A financial update on the U.S. airline industry presented to the DOT Advisory Committee on Aviation Consumer Protection

1. U.S. Airlines: Their Nascent Recovery and the
Benefits to the Nation
Second Meeting of the Advisory Committee on Aviation Consumer Protection
Aug. 7, 2012

2. Overview
• The industry is climbing out of a huge financial hole, to modest profitability
o Diversification of revenues and improved alignment of revenues generated with costs incurred have
been critical elements of the nascent recovery
• A heavy dose of new/proposed regulations in 2012 threaten the recovery
• A financially healthy airline industry means job growth and service reinvestment
• Operational performance is strong and improving, and reflected in a remarkably
low complaint rate – especially compared to other industries with smaller volumes
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3. The Value Proposition for U.S. Air Travelers Is Alive and Well
It’s Safer, It’s Greener, It’s ~80 Percent On-Time and It’s Still a Bargain
Index (1990 = 100)
180
Fuel Efficiency
160
140
120
100 On-Time
80
Fares ($2011)
Exposure
60
40
Noise
20
Fatal Accidents*
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
* 5-year-moving-average fatal accident rate for U.S. air carriers operating under 14 CFR 121 scheduled service (http://www3.ntsb.gov/aviation/Table6.htm)
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4. Modest Profits in 2010 and 2011 Came on the Heels of Massive Losses
Cumulative 2001-2011 Net Loss for U.S. Passenger Airlines = $62.3 Billion
Profit (Billions)
$20 $16.5
$10 $6.3
$2.2 $0.6
$0
($2.1) ($1.1)
($2.9)
($10) ($8.0)
($11.8) ($10.0)
($20)
($24.5)
($30)
($28.6)
($40)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12
Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues
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5. Even With Ancillary Revenues, 2011 Revenues Exceeded Costs by Just 81 Cents (0.4%)
Excluding $8.06 in Ancillaries, Revenues Would Have Lagged Costs by $7.26 (-3.4%)
2011 U.S. Airline Financial Results per Enplaned Passenger
$212.73 $211.93
Ancillary, $8.06
Airfare
$159.53
Cargo & Other
$45.14 $0.81
Revenues Costs Net Income
Source: A4A analysis of DOT Form 41 data reported by U.S. airlines for which passenger revenue constitutes at least 25 percent of total operating revenues
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6. Historically, Airlines Have Been the Least Profitable Segment of the Value Chain
For Airlines, the Cost of Capital Tends to Exceed Returns
IATA worked closely with McKinsey & Company to examine the investors’ returns…over a full industry
cycle (1996 to 2004)… Computer reservation systems (CRS), a sector dominated by just four major
firms, delivered the highest returns, with an annual surplus of $660 million over their cost of capital.
Investor Returns on Capital*
20 1996-2000 15.8
15 2001-2004
10.5
10
4.4 3.7
5
0.3 0.5
0
(1.2) (1.6) (0.4)
(5)
(5.5)
(10)
Manufacturers Lessors Airlines CRS/GDS Travel Agents
* Return on invested capital minus weighted average cost of capital
Source: McKinsey & Company as cited in IATA “Value Chain Profitability” Economics Briefing (June 2006)
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7. The Airline Industry’s Financial Condition Is Improving, But Far From Stellar
Per S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit
Investment Grade1 (>= BBB-) Speculative2 Grade (< BBB-)
ExxonMobil, Microsoft AAA Ford Motor Co. BB+
GE AA+ British Airways, TAM BB
Wal-Mart AA Alaska, Allegiant BB-
Toyota, UPS AA- Avis, GOL, Hertz B+
BP, eBay A Delta, United B
Amtrak, Starbucks A- Air Canada, JetBlue, SAS, US Airways B-
FedEx, Marriott, QANTAS, Starwood BBB American D
Lufthansa, Southwest BBB-
Passenger Airline
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 as of Jul. 21, 2012; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”
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8. Sample of New Regulations on U.S. Airlines Will Add $3.3 Billion in Annual Costs
With More Rules Looming, That Sum Equates to Approximately 39,000 Airline Industry Jobs
TOTAL BURDEN 38,793 ($3.3B)
Existing
Full-Fare Advertising 12,407 ($1.04B)
Flight and Duty Time 9,580 ($804M)
Other Consumer Mandates 9,379 ($787M)
Fuel-Tank Inerting 1,703 ($143M)
Proposed
Training 3,935 ($330M)
Airport Hydrant Fueling Systems 1,789 ($150M)
Lithium Batteries (TBD)
Source: A4A and Federal Aviation Administration
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9. Improved Airline Finances Have Translated to 18 Consecutive Months of Job Growth
