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 May 2, 2018

2 Making the movement of people and goods easier, and stimulating economies The combination of creative freedom and new-generation aircraft has led to another hugely significant development in recent years: the hundreds of new city pairs that airlines have launched and continue to add to their networks. These directly link communities by air as they ve never before been connected, making the movement of people and goods easier, and stimulating economies. -- Karen Walker, Editor-in-Chief, Air Transport World (April 2018) Source: Celebrating an industry, Air Transport World (April 2018) 2

3 On a Daily Basis, the 706,558 Employees* of U.S. Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods 27,000 flights to/from more than 800 airports in nearly 80 countries 2.3 million passengers 55,000 tons of cargo Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines * Headcount as of February

4 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) 4

5 U.S. Airlines Help Grow U.S. Exports, Reduce Trade Deficit, Boost GDP Travel/Tourism Exports Were $243B in Percent 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 5

6 U.S. Economy and Employment Growing; Household Net Worth at All-Time High U.S. Real GDP Growth (% CAGR) U.S. Employment Growth (000) IHS Forecast F U.S. Real Gross Output Growth (% CAGR) J F M A M J J A S O N D J F M A M J J U.S. Household Net Worth ($ Trillion, NSA) Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q Sources: U.S. GDP and gross output (Bureau of Economic Analysis); U.S. nonfarm payroll employment growth (month-over-month, in 000s, seasonally adjusted) from BLS; median personal and household pre-tax income (Census); U.S. household net worth in current dollars, not seasonally adjusted (Federal Reserve) 6

7 As Real Airfares Have Plunged, Growth in Flyers = 4.5x Growth in U.S. Population Ancillary Services Included, 2017 Domestic Air Travel Was ~42% Cheaper Than in 1980 $700 $600 Domestic R/T Airfare (in CY2017 Dollars) Fare Fare + Ancillary 1, Passengers Enplaned (Scheduled Service) $ $400 $ Domestic R/T Airfare (% of Disposable Personal Income) Fare Fare + Ancillary Millions (Gray) Per Capita (Orange) Passengers up 209% (~3X) Population up 46% Pax per capita up 111% (~2X) Source: Bureau of Economic Analysis, Bureau of Labor Statistics and Bureau of Transportation Statistics (Data Bank 1B via Airline Data Inc. and T1 for U.S. airlines) 7

8 As Commercial Air Travel Has Become Safer and More Accessible, More Americans Are Taking to the Skies: Almost 90% in Their Lifetimes, Almost 50% in Past Year The hub-and-spoke network has really been a wonderful thing for mobility of Americans. Rick Geddes, Director of the Cornell Program in Infrastructure Policy (Dec. 20, 2017) % of U.S. Adult Population That Flew Past 12 Months In Lifetime Sources: Gallup and Ipsos Public Affairs; NBC News (Dec. 20, 2017) 8

9 Average Domestic Ticket Price (Fare + Ancillaries) Fell Steadily From 2014 to 2017* Price of Air Travel Continues to Lag U.S. Inflation $ % CPI 2017 $ Current $ Round-Trip Ticket Price (excl. taxes) $410 $400 $390 $380 $ % 2.0% 1.5% 1.0% 0.5% U.S. CPI (% change YOY) $ % Source: A4A analysis of data from DOT Data Bank 1B (all cabins and fare basis codes) and DOT Form 41 via Airline Data Inc. * 4Q16 through 3Q17 9

10 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 33-Fold From 1971 to U.S. Carrier Airfare ( /mile) $140 Magic Kingdom ($/day) 4000 Price Index (1971 = 100) : 5.7% CAGR : 1.3% CAGR $120 $100 $80 $60 $40 $20 $0 $3.50 $ U.S. CPI Disney Airfare 32.9X 6.1X 2.4X Sources: A4A Passenger Airline Cost Index (using DOT Form 41 passenger yield), 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) 10

