U.S. Airlines: Allocating Capital to Benefit Customers, Employees and Investors John P. Heimlich, Vice President & Chief Economist ACI-NA JumpStart Air Service Development Conference June 1, 2015
Evolution of U.S. Airline Industry Structure and Competition Point-to-Point 5 City Pairs Hub Operation 55 City Pairs Network Operation 231 City Pairs Pre-Deregulation Route vs. Route 1980s-1990s Hub vs. Hub 21 st Century Network vs. Network 2
1971-1980 1981-1990 1991-2000 2001-2010 2011 2012 2013 2014 Load Factor (%) Even in 2014, U.S. Flights Needed to Fill 3 of Every 4 Seats to Avoid Losing Money Over Multiple Decades, the Rising Costs of Running an Airline Without a Commensurate Increase in Fares Have Meant That Airlines Have Had to Fill More Seats to Break Even 90 85 Breakeven Actual 80 75 70 81.3 81.0 80.9 77.5 75.6 65 60 62.6 66.2 55 50 56.7 Source: A4A Passenger Airline Cost Index and U.S. Bureau of Transportation Statistics 3
Of the Top 30 U.S. Airline Brands* in 1978, Only Five Remain 1. United 2. American 3. Trans World 4. Eastern 5. Delta 6. Pan American 7. Western 8. Braniff 9. Continental 10.National 11.Northwest 12.Allegheny 13.Hughes Airwest 14.Frontier (former) 15.North Central 16.Texas Int l 17.Ozark 18.Piedmont 19.Southern 20.Alaska 21.Hawaiian 22.Aloha 23.Wien Air Alaska 24.Air New England 25.Reeve Aleutian 26.Aspen 27.Air Midwest 28.Wright 29.Seaboard World 30.New York Airways Source: Airlines for America * By number of revenue passenger miles flown in systemwide scheduled service 4
Deregulation Enabled Southwest to Become the Largest Domestic O&D Carrier Share of U.S. Domestic O&D Passengers by Marketing Airline 1990 2014 Top Four Next Six Other Notables American (14.4) US Airways (13.8) Delta (12.9) United (12.0) Northwest (7.4) Continental (7.3) Southwest (6.4) Eastern (4.5) TWA (4.1) America West (3.8) Pan Am, Alaska, Midway, Aloha, Hawaiian, USAir Shuttle Southwest (24.0) American (21.9) Delta (19.6) United (14.6) JetBlue (5.3) Alaska (4.5) Spirit (2.5) Frontier (2.1) Allegiant (1.8) Hawaiian (1.6) Virgin America, Sun Country Source: DOT Passenger Origin & Destination (O&D) Survey, Data Bank 1B, via Diio Mi 5
Real Decrease Real Increase Relative to Most Goods/Services (and Jet Fuel), Air Travel Remains a Bargain This Century, U.S. Inflation and U.S. Personal Incomes Have Outpaced Domestic Airfare Product (Unit) 2000 2014 % Jet Fuel (Gallon, Price Paid by U.S. Airlines) $0.807 $2.862 254.5 Public College Tuition & Fees (Net of Grant Aid & Tax Benefits) $1,020 $3,079 201.9 Gasoline (Gallon, Unleaded) $1.51 $3.37 123.2 Walt Disney World (One-Day Pass, Adult) $46 $99 115.2 National Football League Game (Nonpremium Ticket) $48.97 $84.43 72.4 Major League Baseball Game (Nonpremium Ticket) $16.22 $27.93 72.2 Prescription Drugs (BLS Index) 285.4 469.8 64.6 Disposable Personal Income per Capita (Annual) $26,206 $40,686 55.3 Movie Ticket (One Adult) $5.39 $8.17 51.6 Food & Beverage (BLS Index) 168.4 245.585 45.8 Single-Family Home (Existing) $143,600 $208,300 45.1 U.S. Consumer Price Index (CPI-U) 1 172.2 236.736 37.5 Air Travel (R/T Domestic Fare + Ancillary) 2 $316.95 $400.47 26.3 Air Travel (R/T Domestic Fare Only) 2 $314.46 $377.39 20.0 Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 123.942 (4.4) Television (BLS Index) 49.9 3.561 (92.9) 1. Bureau of Labor Statistics measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. 2. A4A analysis of data collected by BTS excludes taxes; ancillary includes revenue from reservation changes/cancellations and baggage 6
Healthy Air-Travel Demand and Lower Fuel Drove Airline Profitability* in 1Q 2015 Wages and Benefits Rose 10.5%, Re-Taking Top Spot Among Industry Operating Costs % Change YOY Operating Revenues ($36.7B) 3.1 Operating Expenses ($31.8B) (6.7) Wages & Benefits (29% of Op. Expenses) 10.5 Fuel (24%) (32.9) Landing Fees & Terminal Rents (6%) 3.2 Maintenance, Materials & Repairs (6%) (1.3) Depreciation & Amortization (5%) 8.3 Aircraft Rent (3%) 0.6 Other Operating Expenses** (27%) 4.8 Interest & Other Non-Operating Expenses 5.6 Pre-Tax Profit: $4.1B (11.1% of Revenues) +9.1 pts. Net Profit: $3.1B (8.4% of Revenues) +7.3 pts. 1Q14 1Q15 Change Passenger Yield 1 16.21 16.02 (1.2) Passenger Traffic 2 190.4B 197.9B +3.9 1. Average airfare paid per mile flown, excluding taxes 2. Revenue passenger miles (RPMs) flown 1Q14 1Q15 Change Enplanements 169.0M 175.5M +3.9 U.S. Inflation 3 234.997 234.849 (0.1) Personal Income 4 $40,130 $41,469 +3.3 3. U.S. Consumer Price Index (1982-84 = 100) 4. U.S. disposable personal income per capita, current dollars * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America ** Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals 7
