U.S. Airline Industry Review: Allocating Capital to Benefit Customers, Employees and Investors

Transcription

1 U.S. Airline Industry Review: Allocating Capital to Benefit Customers, Employees and Investors Updated Oct. 26, 2017

2 Commercial Aviation Supports 5% of U.S. GDP and More Than 10M U.S. Jobs For Every 100 Airline Jobs, Approximately 300 Jobs Are Supported Outside the Industry» In 2014, economic activity (output) in the United States attributed to commercial aviation-related goods and services totaled $1.54 trillion, generating 10.2 million jobs with $427 billion in earnings.» Commercial aviation contributed $846 billion (4.9 percent) to U.S. GDP, the value-added measure of overall U.S. economic activity. Terms Commercial aviation airlines, air couriers, airports, airframe/engine/parts/avionics manufacturers, visitor expenditures, R&D, travel arrangements. Output the total economic value of goods and services produced. Earnings wages/salaries/other labor income, benefits, and proprietors income paid to all employed persons who deliver final demand output and services. Jobs the number of people employed in the industry that provide civil-aviation services, manufacture aircraft and aircraft engines, or work in other industries that are indirectly affected by activity in the civil air transportation sector. Source: FAA, The Economic Impact of Civil Aviation on the U.S. Economy (Nov. 2016) 2

3 U.S. Airlines Help Grow U.S. Exports, Reduce Trade Deficit, Boost GDP Travel/Tourism Exports Were $246B in 2016 One-Third of All Services Exports $250 50% Travel/Tourism Exports (Billions) $200 $150 $100 $50 $ % 40% 30% 20% 10% 0% Share of Total Services Exports Passenger Air Transport Other Travel & Tourism* Travel Share of Services Source: Bureau of Economic Analysis * Food, lodging, recreation, gifts, entertainment, local transportation in the USA, and other items incidental to foreign travel 3

4 U.S. Economy and Employment Growing; Household Net Worth at All-Time High 4 Real GDP Growth Rate (% CAGR) 300 Monthly Employment Growth (000) F 2018F Income ($000) Personal (per Capita) Household (Median) Household Net Worth ($ Trillion, NSA) Q17 2Q17 Sources: BEA, BLS, Federal Reserve and IHS; U.S. GDP real annual average growth rate (%), U.S. nonfarm payroll employment growth (month-over-month, in 000s, seasonally adjusted), U.S. disposable personal income (BEA) and median household income (Census); U.S. household net worth in current dollars, not seasonally adjusted 4

5 Over the Decades, as Real Airfares Have Plunged, the Number of Flyers Has Tripled Adjusted for Inflation, Domestic Air Travel Remains 40+ Percent Below 1980 Levels $700 $600 Domestic R/T Airfare (in CY2016 Dollars) Fare Fare + Ancillary 1, Passengers Enplaned (Scheduled Service, Millions) 3X $ $ $ Domestic R/T Airfare (% of Disposable Personal Income) Fare Fare + Ancillary Source: Bureau of Economic Analysis, Bureau of Labor Statistics and Bureau of Transportation Statistics (Data Bank 1B and T1 systemwide for U.S. airlines) 5

6 Average Round-Trip Airfare Down $32 (8.5%) Since 2014; Fees Down 17 (0.8%) Airfare Has Constituted 94 Percent of Total Ticket Price in Each of the Past Six Years $450 $400 $350 $300 Domestic Round-Trip Average Ticket Price (Excluding Taxes) $250 $200 $150 $100 $50 $ Airfare Ancillaries Source: A4A analysis of data from BTS Data Bank 1B (10% sample of tickets: all cabins and fare basis codes) and DOT Form 41 6

7 Within the Travel & Tourism Sector, Airfare Remains One of the Better Bargains In Contrast to Air Travel, the Price of a Day at Disney Rose 31-Fold From 1971 to U.S. Carrier Airfare ( /mile) $120 Magic Kingdom ($/day) 3500 Price Index (1971 = 100) : 5.7% CAGR : 1.3% CAGR $100 $80 $60 $ U.S. CPI Disney Airfare 31.4X $40 $20 $0 $ X 2.4X Sources: A4A, BTS Data Bank 1B, allears.net, How theme parks like Disney World left the middle class behind (Drew Harwell, The Washington Post, June 12, 2015) and Disney Introduces Demand-Based Pricing at Theme Parks (Brooks Barnes, The New York Times, Feb. 27, 2016) 7

8 Relative to Most Consumer Goods and Services, Air Travel Is a Bargain This Century, U.S. Inflation and U.S. Personal Incomes Have Outpaced Domestic Airfare Outpaced Inflation Lagged Inflation Product (Unit) % Public College Tuition & Fees (4-Year, In-State, Net) $1,234 $3, Walt Disney World (One-Day Pass, Adult, Regular Season) $46 $ National Football League Game (Nonpremium Ticket) $43.70 $ Major League Baseball Game (Nonpremium Ticket) $16.22 $ Jet Fuel (Gallon, Price Paid by U.S. Airlines) $0.807 $ Prescription Drugs (BLS Index) Disposable Personal Income per Capita (Annual) $26,206 $43, Gasoline (Gallon, Unleaded Regular, Retail Including Taxes) $1.510 $ Movie Ticket (One Adult) $5.39 $ Single-Family Home (Existing) $147,300 $235, Food (BLS Index) U.S. Consumer Price Index (CPI-U) Vehicle (New, Retail) $24,900 $34, Public Transit Air Travel (R/T Domestic Fare + Ancillary) 2 $ $ Air Travel (R/T Domestic Fare Only) 2 $ $ Apparel: Clothing/Shoes/Jewelry (BLS Index) (2.7) Television (BLS Index) (94.5) 1. Bureau of Labor Statistics measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. 2. A4A analysis of data collected by BTS excludes taxes; ancillary includes revenue from reservation changes/cancellations and baggage 8

