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 29, 2018

2 Contents» Economic Impact» Historical Air Transport Demand, Pricing and Financial Performance» 2018 Operations, Finances and Summer Air Travel Forecast» Eye on Supply» Affordability, Competition and Access to Air Travel» Reinvestment in People and Product» Customer Satisfaction» Flight Delays: Causes and Costs 2

3 ECONOMIC IMPACT 3

4 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) 4

5 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

6 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) 6

7 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 7

8 HISTORICAL AIR TRANSPORT DEMAND, PRICING AND FINANCIAL PERFORMANCE 8

9 By Almost Every Measure, Air Travel Has Improved Dramatically Since Deregulation Pre-Deregulation Today Safety Feared by many; fatality risk = 1 in 1M Safest travel mode; fatality risk = 1 in 29M Competition CAB allowed just 1 or 2 airlines per route CAB set fares, disallowed price competition No limit on number of carriers per route Vigorous price competition Affordability Avg. domestic R/T > $600 incl. fees ($2017) Average domestic R/T ~ $363 incl. fees Accessibility Accessible to affluent 63% had flown Luxury good; predominantly high-income Accessible to all 88% have flown Common form of intercity transportation Small-market service Often propeller aircraft, suboptimal times Widespread jets, market-driven flight times International service Flights, carriers, cities, sales limited by law Plentiful, cheaper due to Open Skies Routings & frequency Often multiple stops, few flights/day/week Plentiful nonstop/1-stop, multiple flights/day Shopping Phone calls, ticket offices, travel agents A few clicks online Ticket delivery By mail only Universally electronic, retrievable Checking in Lined up at the ticket counter Online, kiosk, mobile Inflight entertainment Occasional movie, far-away shared screen Unlimited options, streaming to PED Bag tracking No tools at customers disposal Mobile tools becoming universal Environmental impact Not very fuel efficient; more CO 2 per flight ~120% more efficient; avoidance of CO 2 Source: A4A and Patrick Smith, There Was No Golden Age of Air Travel, New York Times (May 27, 2017) 9

10 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) 10

11 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) 11

12 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+Anc 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) 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. 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) 14

15 In 2017, U.S. Airlines Needed to Fill 71 Percent of Seats to Avoid Losing Money Breakeven Load Factor Requirement Rose on Higher Unit Cost Breakeven Actual 83.5 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 = $23 Billion (0.6% of Revenues, $1.04 per Enplaned Passenger) Net Income ($ Billions) (20) (40) (60) (80) (100) (11.4) (65.0) Net Margin: 0.4% (3.3%) 3.8% (6.3%) 6.0% 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 6.6 Sources: U.S. Bureau of Economic Analysis, A4A Passenger Airline Cost Index and company SEC filings 18

19 2018 OPERATIONS AND FINANCES 19

20 1Q 2018 Was a Very Challenging Operating Environment for U.S. Airlines Major Weather Jan 3-5 ( bomb cyclone ) Jan 7-8, 12, 16-18, Feb 4-5, 7, 9, 11, 15, 20 Mar 2 (Winter Storm Riley northeaster) Mar 7 (Winter Storm Quinn northeaster) Mar 13 (Winter Storm Skylar northeaster) Mar (Winter Storm Toby northeaster) Power Outages/Airport Equipment Jan 1 (U.S. CBP) nationwide outage Jan 7 (JFK T4 water main break / evacuation) Air Traffic Control Understaffing at many major facilities* Critically low staffing at New York TRACON (N90)* Airport Construction Atlanta (ATL) Chicago (MDW & ORD) Dallas/Fort Worth (DFW) Honolulu (HNL) Houston (IAH) Los Angeles (LAX) Miami (MIA) New York (EWR & LGA) Orlando (MCO) Philadelphia (PHL) Phoenix (PHX) San Diego (SAN) Tampa (TPA) Washington (DCA) * 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, FAA Air Traffic Organization and masflight (subsidiary of Global Eagle) 20

21 1Q 2018 Featured the Lowest-Ever Recorded Rate of Involuntary Denied Boardings January-March Airline Flight Ops Impacted by Storms, Airport Construction, CBP Outage 1Q Involuntary Denied Boardings per 100K Psgrs. 1Q Flight Completion Factor (%) Best ever Q On-Time Arrival Rate (%) 1Q Properly Handled Bag Rate (%) Sources: BTS and DOT Air Travel Consumer Report ( 21

22 The Rate of Customer Complaints Continued to Fall in 1Q 2018 Customer Complaints to DOT per 100,000 Passengers Q15 1Q16 1Q17 1Q18 Sources: DOT Air Travel Consumer Report ( 22

23 Jet-Fuel Prices Creeping Up Again A Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses $3.50 Systemwide Average Paid Price of Jet Fuel per Gallon $3.00 $ $2.00 $1.50 $1.00 $0.50 $ Jan-Mar Source: A4A and Bureau of Transportation Statistics (all U.S. carriers, scheduled an nonscheduled services) 23

