Airline financial performance

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1 Airline financial performance 30 March 2017 Brian Pearce Chief Economist, IATA Airline Industry Economics Advisory Workshop

2 The air transport paradox Source: McKinsey presentation to IATA

3 Still very much a growth story % year-on-year Diffusion index 16% 65 12% 8% Growth in industry RPKs (LHS) Global services PMI index (adv. 2 months, RHS) % 0% Global manufacturing PMI index (adv. 2 months, RHS) % 40-8% 35-12% Sources: IATA Economics, IATA Monthly Statistics, Markit

4 Though much variation by travel market RPK growth by int'l route and dom. market (latest month, % year-on-year*) 20% 15% 10% 5% 0% -5% Domestic India Middle East - North America Domestic Russia Europe - Middle East Within Europe Middle East - Asia Domestic China Within Asia Asia - North America Asia - SW Pacific Europe - Asia Europe- C. America Africa - Europe Domestic Japan Domestic Australia North - South America Domestic Brazil Europe - North America Domestic US 0% 2% 4% 6% 8% 10% 12% 14% 16% Share of total global RPKs (Year ended Jan 2017) Sources: IATA Economics, IATA Monthly Statistics by Route *Note: int'l routes data are for January; domestic market data are for February

5 Long-term expansion even in gloomy macro scenario Global O-D passenger journeys (billion) Reflation/open borders scenario Constant policies scenario Pick-up in Protectionism scenario Airline Industry Economics Advisory Workshop Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016

6 Trip frequency still low in many important markets Australia Spain United Kingdom Canada United States Italy France Germany Saudi Arabia Korea, Republic Of Japan Thailand Turkey Chile Colombia Russian Federation Mexico Brazil Indonesia South Africa China Egypt India Nigeria Propensity to fly (total passengers/population) Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop

7 Large potential in populous but (currently) poor markets Source: IATA Economics using data from PaxIS+ and Oxford Economics

8 Demographics strong in some key markets, adverse in others % change 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% The UN's projected change in population ( ,%) UN projections adjusted for demographic factors Airline Industry Economics Advisory Workshop Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016

9 Passenger yields, US$ per RPK Scope for large price change in short-haul markets 0.19 Passenger yields and average trip length Within Africa Within South America Within East Asia Within ASEAN Source: IATA PaxIS+ Within Europe ASEAN- E Asia Middle Eastrest of world North-South America North Atlantic Pacific ASEAN-Africa ASEAN-Europe China-North America ASEAN-North America Europe- Australia 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Average trip length (kms)

10 China largest increment, US remains important China United States India Indonesia Vietnam Turkey Brazil Philippines Australia Mexico Corresponding CAGR 5.2% 2.6% 6.7% 3.5% 8.2% 5.2% 2.6% 6.0% 3.0% 4.2% Change in domestic O-D markets (millions, ) Airline Industry Economics Advisory Workshop Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016

11 Significant change in top-10 markets over next 20 years US China UK Japan Spain Germany India Italy France Indonesia China US India UK Indonesia Japan Spain Germany Brazil Turkey Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop

12 Centre of gravity of air travel shifting fast towards China Source: IATA Economics using data from PaxIS+

13 FTKs billion RPKs billion The GFC precipitated one key divergence Air travel and cargo volumes Passenger RPKs Cargo FTKs 7,000 6,000 5,000 4,000 3, ,000 Source: ICAO, IATA

14 % change over previous year Retreat from globalization 15 World GDP and cross-border trade growth 10 5 World trade growth World GDP growth Source: IMF World Economic Outlook and the World Trade Organization

15 Supply chains have been shortened Index (Oct 2008=100) Source: Netherlands CPB, UNCTAD World trade/ip ratio vs. measure of global supply chains Ratio of foreign value added to domestic value added in world gross exports World trade/ip ratio Share (%)

16 But growth has returned to cargo % year-on-year % year-on-year 30% 40% 20% Growth in industry FTKs Global PMI new export orders component (adv. 2 months) 30% 20% 10% 10% 0% 0% -10% -10% -20% Implied PMI series if the index remains flat at its February 2017 level over the coming months -20% -30% -40% -30% -50% Sources: IATA Economics, IATA Monthly Statistics, Markit Source: Markit, IATA Statistics