9 For U.S. Airlines, 2016 Capacity Growth (3.9%) Outpaced Traffic Growth (3.5%) Systemwide Average Load Factor Fell 0.35 Points to 83.4 Percent Load Factor (%) RPMs ASMs % 80 Billions % Load Factor (%) Source: U.S. Bureau of Transportation Statistics T1, systemwide scheduled service on U.S. airlines revenue passenger miles (RPMs) and available seat miles (ASMs) 9

10 U.S. Airline Traffic Flown and Capacity Operated Continue to Grow in 2017 Systemwide Passengers Enplaned Up 2.8% Year Over Year, 13.9% Over Five Years H12 1H13 1H14 1H15 1H16 1H17 Passengers (Mils) RPMs (Bils) ASMs (Bils) Source: U.S. Bureau of Transportation Statistics T1, systemwide scheduled service on U.S. airlines revenue passenger miles (RPMs) and available seat miles (ASMs) 10

11 U.S. Airlines Transported More Cargo in 2016; Most Tons Enplaned Since Cargo Revenue Ton Miles (Billions) Tons per Day (Right Axis) Billion RTMs per Year (Left Axis) Cargo Revenue Tons Enplaned per Day (000) Source: U.S. Bureau of Transportation Statistics T1 and T100, systemwide, all services on U.S. passenger and cargo airlines 11

12 In , U.S. Flights Needed to Fill 2 of Every 3 Seats to Avoid Losing Money Breakeven Load Factor Requirement Rose in 2016 on Lower Yield, Higher Unit Cost Breakeven Actual Load Factor (%) Source: A4A Passenger Airline Cost Index ( 12

13 In the Deregulated Period, U.S. Airline Earnings Have Been Cyclical and Volatile Cumulatively, Airlines Have Recorded Net Income of $7.6B (or 0.2% of Revenues) Net Income ($ Billions) (20) (40) (60) (80) (11.4) (65.0) Net Margin: 0.4% (3.3%) 3.8% (6.3%) 5.5% Source: A4A Passenger Airline Cost Index 13

14 Since the Great Recession,* U.S. Airlines Have Been Closing the Gap to Average U.S. Corporate Profitability; 2015 Gap Was Narrowest on Record Pre-Tax Profit Margin (%) (5) (10) (15) (20) U.S. Recession U.S. Passenger Airlines All U.S. Corporations (25) Source: ATA Annual Reports ( ), A4A Passenger Airline Cost Index (1977-present); Bureau of Economic Analysis NIPA Table 1.14 * Dec-2007-Jun

15 Airlines Continue to Strive for Solid Profitability Across the Business Cycle In Current U.S. Business Cycle, Airline Margins Are About One-Third the U.S. Average Pre-Tax Profit Margin (%) for Apple McDonald s Disney All US Corps. Starbucks AAPL MCD DIS All USA SBUX Airlines 5.8 Sources: U.S. Bureau of Economic Analysis, A4A Passenger Airline Cost Index and company SEC filings 15

16 Strong U.S. Dollar Remains a Headwind for U.S. Carrier International Revenues Downward Pressure on Foreign Point-of-Sale and Passenger Yield (Cents per RPM) 170 U.S. Dollar Index: Jan. 2010=100* Composite* Canadian Dollar (CAD) Mexican Peso (MXN) British Pound (GBP) 90 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: Federal Reserve Board of Governors * Weighted average of foreign exchange value of USD against currencies of broad group of major U.S. trading partners 16

17 Steadier Oil and Jet-Fuel Prices Boosting Seats, Wages and Reinvestment Every Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses EIA Spot Price* of Crude Oil/Barrel (Brent) $120 EIA Spot Price* of Jet Fuel/Gallon (U.S. Gulf) $3.50 $100 $80 $60 $40 $20 $ $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $ Source: A4A and Energy Information Administration ( * 2017 reflects year-to-date average 17

18 1H17 Revenues Up 4.2%, But All Major Expenses Rise Up 9.1% Profitability (Average Margin) Falls to 11.4% Year-over-Year Change (%) in Operating Revenues and Expenses 19.9 Pre-Tax Profits and Margin (%) $12.0B 11.4 $9.2B Pax Traffic Pax Yield (1) Cargo Rev Other Rev (2) Total OpRev Labor Fuel Maintenance Airports Aircraft Other (3) Total OpExp 1H H Yield = fare per mile (cents per RPM) 2. Sale of frequent flyer award miles to airline business partners, pet transportation, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc. 3. Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 18

