Aviation Industry Overview

Transcription

1 Aviation Industry Overview Prepared for: ASCE Air Transportation Group 20th Annual Conference April 5, 2017 Presented by: Jared Harckham Eric Toler

2 ICF (formerly SH&E) is a full-service global aviation consultancy Airports Airlines Aerospace & MRO Asset Advisory 54 years in business (founded 1963) 100+ professional staff Dedicated exclusively to aviation and aerospace Blend of consulting professionals and experienced aviation executives Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 10,000 private sector and public sector assignments Backed by parent company ICF International (2016 revenue: US$1.19 billion) Global presence offices around the world New York Boston London Singapore Beijing Hong Kong joined ICF in 2007 joined ICF in 2011 joined ICF in

3 Our client base spans the aviation sector, giving us a holistic view of the industry International and regional passenger airlines Major and regional airports National, regional and local governments International development agencies Tourism agencies Air cargo, express and integrated logistics operators IT, equipment, and service providers Airframe, engine, and avionics suppliers Leasing companies Investors and financial institutions Booking, distribution, and travel services Maintenance, Repair, and Overhaul industry Corporate and business aviation 3

4 ICF offers a global airline client list and network of airline contacts 4

5 ICF is especially strong in international air service experience and support San Francisco Salt Lake City Las Vegas Los Angeles Edmonton Denver Dallas/ Ft. Worth Omaha U.S./ Canada Baltimore Indianapolis Richmond Ft. Myers Atlanta Tampa Boston Islip Miami Newcastle Manchester London Morocco Stockholm Nantes Hamburg Birmingham Istanbul Heraklion Cairo Donetsk Jeddah Europe / Russia / Middle East Moscow Medinah Riyadh Oman *Spain includes all airports managed by AENA South / Central America, Caribbean * Mexico includes all airports managed by GAP, and MEX satellite airports * Liberia San Jose San Juan Port of Spain Bogota Medellin Quito Natal Lima Santiago Rio De Janeiro San Paulo Krasnoyarsk Asia Kunming Beijing Shanghai Hong Kong Siem Reap Singapore Khabarovsk Seoul ICN Cheongju 5

6 Global Trends and Outlook 6

7 INDUSTRY OVERVIEW World air traffic growth has outpaced GDP growth, and this trend is expected to continue into the future World Traffic grew 1.9x GDP from , and is forecast to grow 1.7x through ,000 3,500 3,000 2,500 2,000 1,500 1, GDP History & Forecast Traffic History World GDP Growth and Air Transport World Traffic (RPKs) Indexed: 1970 = 100 Airbus Traffic Forecast (5.0%) Boeing Traffic Forecast (4.8%) ICF Traffic Forecast (4.0%) IATA Passenger Forecast (3.7%) World GDP World Traffic Forecast 0 Sources: Airline Monitor, Oxford Economics, World Economic Outlook, Airbus/Boeing/Embraer Market Outlooks, OECD, ICF Analysis (2016 data). Note: RPK (Revenue Passenger Kilometer): number of paying passengers x kilometers flown 7

8 Driven by low fuel costs and consolidation, the global airline industry achieved record profitability in 2016 Rising fuel and labor costs will contribute to a decrease in profitability in 2017 $40 B $30 B Global Airline Profitability F $33B $36B $30B Latin America, $0.2B Middle East, $0.3B $20 B $10 B $0 B -$10 B -$20 B $9B $8B $9B $4B -$6B -$8B -$4B -$13B -$11B $5B $15B $17B $17B $8B $9B$11B -$5B Asia Pacific, $6.3B Europe, $5.6B North America, $18.1B Africa, ($0.8B) -$30 B -$26B Sources: IATA, ICF Analysis 8

9 However, record profitability has been largely limited to carriers in North America and many carriers continue to struggle 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -2% 3% 13% North America 5% -5% Asia Pacific Global Airline EBIT Margin by Region 5% 0% 1% Europe 5% 2% 2% 3% Latin America 1% 3% Middle East 1% -1% F 0% Africa -4% Sources: IATA, ICF Analysis 9

