General Trend of the Global Airline Industry Dr Frankie O Connell

General Trend of the Global Airline Industry Dr Frankie O Connell Istanbul Technical University Air Transportation Management, MSc. Program Airline Business Models and Strategic Management Module #1 8 December 2016

Agenda Global Airline Traffic trends Traffic Forecasts Profitability of the Industry The Problems Facing Network Airlines today that Impact Profitability Fuel Volatility Fuel Hedging Currency Issues Overcapacity Yields Seasonality Air Cargo Trends Airports Their ability to make money Environmental impacts facing Airlines

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 Billions of passengers 1.13 1.15 1.14 1.23 1.30 1.40 1.45 1.47 1.56 1.67 1.64 1.63 1.69 1.88 2.02 2.19 2.30 2.37 2.37 2.5 2.69 2.81 2.94 3.02 3.21 Number of passengers carried worldwide (1991 2015) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Source: IATA, ICAO, AEA, AAPA, ATA, AACO

Passenger Traffic transported by different airline* business models 2003-2015 2003 2015 % change Full Service Airlines 1.3 billion 2.17 billion 67% Low Cost Carriers 178 million 862 million 384% Regional Airlines 147 million 107 million -27% Charter Airlines 83 million 78 million -6% Total 1.7 billion 3.21 billion 89% * Share by top 200 world airlines Source: ICAO, AEA, ATA, AAPA, AACO

Geographical Distribution of Passenger Traffic* 2000-2015 Passengers 2000 Passengers 2015 % Change (millions) (millions) North America 726 924 27% Europe 420 868 107% Asia-Pacific 378 1,035 174% Central/South America 82 181 120% Middle East 44 173 293% Africa 29 34 17% Total 1.67 billion 3.21 billion 92% * Share by top 200 world airlines Source: ICAO, AEA, ATA, AAPA, AACO

1974 1979 1984 1989 1994 1999 2004 2009 2015 2019 2024 2029 2034 RPKs (Trillions) World Traffic Forecast (measured in RPKs) 1972-2034 16 14 12 10 8 6 4 2 ICAO data Air traffic has doubled every 15 years Airbus forecast Traffic is also expected to over the next 15 years 0 What is driving this traffic? Source: ICAO and Airbus GMF 2015

Main Drivers for Traffic Growth 700,000 foreign students study in the US for example (many family and friends will visit) People exploring Tourism (e.g. Egypt) More economic prosperity growing middle class (now at 2.7 billion people) Dynamic growth in emerging markets (China, India, Asia Pacific, Latin America) Continued growth of Low Cost Carriers (particularly in Asia) Greater and continued market liberalisation worldwide More demand for overseas vacations and for Short Break holidays Weekend Commuters who work and live in different places Businesses Travel is strongly connected to International Trade and Commerce Strong correlation between Economic Prosperity and growth in Traffic 215 million people live outside their country of birth (many family and friends will visit)

Tourist Spend ($US Billions) The Importance of Airlines Stimulation of Tourism and Trade 800 700 600 500 400 300 200 2000 2002 2004 2006 2008 2010 2012 2014 Spending by Tourists carried by Air

Top Tourist Cities - 2015 International overnight visitors Source: Mastercard, 2016 London Bangkok Paris Dubai Istanbul New York Singapore Kuala Lumpur Seoul Kong Kong Tokyo Barcelona Amsterdam Rome Milan 8.66 8.08 7.63 7.44 7.41 7.17 16.06 14.26 12.56 12.27 11.88 11.12 10.35 18.82 18.24 0 5 10 15 20 Millions of Tourists Doha: Almost 3 million tourist visits in 2015 33% coming form GCC

Long term growth prospects of air traffic (2015-2035) In terms of Revenue Passenger Kilometres (demand) Source: Airbus General Market Forecast 2016 Asia Pacific 2015 traffic 2016-2035 traffic Europe North America Middle East Latin America CIS Africa 0 1,000 2,000 3,000 4,000 5,000 6,000 Revenue Passenger Kilometres 2015 2015-2035

