Taking the Dismal Science to 30,000 Feet: The Need for Speed

Transcription

1 Taking the Dismal Science to 30,000 Feet: The Need for Speed John P. Heimlich VP and Chief Economist Aircraft Builders Council Annual Conference September 21, 2010

2 Why do people travel, or ship, by air? Cross country skiing is great if you live in a small country. Steven Wright 2

3 Warm-Up Trivia In , what airline was most profitable in the world? How about in Europe? United States? Asia? 3

4 Copa Ryanair Allegiant Singapore LAN Qantas Lufthansa Southwest Cathay Pacific British Airways JetBlue AirTran All Nippon Continental Thai Air France-KLM US Airways American Delta United Competing Globally Will Require Strength at Home Constraining U.S. Carriers Domestically Will Have Lasting Implications 15% Net Profit Margins: Calendar Years % 5% 0% -5% Source: ATA and Morgan Stanley 4

5 Warm-Up Trivia (Cont d) What U.S. passenger airline has the youngest operating fleet? What U.S. passenger airline has the oldest operating fleet? Who has a younger fleet FedEx or UPS? Who has more airplanes: Continental or US Airways? Who has more airplanes: Southwest or United (pre-merger)? True or False: The new United will have more planes than Delta 5

6 The Air Transport Association of America, Inc. When America Flies, It Works Founded in 1936, ATA is the nation s oldest and largest airline trade association. Its fundamental purpose is to foster a business and regulatory environment that ensures safe and secure air transportation and enables U.S. airlines to flourish, stimulating economic growth locally, nationally and internationally. Combination Services AirTran Airways Alaska Airlines American Airlines Continental Airlines Delta Air Lines Hawaiian Airlines JetBlue Airways Southwest Airlines United Airlines US Airways All-Cargo Services ABX Air ASTAR Air Cargo Atlas Air Worldwide Holdings Evergreen Int l Airlines FedEx Corporation UPS Airlines Associate Members Air Canada Air Jamaica Mexicana 6

7 Sample of ATA Functions/Issues Environmental Affairs Taxation Air Traffic Management Cabin/Flight Operations Safety and Security Fuel Quality/Technical Matters Passenger and Cargo Facilitation Legal/Regulatory Matters State and Local Affairs International Affairs Airports/Slots/Infrastructure Manufacturing Sector Alternative Fuels Communications/Media Relations Maintenance/Engineering Medical/Emergency Personnel 7

8 Each Decade, U.S. Airline Safety Has Improved Markedly Fatal Accidents per Million Aircraft Departures in Scheduled Service Source: ATA analysis of data from the National Transportation Safety Board 8

9 Q05 1Q06 1Q07 1Q08 1Q09 1Q10 Doing Better and Doing Well Are Not the Same Thing U.S. Unemployment Rate Percent $13.5 $13.4 $13.3 $13.2 $13.1 $13.0 $12.9 $12.8 $12.7 $12.6 $12.5 Real U.S. GDP Trillions of Chained 2005 Dollars, SAAR Sources: Bureau of Labor Statistics ( and Bureau of Economic Analysis ( 9

10 The Industry Is Climbing Out of a Deep Hole Net Income ($Billions) for U.S. Passenger and Cargo Airlines* The industry hasn t seen a real upcycle in retrospect now looks more like a brief reprieve from a downcycle The industry has not been profitable enough to justify investment. (Lehman Brothers, Implications of a Profound U.S. Airline Industry Restructuring, 6/27/08) $23.1 $2.9 $1.0 ($10.7) ($58.2) H 2010 * DOT Form 41 P-12, Account

11 Airline Energy Costs Are High and Poised to Rise Average U.S. Price per Gallon of Jet Fuel $2.37 $2.14 $2.32 $1.69 $1.05 $ (EIA-F) 2011 (EIA-F) Source: Energy Information Administration 11

12 For U.S. Passenger and Cargo-Only Airlines, Fuel Expenditures Trending Up Despite Lower Consumption $ $50 Billion Gallons 20 $ $30 18 $20 Billion Dollars $ ($0.82) 2001 ($0.78) 2002 ($0.72) 2003 ($0.85) 2004 ($1.16) 2005 ($1.66) 2006 ($1.97) 2007 ($2.11) 2008 ($3.07) 2009 ($1.90) YE 7/10 ($2.16) Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs; YE = year ended Sources: ATA, Energy Information Administration, Department of Transportation 12

13 Annual Percent Change in Domestic ASMs* (16.2) (6.9) 2009 Domestic Seating Capacity Fell Most Since 1942 Market Forces, Policy Resulted in Largest Post-WWII Contraction in Aviation History (20) (40) Sources: ATA, BTS and Innovata (via APGDat) * An available seat mile (ASM) is one seat flown one mile 13

