Air Service and Airline Economics in 2018 Growing, Competing and Reinvesting John P. Heimlich, VP & Chief Economist Presentation to the CAAFI Biennial General Meeting December 5, 2018
The ~720,000 Employees* of U.S. Passenger and Cargo Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods 27,000 daily flights to/from 800+ airports in nearly 80 countries 2.3 million passengers per day 55,000 tons of cargo per day Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines * Headcount as of July 2018 2
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) 1,000 40 35 800 30 600 25 20 400 15 200 10 5 0 0 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines) 3
In 2014-2018, Domestic Airline Capacity Grew at Twice the Rate of the U.S. Economy 6 (Airlines 4.8%, Economy 2.3%) 5 4 3 2 1 0 5.3 5.1 (Airlines 1.3%, Economy 2.0%) 4.9 4.0 2.9 2.6 2.5 2.5 2.2 2.2 1.8 1.6 2.3 1.6 1.6 1.6 1.1 0.2 2010 2011 2012 2013 2014 2015 2016 2017 2018 Domestic Airline Capacity (ASMs) Real US GDP Source: Bureau of Economic Analysis and published airline schedules via Diio Mi 4
Customers Will See All-Time High of 3.07M Daily Seats Departing U.S. Airports Daily Seats (000) Departing U.S. Airports: Up 4.2% YOY in 2018 and 3.6% in 1H 2019 3,500 3,000 2,500 2,000 2,584 2,620 310 330 2,717 351 2,274 2,289 2,366 2,823 368 2,454 2,932 390 2,542 3,056 3,019 405 401 2,651 2,618 3,128 415 2,713 1,500 1,000 500 0 2013 2014 2015 2016 2017 2018 1H18 1H19 Domestic International Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations 5
Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the Fastest Different Types of Carriers Market Their Prices and Services Differently 400 350 Spirit % Change in Capacity* Since 2007 300 250 200 150 100 50 0 Allegiant Alaska JetBlue Sun Ctry AA/DL/UA Hawaiian Frontier (50) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Southwest Source: Innovata (via Diio Mi) schedules as of Oct. 5, 2018, for selected marketing airlines including predecessors * Systemwide scheduled available seat miles 6
From 2000-2017, Global Network Carrier Domestic Share Fell From 73% to Just 53% Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model 9 10 10 11 12 13 13 15 16 16 17 18 19 19 20 21 22 23 24 18 19 20 21 21 21 22 23 24 25 25 25 25 24 24 24 24 24 23 73 71 69 68 67 67 65 62 60 59 58 57 57 57 56 55 54 53 53 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18 Global Network (AA, DL, UA) 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] 7
Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 78%) 2007 O&D Passenger Share 2017 O&D Passenger Share 64% 17% 8% 7% 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 between BUR/LAX/LGB and SEA 8
Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 23%) 2007 O&D Passenger Share 2017 O&D Passenger Share 63% 30% 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 between BOS and CAK/CLE 9
YTD 3Q18 Expenses Rose Faster Than Revenues, Reducing Profitability Yet Again Carriers Under Cost Pressure in Every Major Category, Driving Margins Lower in 2018 Change (%) in Operating Revenues and Expenses First Nine Months 2018 vs. First Nine Months 2017 Pre-Tax Profit Margin (%) YTD 3Q Four-Year Trend 33.9 6.5 15.8 12.4 7.0 5.9 $2.20 vs. $1.70 2.7 6.5 3.2 8.6 12.0 15.6 15.5 12.1 8.2 Pax Rev (1) Cargo Rev Other Rev (2) Total OpRev Labor Fuel Maintenance Airports Aircraft Other (3) Total OpExp $18.7B 2015 $18.3B 2016 $14.9B 2017 $10.8B 2018 1. Traffic (revenue passenger miles) up 4.8 percent; yield (revenue per passenger-mile flown) up 1.6 percent; U.S. CPI up 2.5 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 10
Airlines Recovered $0.68 in Revenue for Every $1.00 Increase in Operating Costs Fuel Alone Accounted for 57 Percent of the Year-Over-Year Increase in Costs Change ($ Millions) in Revenues and Expenses First Nine Months 2018 vs. First Nine Months 2017 $8,668 Other Passenger 1 Cargo $12,767 Other Labor Fuel 1 ~75% traffic-driven 2 ~90% price-driven 2 Aircraft Airports Maintenance ~ $70M/Day ($4,099) Op Revenues Op Expenses Op Profits Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United 11
Even in Best Years, Profitability of U.S. Airlines Lags U.S. Corporate Average Pre-Tax Profit Margin (%) Gap Widened in 2016 and 2017, Widening Further in 2018 20 15 10 5 15.2 8.2 0 (5) (10) (15) (20) U.S. Recession U.S. Passenger Airlines All U.S. Corporations (25) 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: ATA Annual Reports (1970-1976), A4A Passenger Airline Cost Index (1977-present); Bureau of Economic Analysis Note: Recessions highlighted in gray 12
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 $2.50 3.05 3.15 3.01 2.86 $2.00 $1.50 $1.00 $0.50 $0.00 2.27 1.86 1.66 1.70 1.46 0.81 2.14 2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan-Sep Source: A4A and Bureau of Transportation Statistics (all U.S. carriers, scheduled an nonscheduled services) 13