19 In 1H17, U.S. Airline Industry* Profit Margin Trailed the U.S. Average by 4.2 Points U.S. Passenger Airline* Profitability Was Substantially Below McDonald s/apple/starbucks 1H17 Pre-Tax Profit Margin (% of Operating Revenues) Chipotle Marriott Airlines* All U.S. Corps. * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United SourceS: Company SEC filings and Bureau of Economic Analysis NIPA Table 1.14 Comcast Starbucks CSX Disney Apple McDonald s 19

20 Airline Creditworthiness Remains Far From Stellar Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit Standard & Poor s ratings express the agency s opinion about the ability and willingness of an issuer to meet its financial obligations in full and on time. Investment Grade 1 (>= BBB-) Johnson & Johnson, Microsoft AAA ExxonMobil, USG AA+ Google, Wal-Mart AA GE, Toyota AA- UPS A+ McDonald s, PepsiCo, Starbucks, Target A Amtrak, BP A- Ryanair, ebay BBB+ FedEx, Ford, Marriott, SWA BBB Lufthansa, Qantas, WestJet BBB- Speculative 2 Grade (< BBB-) Alaska, Delta, Turkish BB+ Avis, British Airways BB AC, ALGT, AAL, HA, JBLU, LATAM, UAL, Sabre BB- Virgin Australia, Hertz B+ SAS B Gol Linhas Aereas (GOL) CCC Passenger Airline 1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Source: Standard and Poor s; Guide to Credit Rating Essentials: What are credit ratings and how do they work? 20

21 From , U.S. Airlines Fuel Bill Doubled Despite Reducing Consumption Average Systemwide Price Paid by U.S. Carriers Rose 79% from 2000 to 2016 Using Less Fuel... Million Gallons per Day But Due to Higher Prices... Avg. Price Paid per Gallon Systemwide... Incurring More Costs Billion USD per Year $1.45 $0.81 $16.4 $ Source: BTS (T2: 921) for U.S. airlines Source: BTS (Form 41 P-12(a) for U.S. airlines) Source: BTS (Form 41 P-12(a) for U.S. airlines) 21

22 After 2014 Spike, Jet Fuel Price Volatility Subsided in Standard Deviation of U.S. Gulf Coast Jet Fuel Spot Price (Cents per Gallon) Source: U.S. Energy Information Administration 22

23 Like Other Responsible Businesses, Airlines Are Focused on Balanced Allocation of Capital to Benefit All Stakeholders: Customers, Employees and Investors Increasing job security Renewing fleets, improving the product at all stages of travel Boosting operational reliability, advancing environmental objectives Restoring/increasing air service levels (capacity) Adding staff Restoring/increasing employee wages and benefits Shoring up pensions (or comparable retirement accounts) De-risking (reducing debt) Returning cash to shareholders Buying back stock Issuing dividends 23

24 U.S. Airlines Are Putting More Than $20 per Passenger* Right Back Into the Product Use of Operating Cash from Included $82B of Capital Reinvestment $54.3B Retire Debt $64.9B Enhance Product $17.4B Reward Shareholders $8.5B Retire Debt $17.5B Enhance Product $13.1B Reward Shareholders * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors 24

25 Following Financial Hemorrhaging, U.S. Airlines Have Retired $63B in Debt Carriers Ended 2016 With $75B in Gross Debt 1 and $22B in Liquidity 2 $80 Payments on Long-Term Debt and Capital Lease Obligations (Billions) Annual Cumulative $62.8 $60 $40 $20 $9.1 $11.2 $7.5 $7.9 $10.5 Year-End 2016 $75.1B gross debt 1 $21.6B liquidity 2 $8.0 $8.5 $ Source: SEC filings of AAL/ALGT/AAL/DAL/HA/JBLU/LUV/SAVE/UAL/VA 1 Includes 7x annual aircraft rents (capitalized operating leases) 2 Cash, cash equivalents and short-term investments 25

26 Improving Finances Enabling Significant Reinvestment in Customer Experience 1H 2017 Capital Outlays Exceeded $1.5B per Month, Outpacing 2016 Rate U.S. Passenger Airline* Capital Expenditures ($ Billions per Month) H17 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors 26

27 Airlines Strongly Support Infrastructure Investment Across the Country Airline-Airport Collaboration Has Paved the Way for Widespread Capital Improvements» Over $100 billion of capital projects have been completed, are underway or approved at the nation s 30 largest airports alone since 2008, including, for example: o New runways at Fort Lauderdale, Washington Dulles, Seattle, and Charlotte o Multiple new runways at Chicago O Hare o New international facilities at Atlanta and Los Angeles o New, expanded or modernized terminals at Miami, Las Vegas, Orlando, Hawaii, Houston, Denver, Seattle, Salt Lake City and San Francisco» Development is also robust at smaller airports, including, for example: o Runway projects at Erie, Columbus, Dayton, Des Moines, Nashville and Sioux Falls o Terminal projects at New Orleans, Eugene, Grand Rapids, Greenville-Spartanburg, Norfolk, Portland (Maine), Reno-Tahoe and Wichita 27

