A4A Spring 2016 Air Travel Forecast and Operational and Financial Review of 2015

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1 A4A Spring 2016 Air Travel Forecast and Operational and Financial Review of 2015 John P. Heimlich, Vice President & Chief Economist A4A Media Briefing March 9, 2016

2 FORECAST A4A Projects Spring* 2016 Air Travel to Rise 3% to All-Time High of 140M Passengers Airlines Adding Commensurate Number of Seats to Accommodate Record-High Demand U.S. Airline Onboard Passengers (Millions) All Services, March 1 through April % 140 million passengers or about 2.3 million/day Up ~63K/day from 2015; up ~81K/day from 2007 Includes 17M+ (285K/day) traveling internationally Projected average load factor: 83%-85% Key drivers of growth include: Rising employment, personal incomes Air travel affordability Improved airline operations Source: A4A and BTS T100 segment data U.S. carriers only; scheduled and nonscheduled services * For this purpose, defined as March 1 through April 30 2

3 Key U.S. Air-Travel Demand Drivers Still Showing Growth Real GDP Growth Rate (% CAGR) IHS Forecast Monthly Employment Growth (000) Q16 2Q Jan Feb 39 Real ($2009) Personal Incomes ($000) 90 Household Net Worth ($ Trillion, NSA) Q15 2Q15 3Q15 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 3

4 Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-16 Jan-15 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-16 (8.9) (10.0) (10.8) (12.0) (11.5) (11.2) (9.3) (9.7) (8.7) (9.4) (7.1) (5.6) (5.4) (6.3) (6.3) (6.1) (3.7) (3.8) (4.1) (4.3) (2.5) (2.7) (1.1) In 2015, Amid Competitive Pressures, U.S. Carrier Air Fares Fell Almost Every Month Down 5.1% Systemwide on 4.1% Lower Domestic Yield* and 8% Lower International Yield* % Change YOY in Domestic Yield* % Change YOY in International Yield* 2015 vs. 2014: (4.1%) 2015 vs. 2014: (8.0%) Source: A4A analysis of data from Alaska, American, Hawaiian, JetBlue, Southwest, United, Virgin America and regional affiliates * Fare per mile (cents per RPM) 4

5 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 3.0 Domestic R/T Airfare as Share (%) of Per-Capita Disposable Personal Income $650 Domestic R/T Airfare Adjusted for Inflation (in CY2015 Dollars) Fare Fare + Anc $600 $550 Fare Fare + Anc 1.5 $500 $ $ $ $300 Source: A4A analysis of data from BEA, BLS and BTS Data Bank 1B (10% sample of tickets for all cabins and fare basis codes); 2015 based on first three quarters 5

6 U.S. Airlines Saw Improvements in DOT Core-Four Operational Metrics in 2015 Gains Driven by More Benign Weather and Investments in Systems, Procedures, Staffing Flight Completion Factor (%) On-Time Arrival Rate (%) Properly Handled Bag Rate (%) Oversales per 10,000 Customers Sources: BTS and DOT Air Travel Consumer Report ( 6

7 2015 Airline Operating Revenues* Were Flat As Lower Fares Offset Traffic Gains Passenger Revenue Fell $1.3B (1.0%) on 4.4% Higher Traffic and 5.1% Lower Yield Operating Revenues* ($ Billions) $ % (5.1%) (7.9%) $7.4 $0.2 $ % $158.6 Revenue Gain Revenue Loss $ % * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America ** Sale of frequent flyer award miles to airline business partners, pet transportation, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc. 7

8 2015 Airline Operating Expenses* Fell $14B (9.5%) As Lower Fuel Offset Higher Labor Airlines Also Saw Increases in Landing Fees, Terminal Rents and Aircraft Costs Operating Expenses* ($ Billions) (38.3%) $4.4 (1.8%) $0.1 $0.3 $0.1 $ % $ % +2.9% +0.3% $145.2 Cost Reduction Cost Increase $131.4 (9.5%) * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals 8

9 Marriott Starwood MIllerCoors S&P 500 Airlines* Chipotle Comcast Starbucks McDonald s CSX Apple Altria $23.2B $72.7B In 2015, U.S. Airlines* Posted Respectable Margins, Approaching 15% Before Taxes U.S. Passenger Airline* Profitability Was Just Under Half That of Apple and Altria 2015 Pre-Tax Profit Margin (% of Operating Revenues) * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America Note: S&P 500 excludes unusual items 9

10 Apple McDonald s Starbucks S&P 500 Airlines Continue to Strive for Solid Profitability Across the Business Cycle In Current U.S. Business Cycle, Airline Margins Are Less Than Half the S&P 500 Average Pre-Tax Profit Margin (%) for AAPL MCD SBUX SPX* U.S. Airlines Sources: Standard & Poor s (S&P) and A4A Passenger Airline Cost Index plus company SEC filings * Excludes unusual items 10

11 U.S. Airlines Are Putting More Than Half of Cash Flow* Right Back Into the Product Primary Uses of Operating Cash from Included $65B of Capital Reinvestment $8.0B Retire Debt $17.0B Enhance Product $10.5B Reward Shareholders $54.3B Retire Debt $64.9B Enhance Product $17.4B Reward Shareholders * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; denominator is net cash provided by operating activities 11