Billions of People Middle Class Global Population Households with yearly income between $20,000 and $150,000 at 2015 prices 5 4.83 billion 4 3.77 billion 3 2 1 0 1.86 billion 911 956 2.79 billion 2,602 1,738 1,054 1,174 3,528 1,302 2005 2015 2025 2035 Emerging Countries Mature Countries 6.5 billion 7.2 billion 8.1 billion 8.8 billion World population 29% 38% 46% 55% % of Global Middle Class

% Change in GDP (Year over year) 1971 1973 1975 1977 1979 Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Global GDP growth/decline and length of recession 1971-2016 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% 1973-75 Oil Crisis $3 to $12 Stock Market 1980-82 Iran-Iraq war Oil Crisis $12 to $39 Oil to $15 1991-93 1 st Gulf War Oil Crisis $15 to $33 2001-03 US Weakening 9/11 2 nd Gulf War 2008-10 Global Conflicts Credit Crunch Multiple Govt bailouts Fluctuating Oil prices Weak Currencies

% Change in GDP (Year over year) 1971 1973 1975 Correlation of Passenger Traffic and GDP 1971-2015 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 % Change in Passenger Traffic (RPK) Year over year) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% GDP Growth Passenger Traffic 16% 14% 12% 10% 8% 6% 4% 2% 0-2% -4% World GDP growth World RPK growth Source: ICAO, IATA, IMF, Economist Intelligence Unit and World Bank

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015 Net Profit / Loss (US$ Billions) Airline Revenues (US$ Billions) Net Profit/Loss and Revenues for World Commercial Airlines 1978-2015 $40 $35 $30 $25 $20 $15 $10 $5 $0 $-5 $-10 $-15 $-20 $-25 $-30 $800 $700 $600 $500 $400 $300 $200 $100 $0 Net Profit/Loss Total Airline Revenues Source: O Connell analysis from ICAO and IATA

Proportion of Total Revenues to Total Net Profit (2015 data) Total Revenues ($751 billion) Total Net Profit ($35.3 billion) Source: IATA

Why is it so difficult to make money in the Airline Industry???

$ Billions World Airline revenues and expenses 1991-2015 $800 $600 $400 $200 $0 Operating Revenues Operating Expenses Source: ICAO and IATA

Fuel is the largest cost facing Airlines

US$ Dollars The volatility of Jet Fuel and Crude Oil Prices ($/barrel) 2008 2016 Source: Platts and IATA In 2014 Airlines (worldwide) spent $Billions on Fuel? $226 Billion In 2016 Airlines (worldwide) are estimated to spent? $127 Billion (44% less)

Price of Crude Oil 2011 to August 2016 US Dollars Airlines buy Fuel in US$ Dollars Source: Barchart

Index of US Dollar 2011 to August 2016

Cathay Pacific Fuel Hedging Issues 2015 data 2016: 62% of its Fuel at $85 per barrel For the first 6 months of 2016, Cathay posted fuel hedging losses of: $580 million For the second 6 months it will incur the same losses 2017: 51% of its Fuel at $89 per barrel 2018: 44% of its Fuel at $81 per barrel Fuel has fallen by 70% since 2014 2019: 8% of its Fuel at $75 per barrel

2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 Airline Fuel Expenses 100% 80% 60% 40% 20% 0% Emirates Fuel Expenses 2007-2016 68% 64.8% 70.1% 65.5% 59.8% 60.4% 60.9% 65.4% 74.3% 32% 35.2% 29.9% 34.5% 40.2% 39.6% 39.1% 34.6% 25.7% 100% 80% 60% 40% 20% 0% Singapore Airlines Fuel Cost 2007-2016 63.5% 56.2% 65.3% 65% 59.1% 59.4% 61.9% 62.5% 68.2% 36.5% 43.8% 34.7% 35% 40.9% 40.6% 38.1% 37.5% 31.8% Fuel Other expenses Fuel Other expenses Fuel cost on 777-300ER from Abu Dhabi to Chicago (one way) is US$? $150,000