28 J.D. Power: North American Airport Satisfaction Climbs to Record High Overall passenger satisfaction with North American airports has reached an all-time high, as airports of every size have found creative ways to address the challenges of constant construction projects and increased passenger capacity demand [M]ajor city airports that are in the thick of massive construction efforts notably Newark Liberty, LaGuardia, Los Angeles International and Chicago O Hare are still fighting the headwinds of traveler disruption and access challenges that are handicapping their overall satisfaction scores. (Sept. 21, 2017) Notes: Scale = ; study not conducted in 2009/ Six factors (in order of importance): Terminal Facilities* (24%) Airport Accessibility (19%) Security Check (16%) Baggage Claim (15%) Check-In/ Baggage Check (14%) Food / Beverage / Retail (13%) * Concourses, lounges, signage, restrooms, gate areas Notes: The study, fielded Jan-Aug 2017, is based on responses from 34,695 North American travelers who traveled through at least one domestic airport with both departure and arrival experiences (including connecting airports) during the past three months. Travelers evaluated either a departing or arriving airport from their round-trip experience. Source: J.D. Power 2017 North America Airport Satisfaction Study ( 28

29 Strong Credit Ratings Allow Airports to Access Capital Markets at Preferred Rates AA ± ATL BOS HOU* LAS LAX MCO MSP NYC* OMA PDX PHX SEA SNA TPA WAS* A ± ALB ABQ AUS BDL BNA BUR BWI CHS CLE CLT CMH CVG DAL DAY DEN DFW DSM DTW ELP FLL GEG GSO HNL IND JAX LIT MCI MDW MEM MFR MIA MSY MYR OAK OKC ONT ORD PBI PHL PIT PSC RSW SAN SAT SDF SFO SJC SLC SMF STL TYS BBB ± BB ± AGS COS CRP FAT FNT GRR GUM MHT MOB PNS PVD PWM TUL VPS Southwest, WestJet AC ALK ALGT AAL DAL HA JBLU UAL Investment Grade 1 Speculative Grade 2 B ± None 1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Source: Standard and Poor s * HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD 29 airlines org

30 Improving Airline Finances Translating to Customer Benefits The recent wave of consolidation has meant higher profits and more stability, which has led airlines to invest in technology, new airplanes and better customer service A healthy airline industry means a better flying experience overall. -- Rick Seaney, FareCompare.com, in AMR Stands to Gain Vast Route Network, Wall Street Journal, Feb. 7, 2013 What we re seeing in airlines is what we ve seen in railroads, telecom, and trucking... You ll have fewer crises, fewer bankruptcies, more predictability, more stability. -- Clifford Winston, Senior Fellow, Brookings Institution, Christian Science Monitor, Feb. 14,

31 Improving Finances Enabling Significant Reinvestment in Customer Experience» New or refurbished aircraft, larger overhead bins for luggage» Availability of lie-flat seating with AC power and USB, proliferation of Wi-Fi and inflight entertainment» Expanded route networks (scope and frequency) and schedules (seat growth)» Improved airport check-in areas, lounges, gate amenities, baggage systems, ground equipment» Investments in new automated security screening lanes (including automatic bin returns)» Continued development and roll-out of mobile technology and website/kiosk functionality» Increasing operational reliability (controlled for weather conditions)» Enhanced tools (computers, tablets, software) and training for customer-contact employees 31

32 As Airlines Achieve Economic Profits, Customers Are Seeing More Seats Supply of Seats Departing U.S. Airports at All-Time High Entering ,000 3,500 3,000 2,500 2,000 Daily Seats (000) Departing U.S. Airports in Scheduled Service Domestic International 2017: DOM +3.6%, INT +5.8%, SYSTEM +3.9% 2,846 2,932 2,977 2,772 2,834 2,743 2,823 2, ,567 2,567 2,586 2,558 2,584 2, ,574 2,494 2, ,451 2,292 2,285 2,294 2,259 2,274 2,289 2,366 2,454 2,542 2,578 1,500 1, ME Sept Source: Innovata (via Diio Mi) published schedules as of Oct. 20, 2017, for all airlines providing scheduled passenger service from U.S. airports to all destinations 32

33 In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Biggest Driver of Jump % of Domestic Departures by Aircraft Size 1 Average Seats per Domestic Departure Seats Seats >100 Seats Source: Innovata (via Diio Mi) published schedules as of Sept. 22, All carriers 2. AAL, ALGT, ALK, DAL, FRNT, HA, JBLU, LUV, SAVE, Sun Country, UAL 33

34 Use of Larger RJs and Mainline Aircraft Boosting Seats on Many U.S. Routes Net Number of Seats Often Grows Without Reduction in Daily Departures Airline Hub Spoke Mar-2015 Mar-2017 Alaska Seattle Omaha RJ-70, 1x B737, 1x American Dallas/Ft. Worth Greensboro RJ-50, 2x RJ-76, 2x Dallas/Ft. Worth Madison RJ-50, 4x RJ-76, 3x Dallas/Ft. Worth Mobile RJ-50, 3x RJ-76, 3x Dallas/Ft. Worth Tallahassee RJ-50, 2x RJ-76, 2x Los Angeles Albuquerque RJ-50, 2x RJ-76, 2x Los Angeles El Paso RJ-50, 1x RJ-76, 2x Los Angeles Phoenix RJ-76, 3x A321/B757, 7x Delta Atlanta Scranton RJ-76, 1x B717, 1x Cincinnati Hartford RJ-50, 2x RJ-76, 1x Cincinnati Raleigh-Durham RJ-50, 3x RJ-76, 2x United Chicago Rochester RJ-50/A319, 2x/1x RJ-50/A319, 1x/2x Denver Des Moines RJ-50/70/A320, 4x A319/B737, 4x Newark Cincinnati RJ-50, 5x RJ-70/76, 6x Newark Jacksonville RJ-50, 5x RJ-50/A320, 3x San Francisco Eugene RJ-50, 5x A319/A320, 3x San Francisco Reno RJ-50/70, 6x RJ/B737, 4x Wash. Dulles New York LGA RJ-50, 4x RJ-70, 2x Wash. Dulles Philadelphia RJ-50, 4x RJ-70, 4x Source: Innovata (via Diio Mi) published schedules as of May 26, 2017, comparing 3/6/2017 to 3/9/