24 1Q 2018 Revenues Rose 7% But Expenses Rose 10%, Reducing Profitability Again Labor and Fuel Costs Continue to Surge, Pressuring Margins; Other Costs Rising, Too Change (%) in Operating Revenues and Expenses, 1Q18 vs. 1Q Pre-Tax Profit Margin (%) $2.03 vs. $ $2.5B 4.9 $1.9B (0.9) Pax Rev (1) Cargo Rev Other Rev (2) Total OpRev Labor Fuel Maintenance Airports Aircraft Other (3) Total OpExp 1Q17 1Q18 1. Traffic (revenue passenger miles) up 4.5 percent; yield (revenue per passenger-mile flown up 2.3 percent; U.S. CPI up 2.2 percent 2. Sale of frequent flyer award miles to airline business partners, transportation of pets, 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 24

25 In 1Q 2018, U.S. Passenger Airline* Profitability Well Below Average Pre-Tax Profit Margin (% of Operating Revenues) GE Ford Airlines (1) Nordstrom Chipotle Marriott Boeing Starbucks Caterpillar Comcast Honeywell Disney Apple Railroads (2) McDonald s 1 Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 2 CSX, Norfolk Southern and Union Pacific Source: Company SEC filings 25

26 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? 26

27 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 27

28 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) 28

29 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 29

30 Crude-Oil Prices Rising Swiftly, to Highest Level Since Late 2014 May 2018 Averaging 53 Percent More Than May 2017 $120 Spot Price* of Brent Crude Oil ($ per Barrel) $100 $80 $60 $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 ( 30

31 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) 31

32 A4A Projects Summer* 2018 Air Travel to Rise 3.7 Percent to All-Time High Airlines Adding 116,000 Seats/Day to Accommodate 96,000 More Passengers/Day U.S. Airline Onboard Passengers (Millions) Summer* and 2018 Forecast 2.68M/day (2.32M domestically, 354K internationally) + 3.7% F Drivers of growth Expanding presence of low-cost carriers, low-fare products and city-pair (O&D) competition Rising GDP, employment, disposable income and household net worth (savings, stocks, value of homes) Source: A4A and BTS T100 segment data U.S. carriers only; scheduled and nonscheduled services * For this purpose, defined as June 1 through August 31 32

33 Air Travelers Are Enjoying More Choices, More Available Seats Across the Atlantic Airlines Offering More Seats From U.S. Airports to Regions Across the Globe Ticket prices are down, interest is up and Europe is hot. David Solomito, VP, NA Marketing, KAYAK Change (%) in Scheduled Seats From USA by Destination, July 2018 vs. July (0.5) (1.6) Europe Mexico USA LatAm Canada S. Pac ME & Afr Asia Caribbean It s crazy. There are some real deals to be had here. Mark Okerstrom, Chief Executive, Expedia Group Sources: Innovata (via Diio Mi) published schedules (May 18, 2018) and Scott McCartney, Where the Travel Deals Are This Summer, Wall Street Journal (May 9, 2018) 33

34 EYE ON SUPPLY 34

35 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 3.5% YOY 3,500 3,000 2,500 2,000 2,584 2, , ,274 2,289 2,366 2, ,454 2, ,542 3, ,629 1,500 1,000 DOM +3.4% INT +3.9% SYS +3.5% Domestic International Source: Innovata (via Diio Mi) published schedules as of May 26, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations 35

36 Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years % Change in Scheduled-Service Seats Available: July 2018 vs. July (10) DAL AUS SJC FLL CVG SEA BNA PDX RDU OAK SAN MSY MCO IND SFO SMF BOS EWR BDL LAX OMA PBI ORD SLC CMH DEN JFK HOU BUR JAX PIT OGG RSW TPA SAT LAS ONT BWI ANC DFW MCI ATL IAH STL SNA DCA MSP IAD SJU PHL DTW MIA PHX CLT LGA HNL CLE MDW MKE ABQ BUF 1 0 (2) (6) Source: Innovata (via Diio Mi) published schedules as of May 18, 2018, for all airlines providing scheduled service * FAA large and medium hub airports 36

37 2018: Third Consecutive Year of Increased Seat Supply for Small U.S. Communities* New Jets, Sub-$100 Crude Oil and Adaptation to FAA Rules Affecting Pilot Supply Average Daily Flights Most in 5 Years Average Daily Seats Most in 10 Years 4,749 4,529 4,376 4,367 4,402 4, , , , , , , 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 May 18, 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 AFFORDABILITY, COMPETITION AND ACCESS TO AIR TRAVEL 39