10 IATA forecasts a 3.7% annual average growth in global air passenger journeys differing by region Traffic CAGR and Increase in Annual Passenger Counts by Region 1.9 times the number of air passenger journeys in 2035 compared with 2017 North America 535 M 2.8% CAGR Latin America 192 M 3.6% CAGR Europe 566 M 2.5% CAGR Middle East 245 M 4.8% CAGR Africa 189 M 5.1% CAGR Asia Pacific 1,831 M 4.7% CAGR Source: IATA 10

11 Airlines have found the art of capacity discipline in recent years, though this commitment may be tested in % 8% 7% 6% 5% 4% 8% 5% 7% 6% Global Passenger Traffic / Capacity Growth Year-Over-Year Percent Change 5% 5% 5% 4% 6% 6% Traffic (RPK) 7% 7% 6% Capacity (ASK) 6% 6% 5% 3% 2% 1% 0% F Sources: IATA Air Transport Market Analysis (2017) and Economic Performance of the Airline Industry (Dec 2016) 11

12 Fuel prices bottomed out in early 2016, and have risen in the last 12 months $3.20 U.S. Gulf Coast Jet Fuel Price per Gallon January 2014 March 2017 $2.90 $2.60 $2.30 $2.00 $1.70 $1.40 $1.10 $0.80 $0.50 ~68% Decline Jan Feb ~46% Increase Feb Mar Source: EIA, ICF International analysis 12

13 Aircraft production and delivery rates have increased to meet backlogs, though orders have recently fallen 3,500 3,000 2,500 2,000 1,500 Boeing and Airbus Aircraft Orders and Deliveries Boeing Net Orders 748 Deliveries 5,715 Backlog Airbus Net Orders 688 Deliveries 6,874 Backlog Orders Deliveries 1, Sources: Airbus, Boeing, CAPA 13

14 The current commercial air transport fleet consists of 28K aircraft; over half are narrowbody 2016 Global Commercial Air Transport Fleet Turboprop Regional Jet 14% 13% 27,957 Aircraft Narrowbody Jet 54% North America 30% Latin America 7% 5% Africa 27,957 Aircraft 28% Asia Pacific Widebody Jet 19% Middle East 5% 25% Europe By Aircraft Type By Global Region Source: CAPA

15 The 787/A350 have been deployed by airlines around the world to open long-haul, medium-demand routes Most 787/A350 aircraft at NYC airports are deployed on existing routes New Long-Haul Markets Launched by B787/A350 Aircraft Source: Innovata 15

16 As airline strategy continues to evolve, a new long-haul, low cost model has emerged March 2013 March MAX on order Dreamliners on order 9 long-haul destinations added Sources: Innovata, CAPA Note: Aircraft includes those place by operator and by lessors assigned to operator 16

17 Norwegian is advancing its long-haul, low-cost strategy with 10 new routes from the Northeast U.S. to Europe 737 MAX: Efficient, long-range narrowbody makes far, thin routes feasible Potential to disrupt legacy, full-service carriers operating widebody aircraft Q delivery in support of a June 2017 service launch Ambitious growth plans with MAX aircraft on order Promotional non-stop Fares: As low as $65-$99 one-way Additional fees for seat assignments, carry-ons, food, drinks, etc. Source: CNN, BBC, BoardingArea 17

18 Other long-haul low cost airlines are being launched in response to Norwegian IAG launching Level Airlines Los Angeles and San Francisco to Barcelona via A330 beginning in June 2017 Lufthansa expanding Eurowings New A350 flights from Cologne, Germany to Seattle, Orlando, Miami, and Las Vegas in July 2017 Long-haul low cost challenges: Hidden costs catering, turnaround times, crew overnight Utilization long hours but fewer cycles Expectations more services, comfort on long-haul Fewer advantages traditional fuel and seat density advantages vs. mainline carriers eroded on long-haul service Source: BBC, Business Traveller, BoardingArea, Conde Nast Traveler, Skift 18