11 Relative to Most Consumer Goods and Services, Air Travel Is a Bargain U.S. Inflation and Personal Incomes Have Sharply Outpaced Price of Domestic Air Travel Outpaced Inflation Lagged Inflation Product (Unit) % Public College Tuition & Fees (4-Year, In-State, Net) $1,208 $4, Disney World Magic Kingdom (1-Day, Adult, Regular Season) $46 $ Jet Fuel (Gallon, Price Paid by U.S. Airlines) $0.81 $ National Football League Game (Nonpremium Ticket) $43.70 $TBD TBD Major League Baseball Game (Nonpremium Ticket) $16.67 $ Prescription Drugs (BLS Index) Single-Family Home (Existing) $147,300 $248, Movie Ticket (One Adult) $5.39 $ Disposable Personal Income per Capita (Annual) $26,206 $44, Gasoline (Gallon, Unleaded Regular, Retail Including Taxes) $1.510 $ 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 $ $ Apparel: Clothing/Shoes/Jewelry (BLS Index) (3.1) Television (BLS Index) (95.3) 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 via Airline Data Inc. excludes taxes; ancillary includes revenue from reservation changes/cancellations and baggage 11

12 U.S. Airlines Are Moving More People and More Goods Over Longer Distances Significant Growth of Demand for Air Transportation Services in the Deregulated Era 1,200 Passenger Traffic Up 4.1x Revenue Passenger Miles (Billions) 45 Cargo Traffic Up 5.6x Revenue Ton Miles (Billions) 1, Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines) 12

13 For U.S. Airlines, 2017 Traffic Growth (3.3%) Outpaced Capacity Growth (3.2%) Systemwide Average Load Factor Rose a Tenth of a Point to 83.5 Percent % Billions % Load Factor (%) Load Factor (%) RPMs ASMs Source: U.S. Bureau of Transportation Statistics T1, systemwide scheduled service on U.S. airlines revenue passenger miles (RPMs) and available seat miles (ASMs) 13

14 U.S. Airline Traffic Flown and Capacity Operated Reached All-Time Highs in 2017 Systemwide Operations; Enplanements Up 3.1% YOY , , , , Full Year Passengers (Mils) RPMs (Bils) ASMs (Bils) Source: DOT T100, systemwide scheduled service on U.S. airlines revenue passengers enplaned, revenue passenger miles (RPMs) and available seat miles (ASMs) 14

15 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 ( 15

16 In the Deregulated Period, U.S. Airline Earnings Have Been Cyclical and Volatile Cumulative Net Income = $21.9 Billion (0.6% of Revenues, $0.99 per Enplaned Passenger) Net Income ($ Billions) (20) (40) (60) (80) (100) (11.4) (65.0) P Net Margin: 0.4% (3.3%) 3.8% (6.3%) 5.9% Source: A4A Passenger Airline Cost Index 16

17 Even in Best Years, Profitability of U.S. Airlines Lags U.S. Corporate Average Pre-Tax Profit Margin (%) Gap Widened in 2016 and (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 Note: Recessions highlighted in gray 17

18 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 6.5 Sources: U.S. Bureau of Economic Analysis, A4A Passenger Airline Cost Index and company SEC filings 18

19 Many Long-Term Investors Remain Wary of the Airline Industry We actually are the largest holder of the four largest airlines It s a fiercely competitive industry, the question is whether it s a suicidally competitive industry I mean, when you get virtually every one of the major carriers and dozens and dozens and dozens of minor carriers going bankrupt, there ought to come a point you find that maybe you re in the wrong industry -- Warren Buffet, Berkshire Hathaway annual meeting (May 6, 2017) Source: 9 Best Warren Buffett Quotes From the Berkshire Hathaway Annual Meeting (May 8, 2017) 19

20 Strong U.S. Dollar Headwind Easing for U.S. Carrier International Revenues Pressure on Foreign Point-of-Sale and Passenger Yield (Revenue per Mile Flown) 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 20

21 Jet-Fuel Prices Creeping Up Again A Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses EIA Spot Price* of Crude Oil/Barrel (Brent) $80 EIA Spot Price of Jet Fuel/Gallon (U.S. Gulf) $2.50 $70 $60 $50 $40 $30 $20 $10 $ $2.00 $1.50 $1.00 $0.50 $ YTD Average 2018 Source: A4A and Energy Information Administration ( 21

22 Crude-Oil Prices Rising Swiftly, to Highest Level Since Late 2014 April Average Up 38 Percent Year Over Year Spot Price* of Brent Crude Oil ($ per Barrel) $120 $100 $80 $ $40 $20 $0 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Source: A4A and Energy Information Administration ( 22

