Airline Current Business Environment Alex Heiter Istanbul Technical University Air Transportation Management M.Sc. Program Network, Fleet and Schedule Strategic Planning Module 2: 28 March 2016
The underlying dynamics of our industry Fleet Capacity Growth Airline Profitability Airline Capacity Decisions Economic growth Fleet Capacity Requirement Traffic growth Parked Airplanes New Airplanes Used Airplanes Long term Delayed Retirement Liberalization Exogenous shocks Utilization Short term Low High Capital intensity to adjust capacity 2
World Business Environment Key Developments Indicator 2015 2016 2017 Updates Economic environment (GDP growth, Trade volumes, Oil prices, Exchange rates, Financial markets) Geopolitical environment (Gov t actions, Regional conflict) Passenger demand (Traffic volumes, Yields) Passenger Capacity (Airline schedules, Parked fleet, Utilization rates, Load factors) Air cargo demand (Traffic volumes, Yields) Air cargo capacity (Parked fleet, Utilization rates, Load factors) Airline financials (Industry profitability, Airline performance, Airplane financing) Global GDP growth below trend 2016 but stronger service sectors support traffic China transition continues: industry weaker, consumption/services stronger US Dollar strength impacting travel patterns, airline financials Brent oil at ~$35/bbl, volatile; mid-term (5+ year) outlooks for $80+/bbl Financial market volatility potential risk to consumer sentiment Export-Import Bank board quorum unlikely in the near term Iran nuclear deal implemented but hurdles remain U.S. and Cuba agree to restore scheduled flights Traffic up 5.4% in December, +6.5% in 2015 (IATA) Outlook for continued at/above long-term average Global capacity growth stable at ~6%, regional variation Load factors, utilization near/at record highs Parked fleet stable, slightly up due to Transaero Traffic up 0.8% in December, +2.2% in 2015 (IATA) Outlook: growth in 2016 but below long-term average Significant variation between regions Large freighter utilization at/near prior peaks Parked current-generation airplanes Airlines managing economic uncertainty, volatile fuel prices Airline industry net margins doubled to 4.6% in 2015; 2016 forecast ~5% North America over half industry profitability 3
World Economic Outlook European Union 2015 2016 2015-25 CAGR 1.8% 1.8% 1.8% United States 2.4% 2.4% 2.4% China Japan Other Asia LatAm ex. Brazil MidEast Brazil Russia and CIS India Other Europe Africa Canada Australia/NZ World Growth: 2014 2.6% 2015 2.4% 2016 2.5% 2017 3. 2015-2025 3.1% Based on IHS Monthly Interim Forecast (February 2016 Update Annual Real GDP) Note: China includes Hong Kong and Macau. China s stand alone growth rates: 2015 6.9%, 2016 6.3%. 6.7% 0.6% 3.4% 1.7% 2.5% -3.7% -2.9% 7.5% 2.2% 2.7% 1.2% 2.4% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 2014 GDP, Billions real (2010) U.S. Dollars 6.2% 0.9% 3.4% 1.5% 2.2% -3.7% -1.2% 7.5% 2.1% 2.7% 1.3% 2.1% 6.1% 0.9% 3.9% 2.9% 3.9% 1.7% 2.4% 7.3% 2.4% 3.8% 2. 2.6% Growth to remain muted in 2016, acceleration in 2017 4
Real GDP growth in % Emerging Markets Real GDP Growth Outlook 20.0 15.0 forecast 10.0 5.0 0.0-5.0-10.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 all Emerging Markets Brazil Russia India China Source: IHS Economics, February 2016 forecast Russia, Brazil slowing Emerging Market growth in the near term 5
Real GDP growth in % Advanced Economies Real GDP Growth Outlook 6.0 4.0 forecast 2.0 0.0-2.0-4.0-6.0-8.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 all Advanced Economies United States Japan Eurozone Source: IHS Economics, February 2016 forecast Economic growth slightly accelerating in Advanced Economies 6
World Economic Outlook GDP growth slightly up in 2016 Main drivers: oil, monetary stimulus, U.S. economy Risks: financial markets Advanced economies improving Emerging markets mixed 5 4 3 2 1 0-1 -2 Real annual GDP Growth (%) Long-term average Forecast 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Economies leaving Great Recession era Outlook supports traffic growth Uncertainty remains elevated! Watch items: Geopolitical hotspots Oil/FX volatility China spillovers Success of monetary policy Source: IHS (February 2016 Interim Forecast) Global economic growth slow in 2016, accelerating in 2017 7
World Trade 200 Volume Index (s.a. 2005 = 100); indicator of world merchandise trade 180 160 140 120 100 80 60 40 20 0 Emerging Markets World Trade Advanced Economies Source: Netherlands Bureau for Economic Policy Analysis (http://www.cpb.nl/eng/research/sector2/data/trademonitor.html) International trade weakness since start of year BOEING PROPRIETARY 8
