Aviation industry outlook

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1 Euro Aviation ICT Forum Thursday 29 October, 2015 Divani Caravel Hotel, Athens Aviation industry outlook Jonathan Wober, Chief Financial Analyst

2 The leading independent supplier of global aviation knowledge

3 Airline margins: cyclical and thin World airline operating and net margins (% of revenue) 1947 to Operating margin Net Margin Source: CAPA Centre for Aviation, ICAO, A4A, IATA

4 Margin cycle reflects supply & demand Positive supply/demand balance has become more common World airline operating margin versus RPK growth less fleet growth 1971 to 2014 Source: CAPA Centre for Aviation, ICAO, Airline Monitor

5 CAPA world airline operating margin model Margins set to grow in 2015, mainly due to lower fuel cost f 2016f Note/source Brent crude USD/barrel Reuters consensus poll 30-Jun-2015 World real GDP growth % IMF forecast Jul-2015 Fleet growth % CAPA model World RPK growth % CAPA model World airline operating margin % CAPA model but may dip once more in 2016 if oil price rises again

6 e 2016e Nearing a peak, will cyclicality dampen? 8 World airline operating margin (% of revenue) 1979 to 2016e High -2-4 Base case Low Geopolitical crisis/recession -6 Source: CAPA Centre for Aviation, ICAO, A4A, Airline Monitor

7 % of total revenue Ancillaries growing share of revenue World airlines: ancillary revenue and operating margin as % of total revenue 2010 to Ancillary revenue Operating margin Source: CAPA Centre for Aviation analysis; IdeaWorksCompany/CarTrawler for ancillary revenue; ICAO for operating margin (CAPA estimate for 2014)

8 Different ancillaries outside US vs in US, distorted by FFP mile sales Ancillary revenue components 2013 (% of ancillary revenue) 100% 90% Sale of FFP miles, 10% 100% 90% 80% 70% Travel retail, 20% 80% 70% Sale of FFP miles, 55% 60% Onboard retail, 20% 60% 50% 50% 40% 30% Other a la carte services, 30% 40% 30% Travel retail, 5% Other a la carte services, Onboard retail, 15% 20% 20% 10% Baggage fees, 20% 10% Baggage fees, 25% 0% Outside US (non LCC) 0% US major Source: CAPA Centre for Aviation using data from IdeaWorksCompany/CarTrawler

9 Ex FFP sales, vast bulk of ancillaries are from unbundling of core product Ancillary revenue components excluding sale FFP miles 2013 (% of ancillary revenue ex FFP miles) 100% 90% Travel retail, 22% 100% 90% New products, 22% Travel retail, 11% New products, 11% 80% 70% 60% Onboard retail, 22% 80% 70% 60% Other a la carte services, Onboard retail, 33% 50% 40% Other a la carte services, 33% 50% 40% Unbundling of core product, 78% Unbundling of core product, 89% 30% 30% Baggage fees, 56% 20% 20% 10% Baggage fees, 22% 10% 0% Outside US (non LCC) 0% US major Source: CAPA Centre for Aviation using data from IdeaWorksCompany/CarTrawler

10 e 2016e Cash flow is exceeding capital investment currently World airline capital expenditure as a percentage of operating cash flow 1979 to 2016E* 250% 200% 150% 100% 50% 0% * Estimated on-balance sheet capex as % of EBITDA. Source: CAPA Centre for Aviation, Airline Monitor, IATA

11 Uses for surplus cash? Debt repayment Shareholder returns: dividends, buybacks But Consolidation: mergers and acquisitions? Impeded by ownership & control restrictions

12 N America airline margin leads, Europe lags Airline EBIT margin (%) by region 2007 to 2015f 12 N America Global Asia PAcific Europe L America Mid East Africa f N America Europe Asia Pacific Global Middle East Lat Am Africa Source: CAPA Centre for Aviation, IATA

13 Europe margins under-perform post recession Airline average EBIT margin (%) by region 2010 to 2015f N America Asia Pacific Global Lat Am Middle East Europe Africa Source: CAPA Centre for Aviation, IATA

14 Ave EBIT margin f Europe airline profits held back by market structure Average airline EBIT margin F versus market concentration (horizontal axis) by region N America Asia Pacific Europe Middle East Lat America Africa Market concentration (HHI based on share of seats) Source: CAPA Centre for Aviation, OAG (seat data for week of 9-Jun-2014), IATA margin forecasts

15 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

16 Aviation is still a growth industry World airline traffic in revenue passenger kilometres (RPK, million) 1970 to ,000,000 6,000,000 5,000,000 4,000,000 3,000,000 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 % pa (Boeing) 4.6% pa (Airbus) 2,000,000 1,000,000 - Source: CAPA Centre for Aviation, ICAO, Boeing, Airbus

17 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

18 Aircraft in service/on order Source: CAPA Fleet Database as at 23-Oct-2015

19 Widebodies in service/on order Source: CAPA Fleet Database as at 23-Oct-2015

20 Centre of gravity is moving east Widebodies on order Source: CAPA Fleet Database as 18-May-2015

21 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

22 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

23 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

24 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

25 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

Global commercial airline industry outlook March 2013 update

Global commercial airline industry outlook March 213 update Brian Pearce Chief Economist www.iata.org/economics To represent, lead and serve the airline industry Monthly RPK (Billions) Monthly FTK (Billions)