Cycle turns up but risks and structural challenges remain September 2010 Brian Pearce www.iata.org/economics To represent, lead and serve the airline industry
Confidence was still high in July survey Airline CFO question: what change in profits do you expect 100 90 80 70 60 50 40 30 20 0 10 Last Three Months Next Twelve Months Mar 2006 Sep 2006 Apr 2007 Oct 2007 Apr 2008 Oct 2008 Apr 2009 Oct 2009 Apr 2010 Weighted Score (50 = No Change) Source: IATA
Markets rebound from Great Recession International air freight and passenger volumes seasonally adjusted 260 14 240 RPK 13 RPK, billions 220 200 FTK 12 11 FTK, billions 180 10 160 9 2005 2006 2007 2008 2009 2010 Source: IATA
World trade slowing but still above trend 14 World trade in goods and air FTKs Source: Netherlands CPB and IATA 170 Billion FTKs 13 12 11 10 9 International FTKs (left scale) World goods trade volumes (right scale) 160 150 140 130 120 110 100 index of world trade, 2000=100 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 90
Air travel driven by business passengers 25 Premium passengers and world trade growth Source: IATA, CPB Netherlands 20 15 Developed countries trade in goods 10 5 0-5 -10 Premium passenger numbers -15-20 -25-30 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: IATA Premium Traffic Monitor % change over year
Business confident, consumers less so Inxdex to 100 in 2007 105 100 95 90 85 80 75 70 65 Business and consumer confidence in major economies Business confidence Consumer confidence 60 2006 2007 2008 2009 2010 Source: JP Morgan/Markit and Haver
Consumer confident in emerging markets Consumer confidence Source: Haver Analytics Balance expecting improvement, index 120 100 80 60 40 20 US Europe (right scale) China 0-5 -10-15 -20-25 -30 Balance expecteting improvement, net % 0 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010-35
Large geographical differences in travel Change over year 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Growth in passenger numbers by flight segment Within Asia North & Mid Pacific Middle-East - Asia North Atlantic -25% 2007 2008 2009 2010 Source: IATA Premium Traffic Monitor
Freight market growth converging 60% 50% International Freight growth by major routes Source: IATA ODS North and Mid Pacific 40% 30% Within Far East 20% 10% 0% -10% North Atlantic YoY Growth -20% -30% Europe - Far East -40% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Source: IATA
Fares rebounding but so are fuel prices 420 Average international fares and jet kerosene prices 450 400 Jet kerosene price (right scale) 400 US$ per one-way fare 380 360 340 Average one-way international fare (left scale) 350 300 250 200 US cents per gallon 320 150 300 100 2006 2007 2008 2009 2010 Source: IATA and Platts
Yields up 45% from Asia, flat from Europe 1.6 1.6 1.5 Global Total Europe (RHS) to North America SE Asia to Europe (RHS) Air Freight Yields US$ per Kilo Source: IATA CASS 3.4 2.9 1.5 1.4 2.4 1.4 1.9 1.3 1.3 1.4 1.2 1.2 0.9 1.1 0.4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2
Asset utilization not as good as it appears 80% Aircraft utilization and passenger load factor 11.6 79% Twin aisle utilization 11.4 Passenger load factor, % ASKs 78% 77% 76% 75% 74% 73% Passenger load factor 11.2 11.0 10.8 10.6 Aircraft utilization, daily hours 72% 10.4 71% 2005 2006 2007 2008 2009 2010 10.2 Source: IATA
Utilization of freighters looks much better 58% Freighter utilization and freight load factor 11 Freight load factor, % AFTK 56% 54% 52% 50% 48% 46% 44% 42% Freight load factor Freighter utilization 10.5 10 9.5 9 8.5 8 Freighter utilization, daily hours 40% 2005 2006 2007 2008 2009 2010 7.5 Source: IATA, Boeing