Consumer Confidence United States 110 100 90 80 70 60 50 40 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 120 110 100 90 80 70 60 50 40 European Union Economic Sentiment Indicator Consumer Component 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0-5 -10-15 -20-25 -30-35 Japan 55 50 45 40 35 30 25 20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 China 120 110 100 90 80 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Confidence around decade-high in US, improving Sources: Global Insight, in EU European Commission BOEING PROPRIETARY 9
Exchange Rates 135 Monthly Average Exchange Rates /$ /$ 125 115 105 122 0.92 1.10 1.00 0.90 95 0.80 85 - USD strengthening 0.70 - USD weakening 75 0.60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Pacific Exchange Rate Service; Last data point for monthly average: February 2016 U.S. dollar strength continues BOEING PROPRIETARY 10
Oil and jet fuel prices 200 180 160 140 120 100 80 60 Avg Ann Prices 2008 $97 2009 $62 2010 $80 2011 $111 2012 $112 2013 $109 2014 $99 2015 $52 2016 $34 $/Barrel (Brent Crude Oil) Jet Fuel $/gallon (US Gulf Coast Jet Fuel) Forecasts EIU IHS PIRA 4.50 4.00 3.50 3.00 2.50 2.00 1.50 40 OxEcon 1.00 20 Brent Crude Oil 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0.50 0.00 Oil price forecasts are nominal annual average prices for 2015-18 Historical data source: EIA Volatility returns, mid-term price outlooks $70-80/bbl BOEING BOEING PROPRIETARY 11
World Passenger Traffic and Capacity 15% YoY Growth World 15% YoY Growth US Domestic 1 ASK RPK 1 5% 5% -5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15-5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 15% YoY Growth Europe 15% YoY Growth Asia Pacific Int l 1 1 5% 5% -5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15-5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: ATA, AEA, AAPA, IATA, ALTA, CAAC, airline reports, Boeing market analysis All major regions performing well in October BOEING PROPRIETARY 12
Emerging Market Traffic and Capacity YoY Growth 25% 2 15% 1 5% -5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: CAAC China 35% 3 25% 2 15% 1 5% -5% India YoY Growth (Pax) Dom Intl Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Source: Airports Authority of India Latin America Middle East Int l 25% 2 YoY Growth ASK RPK 25% 2 YoY Growth 15% 15% 1 1 5% 5% -5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: ALTA -5% Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: IATA Strong performance in emerging markets but LatAm slowing BOEING PROPRIETARY 13
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F Near-term Traffic Outlook Passenger and Cargo Passenger traffic Air cargo traffic 2 Annual Growth Annual RPKs (trillions) 7 2 Annual Growth Annual RTKs (billions) 300 15% 6 15% 250 1 5 1 200 5% 4 5% 150 3-5% 2 100-1 1-5% 50-15% 0-1 0 Passenger traffic resilient, renewed cargo market weakness 14
Passenger Capacity World Load Factor 9 Airlines adjusting capacity in response to demand, route profitability Load factors are at or near record 85% 8 2015 2013 2014 2010 2011 2012 highs throughout the year; March should just be an anomaly due to Easter timing 75% 7 2000 Parked fleet - typical seasonal trends 65% Utilization near peaks, single aisle more seasonal 6 J F M A M J J A S O N D Global passenger capacity growing broadly in balance with traffic 15
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F Passenger demand Passenger Traffic Emerging markets GDP, middle 2 Annual Growth Annual RPKs (trillions) 7 class growth 15% 6 New airline business models 1 5 Demographics support leisure travel 5% 4 3 Air travel relative affordability -5% 2 Business travel revenue focus, travel -1 1 intensive sectors outperforming -15% 0 Source: ICAO, BCA Passenger traffic resilient due to multiple factors 16
Passenger Load Factors 9 85% 8 75% 7 65% 6 Load Factor World 2015 2013 2014 2012 2011 2008 J F M A M J J A S O N D 9 85% 8 75% 7 65% 6 Load Factor US Domestic J F M A M J J A S O N D 9 85% 8 75% 7 65% 6 Load Factor Europe 9 85% 8 75% 7 65% 6 J F M A M J J A S O N D J F M A M J J A S O N D BOEING PROPRIETARY Load Factor Asia Pacific Int l Record high load factors from traffic growth, capacity discipline 17
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F Air cargo demand Traffic recovery began 2Q2013 Significant regional variation Large freighter utilization recovering Load factors improving, yields pressure easing 2 15% 1 5% Air cargo traffic Annual Growth Annual RTKs (billions) 300 250 200 150 100-5% 50-1 0 Near-term cargo market challenges, long-term growth market 18