23 2017 Revenues Rose 4.5%, But All Major Expenses Rose Faster Up 8.3% Yields Lagged U.S. Inflation; Profitability (Average Pre-Tax Profit Margin) Fell to 11% Year-over-Year Change (%) in Operating Revenues and Expenses Pre-Tax Profits and Margin (%) U.S. inflation up 2.1% Pax Traffic $21.4B $17.6B Pax Yield (1) Cargo Rev Other Rev (2) Total OpRev Labor Fuel Maintenance Airports Aircraft Other (3) Total OpExp Yield = passenger revenue per passenger-mile flown (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 23

24 In 2017, U.S. Passenger Airline* Profitability Respectable But Below Average Pre-Tax Profit Margin (% of Operating Revenues) Ford Chipotle Boeing Airlines* Marriott Caterpillar U.S. Corp. Avg. Honeywell Starbucks Disney Comcast CSX Apple Union Pacific McDonald s * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United Source: Company SEC filings 24

25 Airline Creditworthiness Has Improved But Continues to Lag Many Fortune 500s Per S&P, Only Two U.S. Passenger Airlines Have 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. Johnson & Johnson, Microsoft AAA Alphabet (Google), ExxonMobil, USA AA+ Wal-Mart AA GE, Toyota AA- PepsiCo, UPS A+ Target A Amtrak, BP, Starbucks A- Ryanair, Southwest, ebay, McDonald s BBB+ FedEx, Ford, Marriott BBB British Airways, Delta, Lufthansa, Qantas, WestJet BBB- Alaska BB+ Avis, Air Canada, JetBlue, United BB American, Hawaiian, LATAM, Spirit, Sabre BB- Virgin Australia, Hertz, SAS B+ Gol Linhas Aereas (GOL) B- Investment Grade 1 Speculative 2 Grade 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? 25

26 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 26

27 Improving Finances Enabling Significant Reinvestment in Customer Experience In 2017 Alone, Airlines Directly Invested ~$20B in Flight/Ground Equipment, Facilities, IT U.S. Passenger Airline Capital Expenditures ($ Billions per Year) : $102.4B Includes > 450 aircraft * Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors 27

28 Following Financial Crisis, U.S. Airlines Have Retired ~$69B in Debt and Returned ~$39B to Shareholders to Lure and Retain New Equity Investors Retirement of Debt ($ Billions) Returns to Shareholders ($ Billions) Dividends Stock Repurchase Source: SEC filings of AAL/ALGT/ALK/DAL/HA/JBLU/LUV/SAVE/UAL and merged predecessors * Payments on long-term debt and capital lease obligations 28

29 From , Capital Expenditures ($102B) Equaled 75% of Operating Cash Flow U.S. Airlines Also Retired Expensive Tranches of Debt and Returned Cash to Shareholders $ Billions Total Net Cash from Operations Pay Down Debt Enhance the Product Reward Shareholders * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors 29

30 As U.S. Airlines Generate Sufficient Cash from Operations, They Are Better Positioned to Fund Capital Improvements and to Enhance Shareholder Value $30 $25 Free* (FCF) Operating Cash Flow (Billions) $20 $15 $10 $5 $0 -$ (0.0) Source: SEC filings of AAL/ALGT/ALK/DAL/HA/JBLU/LUV/SAVE/UAL and merged predecessors * Operating cash flow minus capital expenditures 30

31 Airline-Airport Collaboration Has Paved Way for Widespread Infrastructure Investment Capital Projects Have Grown 86% Since 2015 at the 30 Largest U.S. Airports» $130B of capital projects have been completed, are underway or approved at the 30 largest U.S. airports since 2008, including, for example: Investment at Largest Airports o Multiple new runways at Chicago O Hare and new runways at Fort ($ Billions) Lauderdale, Washington Dulles, Seattle and Charlotte $130 o New/expanded/modernized terminal facilities at New York, Miami, Las Vegas, Orlando, Honolulu, Houston, Denver, Seattle, Salt Lake $100 City and San Francisco as well as international facilities at Atlanta, Boston and Los Angeles $70» Development is also robust at smaller airports, including: o Runway projects at Columbus, Des Moines, Erie, Nashville, Providence and Sioux Falls o Terminal projects at New Orleans, Eugene, Grand Rapids, Greenville-Spartanburg, Oakland, Dallas Love Field, San Luis Obispo, Portland (Maine), Pasco, Reno-Tahoe and Wichita» Investment is also occurring in cargo facilities and related infrastructure at Louisville, Newark, Lafayette (Louisiana), Indianapolis, Rockford, Memphis and elsewhere Approved Completed/Underway 31