Royal Caribb. Ford Wal-Mart CVS Whole Foods Marriott Boeing ExxonMobil Airlines* S&P 500 Starbucks Chipotle Verizon McDonald s Coca-Cola CSX Walt Disney Apple U.S. Airline Industry Is Closing the Gap to Average U.S. (S&P 500) Profitability For Every Dollar of Revenue Collected, U.S. Airlines Keeping ~8 Cents as Profit 1Q 2015 Net Profit Margin (After-Tax Income as % of Operating Revenues) 23.4 2.5 2.7 2.9 3.4 4.3 5.9 6.0 7.3 8.4 9.8 10.8 11.3 13.6 13.6 14.5 14.6 16.9 * A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America Sources: Standard & Poor s and company SEC filings 8
Airline Creditworthiness Remains Far From Stellar Per S&P, Only Two U.S. Passenger Airlines Have Investment-Grade Credit Investment Grade 1 (>= BBB-) ExxonMobil, Microsoft AAA GE, United States Government AA+ Google, Wal-Mart AA Toyota AA- UPS A+ BP, ebay, McDonald s, PepsiCo, Target A Amtrak, Starbucks A- FedEx, Marriott, Southwest, Starwood BBB Alaska, Ford, Lufthansa, WestJet BBB- Passenger Airline Speculative 2 Grade (< BBB-) Turkish (THY), Qantas BB+ British Airways, Delta, LATAM BB Allegiant, Avis-Budget, Chrysler BB- AC, JBLU, Virgin Australia, Hertz, Sabre B+ American, GOL, Hawaiian, United B SAS B- 1 Describes issuers with relatively high levels of creditworthiness and credit quality 2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk Source: Standard and Poor s; Guide to Credit Rating Essentials: What are credit ratings and how do they work? 9
2-Jan 16-Jan 30-Jan 13-Feb 27-Feb 13-Mar 27-Mar 10-Apr 24-Apr 8-May 22-May 5-Jun 19-Jun 3-Jul 17-Jul 31-Jul Jet-Fuel Prices Have Enabled Greater Levels of Reinvestment But Remain Volatile Every Penny per Gallon per Year Equates to $190M in Annual Fuel Expenses Spot Price per Barrel (5-Day Moving Average) $85 $80 $75 $70 $65 $60 $55 $50 $45 $40 Crude (Brent) Jet (U.S. Gulf Coast) Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm) 10
Like Other Responsible Businesses, Airlines Are Focused on Balanced Allocation of Capital to Benefit All Stakeholders: Customers, Employees and Investors Customers Renewing fleets, improving the product at all stages of travel Boosts operational reliability, advances environmental objectives Restoring/increasing air service levels (capacity) Employees Increasing job security Restoring/increasing employee wages and benefits Shoring up pensions (or comparable retirement accounts) Investors De-risking (reducing debt) Returning cash to shareholders (e.g., stock buybacks, dividends) 11
2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 Up 88K YOY Up 21K YOY As Airlines Generate Normal Returns on Capital, Customers Are Seeing More Seats Domestic Supply at Highest Point in Seven Years; International Supply at All-Time High 2.55 Domestic USA (Million Daily Seats) 360 International (Thousand Daily Seats) 2.50 350 340 Highest Ever 2.45 2.40 Highest Since Recession 330 320 310 2.35 300 290 2.30 280 270 2.25 260 Source: Innovata (via Diio Mi) published schedules as of May 29, 2015, for all airlines providing scheduled passenger service from U.S. airports to all destinations 12
Mexico, the UK and China Are Seeing the Biggest Increase in Seats Departing USA Top 15 U.S. Int l Nonstop Destinations by Increase in Scheduled Seats per Day Destination Country Additional Daily Seats YOY % Change YOY 1 Mexico 5,767 14.5 2 United Kingdom 3,046 9.2 3 China 2,489 26.3 4 United Arab Emirates 1,883 32.4 5 South Korea 876 9.0 6 France 843 6.1 7 Ireland 819 17.3 8 Italy 795 11.3 9 Canada 710 1.5 10 Australia 621 13.7 11 Iceland 620 31.5 12 Colombia 562 10.8 13 Panama 530 10.7 14 Turkey 435 16.3 15 Chile 377 28.2 Source: Innovata (via Diio Mi) as of May 1, 2015 for all airlines providing scheduled passenger service from U.S. airports to all destinations in June 1 August 31, 2015 13
