Airline financial performance - IATA · PDF fileAirline financial performance 30 March 2017 ... Significant change in top-10 markets over next 20 years 2015 2017 2019 ... Germany Brazil

Airline Industry Economics Advisory Workshop 2016 1

Airline financial

performance 30 March 2017

Brian Pearce

Chief Economist, IATA

www.iata.org/economics

The air transport paradox

IATA Economics www.iata.org/economics Source: McKinsey presentation to IATA

http://www.iata.org/economics

Still very much a growth story

30

35

40

45

50

55

60

65

-12%

-8%

-4%

0%

4%

8%

12%

16%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% year-on-year Diffusion index

Growth in industry RPKs (LHS)

Global manufacturing PMI index (adv. 2 months, RHS)

Sources: IATA Economics, IATA Monthly Statistics, Markit

Global services PMI index (adv. 2 months, RHS)

IATA Economics www.iata.org/economics


Though much variation by travel market

Africa - Europe

Europe- C. AmericaEurope - Asia

Europe - Middle East

Europe - North America

Asia - North AmericaAsia - SW Pacific

Middle East - Asia

Middle East - North America

North - South America

Within Europe

Within Asia

Domestic Australia

Domestic Brazil

Domestic China

Domestic India

Domestic Japan

Domestic Russia

Domestic US

-5%

0%

5%

10%

15%

20%

0% 2% 4% 6% 8% 10% 12% 14% 16%Share of total global RPKs (Year ended Jan 2017)

Sources: IATA Economics, IATA Monthly Statistics by Route

RPK growth by int'l route and dom. market (latest month, % year-on-year*)

*Note: int'l routes data are for January;domestic market data are for February




Long-term expansion even in gloomy macro scenario

2

3

4

5

6

7

8

9

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Global O-D passenger journeys (billion)

Constant policies scenario

Reflation/open borders scenario

Pick-up in Protectionism scenario

Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics



Trip frequency still low in many important markets

0 0.5 1 1.5 2 2.5 3 3.5 4

NigeriaIndia

EgyptChina

South AfricaIndonesia

BrazilMexico

Russian FederationColombia

ChileTurkey

ThailandJapan

Korea, Republic OfSaudi Arabia

GermanyFrance

ItalyUnited States

CanadaUnited Kingdom

SpainAustralia

Propensity to fly (total passengers/population)Source: IATA/Tourism Economics Air Passenger Forecasts, September 2016 IATA Economics www.iata.org/economics


Large potential in populous but (currently) poor markets

Source: IATA Economics using data from PaxIS+ and Oxford Economics IATA Economics www.iata.org/economics



Demographics strong in some key markets, adverse in others

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%% change

The UN's projected change in population (2015-2035,%)

UN projections adjusted for demographic factors



Scope for large price change in short-haul markets

0.05

0.07

0.09

0.11

0.13

0.15

0.17

0.19

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Pass

enge

r yi

eld

s, U

S$ p

er R

PK

Average trip length (kms)

Passenger yields and average trip length

Within Africa

Within South America

Within ASEAN

WithinEurope

Middle East-rest of world

ASEAN-Europe

North Atlantic

Pacific

North-South America

Within East Asia

ASEAN-Africa

China-North America

ASEAN-North America

ASEAN-E Asia

Europe-Australia

IATA Economics www.iata.org/economics Source: IATA PaxIS+



China largest increment, US remains important

4.2%

3.0%

6.0%

2.6%

5.2%

8.2%

3.5%

6.7%

2.6%

5.2%

0 100 200 300 400 500 600 700 800

Mexico

Australia

Philippines

Brazil

Turkey

Vietnam

Indonesia

India

United States

China

Change in domestic O-D markets (millions, 2015-2035)