Currency Issues Income and Expenses Turkish Airlines (2015 data) 60% 50% 51.4% 40% 38.8% 30% 20% 10% 18.8% 14.2% 13.1% 27.1% 29.3% 7.3% Revenues Costs 0% US Dollars Euro's Turkish Lira Other Currencies Source: Turkish Airlines accounts, Q1 2015

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions Source: OAG and DGCA (India) - O Connell analysis Over Capacity Problems India example 120 100 80 60 40 20 0 ' $ ' ' ' $ $ $ ' $ ' $ ' $ ' $ ' $ ' $ ' ' ' $ $ $ ' $ $ Passengers Carried ' Seat Capacity Indian Carriers have lost billions of dollars over the last number of years while overcapacity has been a significant contributor to these losses

Global Average Return Fare Before Surcharges and Taxes $1,200 $1,000 $800 $600 $400 $200 $0 1995 2000 2005 2010 2015? The average return fare has fallen by more 60% over the last 20 years Source: IATA

Seasonality of Traffic for Aer Lingus Monthly Passengers: 2013-2014 1,200,000 1,000,000 800,000 600,000 $ ) $ ) $ ) ) $ $ $ ) ) $ ) $ ) $ ) $ ) $ ) $ ) 400,000 200,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ) 2013 $ 2014 Source: Aer Lingus

Millions Impact of Seasonality on Profits Operating Profits for Aer Lingus 2009 2014 200 150 100 50,,,,, 0-50, -100-150 2009 2010 2011 2012 2013 2014 Summer Winter, Total Source: Aer Lingus Annual Accounts

World s top 10 Airline Groups by Net Profit Rank Airline US$ millions 2015 2014 2013 1 American Airlines 7,610 2,882-1,233 2 United Airlines 7,340 1,132 571 3 Delta Air Lines 4,526 659 10,500* 4 Emirates Group 2,210 1,487 1,112 5 Southwest Airlines 2,200 1,136 754 6 Lufthansa Group (Lufthansa, Swiss Austrian, Brussels) 1,873 72 416 7 Ryanair 1,718 1,081 702 8 IAG (BA, Iberia, Vueling, Aer Lingus) 1,672 1,322 195 9 Japan Airlines 1,450 1,654 2,062 10 Air China 1,194 694 589 * Includes special items - reversal of the company s tax valuation allowance Source: Airline Reports 20,16, 2015, 2014,

Passenger Load Factor 1970-2015 85% 80% 75% 70% 65% 60% 27% Increase 55% 50% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: ICAO and IATA

World s top 12 Underperforming Airlines (Net losses) Rank Airline US$ millions 2015 2014 2013 2012 1 GOL -1,263-473 -332-772 2 Air Berlin -493-497 -419 9 3 Korean Air -483-195 -266 348 4 Air India -402-955 -1,032-1,008 5 Thai Airways -379-479 -389 203 6 Oman Air -225-286 -295-254 7 Alitalia -219-762 -765-361 8 LATAM Group -219-110 -281-523 9 TAP Air Portugal -172-112 -8-33 10 Avianca -140 128 249 38 11 Egyptair -132-419 - - 12 Asiana -123 60-105 56 Source: Airline Reports 2016, 2015, 2014, 2013

Air Cargo The carriage of cargo by air is an essential pillar of international trade, Around $6 trillion worth of good by value are carried by air each year Around 50 million tonnes of Freight is carried by air each year Cargo accounts for 9% of the Industry s revenues, mostly carried by Flag carriers

Revenue Tonne Kilometres World Air Cargo Traffic 1983 2014 6.8% growth per annum 6.3% growth p.a. 2.6% growth p.a. 2014 Source: Boeing Air cargo market forecast, 2014-2015

Trade Goods ($US Tillions) The value of Goods shipped by Air Around $6.4 trillion worth of goods is now carried by air $8 $7 $6 $5 $4 $3 $2,,,,,,,,,,,,,,,, $1 2000 2002 2004 2006 2008 2010 2012 2014 2015, Value of traded goods carried by Air 35% of world trade is carried by air: a key enabler of globalization Cargo will account for around 9% of the Industry s revenues in 2015

