September 2010 Brian Pearce To represent, lead and serve the airline industry

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Dorcas Lawson
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1 Cycle turns up but risks and structural challenges remain September 2010 Brian Pearce To represent, lead and serve the airline industry

2 Confidence was still high in July survey Airline CFO question: what change in profits do you expect Last Three Months Next Twelve Months Mar 2006 Sep 2006 Apr 2007 Oct 2007 Apr 2008 Oct 2008 Apr 2009 Oct 2009 Apr 2010 Weighted Score (50 = No Change) Source: IATA

3 Markets rebound from Great Recession International air freight and passenger volumes seasonally adjusted RPK 13 RPK, billions FTK FTK, billions Source: IATA

4 World trade slowing but still above trend 14 World trade in goods and air FTKs Source: Netherlands CPB and IATA 170 Billion FTKs International FTKs (left scale) World goods trade volumes (right scale) index of world trade, 2000=

5 Air travel driven by business passengers 25 Premium passengers and world trade growth Source: IATA, CPB Netherlands Developed countries trade in goods Premium passenger numbers Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: IATA Premium Traffic Monitor % change over year

6 Business confident, consumers less so Inxdex to 100 in Business and consumer confidence in major economies Business confidence Consumer confidence Source: JP Morgan/Markit and Haver

7 Consumer confident in emerging markets Consumer confidence Source: Haver Analytics Balance expecting improvement, index US Europe (right scale) China Balance expecteting improvement, net % 0 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan

8 Large geographical differences in travel Change over year 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Growth in passenger numbers by flight segment Within Asia North & Mid Pacific Middle-East - Asia North Atlantic -25% Source: IATA Premium Traffic Monitor

9 Freight market growth converging 60% 50% International Freight growth by major routes Source: IATA ODS North and Mid Pacific 40% 30% Within Far East 20% 10% 0% -10% North Atlantic YoY Growth -20% -30% Europe - Far East -40% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Source: IATA

10 Fares rebounding but so are fuel prices 420 Average international fares and jet kerosene prices Jet kerosene price (right scale) 400 US$ per one-way fare Average one-way international fare (left scale) US cents per gallon Source: IATA and Platts

11 Yields up 45% from Asia, flat from Europe Global Total Europe (RHS) to North America SE Asia to Europe (RHS) Air Freight Yields US$ per Kilo Source: IATA CASS Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2

12 Asset utilization not as good as it appears 80% Aircraft utilization and passenger load factor % Twin aisle utilization 11.4 Passenger load factor, % ASKs 78% 77% 76% 75% 74% 73% Passenger load factor Aircraft utilization, daily hours 72% % Source: IATA

13 Utilization of freighters looks much better 58% Freighter utilization and freight load factor 11 Freight load factor, % AFTK 56% 54% 52% 50% 48% 46% 44% 42% Freight load factor Freighter utilization Freighter utilization, daily hours 40% Source: IATA, Boeing

14 Operational cash flow rebounds (partly) 20% 15% EBITDA as % revenues seasonally adjusted Asia-Pacific airlines % revenues 10% 5% US airlines European airlines 0% -5% Source: Bloomberg

15 Business inventory cycle boost ending Total Business inventories to sales ratio and FTKs Source: US Census Bureau and IATA Inventories to sales ratio FTKS Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 8 Source: IATA Cargo echartbook

16 Large reversal of fiscal stimulus ahead 500 US federal budget position, $ billion US$ billion Bank bailout & fiscal stimulus Source: US CBO

17 Europe exposed to govt debt pressures 1000 Credit Default Swap Spreads basis points May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Greece Portugal Spain UK Germany US Source: Haver

18 Western consumers also in bad shape 11 Consumer debt-income and unemployment in the US 1.4 Unemployment rate Consumer debt Unemployment Household debt-income ratio Source: Haver

19 Developed economies to weaken in 2011 % change over year Forecasts for GDP growth source: EIU 0 US Japan Europe ASPAC ex Japan Middle East North Africa Latin America World Source: EIU

20 Source: IATA Volumes will slow, revenues slow further 25 Growth in air cargo volume and world trade 20 Cargo growth % change over year World trade in goods growth F

21 Fuel prices appear range-bound Jet Fuel and Crude Oil Price ($/barrel) Source: Platts, bloomberg Jet Fuel Forward curve 20 Crude oil (Brent)

22 Capacity now coming out of storage Aircraft Retirements and Deliveries Source: Ascend Deliveries Retirements Storage Monthly Average Jul Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-10 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Aircraft per month

23 Passenger fleet utilization will rise 8.6 Daily hours of aircraft utilisation seasonally adjusted Twin aisle Single aisle, hours Twin aisle, hours 8.1 Single aisle Source: IATA

24 Delivery of new capacity set to rise Annual deliveries Scheduled deliveries of new aircraft, jets and turboprops Other Middle East North America Europe Asia Pacific Source: Ascend

25 So yield gains likely to stall in Global revenues/tkp, costs/tkp and fuel cost/tkp Fuel cost/tkp (right scale) Yield Cost per TKP Source: ICAO, IATA

26 Profits cycle up in 2010 but slips in Global commercial airline profitability EBIT margin (left scale) % revenues US$ billion Net losses (right scale) F 2011F Source: IATA

27 Asia strongest, Europe weakest 6 Airline net profits by region US$ billion Europe Asia-Pacific N America L America Middle east Africa Source: ICAO, IATA

28 Still unable to deliver normal returns Return on invested capital in the airline industry vs the cost of capital Forecast % of invested capital Cost of capital (WACC) F 2011F Return on capital (ROIC) Source: IATA

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)