32 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 ( 32

33 Strong Credit Allows U.S. Airports to Access Capital Markets at Preferred Rates AA ± Aa (1-3) ATL BOS CLT HAS (HOU/IAH) LAS LAX MCO MSP MWAA (DCA/IAD) OMA PANYNJ (ACY/EWR/JFK/LGA/SWF) PDX PHX RDU SEA SNA TPA A ± A (1-3) ALB ABQ AIAS (ANC/FAI) AUS BDL BHM BNA BOI BUR BWI CHS CLE CMH CVG DAL DAY DEN DFW DSM DTW ELP FLL GEG GSO GSP HSAS (HNL/ITO/KOA/LIH/OGG) HSV IND JAX LGB LIT MCI MDW MEM MFR MIA MKE MSY MYR OAK OKC ONT ORD ORF PBI PHL PIT PSC RIC RSW SAN SAT SDF SFO SJC SLC SMF STL TUS TYS BBB ± Baa (1-3) BB ± Ba (1-3) AGS BIL BTV COS CRP FAT FNT GRR GUM JAN MDT MFR MHT MOB PNS PVD PWM RAP RDM TUL VPS Delta, Southwest Alaska Allegiant American Hawaiian JetBlue Spirit United Investment Grade 1 Speculative Grade 2 B ± B (1-3) None Legend: AIAS = Alaska International Airport System HAS = Houston Airport System; also includes EFD HSAS = Hawaii s Statewide Airports System; also includes HDH/HNM/JHM/JRF/LNY/LUP/MKK/MUE/PAK/UPP MWAA = Metropolitan Washington Airports Authority PANYNJ = Port Authority of New York and New Jersey; also includes TEB 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 Sources: Standard and Poor s and Moody s 33

34 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,

35 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 35

36 Customers Are Seeing All-Time High of 3M+ Daily Seats Departing U.S. Airports Daily Seats (000) Departing U.S. Airports in Scheduled Service: Up 18% Since ,500 3,000 2,500 2,000 2, ,546 2, , : DOM +3.6%, INT +5.8%, SYSTEM +3.9% 2018: DOM +3.1 INT +4.0%, SYSTEM ,567 2,567 2,586 2,558 2,584 2, ,292 2,285 2,294 2,259 2,274 2,289 2, ,366 2, ,454 2, ,542 3, ,620 1,500 1, Domestic International Source: Innovata (via Diio Mi) published schedules as of Apr. 27, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations 36

37 2018: Small U.S. Communities Seeing Most Flights in 5 Years, Most Seats in 10 Average Daily Flights and Seats Departing Small U.S. Commercial Airports* Average Daily Flights Average Daily Seats ,050 5,771 5,340 5,334 5,141 4,885 4,749 4,529 4,376 4,367 4,402 4, , , , , , , , , , , , , Great Recession crude $ ,500-hour rule (pilots) 2014 flight/duty time (pilots) Notes: Great Recession (Dec-2007 Jun-2009); FAA pilot qualification (1,500-hour) rule effective Jul-2013; pilot flight/duty/rest rule effective Jan-2014 * Per U.S. airports with less than 0.25% of annual passenger boardings Source: Innovata (via Diio Mi) published schedules as of Apr. 27, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations 37

38 In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Replacement of 50-Seaters With Larger Regional Jets Is Primary Driver Factors include availability of pilots, fuel efficiency, congested airspace/airfields, improving economics of large regional jets, lack of new-generation in-production small aircraft % of Domestic U.S. Departures by Aircraft Size Seats Seats > 100 Seats Source: Innovata (via Diio Mi) published schedules as of Dec. 29,

39 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/

40 The Number of Carriers Serving an Airport Is Directly Related to the Level of Traffic* Smaller Airports Tend to Have Fewer Carriers Due to Low 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 40