These are not high value goods being transported

Apple s global supply chain for iphone by Air - 2014 data Source: ATAG 2015

Long term growth prospects of air cargo (2014-2033) In terms of Revenue Tonne Kilometres (demand) Asia - North America Europe - Asia Intra-Asia Europe - North America North America Domestic China Latin America to Europe Latin America to North America Africa - Europe South Asia - Europe Middle East - Europe Intra - Europe 2013 2014-2033 0 20 40 60 80 100 120 140 Billions of Revenue Tonne Kilometres (RTKs) 2013 2014-2033 Source: Boeing

US$ Billions of Dollars (Pax) Very different businesses Global Air Cargo vs Passenger Revenues US$ Billions (Cargo) Source: IATA 2016 90 80 70 60 50 1995 1997 2000 2002 2005 2007 2010 2012 2014 2016F 40 30 Cargo Revenue Air Cargo Revenues are no higher no than they were 10 years ago

Air Cargo Why is it difficult to make money in Cargo???

Global Air Freight Yields US$ per Kilo Source: IATA CASS

Which method of transporting freight is more profitable? All Freighters or Bellyhold Full Freighter Bellyhold Freight on Passenger aircraft World Freight Load Factor 2007-2015

The uniqueness of the 747 Freighter Freighter Capacity (Tons) 747-800F 140 Tons 777F 100 Tons A330F 65 Tons

Bellyhold Capacity (with full passenger load) B777-300ER 20 Tons B747-400 16.5 Tones A340-300 13 Tons A330-200 12 Tons A380 8 Tons B737-800 3.6 tons

Revenue Tonne Kilometres (RTKs) Freighter Bellyhold 2003 2004 World Freight by Freighter and Bellyhold Revenue Tonne Kilometres by Percentage 2005 2006 2007 2008 Freighter Bellyhold 2009 2010 2011 2012 2013 2014 100% 80% 60% 40% 20% estimates 60% estimates 40% 0% 2033F? For every 5 new widebody passenger aircraft delivered - 1 less 100 tonne freighter is required At large hub airports such as LHR and Paris CDG, 95% of the freight volume is carried on Passenger aircraft (Freight Transport Association, 2014) Source: Air Cargo News, Boeing commercial aircraft, Airbus, O Connell Forecast based on Industry experts

Air France/KLM change in Cargo Capacity (Measured in ATKs) AF/KLM generated 2.7 billion from Cargo in 2014 2013/14 72% 28% 14 Freighter Aircraft 2017/18 5 Freighter Aircraft

The Middle East Air Cargo Market 2003-2013 Middle East and Europe Middle East and Asia Pacific Air Cargo accounted for 820,000 tons (2013) Air Cargo accounted for 574,000 tonnes (2013 Severe directional imbalances exist in air cargo Source: Boeing World Cargo Forecast 2014

World s Top 12 Airports - 2015 Rank Airport Passengers (millions) Market share of top 3 airlines (seats, 2016) 1 Atlanta 101.5 Delta 80%, Southwest 10%, United 2% 2 Beijing 90 Air China 39%, China Southern 15%, China Eastern 13% 3 Dubai 78 Emirates 62%, Flydubai 14%, Qatar 2% 4 Chicago 76.9 United 44%, American 32%, Delta 4% 5 Tokyo (HND) 75.3 ANA 46%, JAL 32%, Skymark 5% 6 London (LHR) 74.9 BA 48%, Virgin Atlantic 6%, Aer Lingus 3% 7 Los Angeles 74.9 United Airlines 16%, Delta Air Lines 16%, American 15% 8 Hong Kong 68.5 Cathay Pacific 33%, Dragonair 16%, Hong Kong Air 8% 9 Paris (CDG) 65.7 Air France 51%, easyjet 6%, Lufthansa 2% 10 Dallas 64.1 American Airlines 80%, Spirit 4%, United 3% 11 Istanbul 61.3 Turkish Airlines 76.4%, Onur Air 6.8%, AtlasGlobal 4.8% 12 Frankfurt 60.0 Lufthansa 65%, Condor 4%, Airberlin 2% Source: ACI

