Signs of a structural improvement in airlines financial health?

Transcription

1 Signs of a structural improvement in airlines financial health? February 2016 Brian Pearce Chief Economist International Air Transport Association

2 % growth in traffic and ROIC as % invested capital Structural not cyclical gains (or just cheap fuel)? % growth in GDP Global GDP growth, airline industry ROIC and air traffic growth Growth in air travel and cargo volumes Airlines' return on capital Growth in global GDP (right scale) Source: ICAO, McKinsey, EIU, IATA

3 Passenger revenue, US$ billion Cargo revenues, US$ billion Travel business very strong, cargo very weak 800 Airlines revenues from passengers and cargo Revenue from tickets and ancillaries Revenue from cargo Source: ICAO, IATA

4 Index ratio, 2005 equals 1 Not all structural change is good 1.2 International trade compared to global industrial production Source: Netherlands CPB 4

5 % of invested capital Airline investors paid a normal return for 1 st time Return on capital invested in airlines Cost of capital (WACC) Return on capital (ROIC) Source: McKinsey, IATA 5

6 US$ billion Ending decades of investor capital destruction (?) Difference between investing in airlines and investing in similar assets elsewhere Source: McKinsey, IATA 6

7 And awful relative performance Source: McKinsey Software and services Pharma, biotech, and life sciences Household and personal Healthcare equipment and services Media Food, beverage, and tobacco Tech hardware and equipment Communications and professional services Semiconductors and equipment Telecom Postal/CEP Retailing Consumer services Consumer durables and apparel Bus Capital goods Food and staples retail Energy Contract logistics Materials Freight forwarding Rail Shipping Transportation & logistics Automobiles and components Trucking Utilities Airlines Annual return on invested capital,

8 Debt finance markets still sceptical of change AA+/- A+/- BBB+/- BB+/- B+/- ANZ, Qantas, Lufthansa, Ryanair, Southwest, Alaska, Westjet Delta, American, United, Allegiant, Spirit, BA, Turkish, LATAM Air Canada, Hawaiian, JetBlue, Avianca, GOL, SAS, Virgin Australia Investment grade Source: S&P, Airfinance Journal December 2015

9 2016 forward P/E ratio As are equity markets US transportation sector 43% Legacy airlines LCCs Trucking Rail Integrators Logistics Source: Datastream 9

10 ROIC improvement in 2014 was narrowly based Number of airlines in ROIC band % ROIC 2014 Q1-3 Source: The Airline Analyst, IATA Economics 37 airlines: ROIC>WACC 38% of industry capital

11 ROIC>WACC concentrated mostly in US in % 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% ROIC as a % invested capital, 2014 Average cost of capital N America Europe Asia Pacific LatAm ME Af Source: The Airlines Analyst, IATA Economics

12 But last year ROIC improvement spread Number of airlines in ROIC band airlines: ROIC>WACC 60% of industry capital % ROIC 2015 Q1-3 Source: The Airline Analyst, IATA 12

13 Returns rose in US, Europe and spread to Asia 45% ROIC as % invested capital, 2015 Q1-3 annualized 40% 35% 30% 25% 20% Average cost of 15% capital 10% 5% 0% -5% -10% -15% -20% N America Europe Asia Pacific LatAm ME -25% Source: The Airlines Analyst, IATA Economics

14 US$ billion Unprecedented FCF in the US Cash flow from operations, 2015 Q1-3 Capex, 2015 Q N America Europe Asia Pacific L America Source: The Airline Analyst, IATA Economics

15 Adjusted net debt, US$ billion Allowing significant balance sheet repair for some 2014 free cash flow and adjusted net debt airlines could repay all debt in next 5 years 10 5 Median airline $3 billion net debt -3% FCF/net debt 0-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Free cash flow as a % of adjusted net debt Source: The Airline Analyst, IATA 15

16 US cents per ATK % return on invested capital It s not just cheap fuel Fuel unit costs and airline return on capital Airlines return on capital Fuel unit cost Source: ICAO, McKinsey, IATA