World air cargo traffic recovering since mid-2013 4 3 % Monthly Change YoY 12-Month Rolling Average 2 1-1 -2-3 -4 Sources: IATA Carrier Tracker (industry international scheduled freight) and A4A US domestic cargo traffic. Air cargo traffic down -0.9% in November 2015 YoY, up 2.6% YTD 19
Thousands The strength of the air cargo recovery varies by region of airline domicile and/or business model Air cargo traffic up 2.6% YTD 2,600 2,400 2,200 2,000 November 2015 year-to-date 12-month rolling average shows 2.9% increase 1Q was stronger with 5.1% growth, 2Q increased 2.5%, while 3Q was slower at 0.7% growth 4.5% growth in 2014 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - (200) Africa Asia Pacific PRC Carriers Europe Express Carriers* Latin America Middle East North America (400) Sources: IATA Carrier Tracker (Industry international scheduled freight), A4A US domestic cargo traffic, and Boeing analysis * Fedex and UPS freighter flown statistics only per A4A 20
Airline revenues and costs 800 700 600 500 400 300 200 100 0 $ (billions) $/ATK Fuel Exp Non-Fuel Exp Revenues $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 Unit Revenue Unit Cost Unit Cost ex Fuel 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F Source: IATA, December 2015 Financial Forecast & BCA Market Analysis Airlines generating strong revenue growth, managing non-fuel costs BOEING PROPRIETARY 21
International Fare Development $900 $850 $800 $750 $700 $650 International Fare Per Transaction ($) USGC Oct Jet Fuel Price 2013 $2.89 2014 $2.46 2015 $1.39 $600 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 2012 2013 2014 2015 Data source: ARC Settlements and Operations statistics http://www.arccorp.com/news/sales-document-statistics-archive.jsp Average international fares at lowest level in 4 years BOEING PROPRIETARY 22
Commercial parked fleet trends December 2015 Total Parked Fleet In-Production Parked Fleet 2,500 # of Aircraft % of Fleet 15% 500 # of Aircraft % of Fleet 3.5% 2,000 12% 450 400 3. 350 2.5% 1,500 9% 300 2. 250 1,000 6% 200 1.5% 500 3% 0 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 150 1. 100 0.5% 50 0 0. Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 AC Types Included: All Western-built Jets > 90 seats Airplane types included: 737NG, 747-8, 767, 777, 787, A320 Family, A330, A350 and A380 2,313 airplanes parked at year-end 2015 9.45% of total fleet and 2.7% of in-production fleet parked 23
Airplane Utilization Trends (thru September 2015) Flight Hours Per Day (12-month moving average) Single Aisle Passenger Twin Aisle Pax and Freighter 9.5 12.5 9.0 Passenger 12.0 11.5 Passenger 8.5 11.0 8.0 10.5 7.5 10.0 9.5 Freighter 7.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Single Aisle Passenger includes 717, 737 and 757 (all variants) 9.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Twin Aisle passenger Large Freighters include 777Fs and 747 Fs (-400Fs and 8Fs) Passenger and freighter utilization stable at record levels 24
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F Airline industry operating profitability $60 Operating Profit/Loss (Billions) Operating Margin 12% $50 1 $40 8% $30.. 6% $20 4% $10 2% $0 ($10) -2% ($20) -4% Source: ICAO (1980 2013) and IATA December 2015 (2014-15) Airlines managing economic uncertainty, volatile fuel prices BOEING PROPRIETARY 25
Regional profitability outlook 20 15 19.4 Net Profit (billions $) 2014 2015E 2016F 10 5 6.9 5.8 0 1.4-0.3-0.3-5 N. Amer Europe Asia MidEast LatinAm Africa Source: IATA, December 2015 North America leading industry profitability BOEING PROPRIETARY 26
Regional profitability 16% 14% 12% 1 8% 6% 4% 2% -2% -4% EBIT Margin, % revenues 14.3% 6.6% 5.3% 2.9% 2014 2015 2016F 1.3% -1.7% N. Amer Europe Asia MidEast LatinAm Africa Source: IATA, December 2015 North America leading industry profit margins BOEING PROPRIETARY 27
Business Environment Near-term Baseline outlook for improving global economic 2016+ High oil price volatility/uncertainty returns, price outlook for recovery into mid-term Global passenger traffic growing at/above long-term average rate; emerging markets leading Airlines adding capacity in response to traffic growth; adjusting networks with focus on profitability Air cargo traffic cyclical downturn after strong 2014, expected to recover in 2016, capacity metrics up Airline profit outlook very good due to low fuel prices, North American airlines leading Airlines restructuring networks, fleets, partnerships, and driving down controllable costs Industry is healthy despite ever-present challenges BOEING BOEING PROPRIETARY 28