Airline Industry Economics AWG presentation 21 May 2015 Brian Pearce, Chief Economist www.iata.org/economics To represent, lead and serve the airline industry
Brent crude oil price, $/b US dollar trade-weighted index Two big changes in the business environment 160 140 120 US dollar trade-weighted index and the price of oil RDD5DDG25VHIYN85A2QCI 95 L US dollar tradeweighted index +25% 90 85 100 80 60 40 20 Brent crude oil price -50% 80 75 70 65 60 55 Source: Datastream 0 2008 2009 2010 2011 2012 2013 2014 2015 50 IATA Economics www.iata.org/economics 2
ROIC, % invested capital Operating costs/atk, US cents/atk Impact of lower fuel prices not unambiguous Return on invested capital and unit costs 9.0 70 8.0 7.0 Return on invested capital Unit costs 65 6.0 60 5.0 4.0 55 3.0 50 2.0 1.0 45 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 40 Source: IATA, McKinsey IATA Economics www.iata.org/economics 3
US$ 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: IATA/Tourism Economics Air Passenger Forecasts IATA Economics www.iata.org/economics 4
World GDP growth, % Airlines ROIC, % invested capital A strong economic cycle would help airline returns Airline industry ROIC and world GDP growth 6.0 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 5
% change over year Net balance, 50 = no change Economic cycle but positive not very strong 25% Measures of the global economic cycle 70 20% 15% 10% 5% World trade growth Global 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 30 Source: Datastream IATA Economics www.iata.org/economics 6
% change over year But growth in demand for travel and cargo is solid 30% Global RPK and FTK growth 25% 20% 15% FTKs 10% RPKs 5% 20-year average 0% -5% -10% -15% -20% 2008 2009 2010 2011 2012 2013 2014 2015 Source: IATA IATA Economics www.iata.org/economics 7
Index, 2005=100 Adverse structural change in air cargo 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 8
Much of the airline industry still highly fragmented Market share of top-3 airlines/jvs 53% 75% 25% 35% 25% 20% 37% 50% Source: SRS Analyser IATA Economics www.iata.org/economics 9
Ancillaries as % revenues Commoditized product starting to be addressed 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 10
All of which is leading to this % ATKs 68 Breakeven and achieved load factor 67 66 Achieved 65 64 63 62 Breakeven 61 60 59 58 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA IATA Economics www.iata.org/economics 11
% of invested capital So airline industry ROIC is improving significantly 10.0 Return on capital invested in airlines 9.0 8.0 Cost of capital (WACC) 7.0 6.0 5.0 4.0 3.0 Return on capital (ROIC) 2.0 1.0 0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, McKinsey IATA Economics www.iata.org/economics 12
number of airlines Improvement 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 13
Adjusted net debt, US$ billion Median airline not as well placed as leaders 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 14
Index, 2007=100 Financial markets recognized regional divergences 160 Airline share price indices, 2007 = 100 140 US airlines 120 100 80 60 European airlines Asian airlines 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 Source: Thompson Reuters Datastream IATA Economics www.iata.org/economics 15
ROIC as as % invested capital Performance gains mostly US and parts of Europe 2014 return on capital by region 30% 20% 10% 0% -10% -20% -30% N America Europe Asia Pacific LA ME AF Source: The Airline Analyst, IATA IATA Economics www.iata.org/economics 16