19 Hybrid low cost carriers are blurring the line between full service carriers and pure low-cost carriers New hybrid model: combination of cost savings methodology of pure LCCs with the services, flexibility, and routes structure of full service carriers Ultra Low Cost Carriers Low Cost Carriers Hybrid Carriers Full Service Carriers Point-to-point Hub and spoke No codesharing Codesharing/Alliances Direct Sales GDS distribution Few aircraft types Mix of aircraft types Unbundled fares Bundled Fares 19

20 Global airline alliances have reached maturity, representing more than 50% of global capacity and generating more than $380 billion in revenue annually Source: Airways Magazine 20

21 However, fault lines are beginning to emerge as airlines increasingly form partnerships across alliances Sources: Airways Magazine, CAPA 21

22 INDUSTRY OVERVIEW Tactical, partner-specific models outside the three major alliances are flourishing Equity stakes/alliances Cross-alliance Etihad model Joint Ventures Latin America and Asia partnerships key focus for U.S. airlines Non-aligned carriers e.g. Alaska, JetBlue, Emirates, Icelandair 22

23 Example: JetBlue has an extensive network of 40 global partners Source: JetBlue 23

24 Example: Alaska Airlines generates $850 million in code share revenues resulting from its network of partnerships Source: Alaska Airlines, Airways Magazine 24

25 Outlook Government policy will have a significant impact on industry performance Travel ban, personal device ban Investment in airport infrastructure and ATC Liberalization Traffic growth continues to outperform GDP growth Air traffic continues to prove its resilience to slow economic growth by outperforming global GDP However, the industry is still subject to exogenous shocks, e.g. terrorist events, natural disasters, oil prices, government policy Supply and demand factors will contribute to robust growth in 2017 Asia, Middle East, and Africa will grow the fastest, driven by growth of the middle class Low-cost carriers and Ultra low-cost carriers continue to expand aggressively and promote air travel accessibility Delivery of new aircraft, including fuel efficient and next gen aircraft, will open new service opportunities Source: IATA, Boeing CMO, Airbus GMF, Air Cargo World, South China Morning Post 25

26 U.S. Trends 26

27 Significant consolidation has occurred in the U.S. airline industry in the past decade, and 2016 closed with yet another merger US Airways and Aloha file for bankruptcy Hawaiian files for bankruptcy Delta and Northwest file for bankruptcy US Airways-America West merger Frontier files for bankruptcy Delta-Northwest merger Aloha ceases operations United- Continental merger American- US Airways merger American Airlines files for bankruptcy Southwest-AirTran merger Alaska- Virgin America merger 27

28 Virgin and Alaska are building up their West Coast presence, recently announcing an aggressive route expansion New Alaska/Virgin Nonstop Service from SFO and SJO SFO SJC MCI IND PHL BWI Virgin America Operated Alaska Operated KOA LAX TUS ABQ AUS MSY BNA RDU MEX Source: World Airline News 28

29 With the help of low fuel prices, U.S. airlines have achieved elevated profits in the last two years $30 $25 Operating Income of U.S. Airlines, USD Billions ( *) $28 $26 $20 $15 $10 $5 $5 $3 $5 $7 $5 $6 $11 $14 $0 -$5 -$10 -$8 -$8 -$4 -$3 -$1 -$6 -$0.4 -$ * *Note: YE 3Q 2016 Source: U.S. DOT Form 41 29

30 Revenue weakness and increasing expenses contributed to a small reduction in U.S. airline profitability in 2016 % Change in Operating Revenues 2016 vs % Change in Operating Expenses 2016 vs % 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% 3% -5% -10% 6% -1% 15% 10% 5% 0% -5% -10% -15% -20% 9% -17% 3% 2% 6% 4% 1% Sources: A4A, analysis of airline financial reports 30

31 Labor has replaced fuel as airlines largest cost item, and will continue to rise in the coming years Share of Operating Expenses by Type, U.S. Airlines (2006 vs. 2016*) 100% 90% 80% 70% 60% Fuel Labor Ownership Maintenance Other 50% 40% 30% 30% 38% 20% 10% 0% 29% 18% * *Note: YE 3Q 2016 Source: U.S. DOT Form 41 31