41 Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the Fastest Different Types of Carriers Market Their Prices and Services Differently % Change in Capacity* Since (50) Allegiant Spirit Alaska Hawaiian JetBlue Frontier Sun Country Southwest AAL/DAL/UA L Source: Innovata (via Diio Mi) schedules as of Feb. 9, 2018, for selected marketing airlines including predecessors * Systemwide scheduled available seat miles 41

42 Smaller U.S. Carriers Are Serving More and More Domestic Markets Competitive Presence of Low-Cost and Ultra Low-Cost Carriers Continues to Expand 120 Allegiant Number of U.S. Airports Served* Alaska Frontier JetBlue Spirit Hawaiian Source: Innovata (via Diio Mi) schedules as of Feb. 16, 2018, for selected marketing airlines including predecessors * July of each year 42

43 From , Global Network Carrier Domestic Share Fell From 73% to Just 53% Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model Global Network Southwest Other Source: DOT Data Bank 1B (each airline shown on a marketing-carrier basis and tracked with its respective merged/acquired predecessors [e.g., UA/CO] 43

44 Low-Cost Carriers In Particular Continue to Put Substantial Pressure on Fares Southwest Effect Remains in Force Brueckner/Lee/Singer 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,

45 Low-Cost Carriers In Particular Continue to Put Substantial Pressure on Fares Southwest Effect Remains in Force Beckenstein/Campbell The presence and magnitude of the Southwest Effect has endured through time. Even today, when new markets have frequently been affected already by Southwest s fares on connecting services, the Southwest Effect still shows, on average, an additional market fare reduction of 15% and corresponding traffic increase of 28% to 30%, from the introduction of nonstop service by Southwest. The Southwest Effect is alive and well. We find no evidence that the Southwest Effect has been eroded or overtaken in significance or magnitude by other airlines Our study finds that Southwest produces $9.1 billion annually in domestic consumer fare savings. One-way average market fares are $45 lower when Southwest serves a market nonstop than when it does not. If Southwest provides only connecting service in a city-pair market, average market fares are $17 lower (one-way) than when there is no competitive effect from Southwest. Alan R. Beckenstein, Ph.D., Professor of Business Administration at the Darden School of Business, University of Virginia; and Brian M. Campbell, Ph.D., Principal, the Campbell-Hill Aviation Group, LLC, Public Benefits and Private Success: The Southwest Effect Revisited, Darden Business School Working Paper Number 206 (August 2017) 45

46 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) 46

47 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) 47

48 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 48

49 Competitive Choices for Domestic Flyers Have Continued to Increase Contrary to Some Assertions, Traffic Analysis Shows More Competitors on U.S. City Pairs Average Number of Competitors* on All Reported Domestic U.S. Itineraries * Carrying at least 5 percent of O&D passengers in the city pair; average number of competitors is passenger-weighted across city pairs Source: Compass Lexecon analysis of DOT Origin-Destination Survey (Data Bank 1B) 49