14 23,423 24,355 23,666 1,515 25,102 1,619 1,613 26,384 26,500 27,144 27,052 26,839 1,694 1,702 1,715 28,089 1,764 1,731 1,776 1,830 30,082 1,900 Domestic Departures Down Sharply From 2000 Scheduled Domestic Flights per Day Scheduled International* Flights per Day * Scheduled U.S.- and non-u.s.-airline flights departing U.S. airports for non-u.s. destinations Source: Innovata (via APG) published schedules as of Sept. 17,

15 Domestic US US-Europe Japan-US China-US Within NorthAm North Atlantic NorthAm to LatAm Transpacific Thinking Outside the [Domestic] Box The Future Lies Across the Pond(s) Airbus Global Market Forecast Annual Traffic Growth: Boeing Current Market Outlook Annual Traffic Growth:

16 The World Is Changing; Growth Is Occurring On A Global Scale Population-Weighted Map With 2010 Real GDP Growth Rates (%) +4% +3% +1% +1% +2% +11% +5% +3% +5% +5% +8% +6% +5% +6% Sources: Cartogram of the World's Population (2007); Global Insight (WMM), real GDP growth rates for 2010 (base year as 2005). 16

17 U.S.-Carrier Access to Some of the World s Largest and Fastest-Growing Markets Remains Legally Restricted Open Skies Agreement Restrictive Agreement No Agreement 17

18 Alliances Have Helped Carriers Compete Effectively in Response to Regulatory Barriers in Restricted Markets Online Non-U.S. Destinations Served August 2010 Source: OAG, August

19 Three Highly Competitive Global Airline Alliances 19

20 ExxonMobil Microsoft GE Toyota Wal-Mart BP ebay Goldman Sachs QANTAS Southwest Lufthansa British Air Alaska TAM Continental Delta Air Canada AirTran American JetBlue SAS United US Airways AAA AAA AA+ AA AA A A A BBB BBB BBB- BB- B+ B+ B B B- B- B- B- B- B- B- Healthy Investment Requires Healthy Credit No Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P >= BBB- (investment-grade) < BBB- (speculative or junk ) 20

21 Healthy Investment Requires Healthy Equity Equity Market Capitalization (Billions) as of Sept. 17 at 0950 EDT ebay U.S. airline industry* Deutsche Bank Goldman Sachs BP Toyota GE Wal-Mart Microsoft Apple ExxonMobil $31.5 $35.1 $37.9 * AAI, ALGT, ALK, AMR, CAL, DAL, HA, JBLU, LCC, LUV, MESA, PNCL, RJET, SKYW, UAUA, XJT $78.4 $112.6 $119.4 $174.4 $192.7 $220.4 $253.4 $

22 What s Wrong With This Picture? Testimony of David R. Strine, Impala Asset Management (June 16, 2010) The poor financial performance of the industry through full business cycles can be attributed to its high fixed cost structure, overleveraged balance sheets, low barriers to entry, high barriers to exit, fragmentation, and fierce competition from low-cost domestic carriers and recently-consolidated, well-funded international carriers As you weigh policy objectives for the airlines, you may want to consider the benefits from having airlines in a better position to generate a return on invested capital in excess of their cost of capital through a full business cycle. Only then will there be a solid foundation for increased capital expenditures, rising wages, and increased service. 22

23 The USG Answer to Global Transport? High-Speed Sail! 23

24 The ATA Climate Change Commitment: A Global, Sectoral Approach Improve fuel efficiency by 1.5% per year from 2009 to 2020 Carbon-neutral growth from 2020 Reduce CO 2 emissions by 50% in 2050 (relative to 2005) 24

25 Gallons total 44.7 due to processing gain Airlines Have Opportunity to Reinvent Supply Chain, Alleviate Dependence on Traditional Refining Economics 3.5 Propane Butane Propylene Butylene 8% 19.6 Finished Motor Gasoline (including Naphtha*) 44% Light (52%) Distillates 4.1 Kerosene Jet Fuel 9% 11.7 Heating Oil and Diesel Fuel 26% Middle (35%) Distillates Lubricants Wax Asphalt Tar Fuel Oils Petroleum Coke and Other 7% 6% Heavy (13%) Distillates** * Feedstock for high-octane gasoline, petrochemicals and solvents Sources: EIA and American Petroleum Institute ** Includes heavy oils and residuum used in industry, marine transportation and electric-power generation 25

26 Alternative Energy Is Inevitable, But Aviation Must Not Be Left Behind The The Stone Age Age did did not not end end for for lack lack of of stone, stone, and and the the Oil Oil Age will will end end long long before before the the world world runs runs out out of of oil. oil. Sheikh Sheikh Zaki Zaki Yamani, Yamani, former former oil oil minister minister of of Saudi Saudi Arabia, Arabia, Oct. Oct. 23, 23,

27 When America Flies, It Works