35 U.S. Airports of All Sizes Have Realized Air Service Gains Over Past Two Years On Average, Small Communities Have Experienced an 8% Increase in Seats Change in scheduled seats departing U.S. airports from 3Q 2015 to 3Q 2017 by DOT Hub Size* % of U.S. airports by two-year change in seats % change in seats, flights DOT Airport Size Classification* Large Hub Medium Hub Small/Non Hub All % % + 8.2% + 8.5% + 3.0% + 6.1% + 1.3% + 3.1% Grew or Unchanged Shrank * Source: Innovata (via Diio Mi) published schedules as of June 9, 2017, for all airlines providing scheduled passenger service from U.S. airports to all destinations 35

36 For Small U.S. Communities, 2017 = Fifth Consecutive Year of Seat Growth Seats Up 13.7% Over Past Five Years, More Than Offsetting 3.6% Fewer Departures 600 Flights and Seats Departing Small U.S. Commercial Airports* 6.00 Average Daily Seats (000) Seats (Left Axis) Flights (Right Axis) Average Daily Flights (000) * Per U.S. airports with less than 0.25% of annual passenger boardings Source: Innovata (via Diio Mi) published schedules as of June 9, 2017, for all airlines providing scheduled passenger service from U.S. airports to all destinations 36

37 Smaller U.S. Carriers Have Been Growing Far Faster Than the Four Largest Carriers Growth in Systemwide Scheduled ASMs Since Spirit 200 Percent Sun Country Allegiant Hawaiian Alaska JetBlue Southwest Frontier 0 American/Delta/United (50) Source: Innovata (via Diio Mi) published schedules as of Oct. 13, 2017, for selected marketing airlines including predecessors 37

38 From , Global Network Carrier Domestic Share Fell From 73% to Just 54% Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model Global Network Southwest Other Source: DOT Data Bank 1B, with each airline measured on a marketing-carrier (network) basis and tracked with its respective merged/acquired predecessors (e.g., UA/CO) 38

39 Competition Is Intense Numerous Carriers Continue to Put Substantial Downward Pressure on Fares A December 2016 update of the frequently cited Brueckner/Lee/Singer study demonstrated that the Southwest Effect remains in force: o o In the period 3Q 2015 through 2Q 2016, Southwest s presence on a route lowered fares 21.2 percent In addition, the update found that many smaller but rapidly expanding carriers put substantial downward pressure on global network carrier domestic air fares, e.g.: o o o Alaska 24.0 percent JetBlue 25.4 percent Spirit 18.5 percent Source: Jan K. Brueckner, Darin Lee and Ethan S. Singer, Airline competition and domestic US airfares: A comprehensive reappraisal, Economics of Transportation,

40 The Four Largest U.S. Carriers Have Grown Aggressively at Each Other s Hubs Growth (%) in Daily Domestic ASMs* at Competitors Hubs & Focus Cities: 2010 to 2017 Seattle Dallas/Ft.Worth Charlotte Atlanta Miami Denver 26.3 Salt Lake City 49.3 San Francisco Houston US GDP (Real) Minneapolis/St. Paul US GDP (Real) Salt Lake City Atlanta Minneapolis/St. Paul Seattle Denver Houston US GDP (Real) New York Charlotte Dallas/Ft.Worth Minneapolis/St. Paul Houston Los Angeles Miami San Francisco US GDP (Real) Source: Compass Lexecon analysis of OAG schedule data * Scheduled available seat miles by marketing carrier (and merged/acquired partners) 40

41 Meanwhile, Smaller Carriers Have Been Expanding Rapidly at Large-Carrier Hubs Growth (#) in Daily Domestic Seats* at Competitors Hubs & Focus Cities: 2010 to 2017 Houston Atlanta Washington Detroit Minneapolis/St. Paul New York 3,083 2,586 2,572 2,424 2,108 1,733 New York Los Angeles Washington San Francisco Salt Lake City ,012 2,578 3,316 San Francisco New York Washington Dallas/Ft.Worth ,431 Los Angeles New York Dallas/Ft.Worth 935 1,704 2,721 Atlanta Houston Washington 381 Source: Compass Lexecon analysis of OAG schedule data * Scheduled seats by marketing carrier (and merged/acquired partners) 41

