Euro Aviation ICT Forum Thursday 29 October, 2015 Divani Caravel Hotel, Athens Aviation industry outlook Jonathan Wober, Chief Financial Analyst
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1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Airline margins: cyclical and thin World airline operating and net margins (% of revenue) 1947 to 2014 10 10 8 1966 8 6 6 4 4 2 2 0 0-2 -2-4 -4-6 Operating margin Net Margin -6-8 -8-10 -10 Source: CAPA Centre for Aviation, ICAO, A4A, IATA
Margin cycle reflects supply & demand Positive supply/demand balance has become more common World airline operating margin versus RPK growth less fleet growth 1971 to 2014 Source: CAPA Centre for Aviation, ICAO, Airline Monitor
CAPA world airline operating margin model Margins set to grow in 2015, mainly due to lower fuel cost 2013 2014 2015f 2016f Note/source Brent crude USD/barrel 108.6 98.7 62.0 70.8 Reuters consensus poll 30-Jun-2015 World real GDP growth % 2.5 2.6 2.7 3.2 IMF forecast Jul-2015 Fleet growth % 3.0 3.9 3.9 4.1 CAPA model World RPK growth % 5.5 6.0 6.1 7.0 CAPA model World airline operating margin % 3.5 4.6 5.9 5.2 CAPA model but may dip once more in 2016 if oil price rises again
1979 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 2015e 2016e Nearing a peak, will cyclicality dampen? 8 World airline operating margin (% of revenue) 1979 to 2016e 6 4 2 0 High -2-4 Base case Low Geopolitical crisis/recession -6 Source: CAPA Centre for Aviation, ICAO, A4A, Airline Monitor
% of total revenue Ancillaries growing share of revenue World airlines: ancillary revenue and operating margin as % of total revenue 2010 to 2014 7.0 6.0 Ancillary revenue Operating margin 5.0 4.0 3.0 2.0 1.0 0.0 2010 2011 2012 2013 2014 Source: CAPA Centre for Aviation analysis; IdeaWorksCompany/CarTrawler for ancillary revenue; ICAO for operating margin (CAPA estimate for 2014)
Different ancillaries outside US vs in US, distorted by FFP mile sales Ancillary revenue components 2013 (% of ancillary revenue) 100% 90% Sale of FFP miles, 10% 100% 90% 80% 70% Travel retail, 20% 80% 70% Sale of FFP miles, 55% 60% Onboard retail, 20% 60% 50% 50% 40% 30% Other a la carte services, 30% 40% 30% Travel retail, 5% Other a la carte services, Onboard retail, 15% 20% 20% 10% Baggage fees, 20% 10% Baggage fees, 25% 0% Outside US (non LCC) 0% US major Source: CAPA Centre for Aviation using data from IdeaWorksCompany/CarTrawler
Ex FFP sales, vast bulk of ancillaries are from unbundling of core product Ancillary revenue components excluding sale FFP miles 2013 (% of ancillary revenue ex FFP miles) 100% 90% Travel retail, 22% 100% 90% New products, 22% Travel retail, 11% New products, 11% 80% 70% 60% Onboard retail, 22% 80% 70% 60% Other a la carte services, Onboard retail, 33% 50% 40% Other a la carte services, 33% 50% 40% Unbundling of core product, 78% Unbundling of core product, 89% 30% 30% Baggage fees, 56% 20% 20% 10% Baggage fees, 22% 10% 0% Outside US (non LCC) 0% US major Source: CAPA Centre for Aviation using data from IdeaWorksCompany/CarTrawler
1979 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 2015e 2016e Cash flow is exceeding capital investment currently World airline capital expenditure as a percentage of operating cash flow 1979 to 2016E* 250% 200% 150% 100% 50% 0% * Estimated on-balance sheet capex as % of EBITDA. Source: CAPA Centre for Aviation, Airline Monitor, IATA
Uses for surplus cash? Debt repayment Shareholder returns: dividends, buybacks But Consolidation: mergers and acquisitions? Impeded by ownership & control restrictions
N America airline margin leads, Europe lags Airline EBIT margin (%) by region 2007 to 2015f 12 N America 10 8 6 4 2 0 Global Asia PAcific Europe L America Mid East Africa -2-4 -6 2007 2008 2009 2010 2011 2012 2013 2014 2015f N America Europe Asia Pacific Global Middle East Lat Am Africa Source: CAPA Centre for Aviation, IATA
Europe margins under-perform post recession Airline average EBIT margin (%) by region 2010 to 2015f 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 N America Asia Pacific Global Lat Am Middle East Europe Africa Source: CAPA Centre for Aviation, IATA
