Economic Performance of the Airline Industry

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Kevin Payne
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1 Economic Performance of the Airline Industry Airline Cost Conference 25 th August 2015 Brian Pearce, Chief Economist To represent, lead and serve the airline industry

2 number of airlines ROIC gains driven by a subset of the industry Distribution of 2014 airline ROIC 14 Most frequent ROIC = 0% 12 Median ROIC = 3.2% airlines ROIC > WACC % return on invested capital Source: The Airline Analyst, IATA IATA Economics 2

3 FCF US$ billion FCF concentrated in the US 2014 Free Cash Flow by region Network LCC US LA ME EU AP Source: The Airline Analyst, IATA IATA Economics 3

4 ROIC as as % invested capital But good ROIC performance in Europe as well 2014 return on capital by region 30% 20% 10% Average cost of capital 0% -10% -20% -30% N America Europe Asia Pacific LA ME AF Source: The Airline Analyst, IATA IATA Economics 4

5 Adjusted net debt, US$ billion Median airline balance sheet still deteriorating Free cash flow and adjusted net debt airlines could repay all debt in next 5 years Median airline $3 billion net debt -3% FCF/net debt 0-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Free cash flow as a % of adjusted net debt Source: The Airline Analyst, IATA IATA Economics 5

6 % revenues US$ billion 2015 should see record profits for the industry 8.0 Global commercial airline profitability EBIT margin Net post-tax profit Source: ICAO, IATA IATA Economics 6

7 Though that s still only $8.27 per passenger Worldwide airline net post-tax profit per departing passenger, 2015 $ Ancillaries $ $8.27 Ancillaries 150 Fare Cargo Revenue Cost Net profit Source: IATA IATA Economics 7

8 % of invested capital But paying investors normal return for 1 st time Return on capital invested in airlines Cost of capital (WACC) Return on capital (ROIC) Source: IATA, McKinsey IATA Economics 8

9 Widening gap above breakeven driving returns % ATKs Breakeven and achieved weight load factors 69 Achieved Breakeven Source: IATA IATA Economics 9

10 Consolidation has played an important role Market share of top-4 airlines/jvs 68% 81% 36% 48% 42% 33% 51% 59% Source: SRS Analyser IATA Economics 10

Ancillaries as % revenues The product structure is changing too 2013 ancillaries and operating profits, % revenues 35% 30% Allegiant 25% Ryanair 20% Aer Lingus Easyjet Air Asia Flybe 15% United

11 Ancillaries as % revenues The product structure is changing too 2013 ancillaries and operating profits, % revenues 35% 30% Allegiant 25% Ryanair 20% Aer Lingus Easyjet Air Asia Flybe 15% United Alaska Qantas JetBlue 10% Korean Frontier Delta PIA 5% Hawaiian Spicejet SAA BA JAL 0% -20% -15% -10% -5% 0% 5% 10% 15% 20% Operating profits as % revenues Source: IdeaWorks, Airline Analyst, IATA IATA Economics 11

12 Oil price, US$ per barrel US dollar trade weighted index Low fuel prices important but US$ major offset 160 The Brent crude oil price and the US dollar US dollar Brent crude oil price Source: Datastream IATA Economics 12

13 Net post-tax profit as % revenue Driving further divergence in performance this year Airline net post-tax profit margins 8% N America 6% 4% 2% Europe Asia-Pacific 0% -2% -4% -6% Source: ICAO, IATA IATA Economics 13

14 ROIC, % invested capital Operating costs/atk, US cents/atk Longer-term impact of lower fuel prices not clear Return on invested capital and unit costs Return on invested capital Unit costs Source: IATA, McKinsey IATA Economics 14

15 US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer Costs typically passed through to prices Boeing 707 Unit cost and the price of air transport 1973 oil crisis US deregulation EU deregulation Unit cost (US$/ATK) 0.5 Price (US$/RTK) Source: ICAO, IATA IATA Economics 15

16 World GDP growth, % Airlines ROIC, % invested capital A strong economy is unambiguously positive 6.0 Airline industry ROIC and world GDP growth Airlines ROIC World GDP growth Source: IATA, McKinsey, IHS Global Insight -6.0 IATA Economics 16

17 year-on-year % growth Net balance of respondents, 50 = no change Economic cycle positive but not very strong Indicators of the global economic cycle 25% 70 20% 15% 10% 5% World trade growth Industrial production growth Business confidence % 50-5% 45-10% -15% 40-20% 35-25% Source: Datastream 30 IATA Economics 17

18 Chinese equity market bubble has burst IATA Economics 18

19 year-on-year % growth But growth in demand for travel and cargo looks OK 25% Growth of air travel and air freight 20% 15% Freight (FTK) growth 10% 5% 0% Travel (RPK) growth 20-year average growth rate -5% -10% -15% -20% Source: IATA IATA Economics 19

20 Index, 2005=100 Though cargo growth should be much stronger 1.2 International trade compared to global industrial production BEFORE: FTKs growth 6.4% p.a AFTER: FTKs growth 3.2% p.a Source: Netherlands CPB, IATA IATA Economics 20

21 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Trade and cargo markets appear to have peaked 7. World trade in goods and air FTKs Billion FTKs (seasonally adjusted) Index of world trade, 2005=100 (seasonally adjusted) International FTKs World Trade Index Source: Netherlands CPB, IATA IATA Economics 21

22 Business confidence has been diminishing IATA Economics 22

23 Net balance responses. 50=no change Risk that growth expectations now too high IATA survey of airline CFOs and heads of cargo Passenger services growth expected in the next 12 months Cargo services growth expected in the next 12 months Source: IATA Business Confidence survey IATA Economics 23

The wide spread of financial performance

The wide spread of financial performance WFS Summit 13 th September 2015 Brian Pearce, Chief Economist www.iata.org/economics To represent, lead and serve the airline industry % revenues US$ billion 2015