32 Although ULCCs account for only 6% of domestic capacity, they are growing at a much faster rate than network carriers and traditional LCCs ULCCs have a limited presence at NYC airports with a 2% share of domestic capacity Share of Domestic U.S. Seat Capacity (2016) Average Annual Growth of Domestic U.S. Seat Capacity ( ) 100% 90% 80% 70% 60% 6% 8% Low Cost 26% Ultra-LCC Regional/ Other 13% 18% 23% 50% 40% 30% 20% Netw ork/ Legac y 60% Low Cost Other/Regional 6% 5% 10% Network/Legacy 1% 0% 0% 5% 10% 15% 20% 25% Source: Innovata Schedules 32

33 U.S. legacy carriers have introduced bare-bones basic economy fares in response to ultra-low-cost-carrier pressure 33

34 U.S. legacy carriers have introduced bare-bones basic economy fares in response to ultra-low-cost-carrier pressure MCO - ATL 34

35 Domestic load factors have consistently increased since 2001, now reaching 85% Average load factors in 2016 at NYC airports matched the national average of 85% 100% 90% 80% 70% Average Domestic U.S. Load Factor, U.S. Airlines ( ) 71% 69% 70% 73% 74% 77% 79% 80% 80% 81% 82% 83% 83% 83% 84% 85% 85% 60% 50% 40% 30% 20% 10% 0% Source: U.S. DOT T100 35

36 West Coast airports in particular have seen the largest capacity gains in the last 5 years, while many rust belt airports are among the biggest losers NYC airports saw a 13% gain in seat capacity between Top 10 U.S. Airports Largest Capacity Increase ( ) Bottom 10 U.S. Airports Largest Capacity Decrease ( ) 70% 60% 61% 0% -5% 50% 40% 30% 20% 37% 35% 28% 28% 28% 26% 26% 25% 25% -10% -15% -20% 10% 0% -4% -5% -6% -6% -8% -13% -14% -19% -25% -25% -30% -28% Source: Innovata Schedules 36

37 Revenue from baggage and other ancillary products has become a key element in the airlines ability to achieve top-line growth U.S. Airline Baggage and Cancellation Fee Revenue, Billions ( *) $8.0 $7.0 $6.0 $5.0 $5 $6 $6 $6 $6 $6 $7 $7 $4.0 $3.0 $3 $2.0 $1.0 $1 $1 $1 $1 $1 $1 $1 $1 $0.0 *Note: YE 3Q 2016 Source: U.S. DOT Form 41 37

38 U.S. airlines have robust aircraft orders, supporting fleet renewal and expansion U.S. Airlines Current Fleet and Orders (as of March 2017) 1,400 1,200 1, Current Fleet Orders Network/Regional Carriers Low Cost Carriers Ultra Low Cost Carriers Source: CAPA, March

39 Airlines are investing profits in improving the passenger experience and operational performance New or refurbished aircraft, larger overhead bins for luggage Increased availability of power/usd outlets, wifi, and inflight entertainment Improved design of airport check-in areas and departure lounges Investment in improving security screening process Continued development of mobile apps and kiosk functionality Improved operational reliability Enhanced tools (e.g. tablets) for customerfacing employees Source: A4A 39

40 U.S. airlines have seen continual operational improvements over the last several years Flight Completion Factor (2016) On-Time Arrival Rate (2016) 2016 Best since % 2016 Best since % % % % % Properly Handled Bag Rate (2016) Oversales per 10,000 Customers (2016) 2016 Best ever recorded 99.73% 2016 Best ever recorded % % Source: A4A 40

41 NYC airports seat capacity has grown faster than the national average in the last 5 years, and new routes will support continued growth 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Average Annual Seat Capacity Growth ( ) 3.6% 2.3% 1.8% 1.6% 1.6% Source: Innovata Schedules -5.7% -7.1% -9.1% New 2017 Routes (through August) JFK Delta Glasgow and Bangor Xiamen Airlines Fuzhou Newark United Sacramento, San Jose Alaska San Jose Southwest Oakland LOT Polish Warsaw Allegiant Ft. Walton Beach Stewart Norwegian Edinburgh, Dublin, Shannon, Belfast, Bergen (83% increase in summer capacity) 41

42 Thank you!