40 When Choosing an Airline, Leisure Travelers Value Affordability Above All Else 2017 Rankings Identical to 2016 (Schedule Solidly Second, Followed by Reliability) When traveling for personal reasons, how would you rank the following in terms of choosing which airline to fly, with 1 being your first priority and 8 being your last priority? (Base = all 2017 flyers with at least 1 personal leisure trip) Criteria 2017 (2016) Score Affordability (airfare / ancillaries / taxes) 1 (1) 2.50 (2.65) Flight schedule (routes, timings) 2 (2) 3.12 (3.23) Reliability of on-time departure and arrival 3 (3) 4.22 (4.28) Airline seat comfort 4 (4) 4.54 (4.45) Customer service (reservation/gate agents, flight attendants) 5 (5) 4.82 (4.95) Airline frequent flyer program (earn / redeem / upgrade / status) 6 (6) 5.19 (5.00) Quality of inflight amenities (food / entertainment / WiFi) 7 (7) 5.32 (5.17) Environmental responsibility 8 (8) 6.28 (6.26) Source: Ipsos survey of American adults (January 2018) 40

41 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 Real Increase Real Decrease 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 Indoor Plants and Flowers 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 41

42 Inflation-Adjusted Fares Continued to Fall in 2017, Averaging Less Than in 2010 In Real Terms, Price of Domestic Air Travel Fell 12.5% in , 4.5% in Round-Trip Ticket Price ($2017)* $420 $400 $380 $360 $340 $ Fare Only Ancillary Source: A4A analysis of data from DOT Data Bank 1B (all cabins and fare basis codes) and DOT Form 41 via Airline Data Inc. * Excluding taxes 42

43 Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the Fastest Different Types of Carriers Market Their Prices and Services Differently 350 Spirit 300 Allegiant % Change in Capacity* Since Alaska JetBlue Sun Ctry AA/DL/UA Hawaiian Frontier (50) Southwest Source: Innovata (via Diio Mi) schedules as of May 26, 2018, for selected marketing airlines including predecessors * Systemwide scheduled available seat miles 43

44 Smaller U.S. Carriers Are Serving More and More Domestic Markets Competitive Presence of Low-Cost and Ultra Low-Cost Carriers Continues to Expand Number of U.S. Airports Served* Alaska Allegiant Frontier Hawaiian JetBlue Spirit Source: Innovata (via Diio Mi) schedules as of April 20, 2018, for selected marketing airlines including predecessors * July of each year 44

45 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] 45

46 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,

47 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) 47

48 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) 48

49 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) 49

50 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 50

51 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 51

52 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) 52

53 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 53

54 Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition* Increased From (Real Fares Down 20%, Passengers Up 78%) Calendar Year 2007 Share of BUR/LAX/LGB-SEA Passengers 64% 17% 8% 7% Calendar Year 2017 Share of BUR/LAX/LGB-SEA Passengers 52% 19% 8% 7% 7% 5% 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 54

55 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 55

56 REINVESTMENT IN PEOPLE AND PRODUCT 56

57 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) Mar Source: Bureau of Transportation Statistics Note: 2016 includes FedEx acquisition of TNT on May 25, 2016, which increased headcount by approximately 55,000 57

58 U.S. Passenger Airline Jobs Averaging Highest Level Since 2004 March 2018 Represented the 53 rd Consecutive Month of YOY Gains 525 U.S. Scheduled Passenger Airline Full-Time Equivalent Employees (000s) ,367 (27%) ,505 (14.1%) Source: Bureau of Transportation Statistics for scheduled U.S. passenger airlines 58

59 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) 59

60 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 60

61 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 61

62 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 62

63 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 63

64 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 64

65 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 65

66 Airline-Airport Collaboration Has Paved Way for Widespread Infrastructure Investment Capital Projects Have Grown 86% Since 2015 at the 30 Largest U.S. Airports» $130B of capital projects completed, underway or approved at the 30 largest U.S. airports since 2008, including, for example: o Multiple new runways at Chicago O Hare and new runways at Fort Lauderdale, Washington Dulles, Seattle and Charlotte o New/expanded/modernized facilities at NYC, Miami, Las Vegas, Orlando, Honolulu, Houston, Denver, Seattle, Salt Lake City and San Francisco plus international facilities at Atlanta, Boston and L.A.» Development is also robust at smaller airports, including: Investment at Largest Airports ($ Billions) $70 $100 $130 o Runway projects at Columbus, Des Moines, Erie, Nashville, Providence, Sioux Falls; terminal projects at New Orleans, Eugene, Grand Rapids, Greenville-Spartanburg, Oakland, Dallas Love Field, San Luis Obispo, Portland (ME), Pasco, Reno-Tahoe, Wichita» Investment is also occurring in cargo facilities and related infrastructure at Louisville, Newark, Lafayette (Louisiana), Indianapolis, Rockford, Memphis and elsewhere Approved Completed/Underway 66

67 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 67

68 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 68

69 CUSTOMER SATISFACTION 69

70 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,

71 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 ( 71

72 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 ( 72

73 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 ( 73

74 FLIGHT DELAYS: CAUSES AND COSTS 74

75 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 75

76 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 76

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