17 % ROIC Suppliers mostly generate much better returns 30% Return on capital across the air transport supply chain 25% 20% % 10% 5% 0% Source: McKinsey for IATA 17

18 But this is not the main issue for airline earnings Average yearly economic profit, USD billion, (0.7) - (2.0) (2.5) 0.8 Estimate (19.4) (16.7) (18.0) Manufacturers Lessors MRO Ground Catering Airports ANSP Airlines CRS GDS Travel Agents Freight Forwarders TOTAL Source: McKinsey for IATA 18

19 Number of unique city-pairs US$/RTK in 2014US$ Most of the value created ends up with consumers 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Unique city-pairs and real transport costs Unique city pairs Real cost of air transport Source: ICAO, Boeing, OAG, IATA

20 % ATKs Step change in airlines asset use since the GFC Breakeven and achieved load factor (LF) Achieved LF Breakeven LF Source: ICAO, IATA 20

21 And the productivity of capital is improving Operating margin, % revenue Capital productivity, revenue/invested capital, US$ Capital productivity Operating margin Source: ICAO, McKinsey, IATA

22 % revenues Still driven primarily by the US 15% Operating profit margins by region, 2016 vs % % 0% -5% N America Europe Asia Pacific Middle East Latin America Africa Source: ICAO, IATA 22

23 Only a few generated economic profits consistently Ryanair Easyjet Emirates COPA Aeroflot Westjet Spirit Allegiant Wizz Alaska Vuelling Aegean Economic profit, cumulated Average ROIC 12.5% 11.8% 10.0% 12.5% 10.5% 9.6% 12.1% 24.1% 12.4% 7.6% 7.3% 8.7% Source: McKinsey for IATA Economic profit ((ROIC-WACC)*IC), US$ million 23

24 What differentiates the few? Route network with time advantages/high QSI A brand that consumers value in some way Cost advantage versus key competitors Less capital? Shorter-haul? 24

25 Are we measuring the right thing? Economic losses persisted for 70 years No apparent shortage of capital Operating cash flow covers leasing cost/depreciation Are aircraft really capital? Is WACC overstated? Are airlines doing better than we think? 25

26 BACK UP SLIDES 26

27 % change over previous year Wide variation in travel growth by country 25 Economic and passenger growth in 2015 to date GDP Pax -5 India China US Eurozone Brazil Russia Source: Datastream, IATA Statistics 27

28 Equity markets not always a good signal Index (January 2005 = 100) Bird flu outbreak Shanghai composite share Domestic China air passenger trips (seasonally adjusted) Int'l air passenger trips to/from China (seasonally adjusted) Source: Datastream, IATA 28

29 Partly driven by major exchange rate shifts Jet fuel price index (Jan 2014 = 100) 30 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: Datastream % changes in jet fuel prices since Jan 2014 Russian ruble: -23% Brazil: -40% Euro: -54% Indian rupee: -60% Chinese yuan: -61% US dollar: -63% 29

30 Premium slowing yield decline in some markets North And Mid Pacific Europe-Asia South Atlantic North Atlantic Europe-Southern Africa Europe-Middle East Within Asia Asia-Southwest Pacific Within Europe North-South America Each route's share of industry-wide premium revenues 12.4% 14.7% 3.2% 24.6% 4.4% 5.8% 8.4% 3.3% 4.2% 2.9% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% Change in premium's share of revenues (Nov'15 vs. Nov'14, %-point) Source: PaxIS+, IATA 30

31 Still vast potential in air travel marketes Air passenger journeys per capita (2014, log scale) Jordan Oman Iraq Iran Saudi Arabia UAE Kuwait UK Zoomed portion of chart US Germany Norway Qatar Air passenger journeys per capita (2014, log scale) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 GDP per capita (2014, US dollars) 1.0 'Normal' line B)...but a much bigger increase in trip frequencies is possible if the Iranian air market 'normalizes' over the coming years. Iran A) The expected increase in living standards in Iran now that sanctions have been lifted will underpin a rise in the average number of air journeys taken each year $0 $2,500 $5,000 $7,500 $10,000 GDP per capita (2014, US dollars) 31 B A