42 LCCs/Others* Now Carry a Significant Share of Passengers in Large-Carrier Hub Cities Share (Percent) of Domestic O&D Passengers [in Ascending Order by 2016 Share] Hub City Airport(s) Charlotte, NC CLT Philadelphia, PA PHL New York, NY-NJ EWR/JFK/LGA Atlanta, GA ATL Detroit, MI DTW Minneapolis/St. Paul, MN MSP Salt Lake City, UT SLC Dallas/Fort Worth, TX DAL/DFW Chicago, IL MDW/ORD Miami, FL FLL/MIA Houston, TX HOU/IAH Washington, DC BWI/DCA/IAD Phoenix, AZ PHX Los Angeles, CA BUR/LAX/LGB San Francisco, CA OAK/SFO Denver, CO DEN Source: Compass Lexecon analysis of DOT Origin-Destination Survey (Data Bank 1B) * Airlines other than American, Delta United and their predecessors 42

43 Competitive Choices for Domestic Flyers Have Increased Over the Past Decade Analysis of Traffic Flows Shows More Competitors on Domestic City Pairs in 2016 Average Number of Competitors* on All Reported Domestic Itineraries The growth of low-cost carriers, emergence of ultra-low-cost carriers and mergers among network carriers have led to additional competitors and new options for flyers in large and small markets: Sample O&D Market (Passengers/Day Each Way) Competitors* in 2007 (Share of O&D Passengers) Competitors* in 2016 (Share of O&D Passengers) Washington, DC Detroit (1,048) Northwest 72% Southwest 19% Delta 56% Southwest 20% Spirit 8% American 8% United 7% Charleston, SC NYC (669) Delta 45% US Airways 36% Continental 12% JetBlue 36% Delta 35% United 24% American 5% Raleigh/Durham Orlando (507) Southwest 76% Delta 15% Southwest 46% Delta 31% Frontier 10% Allegiant 8% Cleveland Boston (402) Continental 63% AirTran 30% JetBlue 41% United 31% Spirit 14% American 7% Fort Myers Cleveland (363) Continental 44% USA % AirTran 17% Frontier 39% Southwest 18% Spirit 18% United 12% Delta 8% Birmingham Dallas (209) American 57% Southwest 39% Southwest 48% American 44% Delta 7% Norfolk Chicago (197) United 47% Southwest 33% American 9% Southwest 37% United 32% American 23% Delta 8% Boise Las Vegas (174) Southwest 88% Southwest 62% Allegiant 20% Delta 10% Columbus, OH Houston (155) Continental 66% Southwest 22% United 42% Southwest 34% Delta 13% American 11% Lubbock Houston (124) Southwest 84% Continental 14% Southwest 53% United 41% American 6% Source: Compass Lexecon analysis of data from DOT Data Bank 1B * Defined as carrying at least 5 percent of O&D passengers in the city pair 43

44 The Number of Carriers Serving an Airport Is Directly Related to the Level of Traffic* Smaller Airports Tend to Have Fewer Carriers Due to Minimal Demand 1 78 # of Carriers Serving Airport ,110 2,258 3, ,277 Average Daily Domestic Passengers Each Way, 2016 Source: Compass Lexecon analysis of data from OAG and DOT Data Bank 1B * Domestic only 44

45 Several Secondary U.S. Cities Now Enjoy Nonstop Transoceanic Service Nonstop Services Are Provided by a Mix of Traditional and Low-Cost Carriers Airport ANC/FAI AUS BDL CVG JAX/PBI KOA MSY OAK PIT PVD RDU RSW SJC Destination Airport (Marketing Airline) Frankfurt (Condor), Reykjavik (Icelandair, from ANC) Frankfurt (Condor), London LGW (NAS), London LHR (BA) Dublin (Aer Lingus), Edinburgh (NAI) Paris (Delta) Bimini/Marsh Harbour/Nassau: Bahamas (Bahamasair, Silver) Tokyo Haneda (Hawaiian), Tokyo Narita (JAL) Frankfurt (Condor), London LHR (BA), Panama City (Copa) Barcelona (Iberia/NAS), London LGW (BA/NAS), Copenhagen/Rome**/Oslo/Stockholm (NAS) Frankfurt (Condor), Paris (Delta), Reykjavik (WOW) Belfast/Bergen/Cork/Dublin/Edinburgh/Shannon (NAI), Azores (SATA), Cape Verde (TACV) London LHR (American), Paris (Delta) Düsseldorf (airberlin), Nassau (Silver) Beijing (Hainan), Frankfurt (Condor), London LHR (BA), Shanghai (Air China), Tokyo NRT (ANA) * Slated to commence Mar. 27, 2018 ** Slated to commence Feb. 6,

46 Among Top 60 U.S. Airports, the Picture for Air Cargo Volumes Is Split Though Average Post-2010 Decline is 5.8%, 29 of the 60 Have Experienced Gains % Change in Avg. Daily Onboard Cargo Volumes from 2010 to (25) (50) (0.7) (0.9) (1.7) (3.0) (3.0) (3.0) (3.0) (3.8) (5.3) (5.8) (6.4) (7.3) (7.9) (8.1) (8.4) (9.5) (9.9) (11.9) (12.2) (14.2) (14.5) (14.6) (16.0) (18.8) (22.0) (22.4) (24.3) (26.7) (27.3) (30.1) (33.1) (40.4) (75) CVG TPA DCA PHX ONT MCO MCI LAX DTW SAN BWI DFW PIT SLC SEA LGA CLT PDX SMF OAK OGG CMH SJU DAL HNL FLL OMA IND JAX BNA MKE BOS AUS BDL ORD ATL SFO SJC Mean MSP PHL SAT CLE LAS STL BUF SNA DEN RDU IAH RSW PBI EWR MSY ABQ MIA ANC JFK HOU IAD MDW Source: DOT T-100 (via Diio Mi) segment data, scheduled and nonscheduled services 46