50 Competitive Choices for Domestic Flyers Have Increased (Cont d) Analysis of O&D Passenger Traffic in 25 Sample Domestic City Pairs: 2016 vs Sample O&D Market PDEW Competitors* in 2007 Share of O&D Passengers Competitors* in 2016 Share of O&D Passengers Dallas-NYC 2,956 American 69% Continental 16% American 48% Southwest 13% United 12% Delta 11% Virgin 11% Boston-San Francisco 1,717 United 47% American 23% JetBlue 22% United 45% JetBlue 22% Virgin 18% American 6% Delta 5% Atlanta-Los Angeles 1,570 Delta 63% AirTran 24% Delta 43% American 24% Southwest 19% Spirit 7% Denver-Seattle 1,089 United 34% Alaska 29% Frontier 25% Alaska 31% Southwest 28% United 16% Delta 15% Frontier 9% Detroit-Washington, DC 1,048 Northwest 72% Southwest 19% Delta 56% Southwest 20% Spirit 8% American 8% United 7% Austin-Los Angeles 845 American 57% Southwest 28% US Airways 6% American 36% Southwest 26% JetBlue 15% Delta 12% United 10% Orlando-Pittsburgh 686 Southwest 37% US Airways 31% AirTran 25% Southwest 72% Frontier 8% American 7% Allegiant 6% Delta 6% Charleston, SC-NYC 669 Delta 45% US Airways 36% Continental 12% JetBlue 36% Delta 35% United 24% American 5% Chicago-Portland, OR 661 United 48% Southwest 23% American 18% United 26% Southwest 24% American 17% Alaska 16% Spirit 11% Hartford-Washington, DC 609 Southwest 64% US Airways 26% United 10% Southwest 32% American 32% JetBlue 24% United 12% Cleveland-Miami/FLL 563 Continental 57% AirTran 12% US Airways 12% Delta 8% Spirit 25% AA 21% JBLU 20% UA 12% DL 11% SWA 6% ALGT 5% Orlando-Raleigh/Durham 507 Southwest 76% Delta 15% Southwest 46% Delta 31% Frontier 10% Allegiant 8% Boston-Cleveland 402 Continental 63% AirTran 30% JetBlue 41% United 31% Spirit 14% American 7% Cleveland-Fort Myers 363 Continental 44% USA % AirTran 17% Frontier 39% Southwest 18% Spirit 18% United 12% Delta 8% Dallas-Indianapolis 338 American 86% American 64% Southwest 27% Delta 7% Charlotte-Denver 319 US Airways 53% United 31% American 6% American 53% United 16% Delta 16% Frontier 10% Southwest 6% Nashville-Raleigh/Durham 247 Southwest 92% Southwest 85% Delta 9% Birmingham-Dallas 209 American 57% Southwest 39% Southwest 48% American 44% Delta 7% Chicago-Norfolk 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% Nashville-San Antonio 155 Southwest 79% American 11% Southwest 80% American 9% Delta 6% United 5% Miami/FLL-Syracuse 140 JetBlue 38% US Airways 35% Delta 16% Allegiant 30% JetBlue 29% Delta 21% American 17% Houston-Lubbock 124 Southwest 84% Continental 14% Southwest 53% United 41% American 6% Miami/FLL-Rochester, NY 120 AirTran 34% US Airways 24% Delta 18% JetBlue 15% Allegiant 28% Delta 26% Southwest 19% American 16% JBLU 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 50

51 Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which Competition* Increased From (Real Fares Down 20%, Passengers Up 23%) Calendar Year 2007 Share of BOS-CAK/CLE Passengers 63% 30% Calendar Year 2017 Share of BOS-CAK/CLE Passengers 47% 28% 12% 6% Source: DOT Data Bank 1B and Innovata published schedules via Diio Mi * Defined as carrying at least 5 percent of O&D passengers in the city pair 51

52 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,

53 2017 Was a Very Challenging Operating Environment for U.S. Airlines Major Weather (Storms/Wind/Heat/Ice) Jan 6-8, 10, Feb 9, 12-13, 17 Mar Apr 3, 5-8 May 1, 5, 22, 25 Jun 2, 14-15, Jul 10, 12-17, Aug 2-4, 15, 18, Sep 1-5, 7-15 Oct 8 (wildfires/visibility) Nov 3-5 Dec 8-9 Hurricanes (~33,000 cancellations) Harvey (Texas, Aug 25) Irma (Florida Keys, Sep 10) Maria (Puerto Rico, Sep 20) Construction Boston (BOS) Los Angeles (LAX) New York (JFK & LGA) Seattle (SEA) Security FLL shooting (Jan) LAS shooting (Oct) SJC breach (Aug) DAL fire alarm/evacuation (Dec) Air Traffic Control Understaffing at many major facilities* Critically low staffing at New York TRACON (N90)* Construction-related fire at FAA Washington Center (Jul) Power Outages U.S. Customs & Border Protection nationwide outage (Jan) San Jose airport ticket counters/baggage (Jan) Sabre computer systems nationwide (Feb) Sacramento airport (May) Atlanta airport fire (Dec) * Staffing is routinely cited as the basis for many traffic management initiatives (ground delay programs, ground stops, airspace flow programs, miles-in-trail) across the NAS Source: A4A research and masflight (subsidiary of Global Eagle) 53