Ave EBIT margin 2010-2015f Europe airline profits held back by market structure Average airline EBIT margin 2010-2015F versus market concentration (horizontal axis) by region 8.0 7.0 N America 6.0 5.0 Asia Pacific 4.0 3.0 2.0 Europe Middle East Lat America 1.0 0.0 Africa 0 200 400 600 800 1000 1200 1400 Market concentration (HHI based on share of seats) Source: CAPA Centre for Aviation, OAG (seat data for week of 9-Jun-2014), IATA margin forecasts
Ownership & control in practice Many ways to circumvent the restrictions Minority stakes Holding company structures Global alliances Revenue or profit sharing joint ventures These methods continue to grow, but are less efficient than merger Why should airlines be a special case? Banks, telecoms, utilities, media
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Aviation is still a growth industry World airline traffic in revenue passenger kilometres (RPK, million) 1970 to 2014 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 Historic growth CAGR 1970 to 2014: 6.1% pa CAGR 2000 to 2014: 4.2% pa Only 3 years with negative growth Forecast CAGR 2014 to 2034 4.9% pa (Boeing) 4.6% pa (Airbus) 2,000,000 1,000,000 - Source: CAPA Centre for Aviation, ICAO, Boeing, Airbus
but Europe will grow less rapidly Forecast CAGR in Europe revenue passenger kilometres (RPK, million) 2014 to 2034 Source: CAPA Centre for Aviation, Boeing, Airbus
Aircraft in service/on order Source: CAPA Fleet Database as at 23-Oct-2015
Widebodies in service/on order Source: CAPA Fleet Database as at 23-Oct-2015
Centre of gravity is moving east Widebodies on order Source: CAPA Fleet Database as 18-May-2015
Summary Airline profits still cyclical Cost and capacity discipline may reduce cyclicality Ancillary revenue is growing Will see more new revenue generation Europe s airline profits held back by fragmentation Ownership & control restrictions will reduce, slowly Partnerships and alliances will continue to grow Aviation is still a growth industry Europe s growth will be slower Europe will have to solve problems of infrastructure & taxes Centre of gravity is moving eastwards
Summary Airline profits still cyclical Cost and capacity discipline may reduce cyclicality Ancillary revenue is growing Will see more new revenue generation Europe s airline profits held back by fragmentation Ownership & control restrictions will reduce, slowly Partnerships and alliances will continue to grow Aviation is still a growth industry Europe s growth will be slower Europe will have to solve problems of infrastructure & taxes Centre of gravity is moving eastwards
Summary Airline profits still cyclical Cost and capacity discipline may reduce cyclicality Ancillary revenue is growing Will see more new revenue generation Europe s airline profits held back by fragmentation Ownership & control restrictions will reduce, slowly Partnerships and alliances will continue to grow Aviation is still a growth industry Europe s growth will be slower Europe will have to solve problems of infrastructure & taxes Centre of gravity is moving eastwards
Summary Airline profits still cyclical Cost and capacity discipline may reduce cyclicality Ancillary revenue is growing Will see more new revenue generation Europe s airline profits held back by fragmentation Ownership & control restrictions will reduce, slowly Partnerships and alliances will continue to grow Aviation is still a growth industry Europe s growth will be slower Europe will have to solve problems of infrastructure & taxes Centre of gravity is moving eastwards
Summary Airline profits still cyclical Cost and capacity discipline may reduce cyclicality Ancillary revenue is growing Will see more new revenue generation Europe s airline profits held back by fragmentation Ownership & control restrictions will reduce, slowly Partnerships and alliances will continue to grow Aviation is still a growth industry Europe s growth will be slower Europe will have to solve problems of infrastructure & taxes Centre of gravity is moving eastwards