Global commercial airline industry outlook March 213 update Brian Pearce Chief Economist www.iata.org/economics To represent, lead and serve the airline industry
Monthly RPK (Billions) Monthly FTK (Billions) Travel and air freight markets have diverged Air travel continues to grow but freight stagnated over past 18 months 48 Air freight and passenger volumes, seasonally adjusted 18 46 44 RPK 17 42 16 4 38 FTK 15 36 14 34 32 13 3 28 29 21 211 212 213 11 Source: IATA IATA Economics www.iata.org/economics 2
Freight tonne kilometers, billions Value of goods carried, US $ billion Even so $6 trillion of goods annually now carried by air 35% of world trade is carried by air; a key enabler of globalization 18 Air freight tonne kilometers flown and the value of goods carried 7, 16 14 12 1 Freight tonne kilometers 6, 5, 4, 8 6 4 2 Value of goods carried by air 3, 2, 1, 197 1975 198 1985 199 1995 2 25 21 Source: ICAO, IATA, WTO. Value carried by air=world merchandize exports*35% (35% estimated by The Colography Group, 25) IATA Economics www.iata.org/economics 3
JP Morgan/Markit index 5=no change Air FTKs, billions Another false dawn for air freight or a durable upturn? Business confidence is a good leading indicator 6 Business confidence and air freight volumes 15 PEAK False dawns 55 Business confidence index? 14 5 13 45 FTKs 12 4 11 35 1 3 28 29 21 211 212 213 Source: JP Morgan/Markit, IATA 9 IATA Economics www.iata.org/economics 4
% point spread of Spanish over German 1 year bond yields JP Morgan/Markit global business confidence index Upturn depends on stability in the Eurozone Spanish bond spread is a good proxy for Eurozone confidence 6 5 PEAK Business confidence and the Eurozone crisis False dawns Spanish bond spread 58 56 4 3? 54 52 5 2 1 Business confidence 48 46 21 211 212 213 Source: Haver, IATA 44 IATA Economics www.iata.org/economics 5
Indexed to equal 1 in 2 Recent trade growth has come from emerging markets Aviation not entirely dependent on Western business confidence 25 International trade in goods 23 +15% 21 19 17 15 Emerging economies 13 11-5% 9 Advanced economies 7 5 1993 1995 1997 1999 21 23 25 27 29 211 Source: Netherlands CPB, IATA IATA Economics www.iata.org/economics 6
Value proposition for air passengers remains strong Fares down in real terms, accidents trending lower, fuel efficiency higher Index (199=1) 2 18 16 Fuel efficiency 14 12 1 8 6 4 2 Fares (212 US$) Fatal accidents* 199 1992 1994 1996 1998 2 22 24 26 28 21 212 * 5-year moving average fatal accidents per passenger departure Source: Constructed from worldwide data from ICAO and IATA IATA Economics www.iata.org/economics 7
Weighted survey response score, 5=no change Optimism about the outlook for revenues has improved Survey of airline CFOs shows rising confidence 1 Airline CFO expectations for the year ahead 9 8 7 6 5 4 3 2 1 Pax yield growth expectations, year ahead RPK growth expectations, year ahead 28 29 21 211 212 213 Source: IATA quarterly survey IATA Economics www.iata.org/economics 8
$ per barrel High cost environment set to continue Fuel bill is estimated to rise to $216bn in 213 or 33% of opex 2 18 16 14 Price of jet and Brent crude Jet kerosene price New jet forecast ($13/b) Old jet forecast 12 1 8 6 4 2 Brent crude oil price Bloomberg 'consensus' forecast Futures mkt. 15 March 28 29 21 211 212 213 Source: Platts, Bloomberg, IATA IATA Economics www.iata.org/economics 9
Asset utilization has weakened in the air freight business Weakening utilization has damaged profitability in air cargo % AFTKs Average hours flown per day 53% Asset utilization in the air freight business 1.5 51% 49% 47% 45% 43% Freight load factor 1. 9.5 9. 41% 39% 37% Freighter aircraft utilization 8.5 8. 35% 7.5 27 28 29 21 211 212 213 Source: IATA, Boeing IATA Economics www.iata.org/economics 1
% ASKs Average hours flown per day High asset utilization key factor in passenger business Lower entry and consolidation have helped boost utilization 81% Asset utilization in the passenger business 8.8 8% 79% 78% Passenger load factor 8.6 8.4 77% 76% 75% 74% Single aisle aircraft utilization 8.2 8. 7.8 73% 7.6 27 28 29 21 211 212 213 Source: IATA, Boeing IATA Economics www.iata.org/economics 11
Large airline cash flows are higher than expected Similar to 26 when oil price $4/b lower and GDP growth double 2% Largest 8 airlines, EBITDA as % revenues, seasonally adjusted 15% Asia-Pacific 1% US 5% Europe % -5% 26 27 28 29 21 211 212 Source: Bloomberg, IATA IATA Economics www.iata.org/economics 12
% revenues Outlook for profitability improving Margins still below 2s peaks and well below 199s peak 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212E 213F US$ billion 6. 3.. -3. -6. -9. Global commercial airline profitability EBIT margin (left scale) Net post-tax losses (right scale) 2 15 1 5-5 -1-15 -2-25 -3 Source: ICAO (history), IATA (212 estimate and 213 forecast) IATA Economics www.iata.org/economics 13
Revenue per passenger exceeded cost by just $2.56 Excluding $12 ancillaries revenues would have lagged costs by $1 212 worldwide airline financial results per departing passenger 22 $214.64 $212.4 2 Ancillary $12.14 18 16 14 12 1 8 6 4 2 Air fare $171.2 Cargo & other $31.3 Revenues Costs $212.4 Costs $2.56 Net profit Source: Ancillary revenues from Idea Works 212 estimate, other data IATA. Costs include operating items and debt interest. IATA Economics www.iata.org/economics 14
% of invested capital Still a long way to go before airline returns are adequate Below WACC returns indicate intense competition and fragile financing 1. Return on invested capital in airlines and their WACC 9. 8. 7. 6. 5. 4. 3. 2. 1. WACC Investor value losses ROIC. 1993 1995 1997 1999 21 23 25 27 29 211 213F Source: IATA IATA Economics www.iata.org/economics 15