The Dynamics of the Airport Business Model Airports make money via: i) Aeronautical charges ii) Non-aeronautical charges

Airports make money from Aeronautical based sources Aircraft landing Terminal Rental fees Ground Handling Passenger Charge

Airports make money from Non Aeronautical based sources Duty Free Advertising Car Parking Food and Beverage Hangers Foreign Currency shops

Airport Revenue Airports receive income from multiple business platforms % breakdown of sources of airport revenue by region 2013 data Aeronautical income is largest from airlines Larger the airport the more diverse the business Each business platform will have unique market and business conditions Source: ACI economics report 2013

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Operating Margins for worlds top 100 airports and 150 top airlines 30% 25% 20% 15% 10% Airlines Airports 5% 0% -5% Source: FlightGlobal and Airline Business

Overview of the airport business (2014) Turnover and operating margin of 7 large airports and their largest airline customer (2014 data) Turnover Margin Turnover Margin $million $million Heathrow 4,425 37.2% IAG (BA + Iberia) 26,587 5.1% Aeroports de Paris 3,679 26.2% Air France / KLM 32,861-0.5% Fraport (Germany) 3,156 20.2% Lufthansa Group 39,558 3.2% Port Authority of New York (JFK + Newark) 2,479 34.5% United 38,901 6.1% Hong Kong 2,111 54.3% Cathay Pacific 13,666 4.2% Avinor (Norway) 1,674 21.6% SAS 5,646 0.4% Incheon (Korea) 1,664 49.7% Korean Air 11,064 3.2% Source: FlightGlobal, 2015

Duty Free In 2015, Dubai Duty Free had sales of: $1.93 billion... wow Best selling Items in 2015: 1) Perfumes selling US$311 million (Best Selling category makes up 16.5% of total Sales) 2) Liquor had US$293 million in sales 3) Tobacco: US$161 million 4) Confectionary US$152 million 5) Gold: US$150.5 million in sales Source: Dubai Airport, 2016 data

Aviation and the Environment The Threat

Environmental concerns 1973 2003 2013

Air Transport s environmental Impact Global CO2 Emissions Residential Commercial 13.0% griculture deforest ation 9.1% Transportation 19.2% Global Transport C0 2 Emissions by Mode 14.3% 2.2% 1.4% 1.3% Power Stations 29.5% Fossil Fuel Production 8.4% Industrial Processes 20.8% Road Transport Air Transport Shipping Rail, Inland Waterway Source: Emissions database for Global Athmospheric Research Source: Emissions database for Global Atmospheric Research

The EU Emissions Trading Scheme (ETS) The EU Commission charges all European Airlines a Carbon Tax to operate within Europe. Ryanair and easyjet for example pay around 0.13 cents per passenger. Then the EU wanted to charge all airlines operating to/from Europe for Carbon Emissions. IATA estimated that this emission tax would cost the airline industry at US$900 million for 2013 The RESISTANCE from the rest of the World: China blocks Hong Kong Airlines order of ten A380s from Airbus Chinese aircraft carriers are forbidden from complying with EU ETS Russian Federation threatens to deny EU trans-siberia route, actually denies Finnair new landing rights The US introduced a bill that prohibits American based carriers from complying with EU ETS There were a Coalition of the Unwilling that included US, China, Russia, Brazil, India, Japan, South Korea, Saudi Arabia, Singapore For the period 2013-2016, the legislation was amended so that Non-EU carriers do not have to pay the EU ETS fee. ICAO is mandating that a global market-based mechanism addressing international aviation emissions will be applied by 2020.

Emissions Trading Scheme still applies for all INTRA-European flights Hamburg Munich Istanbul New Delhi Take Hamburg to Delhi for example there is no direct conection So passengers MUST transfer through a hub. If this is done via European hub such as Munich this is then subject to an emissions Trading carbon tax, which increases the ticket cost. However it the trip is taken via a hub outside the European Union there is NO cost.

Aircraft developments of the Future? Development driven by Environmental issues

The Boeing 787 Lightweight aircraft

Thank you all very much

Great book!!!