Cyclical gains but structural challenges Brian Pearce Chief Economist www.iata.org/economics To represent, lead and serve the airline industry
% change over year PMI index level, 50=no change Economic conditions are improving Global industrial production, trade and business confidence 25% 20% 70 65 15% 10% 5% International trade Industrial output 60 55 0% 50-5% Business confidence 45-10% -15% 40-20% 35-25% 30 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Datastream IATA Economics www.iata.org/economics 2
Though volatility and risk remains US$ per Ruble US$ per barrel 0.031 Russian ruble exchange rate and the Brent crude oil price 112 111 0.03 110 0.029 Brent crude oil price 109 108 0.028 Russian Ruble exchange rate 107 106 0.027 Jan Feb Mar 105 Source: Datastream IATA Economics www.iata.org/economics 3
Fuel prices stuck in (high) range 200 180 Jet kerosene and crude oil price, $/barrel 160 140 120 100 Jet kerosene price $140/b $110/b 80 Brent crude oil price 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 Source: IATA, Platts IATA Economics www.iata.org/economics 4
% change over year % change over year Growth in air travel accelerating 15% 10% Global industrial production and RPK growth Industrial production growth RPK growth 15% 10% 5% 0% 5% 0% -5% -5% -10% -10% 2007 2008 2009 2010 2011 2012 2013 Source: IATA, Datastream -15% IATA Economics www.iata.org/economics 5
Cyclical upturn in demand for air cargo Business confidence index FTKs billion 60 FTKs and business confidence 18 55 Business confidence 17 50 16 45 40 FTKs 15 14 13 35 12 30 2008 2009 2010 2011 2012 2013 2014 Source: IATA, Markit 11 IATA Economics www.iata.org/economics 6
Indexed to 100 in May 2010 Even Asia is now seeing some growth 160 FTKs by region of airline registration 150 140 Middle East (+45%) 130 120 110 100 Cycle peak for market total Africa Latin America Europe North America 90 Asia-Pacific (-12%) 80 2010 2011 2012 2013 2014 Source: IATA IATA Economics www.iata.org/economics 7
But trade growth much weaker than normal % change year-on-year 20% 15% 10% World trade and industrial production growth World trade growth (avg. 5.6% pa) 5% 0% -5% -10% Industrial production growth (avg. 2.8% pa) -15% -20% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Datastream IATA Economics www.iata.org/economics 8
On-shoring? International trade volumes relative to domestic industrial output (WT/IP) 2.0 Globalization / off-shoring 1.8 1.6 1.4 On-shoring / protectionism? 1.2 1.0 0.8 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: IATA, Datastream IATA Economics www.iata.org/economics 9
Resist protectionism/ implement Bali Almost 500 protectionist measures taken in 2012 Number of measures Source: Global Trade Alert IATA Economics www.iata.org/economics 10
Unit labour cost, 2000=100 Henry hub gas prices, US$/mmbtu But some on-shoring permanent 250 China's labour costs and US gas prices 12 200 China's unit labour costs 11 10 9 150 8 7 100 6 US gas prices 5 50 4 3 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Haver 2 IATA Economics www.iata.org/economics 11
Weight load factor, % AFTK Freighter aircraft utilization, average daily hours Asset utilization bottoming out 53% Air cargo asset utilization 10.50 51% 10.00 49% 47% Freight load factor 9.50 45% 9.00 43% 41% 39% Freighter aircraft utilization 8.50 8.00 37% 7.50 2008 2009 2010 2011 2012 2013 2014 Source: IATA, Boeing, all data seasonally adjusted by IATA IATA Economics www.iata.org/economics 12
Pressure on cargo yields may not be over 14,000 Tonnes of new cargo capacity from aircraft deliveries 12,000 10,000 Pax fleet new belly capacity Freighter fleet new capacity 8,000 6,000 4,000 2,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IATA, Ascend IATA Economics www.iata.org/economics 13
Structural improvements helping Source: IATA, ICAO IATA Economics www.iata.org/economics 14
Improving net profits and EBIT margins % revenues US$ billion 6.0 Global commercial airline profitability 25 3.0 EBIT margin (left scale) 15 5 0.0-3.0 Net post-tax profit (right scale) -5-15 -6.0-25 -9.0-35 Source: IATA (forecast), ICAO (history) IATA Economics www.iata.org/economics 15
Average airline margins remain fragile Forecast 2014 worldwide airline results per departing passenger 240 220 200 180 160 140 120 100 80 60 40 20 0 Source: IATA $225.58 Ancillary $13.93 Air fare $180.96 Cargo & other $30.69 Revenues $219.93 Costs $219.93 Costs $5.65 Net profit IATA Economics www.iata.org/economics 16
% of invested capital Returns on capital still too low 9.0 8.0 Return on capital invested in airlines and their cost of capital Cost of capital (WACC) 7.0 6.0 5.0 4.0 Inadequate returns Return on capital (ROIC) 3.0 2.0 1.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014F Source: IATA Source: IATA, McKinsey IATA Economics www.iata.org/economics 17
Net post-tax profit as % revenue Regional divergence persists Airline net post-tax profit margins 8% 6% 4% 2% 0% N America Asia-Pacific Europe -2% -4% -6% 2007 2008 2009 2010 2011 2012 2013F 2014F Source: IATA (forecast), ICAO (history) IATA Economics www.iata.org/economics 18