Corresponding CAGR




Significant change in top-10 markets over next 20 years

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

US

China

UK

Japan

Spain

Germany

India

Italy

France

Indonesia

China

US

India

UK

Indonesia

Japan

Spain

Germany

Brazil

Turkey



Centre of gravity of air travel shifting fast towards China

Source: IATA Economics using data from PaxIS+

1914 2004 2015 2035



The GFC precipitated one key divergence

Source: ICAO, IATA

Passenger RPKs

2,000

3,000

4,000

5,000

6,000

7,000

80

130

180

230

280

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

RP

Ks

bill

ion

FTK

s b

illio

n

Air travel and cargo volumes

Cargo FTKs



Retreat from globalization

Source: IMF World Economic Outlook and the World Trade Organization

-15

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016

% c

han

ge o

ver

pre

vio

us

year

World GDP and cross-border trade growth

World trade growth

World GDP growth



Supply chains have been shortened

30

32

34

36

38

40

42

44

46

48

50

52

50

60

70

80

90

100

110

120

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Index (Oct 2008=100)

World trade/IP ratio vs. measure of global supply chainsShare (%)

World trade/IP ratio

Ratio of foreign value added to domestic value added in world gross exports

IATA Economics www.iata.org/economics Source: Netherlands CPB, UNCTAD


But growth has returned to cargo

IATA Economics www.iata.org/economics Source: Markit, IATA Statistics

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-30%

-20%

-10%

0%

10%

20%

30%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

% year-on-year % year-on-year

Growth in industry FTKs Global PMI new export orders component (adv. 2 months)

Sources: IATA Economics, IATA Monthly Statistics, Markit

Implied PMI series if the index remains flat at its

February 2017 level over the coming months


Despite sluggish world trade

IATA Economics www.iata.org/economics Source: IATA Statistics, Netherlands CPB

60

70

80

90

100

110

120

130Indices (Jan 2012=100, seasonally adjusted)

Global FTKs

World trade volumes

90

95

100

105

110

115

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: IATA Economics, IATA Monthly Statistics, CPB

Rising FTK share

Ratio of global FTKs to world trade volumes



Traffic accelerating ahead of capacity growth

Source: IATA using data from The Airline Analyst IATA Economics www.iata.org/economics

0%

2%

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 2017

% c

han

ge o

n y

ear

earl

ier

RPKs and ASKs growth

ASKs 6.2% => 5.6%

RPKs 5.9% => 5.1%



Margin squeeze signs of easing?


60

65

70

75

80

85

90

95

100

105

110

0

20

40

60

80

100

120

140

2011 2012 2013 2014 2015 2016 2017

Ind

exed

to

eq

ual

l 1

00

in J

nau

ary

20

11

US$

per

bar

rel

Airline passenger yield (constant fx) and crude oil prices, indexed

Oil price 44.6 => 55 $/b

Pax yield-8% => 0%



Industry profitability declining but how fast?

Source: IATA Economic Performance of the Airline Industry – end year 2016 report IATA Economics www.iata.org/economics

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2011 2012 2013 2014 2015 2016 2017

EBIT

as

% r

even

ues

Quarterly profile for airline industry operating profits (EBIT)

Operating margin 8.3% => 6.6%Net profits$39.6bn => $29.8bn


At last investors are getting a ‘normal’ return

Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% o

f in

vest

ed c

apit

al

Return on capital invested in airlines

Cost of capital (WACC)

Return on capital (ROIC)



Ending decades of investor capital destruction (?)