In Addition to Expanding Schedules, Airlines Are Deploying Larger Aircraft Airlines Have Sharply Reduced Use of 50-Seaters, Steadily Rolling Out Larger RJs % Change in Scheduled Domestic Departures from July 2010 to July 2015 28.6 Average Domestic Aircraft Size* 106.5 5.5 95.0 96.9 97.3 99.1 102.3 (33.6) 50 51-100 > 100 Aircraft Size (Seats) 2010 2011 2012 2013 2014 2015 * Seats per scheduled domestic departure in July of each year Source: Innovata (via Diio Mi) as of May 8, 2015 14
Spirit Allegiant Frontier JetBlue Alaska Southwest American Hawaiian Delta United Virgin Competitive Pressure Is Alive and Well Amid Rising Supply and Improving Finances On Average, U.S. Airlines Increasing Domestic Capacity by ~6% YOY in Third Quarter 40 35 30 25 20 15 10 5 0 (5) YOY Growth (%) in Domestic Available Seat Miles: 3Q 2015 vs. 3Q 2014 Avg. = 5.7% Source: Innovata (via Diio Mi) published schedules as of May 29, 2015; ASMs include regional affiliates 15
In 2015, Domestic Fares Down Slightly; Latin and Pacific Seeing Bigger Declines % Change YOY in Passenger Yield (Fare per Mile Flown) by Region 1.6 (0.4) (1.3) (5.7) (9.0) Domestic Atlantic Latin Pacific System 17.1 /RPM 14.8 /RPM 14.9 /RPM 12.4 /RPM 16.2 /RPM Source: A4A revenue report, containing data from Alaska, American, Delta, JetBlue, Southwest and United 16
Seattle Tacoma Int l is a Showcase for Service Increases and Competitive Intensity One-Year and Five-Year Developments at SEA 4Q 2010 4Q 2014 4Q 2015 Destinations Total 91 101 106 Flights/Day Domestic 361 395 464 International 38 49 54 Total 399 444 518 Seats/Day Domestic 46,029 52,152 59,874 International 4,947 6,514 7,487 Total 50,976 58,666 67,361 Domestic Seat Share (%) Alaska 52.2 55.0 55.8 Delta 9.7 15.3 17.5 Southwest 11.2 8.9 9.3 Subtotal Top 3 73.1 79.2 82.6 Source: Innovata (via Diio Mi) as of May 22, 2015 17
Improving Finances Enabling Significant Reinvestment in Customer Experience Airline Capital Spending Exceeding $1 Billion per Month Highest in 15 Years U.S. Airline* Capital Expenditures ($ Billions) 12.4 9.8 6.6 5.2 13.9 3.6 2010 2011 2012 2013 2014 1Q15» 2014 outlays exceeded $1.1B per month Included delivery of 317 aircraft At 12/31, firm orders for 1,800+ aircraft worth $94B» 2015 outlays thus far @ $1.2B per month Exceeding $20 per passenger 10 carriers taking delivery of 367 aircraft * SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America 18
After a Decade of Sharp Workforce Reductions, U.S. Airline Jobs on the Rise Again March 2015 Was 16 th Consecutive Month of YOY Employment Gains at U.S. Airlines Employment at U.S. Passenger Airlines Thousand Full-Time Equivalents (FTEs) 2000 520.6 2010 2014 2015 Down ~142,300 (-27.3%) from 2000 Up ~6,300 (+1.7%) from 2010 YTD through March 378.3 384.6 388.8 Source: Bureau of Transportation Statistics 19
After Several Years of Huge Losses in 2001-2009, U.S. Airlines* Are Paying Down Debt and Returning Cash to Shareholders, Helping Lure New Equity Investors Total Debt as % of Operating Revenues* Billions 80 70 60 65.9 $6.0 $5.0 Dividend Stock Repurchase 50 40 30 20 10 $74B 41.4 $66B $4.0 $3.0 $2.0 $1.0 0 2010 2014 $0.0 2010 2014 * SEC filings of Alaska/Allegiant/American/Delta/Hawaiian/JetBlue/Southwest/Spirit/United/Virgin America; includes capitalized operating leases at 7x annual aircraft rents 20
Recap» An expanding U.S. economy, employment growth, rising personal incomes and the highest U.S. consumer sentiment in a decade driving increased demand for air travel» Strong demand has supported pricing, which has enabled airlines to inch closer to average U.S. profitability (i.e., as measured by the S&P 500) and, in turn: boost staffing and wages acquire new aircraft and ground equipment launch new routes and enhance airport and inflight amenities reduce debt and return cash to shareholders» Airlines are offering the U.S. public the highest number of seats since the Great Recession and are consistently deploying larger aircraft on domestic routes» First quarter (2015) capital expenditures totaled $3.6 billion, or more than $20 per enplaned passenger, largely reflecting the arrival of one new aircraft per day» Competition is intensifying, both domestically and internationally 21
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