in Revenue for Every $1.00 Increase in Operating Costs Fuel Alone Accounted for 57 Percent of the Year-Over-Year Increase in Costs Change ($ Millions) in Revenues and Expenses First Nine Months 2018 vs. First Nine Months 2017 $8,668 Other Passenger 1 Cargo $12,767 Other Labor Fuel 1 ~75% traffic-driven 2 ~90% price-driven 2 Aircraft Airports Maintenance ~ $70M/Day ($4,099) Op Revenues Op Expenses Op Profits Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 11

12 Even in Best Years, Profitability of U.S. Airlines Lags U.S. Corporate Average Pre-Tax Profit Margin (%) Gap Widened in 2016 and 2017, Widening Further in (5) (10) (15) (20) U.S. Recession U.S. Passenger Airlines All U.S. Corporations (25) Source: ATA Annual Reports ( ), A4A Passenger Airline Cost Index (1977-present); Bureau of Economic Analysis Note: Recessions highlighted in gray 12

13 Jet-Fuel Prices Creeping Up Again A Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses $3.50 Systemwide Average Paid Price of Jet Fuel per Gallon $3.00 $ $2.00 $1.50 $1.00 $0.50 $ Jan-Sep Source: A4A and Bureau of Transportation Statistics (all U.S. carriers, scheduled an nonscheduled services) 13

14 Crude-Oil Prices Surged Through October, Plunging in November October 2018 Averaged 41% More Than October 2017; Remain Highest in Four Years $120 Spot Price* of Brent Crude Oil ($ per Barrel) $100 $80 $60 $40 $20 $0 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Source: A4A and Energy Information Administration ( 14

15 Airlines Utilize a Wide Array of Tools to Minimize Fuel Consumption o Continue to replace older (often smaller) aircraft with typically larger, next-generation or re-engined aircraft o Deploy state-of-the-art flight planning/navigation software to optimize airborne movement of aircraft o Utilize taxi-management technologies and single-engine taxi to minimize ground-based fuel burn o Consistently employ ground power while parked at gate instead of aircraft auxiliary power unit (APU) o Reduce onboard weight (e.g., lighter materials/structures, inflight entertainment systems, excess fuel) 15

16 Substantial U.S. Airline Capital Investment* Has Continued in 2018 Despite Waning Profits Bringing Total for This Business Cycle to $115 Billion U.S. Passenger Airline Capital Expenditures* ($ Billions per Year) Included > 450 aircraft Jan-Sep * Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors 16

17 Infrastructure Investment Is Robust and Growing at Airports of All Sizes U.S. Airport Capital Expenditures ($ Billions) by FAA Hub Size Large Medium Small Non Source: FAA Form reports, section 10: Capital Expenditures and Construction in Progress 17

18 Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years % Change in Scheduled-Service Seats Available: 2018 vs (10) (2) (3) (4) DAL AUS SJC FLL SEA CVG BNA MCO RDU MSY PDX BOS SMF SAN OAK SFO IND LAX EWR RSW OMA SLC CMH BUR BDL TPA OGG JFK ORD PBI DEN JAX ONT PIT HOU LAS BWI SAT MCI STL ANC ATL SNA IAH DFW DTW MSP DCA MIA PHX CLT IAD LGA HNL PHL MDW MKE CLE BUF ABQ SJU Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled service * FAA large and medium hub airports 18

19 In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Primary Driver Factors include availability of pilots, fuel efficiency, congested airspace/airfields, improving economics of large regional jets, lack of new-generation in-production small aircraft % of Domestic U.S. Departures by Aircraft Size Seats Seats > 100 Seats Source: Innovata (via Diio Mi) published schedules as of Dec. 29,

20 In 2017, the Average Airline Flight Departing a U.S. Airport Traveled 16 Percent Farther and Carried an 19 Percent Larger Payload Than It Did in ,000 40, ,000 Average Stage Length (Miles) ,675 35,354 36,000 34,000 32,000 30,000 28,000 26,000 24,000 Average Payload (Pounds) , ,000 Source: Innovata (via Diio Mi) published schedules as of Dec. 29,

21 Jet-Fuel Demand Growth at U.S. Airports Varied Widely From 2007 to 2017 % Change in Gallons Dispensed at 65 U.S. Airports: 2007 to Changes in law (DAL Wright Amendment, DCA-perimeter rule) Airline change of hubs (AA-PIT/STL, UA-CLE, DL-MEM) Airline focus city growth (B6-BOS, B6/NK/WN-FLL) Organic economic/tourism growth (AUS, BNA, DEN, Hawaii) Growth of international flights (BOS, HOU, JFK, SJC) Amazon (cargo) effect (CVG) Fuel-efficiency gains (aircraft, flight mix IAD, PDX) DAL LIH AUS MSY CLT FLL KOA ITO SEA BOS SFO SJC CVG DCA OGG LAX MIA JFK SAN DFW HOU SLC TUL BWI BNA HNL LGA MCO DEN SAT IAH RDU RSW EWR ONT DSM MEM IAD PDX MSP ATL PIT ORD DTW SMF LAS PHX BUF MDW TPA PHL SNA OAK COS MCI ELP ORF RNO ROC MKE STL (0) (3) (3) (4) (5) (6) (6) (6) (6) (6) (8) (10) (11) (13) (14) (16) (17) (20) (20) (20) (23) (28) (29) (30) Source: A4A Fuel Portal 21

22 Total U.S.-Based Jet Fuel Demand 1 Back to 2000 All-Time High 1,800 U.S. Product Supplied 2 of Kerosene-Type Jet Fuel (Thousand Barrels per Day) 1,600 1,400 1,200 1, ,005 1,105 1,181 1,236 1,284 1,340 1,296 1,310 1,357 1,480 1,497 1,575 1,598 1,623 1,675 1,725 1,656 1,621 1,578 1,630 1,679 1,633 1,622 1,539 1,393 1,432 1,425 1,398 1,434 1,470 1,548 1,614 1,682 1, Jet fuel supplied within the United States to all users (i.e., U.S. and foreign airlines, recreational and business aviation, civilian government, military) 2 Per EIA, approximates consumption by measuring the disappearance of these products from primary sources (i.e., refineries, natural gas processing plants, blending plants, pipelines, bulk terminals). Generally computed as follows: field production, plus renewable fuels and oxygenate plant net production, plus refinery and blender net production, plus imports, plus net receipts, plus adjustments, minus stock change, minus refinery and blender net inputs, minus exports. Source: U.S. Energy Information Administration 22

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