47 U.S. Airlines Saw Continued Improvements in DOT Operational Metrics in 2016 Gains Driven by Investments in Aircraft, Systems, Procedures, Staffing Flight Completion Factor (%) On-Time Arrival Rate (%) 2017 Jan-Aug Jan-Aug Best since Best since Properly Handled Bag Rate (%) Involuntary Denied Boardings* 2017 Jan-Jul H Best ever recorded Best ever recorded Sources: BTS and DOT Air Travel Consumer Report ( * Per 10,000 enplaned passengers 47

48 Severe Hurricanes Are Disrupting August-September 2017 Airline Flight Operations Nationwide U.S. Domestic Flight Cancellations 5,000 4,500 4,000 3,500 3,000 8/25: Harvey landfall in Texas (PM) 9/10: Irma landfall in Florida Keys (AM) 9/20: Maria landfall in Puerto Rico (AM) 2,872 4,567 2,500 2,000 1,500 1, ,013 1,683 1,622 1,488 1,550 1,421 1, ,033 1,991 1, Fri 8/18 Sat 8/19 Sun 8/20 Mon 8/21 Tue 8/22 Wed 8/23 Thu 8/24 Fri 8/25 Sat 8/26 Sun 8/27 Mon 8/28 Tue 8/29 Wed 8/30 Thu 8/31 Fri 9/1 Sat 9/2 Sun 9/3 Mon 9/4 Tue 9/5 Wed 9/6 Thu 9/7 Fri 9/8 Sat 9/9 Sun 9/10 Mon 9/11 Tue 9/12 Wed 9/13 Thu 9/14 Fri 9/15 Sat 9/16 Sun 9/17 Mon 9/18 Tue 9/19 Wed 9/20 Thu 9/21 Fri 9/22 Sat 9/23 Sun 9/24 Mon 9/25 Tue 9/26 Wed 9/27 Thu 9/28 Fri 9/29 Source: masflight 48

49 How s the Weather Affecting U.S. Airport Operations?

50 Heard on the Street With airlines in the U.S. now generating acceptable returns, their ability to reinvest in their products has been greatly enhanced. Today s traveler is likely to check in via smart phone, monitor the upgrade list in real time, board and enjoy a sufficiently sized overhead, and pass the time en route surfing the Internet. There is no way any of this would have been possible had the industry not found its way to firmer financial footing. For those in premium cabins, long gone are the EZ-boy recliners requiring a double excuse me in order to get to the aisle. Today s business traveler is likely to enjoy direct aisle access and a lie-flat seat suitable for sleeping, even on transcon flights. Absent the industry s financial turnaround, these benefits simply would not be available. -- Jamie Baker, Managing Director, Global Equity Research, J.P. Morgan, Feb. 28, 2014 Jamie Baker is a Research Analyst at J.P. Morgan. His views may not be representative of others at the Company. For disclosures related to companies that Mr. Baker covers, please see 50

51 U.S. Airline Industry Headcount Ended 2016 at Highest Level Since 2000 Year-End Full-Time + Part-Time Employees at U.S. Passenger and Cargo Airlines (000s) YTD August Source: Bureau of Transportation Statistics Note: 2016 includes FedEx acquisition of TNT on May 25, 2016, which increased headcount by approximately 55,000 51

52 U.S. Passenger Airline Jobs Averaging Highest Level Since 2004 August 2017 Represented the 46 th Consecutive Month of YOY Gains 525 U.S. Scheduled Passenger Airline Full-Time Equivalent Employees (000s) ,367 (27%) YTD17 +45,612 (12%) Jan-Aug Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 52

53 Since April 2015, U.S. Airline Job Growth Has Exceeded Overall U.S. Job Growth Airline Employment Growing at More Than Double the Rate of Overall U.S. Jobs 5 4 U.S. Airlines Overall USA Year-Over-Year Change (%) (1) (2) Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Bureau of Labor Statistics (U.S. nonfarm employment, CES ) and Bureau of Transportation Statistics (U.S. scheduled passenger airline FTEs) 53

54 U.S. Airlines* Continue to Pump More Wages and Benefits into the Economy Airlines* Spent $3.87 Billion/Month on the Workforce in 1H17 Up 52 Percent from 2010 Total Employee Wages and Benefits* ($ Billions per Month) H17 * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United 54

55 U.S. Passenger Airline Wages Averaged 45% More Than U.S. Private Sector* in 2016 From 2010 to 2016, Airline Wages Rose 37% (More Than Double 15% for Overall USA*) $95 $90 $85 $80 $75 $70 $65 $60 $55 $50 Wages and Salaries (000) per Full-Time Equivalent Employee (FTE) U.S. Private Sector* U.S. Airlines $80.9 $74.5 $70.0 $67.3 $86.0 $62.6 $63.1 $58.7 $59.5 $57.1 $54.9 $55.4 $53.5 $ % Source: BEA NIPA Table 6.6D and A4A Passenger Airline Cost Index * For all private industries 55

