Airline financial performance and longterm developments in air travel markets March 2018 Brian Pearce, Chief Economist, IATA www.iata.org/economics
% of invested capital Investor returns falling but above cost of capital for a 4 th year 12.0 Return on capital invested in airlines and their cost of capital 10.0 Return on capital (ROIC) 8.0 6.0 Cost of capital (WACC) 4.0 2.0 0.0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: IATA Economics using data from McKinsey, The Airlines Analyst, IATA forecasts
US$ billion From value destruction to value creation to a normal industry 30 Difference between investing in airlines and investing in similar assets elsewhere 20 10 0-10 -20-30 -40 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: IATA Economics using data from McKinsey, The Airlines Analyst, IATA forecasts
ROIC, % of invested capital Jet fuel price, US$/barrel Fuel costs are down but it s not a simple link with profitability 12.0 10.0 8.0 Airline industry ROIC and jet fuel prices Return on capital (ROIC) 160 140 120 100 6.0 80 4.0 2.0 Jet fuel price 60 40 20 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 Source: IATA Economics using data from McKinsey, Platts and own forecasts
And the correlation with the economic cycle has broken down 10% Airline industry EBIT margin and global GDP growth 8% Airlines' EBIT margin 6% 4% 2% Global GDP growth 0% -2% -4% -6% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: IATA Economics using data from ICAO, IATA Statistics, IMF and our own forecasts
% ATKs Signs of improvement being structural rather than transitory Breakeven and achieved weight load factors 71 69 Load factor achieved 67 65 63 61 59 Breakeven load factor 57 55 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: IATA Economics using data from ICAO, IATA Statistics, IATA forecasts
Airlines are sweating assets as well as improving margins Operating margin, % revenue Capital productivity, revenue/invested capital, US$ Components of return on capital 10 Operating margin 8 1.5 1.4 6 Capital productivity 1.3 4 1.2 2 0 1.1-2 1.0-4 0.9-6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0.8 Source: IATA Economics using data from ICAO, McKinsey, The Airline Analyst, IATA forecasts
Debt adjusted for operating leases/ebitdar But within the industry totals there is still much variation 8 Adjusted net debt/ebitdar 7 6 5 Latin America Middle East Asia Pacific 4 3 2 1 Industry average Europe North America Investment grade 0 2010 2011 2012 2013 2014 2015 2016 Source: IATA Economics using data from The Airline Analyst
Air travel outlook will depend on economics and geopolitics Global passengers (O-D basis, billion) 10 5.7% Policy Stimulus and Market Liberalization 9 Constant policies scenario 8 A Pick-up in Protectionism Average rates of passenger growth per year in each scenario 7 6 5 3.6% 2.7% 4 3 2 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Source: IATA/TE Passenger Forecasts
Trip frequency and living standards is a key driver in our model 2 Frequency of air travel and living standards 350 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Trip frequency Months before next trip Low income Middle income High income Above $20,000 300 250 200 150 100 50 0 Source: IATA/Tourism Economics Air Passenger Forecasts, April 2016 www.iata.org/economics 10
Trip frequency still low in many populous countries Australia Spain United Kingdom Canada United States Italy France Germany Saudi Arabia Korea, Republic Of Japan Thailand Turkey Chile Colombia Russian Federation Mexico Brazil Indonesia South Africa China Egypt India Nigeria 0 0.5 1 1.5 2 2.5 3 3.5 4 Propensity to fly (total passengers/population) Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Living standards still have much room for catch-up % CAGR (2015-2035) 5.5% Growth in per capita incomes over the long run 5.0% 4.8% 4.7% 4.5% 3.9% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 1.5% 1.4% 1.5% 1.3% 1.2% 0.9% 1.0% 0.8% 0.8% 0.8% 0.7% 0.7% 0.5% 0.0% Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
This is one of the key relationships driving our air travel forecasts Source: IATA Economics using data from PaxIS+ and Oxford Economics
Population, adjusted for age structure, is another key driver % change 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% The UN's projected change in population (2015-2035,%) UN projections adjusted for demographic factors Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016
Proportion of countries in each range (%) And price is driven by efficiency gains and liberalization trends 40% Distribution of countries by level of air market liberalization 35% 30% 25% 20% 15% 10% 5% Air markets are less liberal Air markets are more liberal Median WALI scores 2005: 9.9 2011: 10.2 0% 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 Weighted Air Liberalization Index (0 = completely regulated, 50 = completely liberalized) Source: World Trade Organization QASAR database 2005 2011 www.iata.org/economics 15
Scope for large price change in short-haul markets Passenger yields, US$ per RPK 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 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) Source: IATA Economics using data from PaxIS+
Emerging countries dominate the fastest growing passenger markets Markets with the largest increases in O-D passengers (2016-2036) Million O-D passenger journeys (to, from and within) 1,500 1,250 1,000 750 500 450 400 350 300 250 200 150 100 50 0 2016 2036 Source: IATA/TE Passenger Forecasts China US India Indonesia Turkey Thailand Brazil UAE Viet Nam Philippines
Leading to a re-ranking of the top-10 air travel markets Source: IATA/TE Passenger Forecasts
Aviation s centre of gravity shifts further eastwards Source: IATA/TE Passenger Forecasts
