Economic Performance of the Airline Industry Airline Cost Conference 25 th August 2015 Brian Pearce, Chief Economist www.iata.org/economics To represent, lead and serve the airline industry
number of airlines ROIC gains driven by a subset of the industry Distribution of 2014 airline ROIC 14 Most frequent ROIC = 0% 12 Median ROIC = 3.2% 10 8 34 airlines ROIC > WACC 6 4 2 0-21 -19-17 -15-13 -11-9 -7-5 -3-1 1 3 5 7 9 11 % return on invested capital 13 15 17 19 21 23 25 27 29 31 Source: The Airline Analyst, IATA IATA Economics www.iata.org/economics 2
FCF US$ billion FCF concentrated in the US 2014 Free Cash Flow by region 4 2 0-2 -4 Network LCC -6-8 -10 US LA ME EU AP Source: The Airline Analyst, IATA IATA Economics www.iata.org/economics 3
ROIC as as % invested capital But good ROIC performance in Europe as well 2014 return on capital by region 30% 20% 10% Average cost of capital 0% -10% -20% -30% N America Europe Asia Pacific LA ME AF Source: The Airline Analyst, IATA IATA Economics www.iata.org/economics 4
Adjusted net debt, US$ billion Median airline balance sheet still deteriorating Free cash flow and adjusted net debt 30 25 20 6 airlines could repay all debt in next 5 years 15 10 5 Median airline $3 billion net debt -3% FCF/net debt 0-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Free cash flow as a % of adjusted net debt Source: The Airline Analyst, IATA IATA Economics www.iata.org/economics 5
% revenues US$ billion 2015 should see record profits for the industry 8.0 Global commercial airline profitability 30 6.0 4.0 2.0 EBIT margin 20 10 0.0 0-2.0-4.0-6.0 Net post-tax profit -10-20 -8.0 2000 2002 2004 2006 2008 2010 2012 2014-30 Source: ICAO, IATA IATA Economics www.iata.org/economics 6
Though that s still only $8.27 per passenger 250 200 Worldwide airline net post-tax profit per departing passenger, 2015 $205.37 Ancillaries $197.10 $8.27 Ancillaries 150 Fare 100 50 0 Cargo Revenue Cost Net profit Source: IATA IATA Economics www.iata.org/economics 7
% of invested capital But paying investors normal return for 1 st time Return on capital invested in airlines 9.0 8.0 Cost of capital (WACC) 7.0 6.0 5.0 4.0 3.0 2.0 Return on capital (ROIC) 1.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, McKinsey IATA Economics www.iata.org/economics 8
Widening gap above breakeven driving returns % ATKs Breakeven and achieved weight load factors 69 Achieved 67 65 63 Breakeven 61 59 57 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA IATA Economics www.iata.org/economics 9
Consolidation has played an important role Market share of top-4 airlines/jvs 68% 81% 36% 48% 42% 33% 51% 59% Source: SRS Analyser IATA Economics www.iata.org/economics 10
Ancillaries as % revenues The product structure is changing too 2013 ancillaries and operating profits, % revenues 35% 30% Allegiant 25% Ryanair 20% Aer Lingus Easyjet Air Asia Flybe 15% United Alaska Qantas JetBlue 10% Korean Frontier Delta PIA 5% Hawaiian Spicejet SAA BA JAL 0% -20% -15% -10% -5% 0% 5% 10% 15% 20% Operating profits as % revenues Source: IdeaWorks, Airline Analyst, IATA IATA Economics www.iata.org/economics 11
Oil price, US$ per barrel US dollar trade weighted index Low fuel prices important but US$ major offset 160 The Brent crude oil price and the US dollar 95 140 US dollar 90 120 85 100 80 80 75 60 40 Brent crude oil price 70 65 Source: Datastream 20 2008 2009 2010 2011 2012 2013 2014 2015 60 IATA Economics www.iata.org/economics 12
Net post-tax profit as % revenue Driving further divergence in performance this year Airline net post-tax profit margins 8% N America 6% 4% 2% Europe Asia-Pacific 0% -2% -4% -6% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ICAO, IATA IATA Economics www.iata.org/economics 13
ROIC, % invested capital Operating costs/atk, US cents/atk Longer-term impact of lower fuel prices not clear Return on invested capital and unit costs 9.0 70 8.0 7.0 Return on invested capital Unit costs 65 6.0 60 5.0 4.0 55 3.0 50 2.0 1.0 45 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 40 Source: IATA, McKinsey IATA Economics www.iata.org/economics 14
US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer Costs typically passed through to prices 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Boeing 707 Unit cost and the price of air transport 1973 oil crisis US deregulation EU deregulation Unit cost (US$/ATK) 0.5 Price (US$/RTK) 0.0 1950 1960 1970 1980 1990 2000 2010 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - Source: ICAO, IATA IATA Economics www.iata.org/economics 15
World GDP growth, % Airlines ROIC, % invested capital A strong economy is unambiguously positive 6.0 Airline industry ROIC and world GDP growth 8.0 5.0 Airlines ROIC 6.0 4.0 3.0 2.0 4.0 2.0 1.0 0.0-1.0-2.0 World GDP growth 0.0-2.0-4.0-3.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, McKinsey, IHS Global Insight -6.0 IATA Economics www.iata.org/economics 16
year-on-year % growth Net balance of respondents, 50 = no change Economic cycle positive but not very strong Indicators of the global economic cycle 25% 70 20% 15% 10% 5% World trade growth Industrial production growth Business confidence 65 60 55 0% 50-5% 45-10% -15% 40-20% 35-25% 2008 2009 2010 2011 2012 2013 2014 2015 Source: Datastream 30 IATA Economics www.iata.org/economics 17
Chinese equity market bubble has burst IATA Economics www.iata.org/economics 18
year-on-year % growth But growth in demand for travel and cargo looks OK 25% Growth of air travel and air freight 20% 15% Freight (FTK) growth 10% 5% 0% Travel (RPK) growth 20-year average growth rate -5% -10% -15% -20% 2008 2009 2010 2011 2012 2013 2014 2015 Source: IATA IATA Economics www.iata.org/economics 19
Index, 2005=100 Though cargo growth should be much stronger 1.2 International trade compared to global industrial production 1.1 1.0 0.9 0.8 0.7 BEFORE: FTKs growth 6.4% p.a AFTER: FTKs growth 3.2% p.a. 0.6 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: Netherlands CPB, IATA IATA Economics www.iata.org/economics 20
Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Trade and cargo markets appear to have peaked 7. World trade in goods and air FTKs Billion FTKs (seasonally adjusted) 15 14 13 12 11 10 9 Index of world trade, 2005=100 (seasonally adjusted) 140 130 120 110 100 90 International FTKs World Trade Index Source: Netherlands CPB, IATA IATA Economics www.iata.org/economics 21
Business confidence has been diminishing IATA Economics www.iata.org/economics 22
Net balance responses. 50=no change Risk that growth expectations now too high IATA survey of airline CFOs and heads of cargo 120 100 Passenger services growth expected in the next 12 months 80 60 Cargo services growth expected in the next 12 months 40 20 0 2006 2008 2010 2012 2014 Source: IATA Business Confidence survey IATA Economics www.iata.org/economics 23