12 Following Enormous Losses of , U.S. Airlines Have Retired $54.3B in Debt Adjusted Net Debt Now Just 32% of Operating Revenues, Down from 45% in 2010 Payments on Debt* (Billions) Debt** as % of Operating Revenues $12 $10 Average = $9B per year $8 40 $6 $ $2 30 $ Source: SEC filings of AAL/ALGT/AAL/DAL/HA/JBLU/LUV/SAVE/UAL/VA * Payments on long-term debt and capital lease obligations ** Includes 7x annual aircraft rents (capitalized operating leases) 12

13 Improving Finances Enabling Significant Reinvestment in Customer Experience U.S. Airline* Capital Expenditures ($ Millions per Month) 1,288 1,148 1,038 1,162 1, » 2015 outlays of $17B were highest in at least 16 years: Averaged $1.4B per month or ~$22 per passenger Constituted 60% of operating cash flow Included receipt of 388 new aircraft» At YE15, $86B in firm orders to be delivered in 2016 and beyond, including an average of a plane a day in 2016 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America 13

14 As Airlines Generate Normal Returns on Capital, Customers Are Seeing More Seats Domestic Supply at Highest Point in Eight Years; International Supply at All-Time High 2.55 Domestic USA (Million Daily Seats) 380 International (Thousand Daily Seats) 2.50 Exceeding Highest Ever Source: Innovata (via Diio Mi) published schedules as of Mar. 4, 2016, for all airlines providing scheduled passenger service from U.S. airports to all destinations 14

15 Alaska Allegiant American Delta Frontier Hawaiian JetBlue Southwest Spirit United Virgin Average In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Biggest Driver of 14% Jump Average Domestic Aircraft Size (Seats per Scheduled Departure) Source: Innovata (via Diio Mi) as of Mar. 4,

16 After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again December 2015 Was 25 th Consecutive Month of YOY Employment Gains at U.S. Airlines Employment at U.S. Passenger Airlines Thousand Full-Time Equivalents Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 16

17 U.S. Airlines* Are Pumping More Wages and Benefits into the Economy Airlines* Spending $3.35 Billion per Month on the Workforce Up ~$800M from 2010 Total Employee Wages and Benefits* per Month (in $ Billions) * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America 17

18 In 2015 U.S. Airlines Redoubled Their Efforts to Retain and Lure New Equity Investors, Returning $10.5B to Shareholders Via Stock Buybacks ($9.5B) and Dividends ($981M) Stock Repurchases (Billions) Dividends (Millions) $10 $1,000 $9 $900 $8 $800 $7 $700 $6 $600 $5 $500 $4 $400 $3 $300 $2 $200 $1 $100 $ $ Source: SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America 18

19 2015 Operational and Financial Recap: U.S. Passenger Airlines» 2015 constituted the 6 th consecutive year of consummate airline safety performance» Like all responsible businesses, U.S. airlines serve multiple stakeholders; accordingly, they are reinvesting cash flows to benefit customers, employees and investors More reliable operations, lower airfares, more seats in the marketplace, a steady stream of new and larger aircraft, expansion of inflight Wi-Fi and entertainment options all translated in to an improving experience for airline customers, who traveled in record numbers (>790M) Despite flattish operating revenues, employees and investors, too, are benefiting as falling operating expenses steadily improve the industry s financial wherewithal» Nearly seven years post-recession, U.S. airlines are finally achieving profitability in line with the overall U.S. corporate (i.e., S&P 500) average and, in turn: retiring expensive debt, reducing leverage and increasing creditworthiness acquiring new aircraft and ground equipment and enhancing IT systems boosting employee staffing as well as wages and benefits launching new routes and enhancing airport and inflight amenities offering domestic flyers the highest number of seats since the Great Recession returning cash to shareholders through stock buybacks and dividends 19

20 The Administration Is Pushing to Increase the Government s Share of Each Ticket Growing Take of $300* Itinerary Leaves Less Revenue for Carriers to Reinvest AATF Begins 7% ($22)* PFC Begins 13% ($38)* /11 Fee Begins 19% ($58)* /11 Fee Hike 21% ($63)* Proposed** POTUS FY % ($80)* Taxes Airfare AATF = Airport and Airway Trust Fund * Sample itinerary is a $300 domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; total ticket price includes taxes ** Based on proposed increases in President s FY2017 budget 20

21 TBD U.S. Airports Have Ample/Multiple Resources from Which to Fund Improvements AATF* Revenues ($ Billions) All-Time High AATF* Unobligated Balance ($ Billions) Nearly $6B U.S. Airport Revenues ($ Billions) All-Time High U.S. Airport Credit Ratings (per S&P) Investment Grade AA ± 16 A ± 49 BBB ± Lower PFC (net) Non-PFC 14 0 Source: A4A, FAA, Standard & Poor s; PFC collections exclude any compensation received for collecting/handling/remitting * Airport and Airway Trust Fund 21

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