17 Despite sluggish world trade Indices (Jan 2012=100, seasonally adjusted) Global FTKs Ratio of global FTKs to world trade volumes World trade volumes Rising FTK share Sources: IATA Economics, IATA Monthly Statistics, CPB Source: IATA Statistics, Netherlands CPB

18 % change on year earlier Traffic accelerating ahead of capacity growth 14% RPKs and ASKs growth 12% 10% 8% 6% 4% 2% ASKs 6.2% => 5.6% RPKs 5.9% => 5.1% 0% Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop

19 US$ per barrel Margin squeeze signs of easing? Indexed to equal l 100 in Jnauary Airline passenger yield (constant fx) and crude oil prices, indexed Pax yield -8% => 0% Oil price 44.6 => 55 $/b Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop

20 EBIT as % revenues Industry profitability declining but how fast? 16% 14% 12% 10% 8% Quarterly profile for airline industry operating profits (EBIT) 6% 4% 2% 0% Operating margin 8.3% => 6.6% Net profits $39.6bn => $29.8bn -2% Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop

21 At last investors are getting a normal return % of invested capital Return on capital invested in airlines Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Cost of capital (WACC) Return on capital (ROIC)

22 US$ billion Ending decades of investor capital destruction (?) Difference between investing in airlines and investing in similar assets elsewhere Source: McKinsey, IATA

23 % ROIC 30% Other sectors do better Return on capital across the air transport supply chain 25% 20% % 10% 5% 0% Source: McKinsey for IATA

24 But this is not the main issue for airline earnings Average yearly economic profit, USD billion, (0.7) - (2.0) (2.5) 0.8 Estimate (19.4) (16.7) (18.0) Manufacturers Lessors MRO Ground Catering Airports ANSP Airlines CRS GDS Travel Agents Freight Forwarders TOTAL Source: McKinsey for IATA

25 Aircraft fuel efficiency has improved dramatically Source: Lee

26 But costs typically passed through to prices US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer 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

27 In fact prices have fallen further than costs % ATKs 70% Breakeven and actual load factors 65% Load factor achieved 60% 55% Breakeven load factor +15% points 50% Source: IATA, ICAO 45%

28 Number of unique city-pairs US$/RTK in 2014US$ Consumers have been the major beneficiaries 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Unique city-pairs and real transport costs Unique city pairs Real cost of air transport Source: ICAO, Boeing, OAG, IATA

29 % ATKs Structural change? Breakeven and achieved weight load factor 68 Achieved LF Breakeven LF Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop

30 ROIC, % of invested capital Jet fuel price, US$/barrel High fuel prices not always bad for airlines Airline industry ROIC and jet fuel prices 10.0 ROIC Jet fuel price Source: IATA, Platts Airline Industry Economics Advisory Workshop

31 Operating margin, % revenue Capital productivity, revenue/invested capital, US$ Solid improvement in capital productivity Airlines' operating or EBIT margin and capital productivity Capital productivity Operating margin Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop

32 Very wide variety of business models EBIT margin, adjusted EBIT/revenue ROIC = adjusted EBIT/revenue * revenue/invested capital Jazeera Spring Mesa Ryanair Spirit Allegiant Volaris Alaska PFIZER Hawaiian JetBlue Southwest Air China AMR JAL Delta United Easyjet Aeromexico PIA IAG Qantas Air Canada Cathay SIA ANA LATAM Korean GOL AF-KLM Comair Thai Increasing return on capital (ROIC) Lufthansa WALMART Capital productivity ($ revenue per $ invested capital) Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop

33 US performance dominating industry totals 15% Net post-tax profit margins 10% % 0% -5% -10% N America Europe Asia Pacific Midle East L America Africa Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report

34 Wide variation in balance sheet performance Adjusted net debt/ebitdar Adjusted net debt/ebitdar by region Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Latin America Asia Pacific Europe North America

35 Airline Industry Economics Advisory Workshop

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