54 Severe Hurricanes Disrupted August-September 2017 Airline Flight Operations ~33,000 Nationwide U.S. Domestic Flight Cancellations: August 18-September 24 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, Fri 8/ Sat 8/19 Sun 8/20 Mon 8/21 Tue 8/22 Wed 8/23 Thu 8/24 Fri 8/25 1,013 Sat 8/26 1,683 1,622 1,488 1,550 1,421 1,213 Sun 8/27 Mon 8/28 Tue 8/29 Wed 8/30 Thu 8/31 Fri 9/ ,033 Sat 9/2 Sun 9/3 Mon 9/4 Tue 9/5 Wed 9/6 Thu 9/7 Fri 9/8 1,991 Sat 9/9 Sun 9/10 Mon 9/11 1,949 Tue 9/ 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 Source: masflight 54

55 2017 U.S. Airline Flight Ops Impacted by Hurricanes, Airport and CBP Power Outages Best Ever Recorded Performance for Baggage Handling and Involuntary Denied Boardings Flight Completion Factor (%) On-Time Arrival Rate (%) Properly Handled Bag Rate (%) Involuntary Denied Boardings per 100K Psgrs Best ever Best ever 3.4 {By quarter: 6.2, 4.4, 1.5, 1.8} Sources: BTS and DOT Air Travel Consumer Report ( 55

56 In 2017, Customer Complaints Fell Again, Reaching Lowest Rate Since 2013 Customer Complaints to DOT per 100,000 Passengers Jan Feb Sources: DOT Air Travel Consumer Report ( 56

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

58 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 58

59 U.S. Airline Industry Headcount at Highest Level Since 2000 Year-End Full-Time + Part-Time Employees at U.S. Passenger and Cargo Airlines (000s) Feb Source: Bureau of Transportation Statistics Note: 2016 includes FedEx acquisition of TNT on May 25, 2016, which increased headcount by approximately 55,000 59

60 U.S. Passenger Airline Jobs Averaging Highest Level Since 2004 February 2018 Represented the 52 nd Consecutive Month of YOY Gains 525 U.S. Scheduled Passenger Airline Full-Time Equivalent Employees (000s) ,367 (27%) ,436 (13.8%) Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 60

61 For Three Years, U.S. Airline Job Growth Has Exceeded Overall U.S. Job Growth Airline Employment Growing at Double the Rate of Overall U.S. Employment 5 4 Year-Over-Year Change (%) (1) U.S. Airlines Overall USA (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 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Source: Bureau of Labor Statistics (U.S. nonfarm employment, CES ) and Bureau of Transportation Statistics (U.S. scheduled passenger airline FTEs) 61

62 U.S. Airlines* Spent $47B on Wages & Benefits in 2017 ($295B in ) Average Compensation per Employee Rose Approximately $34,000 Up 39% From 2010 Employee Wages and Benefits* Total ($Mils) Per FTE ($000) * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United and A4A Cost Index 62

63 U.S. Airline Wages Averaged 44% More Than U.S. Private Sector in 2016 From 2010 to 2016, Airline Wages Rose 37% (More Than Double 15% for Overall USA*) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Wages and Salaries (000) per Full-Time Equivalent Employee (FTE) U.S. Passenger Airlines $62.6 $50.3 $51.9 $38.9 U.S. Private Sector $ % differential $ Sources: BEA NIPA Table 6.6D and A4A Passenger Airline Cost Index 63

64 ACSI Airline Customer Satisfaction Index Down Slightly in 2018 Still Second Best Score in 25-Year History of Benchmark 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 Source: ACSI Travel Report 2018 ( 64

65 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 ( 65

66 51% of 2017 U.S. Flight Delays Were Attributable to National Airspace System (NAS) An Additional 5 Percent Were a Function of Extreme Weather or Security Issues National Airspace System, 51.2% 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, 4.4% Air Carrier, 44.1% 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 66

67 According to FAA, Flight Delays Cost the USA an Estimated $26.6B in 2017 More Than Half of Delay Costs Attributed to Passenger Value of Time 2017 Flight Delay Costs ($Billions) $14.8 $2.0 $3.4 $26.6 $ 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 67

68 2017 Operational and Financial Recap: U.S. Passenger Airlines» U.S. airlines carried 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 workers 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 spent 54% more on wages and benefits than 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 68

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