Outlook for growth, traffic and airline profits Brian Pearce, Chief Economist, IATA www.iata.org/economics Airline Industry Economics Advisory Workshop 2016 1
50 = no change in output expected Widespread revival of business confidence 60 Business confidence in developed and emerging economies 55 50 Developed economies Emerging economies 45 40 35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA Economics using data from Markit
Consumers have become more confident too Worldwide average consumer confidence 102 101 100 99 98 97 96 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA Economics using data from Datastream
Perhaps surprisingly given political shocks Donald Trump Vows to Rip Up Trade Deals and Confront China The New York Times 28 June 2016
Will the IMF economic growth forecast be right at last? 5 IMF forecasts of global economic growth (using market exchange rates), % y-o-y 4 3 2 1 April 2013 April 2014 April 2015 April 2016 January 2017 Latest data point 0-1 -2-3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: IMF World Economic Outlook databases
% interest rate Billion US$ Monetary policy effectiveness is exhausted 10 9 8 7 6 5 4 3 2 1 US federal funds target rate and balance sheet assets US Federal Reserve Bank assets US fed funds 0 1985 1990 1995 2000 2005 2010 2015 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Source: IATA Economics using data from Haver
But fiscal policies recently became a stimulus to growth 2.5 2 1.5 1 0.5 0-0.5-1 -1.5-2 -2.5 Change in general government structural budget as % GDP 2011 2012 2013 2014 2015 2016 2017 Source: IATA Economics using data from the IMF World Economic Outlook US Euro area China Tighter/ deflationary fiscal policy Looser/ reflationary fiscal policy
Changes in trade competitiveness spread the recovery 140 Real effective exchange rates 130 120 110 100 90 80 70 China US Germany Brazil Deteriorating competitiveness Improving competitiveness 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IATA Economics using data from the World Bank
% change versus year ago Economic growth converging in key regions 14 12 10 8 6 4 2 0-2 -4-6 -8 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA Economics using data from Oxford Economics Economic growth in key regions and countries China United States Brazil European Union
Strong start to the year, though Americas travel lagging YTD Feb 2017 Industry 7.0% Middle East 11.4% Asia Pacific 9.5% Europe 7.3% Africa 5.4% L. America 3.9% N. America 1.7% 0% 2% 4% 6% 8% 10% 12% 14% Revenue passenger kilometres (YTD, % year-on-year) Source: IATA Economics using data from IATA Statistics
Cargo also strong, but again Americas lagging Freight tonne kilometres (% year-on-year) February 2017 Industry 8.4% Asia Pacific Africa Europe N. America Middle East L. America -4.9% 3.4% 5.8% 10.6% 10.5% 11.8% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% Source: IATA Economics using data from IATA Statistics
US$ per barrel But profit margins are now being squeezed Indexed to equal l 100 in Jnauary 2011 140 120 100 80 60 40 Airline passenger yield and crude oil prices, indexed Passenger yield Oil price 20 0 2011 2012 2013 2014 2015 2016 2017 110 105 100 95 90 85 80 75 70 65 60 Source: IATA using data from PaxIS+ and Haver Airline Industry Economics Advisory Workshop 2016 12
EBIT as % revenues Industry profitability peaked a year ago 16% 14% Quarterly profile for airline industry operating profits (EBIT) 12% 10% 8% 6% 4% Seasonally adjusted margins Unadjusted margins 2% 0% -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 13
Return on capital lower this year but still good % 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)
It s partly fuel prices ROIC, % of invested capital Jet fuel price, US$/barrel Airline industry ROIC and jet fuel prices 10.0 ROIC 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Jet fuel price 2.0 1.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economics using data from Platts and IATA 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Airline Industry Economics Advisory Workshop 2016 15
But also much better asset utilization % ATKs Breakeven and achieved weight load factor 68 Achieved LF 67 66 65 64 63 62 61 60 Breakeven LF 59 58 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IATA Economic Performance of the Airline Industry end year 2016 report Airline Industry Economics Advisory Workshop 2016 16
Operating margin, % revenue And capital has become much more productive Capital productivity, revenue/invested capital, US$ 10 8 6 4 2 Airlines' operating or EBIT margin and capital productivity Capital productivity Operating margin 1.4 1.3 1.2 1.1 0-2 -4 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 17
EBIT adjusted for operating leases as % invested capital But performance is very different between regions 20% 18% Return on invested capital 16% North America 14% 12% 10% 8% 6% 4% 2% 0% 2010 2011 2012 2013 2014 2015 2016 Source: IATA Economics using data from The Airline Analyst Europe Industry average Asia Pacific Latin America Middle East Weighted Average Cost of Capital
Debt adjusted for operating leases/ebitdar Balance sheets show divergent degrees of resilience 8 Adjusted net debt/ebitdar 7 6 5 4 3 2 1 0 Middle East 2010 2011 2012 2013 2014 2015 2016 Latin America Asia Pacific Industry average Europe North America Investment grade credits Source: IATA Economics using data from The Airline Analyst
This year divergence narrows, but not by much 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Net post-tax profit margins 2015 2016 2017 N America Europe Asia Pacific Midle East L America Africa Source: IATA Economic Performance of the Airline Industry end year 2016 report
Airline Industry Economics Advisory Workshop 2016 21