After Years of Losses, U.S. Passenger Airlines Have Also Been to Reinvest in Equipment
Airline Jobs Added in 18 Months in a Row Aircraft Capital Spending on the Rise
YOY Change (%) in Full-Time Equivalent Employees Average Annual Estimated Aircraft/Engine CapEx (Billions)
4
$16.9
2
0
$9.7
(2)
$9.2
$6.6
(4)
$5.8
$5.8
$5.7
$4.8
$4.2
(6)
$3.4
(8)
2007
2008
2009
2010
2011
2012
05
00-01
02
03
04
06-09
10
11
12F
13F
Source: BTS for U.S. scheduled passenger airlines Source: Bank of America Merrill Lynch airline equity research (Jan. 5, 2012)
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10. Rising Costs and Constraints on Revenue Production Translate to Air Service Cuts
Domestically, the United States Has a 9 Percent Smaller Industry Than Five Years Ago
Scheduled Domestic Seating Capacity: Five-Year Comparison
190
Available Seat Miles (Billions)
186.2
185
180
175
170 169.0
165
160
4Q07 4Q12
Source: Innovata (via Diio Mi) published schedules as of Aug. 3, 2012; an available seat mile (ASM) is one seat flown one mile
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11. Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a Bargain
The U.S. Consumer Price Index (CPI) Has Risen at Twice the Rate of Domestic Air Travel
Product (Unit) 2000 2011 Change (%)
College Tuition: Public (Year) $3,508 $8,244 135.0
Gasoline (Gallon, Unleaded) $1.51 $3.53 133.8
Costs Faced by U.S. Passenger Airlines (Index) 100.0 195.0 95.0
Eggs (Dozen, Grade A, Large) $0.91 $1.77 94.5
College Tuition: Private (Year) $16,072 $28,500 77.3
Baseball Game (Nonpremium MLB Ticket) $16.22 $26.91 65.9
Movie Ticket $5.39 $7.92 46.9
Single-Family Home (New) $169,000 $227,200 34.4
U.S. CPI (All Urban Consumers)1 172.2 224.9 30.6
Vehicle (New) $24,923 $30,659 23.0
Air Travel (Round-Trip Domestic Fare + Ancillary)2 $316.95 $365.23 15.2
Air Travel (Round-Trip Domestic Fare Only)2 $314.46 $343.46 9.2
Apparel: Clothing/Footwear/Jewelry (Index) 129.6 122.1 (5.8)
Television (Index) 49.9 6.6 (86.8)
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 the Bureau of Transportation Statistics – excludes taxes; “ancillary” includes revenue from reservation changes and baggage
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12. Even With Ancillaries Included, Price of Domestic Air Travel Lags U.S. Inflation
From 2000 to 2011, Price in Key States Either Decreased or Rose Less Than U.S. CPI
% Change (2011 vs. 2000) Less Than U.S. CPI More Than U.S. CPI
U.S. Domestic Average 15.2
U.S. CPI: +30.6%
California 16.8
Illinois 7.7
Massachusetts (2.9)
Sources: A4A analysis of BTS Data Bank 1B (from the Department of Transportation)
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13. U.S. Airline Operations Have Improved Substantially Over Past Five Years
Record Performance Enabled by Reinvestment in Product, Cooperative Weather, Etc.
2007 YTD 2012 Better Success Rate
On-Time Arrival Rate
73.4 84.3 ~11 pts. 84.3%
(% of domestic flights within 00:15)
Involuntary Denied Boardings
1.12 0.91 ~19% 99.991%
(per 10,000 passengers)
Mishandled Bags
7.05 3.01 ~57% 99.699%
(per 1,000 domestic passengers)
Flight Cancellations
2.16 1.06 ~51% 98.940%
(as % of sched. domestic departures)
Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)
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14. Hence, the Rate of Customer Complaints Against Airlines is Remarkably Low
Rail Customers Express Far Greater Levels of Dissatisfaction
Complaints received per 100,000 customers, CY2011
632 U.S. Passenger Airlines 1.18 Sample Route Rate
Capitol Corridor (Cal.) 15.5
Keystone 78.9
Millions of Customers
0.466 Capital Metro (Austin, TX) 2.50
Acela 204.3
362 Los Angeles Metrobus 2.92 NE Regional 248.6
Chicago-Carbondale 419.7
Chicago-St. Louis 487.2
97 U.S. Cable Companies 6.56
California Zephyr 6,138.2
367 WMATA (Wash., DC) 12.50
83 Metro North RR (NYC) 16.28
30 AMTRAK 627.54
Sources: DOT, Federal Communications Commission, National Cable & Telecommunications Association, WMATA, Capital Metro (Austin), Los Angeles County
Metropolitan Transportation Authority, American Public Transportation Association, AMTRAK
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15. Conclusion
• The industry is climbing out of a huge financial hole, to modest profitability
• New/proposed/looming regulations in 2012 alone threaten the recovery, jobs
• A financially healthy airline industry means job growth and service reinvestment
• Operational performance is strong and improving, and reflected in a remarkably
low complaint rate – especially compared to other industries with smaller volumes
15 airlines.org

16. www.airlines.org