Crude-Oil Prices Surged Through October, Plunging in November October 2018 Averaged 41% More Than October 2017; Remain Highest in Four Years $120 Spot Price* of Brent Crude Oil ($ 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 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm) 14
Airlines Utilize a Wide Array of Tools to Minimize Fuel Consumption o Continue to replace older (often smaller) aircraft with typically larger, next-generation or re-engined aircraft o Deploy state-of-the-art flight planning/navigation software to optimize airborne movement of aircraft o Utilize taxi-management technologies and single-engine taxi to minimize ground-based fuel burn o Consistently employ ground power while parked at gate instead of aircraft auxiliary power unit (APU) o Reduce onboard weight (e.g., lighter materials/structures, inflight entertainment systems, excess fuel) 15
Substantial U.S. Airline Capital Investment* Has Continued in 2018 Despite Waning Profits Bringing Total for This Business Cycle to $115 Billion U.S. Passenger Airline Capital Expenditures* ($ Billions per Year) 15.5 13.8 7.7 6.6 5.8 5.2 6.6 9.8 12.5 13.9 17.0 17.5 19.9 Included > 450 aircraft 13.0 2000 2001 2002 2003-08 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan-Sep * 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 16
Infrastructure Investment Is Robust and Growing at Airports of All Sizes U.S. Airport Capital Expenditures ($ Billions) by FAA Hub Size 12.7 8.9 8.9 1.1 1.1 1.0 1.0 1.1 1.0 9.8 1.2 1.1 1.0 10.3 1.0 1.0 1.3 1.1 1.1 1.7 5.6 5.7 6.4 6.9 8.7 2013 2014 2015 2016 2017 Large Medium Small Non Source: FAA Form 5100-127 reports, section 10: Capital Expenditures and Construction in Progress 17
Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years % Change in Scheduled-Service Seats Available: 2018 vs. 2013 80 70 70 60 50 40 30 20 10 0 (10) 57 56 51 45 44 43 35 35 35 33 33 32 32 31 30 30 29 26 25 24 24 24 24 22 22 22 21 20 20 19 19 18 17 16 16 15 15 14 14 12 11 10 9 9 9 9 9 8 7 7 5 5 5 3 2 1 1 (2) (3) (4) DAL AUS SJC FLL SEA CVG BNA MCO RDU MSY PDX BOS SMF SAN OAK SFO IND LAX EWR RSW OMA SLC CMH BUR BDL TPA OGG JFK ORD PBI DEN JAX ONT PIT HOU LAS BWI SAT MCI STL ANC ATL SNA IAH DFW DTW MSP DCA MIA PHX CLT IAD LGA HNL PHL MDW MKE CLE BUF ABQ SJU Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled service * FAA large and medium hub airports 18
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 47 48 53 56 8 15 45 38 20 22 27 22 2005 2010 2015 2018 50 Seats 51-100 Seats > 100 Seats Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017 19
In 2017, the Average Airline Flight Departing a U.S. Airport Traveled 16 Percent Farther and Carried an 19 Percent Larger Payload Than It Did in 2007 1,000 40,000 900 844 38,000 Average Stage Length (Miles) 800 700 600 500 400 300 200 726 29,675 35,354 36,000 34,000 32,000 30,000 28,000 26,000 24,000 Average Payload (Pounds) 100 22,000 0 2007 2017 20,000 Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017 20
Jet-Fuel Demand Growth at U.S. Airports Varied Widely From 2007 to 2017 % Change in Gallons Dispensed at 65 U.S. Airports: 2007 to 2017 175 94 Changes in law (DAL Wright Amendment, DCA-perimeter rule) Airline change of hubs (AA-PIT/STL, UA-CLE, DL-MEM) Airline focus city growth (B6-BOS, B6/NK/WN-FLL) Organic economic/tourism growth (AUS, BNA, DEN, Hawaii) Growth of international flights (BOS, HOU, JFK, SJC) Amazon (cargo) effect (CVG) Fuel-efficiency gains (aircraft, flight mix IAD, PDX) DAL LIH AUS MSY CLT FLL KOA ITO SEA BOS SFO SJC CVG DCA OGG LAX MIA JFK SAN DFW HOU SLC TUL BWI BNA HNL LGA MCO DEN SAT IAH RDU RSW EWR ONT DSM MEM IAD PDX MSP ATL PIT ORD DTW SMF LAS PHX BUF MDW TPA PHL SNA OAK COS MCI ELP ORF RNO ROC MKE STL (0) (3) (3) (4) (5) (6) (6) (6) (6) (6) (8) (10) (11) (13) (14) (16) (17) (20) (20) (20) (23) (28) (29) (30) 42 40 39 36 35 33 33 26 25 22 21 20 20 17 17 16 12 11 11 10 10 8 8 7 7 7 6 5 4 4 2 1 0 62 57 Source: A4A Fuel Portal 21
Total U.S.-Based Jet Fuel Demand 1 Back to 2000 All-Time High 1,800 U.S. Product Supplied 2 of Kerosene-Type Jet Fuel (Thousand Barrels per Day) 1,600 1,400 1,200 1,000 800 600 400 842 771 791 789 831 858 876 851 809 804 839 953 1,005 1,105 1,181 1,236 1,284 1,340 1,296 1,310 1,357 1,480 1,497 1,575 1,598 1,623 1,675 1,725 1,656 1,621 1,578 1,630 1,679 1,633 1,622 1,539 1,393 1,432 1,425 1,398 1,434 1,470 1,548 1,614 1,682 1,720 200 0 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1 Jet fuel supplied within the United States to all users (i.e., U.S. and foreign airlines, recreational and business aviation, civilian government, military) 2 Per EIA, approximates consumption by measuring the disappearance of these products from primary sources (i.e., refineries, natural gas processing plants, blending plants, pipelines, bulk terminals). Generally computed as follows: field production, plus renewable fuels and oxygenate plant net production, plus refinery and blender net production, plus imports, plus net receipts, plus adjustments, minus stock change, minus refinery and blender net inputs, minus exports. Source: U.S. Energy Information Administration 22