Airline financial performance 30 March 2017 Brian Pearce Chief Economist, IATA www.iata.org/economics Airline Industry Economics Advisory Workshop 2016 1
The air transport paradox Source: McKinsey presentation to IATA
Still very much a growth story % year-on-year Diffusion index 16% 65 12% 8% Growth in industry RPKs (LHS) Global services PMI index (adv. 2 months, RHS) 60 55 4% 0% Global manufacturing PMI index (adv. 2 months, RHS) 50 45-4% 40-8% 35-12% 30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: IATA Economics, IATA Monthly Statistics, Markit
Though much variation by travel market RPK growth by int'l route and dom. market (latest month, % year-on-year*) 20% 15% 10% 5% 0% -5% Domestic India Middle East - North America Domestic Russia Europe - Middle East Within Europe Middle East - Asia Domestic China Within Asia Asia - North America Asia - SW Pacific Europe - Asia Europe- C. America Africa - Europe Domestic Japan Domestic Australia North - South America Domestic Brazil Europe - North America Domestic US 0% 2% 4% 6% 8% 10% 12% 14% 16% Share of total global RPKs (Year ended Jan 2017) Sources: IATA Economics, IATA Monthly Statistics by Route *Note: int'l routes data are for January; domestic market data are for February
Long-term expansion even in gloomy macro scenario Global O-D passenger journeys (billion) 9 8 7 6 Reflation/open borders scenario Constant policies scenario 5 4 3 Pick-up in Protectionism scenario 2 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 Airline Industry Economics Advisory Workshop 2016 5 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Trip frequency still low in many important markets Australia Spain United Kingdom Canada United States Italy France Germany Saudi Arabia Korea, Republic Of Japan Thailand Turkey Chile Colombia Russian Federation Mexico Brazil Indonesia South Africa China Egypt India Nigeria 0 0.5 1 1.5 2 2.5 3 3.5 4 Propensity to fly (total passengers/population) Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop 2016 6
Large potential in populous but (currently) poor markets Source: IATA Economics using data from PaxIS+ and Oxford Economics
Demographics strong in some key markets, adverse in others % change 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% The UN's projected change in population (2015-2035,%) UN projections adjusted for demographic factors Airline Industry Economics Advisory Workshop 2016 8 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Passenger yields, US$ per RPK Scope for large price change in short-haul markets 0.19 Passenger yields and average trip length 0.17 0.15 0.13 Within Africa Within South America Within East Asia Within ASEAN 0.11 0.09 0.07 0.05 Source: IATA PaxIS+ Within Europe ASEAN- E Asia Middle Eastrest of world North-South America North Atlantic Pacific ASEAN-Africa ASEAN-Europe China-North America ASEAN-North America Europe- Australia 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Average trip length (kms)
China largest increment, US remains important China United States India Indonesia Vietnam Turkey Brazil Philippines Australia Mexico Corresponding CAGR 5.2% 2.6% 6.7% 3.5% 8.2% 5.2% 2.6% 6.0% 3.0% 4.2% 0 100 200 300 400 500 600 700 800 Change in domestic O-D markets (millions, 2015-2035) Airline Industry Economics Advisory Workshop 2016 10 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Significant change in top-10 markets over next 20 years US China UK Japan Spain Germany India Italy France Indonesia China US India UK Indonesia Japan Spain Germany Brazil Turkey 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 Airline Industry Economics Advisory Workshop 2016 11
Centre of gravity of air travel shifting fast towards China 1914 2004 2015 2035 Source: IATA Economics using data from PaxIS+
FTKs billion RPKs billion The GFC precipitated one key divergence Air travel and cargo volumes 280 230 180 130 Passenger RPKs Cargo FTKs 7,000 6,000 5,000 4,000 3,000 80 2,000 Source: ICAO, IATA 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
% change over previous year Retreat from globalization 15 World GDP and cross-border trade growth 10 5 World trade growth World GDP growth 0-5 -10-15 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IMF World Economic Outlook and the World Trade Organization
Supply chains have been shortened Index (Oct 2008=100) 120 110 100 90 80 70 60 50 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Netherlands CPB, UNCTAD World trade/ip ratio vs. measure of global supply chains Ratio of foreign value added to domestic value added in world gross exports World trade/ip ratio Share (%) 52 50 48 46 44 42 40 38 36 34 32 30
But growth has returned to cargo 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 % year-on-year % year-on-year 30% 40% 20% Growth in industry FTKs Global PMI new export orders component (adv. 2 months) 30% 20% 10% 10% 0% 0% -10% -10% -20% Implied PMI series if the index remains flat at its February 2017 level over the coming months -20% -30% -40% -30% -50% Sources: IATA Economics, IATA Monthly Statistics, Markit Source: Markit, IATA Statistics