Source: McKinsey, IATA

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

US$

bill

ion

Difference between investing in airlines and investing in similar assets elsewhere



Other sectors do better

IATA Economics www.iata.org/economics Source: McKinsey for IATA

0%

5%

10%

15%

20%

25%

30%%

RO

ICReturn on capital across the air transport supply chain

1996-2014 2007-2014


But this is not the main issue for airline earnings

Source: McKinsey for IATA

0.8

(2.5) 0.3 0.7 0.4 2.0

TOTAL

(16.7) –

(18.0)

Freight

Forwarders

1.2

Travel

Agents

0-2.0

CRS

GDS

0.5

Airlines

(19.4)

ANSPAirportsCateringGroundMROLessors

(0.7) - (2.0)

Manufac-

turers

Estimate

Average yearly economic profit, USD billion, 2007-2014



Aircraft fuel efficiency has improved dramatically

IATA Economics www.iata.org/economics Source: Lee


But costs typically passed through to prices


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1950 1960 1970 1980 1990 2000 2010

US

$ in

20

13

price

s p

er

ton

ne

kilo

me

ter

US

$ in

20

13

price

s t

o f

ly a

to

nn

e k

ilom

ete

r

Unit cost and the price of air transport

Price(US$/RTK)

Unit cost(US$/ATK)

US deregulation

EU deregulation

Boeing 707

1973 oil crisis

Source: ICAO, IATA


In fact prices have fallen further than costs


45%

50%

55%

60%

65%

70%

1970 1975 1980 1985 1990 1995 2000 2005 2010

% A

TK

s

Breakeven and actual load factors

Breakeven load factor

Load factor achieved

+15%points

Source: IATA, ICAO


Consumers have been the major beneficiaries

Source: ICAO, Boeing, OAG, IATA

0.5

1

1.5

2

2.5

3

3.5

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

US$

/RTK

in 2

01

4U

S$

Nu

mb

er o

f u

niq

ue

city

-pai

rs

Unique city-pairs and real transport costs

Unique city pairs

Real cost of air transport




Structural change?

58

59

60

61

62

63

64

65

66

67

68

2000 2002 2004 2006 2008 2010 2012 2014 2016

% A

TKs

Breakeven and achieved weight load factor

Achieved LF

Breakeven LF




High fuel prices not always bad for airlines

Source: IATA, Platts IATA Economics www.iata.org/economics

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2000 2002 2004 2006 2008 2010 2012 2014 2016

Jet

fuel

pri

ce, U

S$/b

arre

l

RO

IC, %

of

inve

sted

cap

ital

Airline industry ROIC and jet fuel prices

ROIC

Jet fuel price



Solid improvement in capital productivity

0.8

0.9

1.0

1.1

1.2

1.3

1.4

-6

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Cap

ital

pro

du

ctiv

ity,

rev

enu

e/in

vest

ed

cap

ital

, US$

Op

erat

ing

mar

gin

, % r

even

ue

Airlines' operating or EBIT margin and capital productivity

Capital productivity

Operating margin




Very wide variety of business models

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.00 0.50 1.00 1.50 2.00 2.50

EBIT

mar

gin

, ad

just

ed E

BIT

/rev

enu

e

Capital productivity ($ revenue per $ invested capital)

2015 ROIC = adjusted EBIT/revenue * revenue/invested capital

WALMART

PFIZER

Allegiant

Lufthansa

Easyjet

Southwest

Alaska

Spirit

Ryanair

Jazeera

Delta

IAG

AF-KLM

Hawaiian

AMR JAL

Qantas

United

Thai

Volaris

Mesa

Spring

Air CanadaPIA

GOLKorean

SIA

Air China

Cathay

Aeromexico

JetBlue

LATAMANA

Increasing return on capital (ROIC)

Comair



US performance dominating industry totals

-10%

-5%

0%

5%

10%

15%

N America Europe Asia Pacific Midle East L America Africa

Net post-tax profit margins

2015 2016

Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report IATA Economics www.iata.org/economics


Wide variation in balance sheet performance

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2011 2012 2013 2014 2015

Ad

just

ed n

et d

ebt/

EBIT

DA

R

Adjusted net debt/EBITDAR by region

North America

Europe

Asia Pacific

Latin America

Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report IATA Economics www.iata.org/economics



Documents

Airline financial performance - IATA · PDF fileAirline financial performance 30 March 2017 ... Significant change in top-10 markets over next 20 years 2015 2017 2019 ... Germany Brazil