% CAGR Passenger flows to and from (Millions) Rank (2014) Country 5 year 10 year 20 year 2014 2019 2024 2034 2014-2019 2014-2024 2014-2034 Passenger numbers ('000s) CAGR % 1 US Domestic 438,252 554,280 636,662 822,051 4.8% 3.8% 3.2% 2 Canada 23,733 27,166 30,809 39,084 2.7% 2.6% 2.5% 3 Mexico 21,011 24,531 28,762 41,011 3.1% 3.2% 3.4% 4 UK 13,946 18,283 20,628 26,145 5.6% 4.0% 3.2% 5 Japan 9,557 10,214 10,550 11,485 1.3% 1.0% 0.9% 6 Germany 8,369 9,726 10,997 13,975 3.1% 2.8% 2.6% 7 China 6,334 7,004 8,423 12,358 2.0% 2.9% 3.4% 8 France 6,026 7,166 8,284 11,005 3.5% 3.2% 3.1% 9 Dominican Republic 5,836 6,698 8,171 12,288 2.8% 3.4% 3.8% 10 Brazil 5,659 6,071 7,542 11,739 1.4% 2.9% 3.7% 11 India 4,516 6,035 8,070 13,565 6.0% 6.0% 5.7% 12 Korea 4,512 5,729 6,982 9,289 4.9% 4.5% 3.7% 13 Italy 4,344 4,865 5,537 7,103 2.3% 2.5% 2.5% 14 Colombia 3,195 3,769 4,785 7,539 3.4% 4.1% 4.4% 15 Jamaica 3,053 3,838 4,662 6,782 4.7% 4.3% 4.1% 16 Australia 2,813 3,125 3,423 4,106 2.1% 2.0% 1.9% 17 Spain 2,580 3,243 3,912 5,197 4.7% 4.2% 3.6% 18 Bahamas 2,536 3,265 3,930 5,513 5.2% 4.5% 4.0% 19 Ireland 2,298 2,678 3,315 4,350 3.1% 3.7% 3.2% 20 Switzerland 2,233 2,572 2,930 3,796 2.9% 2.8% 2.7% US Domestic Canada Mexico UK Japan Germany China France Dominican Republic Brazil India Korea Italy Colombia Jamaica Australia Spain Bahamas Ireland Switzerland 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 US Domestic Mexico Canada UK Germany India China Dominican Republic Brazil Japan France Korea Colombia Italy Jamaica Bahamas Spain Costa Rica Netherlands Ireland Global Report Country Reports Online database/webtool United States - Passenger Market Overview Air Passenger Forecasts October 2014 Decomposition of growth, 2014-2034 3.5% The United States air passenger market is forecast to grow at an average annual growth rate of 3.2% per annum over the next 20 years. 3.0% 2.5% 0.8% 0.2% This puts the United States in the 28th percentile of fastest growing markets in our forecast during the period 2014-2034. Improvements in livings standards contribute 1.4 percentage points to annual growth. Favourable population and demographic factors are forecast to contribute 0.8 percentage points to annual growth. 2.0% 1.5% 3.2% 0.8% Other factors, mainly future technological gains, will contribute 0.8 percentage points per year. Explanation of the main drivers of growth (for more details, see the Global Report) 1.0% 0.5% 1.4% Living standards: We proxy a country s standard of living by its level of Gross Domestic Product per capita (ie, the total amount of output produced in an economy each year divided by its population). The living standards channel captures the clear relationship between the number of trips taken on average by inhabitants of a country each year and that country s standard of living. Population and demographics: Forecasting air passenger markets requires a further understanding of how many people there will 0.0% be to demand air travel in the future. This will depend on changes in total population sizes over time as well as changes in Total passenger market growth Main drivers demographic structures ; given that older people tend to fly less often than people in working-age groups, air market growth in countries whose populations are projected to age considerably over the coming 20 years is likely to face Living standards Population & Demographics Trade Price & Liberalisation headwinds. Change in passenger numbers, 2014-2034 600 500 400 31.4% Trade flows: A high correlation is observed between a country s trade openness measured by exports and imports as a proportion o an economy s total output and its propensity to travel. We therefore include Oxford Economics forecasts of trade intensity over time into our modelling. Price and liberalisation: The decline in the price of air travel that is the cost of air travel in both monetary terms and the time saved by more direct routes has been a notable feature of the industry over the past 60 years or so. We expect the downward trend in the unit cost of air travel to resume in the future, mainly reflecting new technologies and efficiencies being realized The introduction of new longer-range mid-size aircraft will connect many more city and country pairs too and lead to considerable time savings for passengers. Future potential for reductions in travel times will also be driven by changes in regulatory regimes. 300 559 The United States is forecast to gain an additional 559 million passengers by 2034, compared to 2014. Whilst the United States is in the 28th percentile in terms of fastest growing markets over the next 20 years, it is forecast to be ranked as the 2nd largest markest based on the total number of passengers in 2034. 200 68.6% Domestic passengers will represent 68.6% of total growth over this period, accounting for 384 million addittional passengers. 100 Foreign passengers will contribute less to overall growth, representing 31.4% of total growth, equal to 175 million addittional passengers. 0 Total passenger absolute growth (millions) Domestic Absolute growth by foreign and domestic Foreign Air Passenger Forecasts United States - Top Country Pairs October 2014 Top US country pairs ranked by passenger numbers, 2014-2034 The United States domestic market is ranked 1st in 2014, and is forecast to remain as the largest market in 2034; taking 70.6% of the total market in 2034, down from 76.5% in 2014. Whilst the United States domestic market is the largest market in 2014; the 2nd largest market is Canada, accounting for 3% of total passengers which is forecast to rise marginally to 3.4% by 2034. The biggest three markets in 2014 are the US Domestic, Canada and Mexico, while in 2034 they are forecast to become the US Domestic, Mexico and Canada respectively. The largest riser in the 20 year period is forecast to be India rising 5 places to be ranked 6th largest market in 2034. Whilst the biggest faller in the period 2014-2034 is forecast to be Australia falling 6 places to be ranked 22nd largest market in 2034. www.iata.org/pax-forecast