56 As U.S. Airlines Generate More Cash from Operations, They Are Better Positioned Not Only to Fund Capital Improvements But Also to Enhance Shareholder Value $30 $25 Free* (FCF) Operating $28.0 Cash Flow (Billions) $20 $15 $10 $5 $0 -$5 $11.1 $10.5 $4.5 $3.0 $0.6 $2.5 ($0.0) Source: SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America * Operating cash flow minus capital expenditures 56

57 In 2016, U.S. Airlines Continued Efforts to Retain and Lure New Equity Investors, Returning $13B to Shareholders Via Stock Buybacks ($12B) and Dividends ($1B) Stock Repurchases (Billions) Dividends (Billions) $14 $1.4 $12 $12.0 $1.2 $1.2 $10 $8 $6 $4 $2 $0 All companies listed below $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 ALGT, ALK, AAL, DAL, LUV * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America 57

58 ACSI Airline Customer Satisfaction Index Up Again in 2017 ACSI Travel Report 2017 (April 25, 2017) [T]here is a notable improvement this year in customer satisfaction for several airlines Much of the increase appears to be driven by price In addition, airlines have made strides to improve on-time arrivals and in-flight meals, plus lost baggage is down [E]very aspect of flying is better than it was a year ago Up 13 points from Scale = 0-100; ACSI for airlines commenced in Ease of check-in process Ease of making a reservation Courtesy of flight crew Timeliness of arrival Website satisfication Baggage handling Boarding experience Call center satisfaction Range of flight schedules Loyalty program Quality of inflight services Seat comfort Note: ACSI and its logo are Registered Marks of the University of Michigan; see 58

59 J.D. Power: North American Airline Satisfaction Climbs to Record High Lower fares, better on-time performance, fewer lost bags and the lowest bump rate ever recorded have contributed to steady improvement in customer satisfaction with North American airlines. According to the J.D. Power 2017 North America Airline Satisfaction Study, SM released today, overall customer satisfaction with airlines has reached its highest level ever, continuing a trend that now stretches five consecutive years. (May 10, 2017) Up 98 points from Note: Scale = 0 to Scores are higher this year than one year ago in all of the study factors that measure customer satisfaction. Seven factors (in order of importance): Cost & fees In-flight services Aircraft Boarding/deplaning/baggage Flight crew Check-in Reservation Notes: The study is based on responses from 11,015 passengers who flew on a major North American airline between March 2016 and March Source: J.D. Power 2017 North America Airline Satisfaction Study ( 59

60 Half of 2016 U.S. Flight Delays Were Attributable to the National Airspace System An Additional 5 Percent Were a Function of Extreme Weather or Security Issues National Airspace System, 49.0% Security, 0.3% DOT Categories for Causes of Delay National Airspace System Non-extreme weather conditions, airport ops, heavy traffic volume, air traffic control, etc. Security Caused by evacuation of a terminal or concourse, re-boarding of aircraft because of security breach, inoperative screening equipment and/or long lines in excess of 29 minutes at screening areas. Extreme Weather, 4.7% Air Carrier, 46.0% Extreme Weather Significant meteorological conditions (actual or forecasted) that, in the judgment of the carrier, delays or prevents the operation of a flight such as tornado, blizzard or hurricane. Air Carrier Circumstances within the airline s control (e.g., maintenance/crew problems, aircraft cleaning, baggage loading, fueling). Source: A4A analysis of data from the Bureau of Transportation Statistics 60

61 According to FAA, Flight Delays Cost the USA an Estimated $25B in 2016 More Than Half of Delay Costs Relate to Passenger Value of Time 2016 Flight Delay Costs ($Billions) $13.2 $1.7 $3.2 $25.1 $ Increased expenses for crew, fuel, maintenance, etc. 2. Time lost due to schedule buffer, delayed flights, flight cancellations, missed connections 3. Estimated welfare loss incurred by passengers who avoid air travel as the result of delays 4. Increased cost of doing business for other sectors, making associated business less productive Source: FAA Air Traffic Organization update to Total Delay Impact Study: A Comprehensive Assessment of the Costs and Impacts of Flight Delay in the United States 61

62 The Coalition for Modern Skies advocates to build on our first-rate safety record, to reduce flight delays, to accelerate modernization and to restore America s global leadership in air traffic control. The coalition will continue do this by advancing sensible policies to improve Air Traffic Control systems through government accountability, reliable funding, modern technology and improving efficient procedures to get passengers and cargo to their destination more quickly. 51

63 1H 2017 Operational and Financial Recap: U.S. Passenger Airlines» U.S. airlines projected to carry record number of passengers in 2017 on steadily improving economy and continued air-travel affordability» Profitability fell, as surging expenses outpaced modest growth in revenues, placing the industry s margin behind McDonald s, Apple, Disney, Starbucks and Comcast» Airlines continue to increase supply at airports, with domestic levels at their highest level in a decade and international levels at an all-time high» The number of works employed by U.S. passenger airlines stands at its highest level since 2005 and is growing at twice the rate of overall U.S. employment» Airlines are spending 52 percent more on wages and benefits than they were at the beginning of the decade» Broadly, a combination of data from DOT and independent entities shows a decline in customer complaints and an increase in customer satisfaction 63

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