Operational cash flow rebounds (partly) 20% 15% EBITDA as % revenues seasonally adjusted Asia-Pacific airlines % revenues 10% 5% US airlines European airlines 0% -5% 2005 2006 2007 2008 2009 2010 Source: Bloomberg
Business inventory cycle boost ending 1.6 1.4 1.2 1 Total Business inventories to sales ratio and FTKs Source: US Census Bureau and IATA Inventories to sales ratio FTKS 18 17 16 15 14 13 12 11 10 9 0.8 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 8 Source: IATA Cargo echartbook
Large reversal of fiscal stimulus ahead 500 US federal budget position, $ billion 0-500 -1000 US$ billion -1500 Bank bailout & fiscal stimulus -2000 2010 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: US CBO
Europe exposed to govt debt pressures 1000 Credit Default Swap Spreads basis points 900 800 700 600 500 400 300 200 100 0 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Greece Portugal Spain UK Germany US Source: Haver
Western consumers also in bad shape 11 Consumer debt-income and unemployment in the US 1.4 Unemployment rate 10 9 8 7 6 5 4 Consumer debt Unemployment 1.3 1.2 1.1 1.0 0.9 Household debt-income ratio 3 1997 1999 2001 2003 2005 2007 2009 0.8 Source: Haver
Developed economies to weaken in 2011 % change over year 8 7 6 5 4 3 2 1 2010 2011 Forecasts for GDP growth source: EIU 0 US Japan Europe ASPAC ex Japan Middle East North Africa Latin America World Source: EIU
Source: IATA Volumes will slow, revenues slow further 25 Growth in air cargo volume and world trade 20 Cargo growth % change over year 15 10 5 0-5 World trade in goods growth -10-15 1999 2001 2003 2005 2007 2009 2011F
Fuel prices appear range-bound Jet Fuel and Crude Oil Price ($/barrel) Source: Platts, bloomberg 200 180 160 140 Jet Fuel 120 100 80 60 40 Forward curve 20 Crude oil (Brent) 0 2003 2004 2005 2006 2007 2008 2009 2010
Capacity now coming out of storage Aircraft Retirements and Deliveries Source: Ascend Deliveries Retirements Storage 130 90 50 10-30 -70-110 Monthly Average Jul-10 2006 2007 2008 2009 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-10 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Aircraft per month
Passenger fleet utilization will rise 8.6 Daily hours of aircraft utilisation seasonally adjusted 11.6 8.5 8.4 Twin aisle 11.4 11.2 Single aisle, hours 8.3 8.2 11.0 10.8 Twin aisle, hours 8.1 Single aisle 10.6 8.0 10.4 7.9 10.2 2005 2006 2007 2008 2009 2010 Source: IATA
Delivery of new capacity set to rise Annual deliveries 1600 1400 1200 1000 800 600 400 Scheduled deliveries of new aircraft, jets and turboprops Other Middle East North America Europe Asia Pacific 200 0 2004 2005 2006 2007 2008 2009 2010 2011 Source: Ascend
So yield gains likely to stall in 2011 105.0 Global revenues/tkp, costs/tkp and fuel cost/tkp 35.0 100.0 95.0 Fuel cost/tkp (right scale) Yield 30.0 25.0 90.0 85.0 80.0 75.0 70.0 65.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Cost per TKP 2008 2009 2010 2011 20.0 15.0 10.0 5.0 0.0 Source: ICAO, IATA
Profits cycle up in 2010 but slips in 2011 8.0 6.0 4.0 Global commercial airline profitability EBIT margin (left scale) 20 15 10 % revenues 2.0 0.0-2.0 5 0-5 US$ billion -4.0-6.0 Net losses (right scale) -10-15 -8.0-20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F Source: IATA
Asia strongest, Europe weakest 6 Airline net profits by region 4 2009 2010 2011 2 US$ billion 0-2 -4-6 Europe Asia-Pacific N America L America Middle east Africa Source: ICAO, IATA
Still unable to deliver normal returns 14.0 12.0 Return on invested capital in the airline industry vs the cost of capital Forecast % of invested capital 10.0 8.0 6.0 4.0 Cost of capital (WACC) 2.0 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F 2011F Return on capital (ROIC) Source: IATA