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Despite sluggish world trade Indices (Jan 2012=100, seasonally adjusted) 130 120 110 100 90 80 70 60 115 110 105 100 95 90 Global FTKs Ratio of global FTKs to world trade volumes World trade volumes Rising FTK share Sources: IATA Economics, IATA Monthly Statistics, CPB Source: IATA Statistics, Netherlands CPB
% change on year earlier Traffic accelerating ahead of capacity growth 14% RPKs and ASKs growth 12% 10% 8% 6% 4% 2% ASKs 6.2% => 5.6% RPKs 5.9% => 5.1% 0% 2011 2012 2013 2014 2015 2016 2017 Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop 2016 18
US$ per barrel Margin squeeze signs of easing? Indexed to equal l 100 in Jnauary 2011 140 120 100 80 60 40 20 Airline passenger yield (constant fx) and crude oil prices, indexed 0 2011 2012 2013 2014 2015 2016 2017 Pax yield -8% => 0% Oil price 44.6 => 55 $/b 110 105 100 95 90 85 80 75 70 65 60 Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop 2016 19
EBIT as % revenues Industry profitability declining but how fast? 16% 14% 12% 10% 8% Quarterly profile for airline industry operating profits (EBIT) 6% 4% 2% 0% Operating margin 8.3% => 6.6% Net profits $39.6bn => $29.8bn -2% 2011 2012 2013 2014 2015 2016 2017 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 20
At last investors are getting a normal return % of invested capital 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Return on capital invested in airlines 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Cost of capital (WACC) Return on capital (ROIC)
US$ billion Ending decades of investor capital destruction (?) Difference between investing in airlines and investing in similar assets elsewhere 15 10 5 0-5 -10-15 -20-25 -30-35 -40 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: McKinsey, IATA
% ROIC 30% Other sectors do better Return on capital across the air transport supply chain 25% 20% 1996-2014 2007-2014 15% 10% 5% 0% Source: McKinsey for IATA
But this is not the main issue for airline earnings Average yearly economic profit, USD billion, 2007-2014 2.0 (0.7) - (2.0) 0.4 0.7 0.3 (2.5) 0.8 Estimate (19.4) 0.5 0-2.0 1.2 (16.7) (18.0) Manufacturers Lessors MRO Ground Catering Airports ANSP Airlines CRS GDS Travel Agents Freight Forwarders TOTAL Source: McKinsey for IATA
Aircraft fuel efficiency has improved dramatically Source: Lee
But costs typically passed through to prices US$ in 2013 prices to fly a tonne kilometer US$ in 2013 prices per tonne kilometer 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
In fact prices have fallen further than costs % ATKs 70% Breakeven and actual load factors 65% Load factor achieved 60% 55% Breakeven load factor +15% points 50% Source: IATA, ICAO 45% 1970 1975 1980 1985 1990 1995 2000 2005 2010
Number of unique city-pairs US$/RTK in 2014US$ Consumers have been the major beneficiaries 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Unique city-pairs and real transport costs Unique city pairs Real cost of air transport 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 3.5 3 2.5 2 1.5 1 0.5 Source: ICAO, Boeing, OAG, IATA
% ATKs Structural change? Breakeven and achieved weight load factor 68 Achieved LF 67 66 65 64 63 62 61 60 Breakeven LF 59 58 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 29
ROIC, % of invested capital Jet fuel price, US$/barrel High fuel prices not always bad for airlines Airline industry ROIC and jet fuel prices 10.0 ROIC 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Jet fuel price 2.0 1.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA, Platts 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Airline Industry Economics Advisory Workshop 2016 30
Operating margin, % revenue Capital productivity, revenue/invested capital, US$ Solid improvement in capital productivity 10 8 6 4 2 0-2 -4 Airlines' operating or EBIT margin and capital productivity Capital productivity Operating margin 1.4 1.3 1.2 1.1 1.0 0.9-6 0.8 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 31
Very wide variety of business models EBIT margin, adjusted EBIT/revenue 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00-0.05-0.10 2015 ROIC = adjusted EBIT/revenue * revenue/invested capital Jazeera Spring Mesa Ryanair Spirit Allegiant Volaris Alaska PFIZER Hawaiian JetBlue Southwest Air China AMR JAL Delta United Easyjet Aeromexico PIA IAG Qantas Air Canada Cathay SIA ANA LATAM Korean GOL AF-KLM Comair Thai Increasing return on capital (ROIC) Lufthansa WALMART 0.00 0.50 1.00 1.50 2.00 2.50 Capital productivity ($ revenue per $ invested capital) Source: IATA using data from The Airline Analyst Airline Industry Economics Advisory Workshop 2016 32
US performance dominating industry totals 15% Net post-tax profit margins 10% 2015 2016 5% 0% -5% -10% N America Europe Asia Pacific Midle East L America Africa Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report
Wide variation in balance sheet performance Adjusted net debt/ebitdar 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Adjusted net debt/ebitdar by region 2.0 2011 2012 2013 2014 2015 Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report Latin America Asia Pacific Europe North America
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