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U.S. Airlines: “Mainline Carrier Prospects”
John P. Heimlich ([email protected])
Vice President and Chief Economist
30th Annual FAA Aviation Forecast Conference
March 18, 2005
ATA Mar-05 -- 2
The Air Transport Association of America, Inc.March 2005
Combination Services
Alaska AirlinesAloha Airlines
America West AirlinesAmerican Airlines
ATA AirlinesContinental Airlines
Delta Air LinesHawaiian AirlinesJetBlue AirwaysMidwest Airlines
Northwest AirlinesSouthwest Airlines
United AirlinesUS Airways
All-Cargo Services
ABX AirASTAR Air Cargo
Atlas AirEvergreen Int’l Airlines
FedEx CorporationPolar Air Cargo
UPS Airlines
Associate Members
AeromexicoAir CanadaAir Jamaica
Mexicana
ATA Mar-05 -- 3
Wall Street Perspective“Ultimately, all carriers feeling ill effects…”
“[L]egacy carriers and LCCs continue to fight strenuously for market share with a complete lack of pricing power creating an anemic revenue environment… Fuel…remains a major factor in the industry’s inability to make a profit and we remind investors that this is not the first time the airlines have been faced with tough year over year comps. However, this is the first time that carriers have not been able to pass these costs on to the consumer as evident by several failed fare increases and the declining yields.
In the current environment, we doubt that legacy carriers are even marginally inching forward since the meager revenue gains are more than offset by still very high and once again rising fuel price levels. The near-term prognosis is quite bleak considering the sector is not even at the halfway point of what seasonally is by far its toughest period… Ultimately, all carriers lack any pricing power and are feeling the ill effects…”
Reno Bianchi and Steven K. Burton – Citigroup Corporate Bond ResearchAirline Industry Research Report (December 21, 2004)
ATA Mar-05 -- 4
All Aviation Stakeholders Must Engage in “Self-Help” Along With Airlines and Suppliers… Congress, Regulators, and Airports Must Adapt
“We find ourselves in the grip of a strange anomaly. The government that embraced deregulation more than 25 years ago, and whose members often excoriate airline executives for failing to change rapidly enough to accommodate market demands, has itself failed to adapt to the changing times. Many elements of our aviation policy are remnants of the past…”
Robert L. Crandall, Retired Chairman, American AirlinesKeynote speech, Wright Memorial Dinner (December 17, 2004)
ATA Mar-05 -- 5
Airline Balance Sheets in Disrepair With Heavy LossesStandard & Poor’s (S&P) Corporate Credit Ratings
AAA: Extremely strong capacity to meet financial commitments. Highest rating.AA: Very strong capacity to meet financial commitments.A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.BBB: Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. (BBB- is the lowest investment grade rating.)BB: Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.B: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.CCC: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.CC: Currently highly vulnerable.C: A bankruptcy petition has been filed or similar action taken but payments or financial commitments are continued.D: Payment default on financial commitments.
Inv
es
tme
nt
Gra
de
(>=
BB
B-)
* Formerly Atlantic Coast Airlines** Airfreight company
ATA Mar-05 -- 6
Crude Oil Prices Soaring to Record HighsWTI* to Reach Nominal Record in ’04; Little Relief Seen in ’05
$19.73
$23.34
$27.14
$31.66
$41.40$41.40
$31.10
$50.00
$26.10
15
20
25
30
35
40
45
50
55
60
65
70
1992-2001 2002 2003 2004 2005F
Nominal Real ($2004)
*West Texas Intermediate at Cushing, Texas
Source: PIRA Energy Group and Air Transport Association
“…it would be a mistake to underestimate the effect high oil prices have already had on the world economy. [T]he…losses suffered by the airlines mirror the increase in their fuel bills. ‘We are not that far behind the high prices of the early 1980s even in real terms…’”
(Daniel Yergin, Chairman, Cambridge Energy Research Associates, Financial Times, September 16, 2004)
“If fuel prices average $50 for 2005, the debt burden on the network airlines will grow by a number that rivals the entire combined market capitalization of these carriers.”
(Gary Chase, Lehman Brothers, “Fuel Eating the Upcycle,” October 19, 2004)
Ave
rag
e P
rice
of
Cru
de
Oil
($/
Bar
rel)
*
ATA Mar-05 -- 7
2005 Jet Fuel Prices Expected to Surpass 2004 RecordHedging and Point-of-Sale Alteration Keep Jet Price Paid Below Spot
10
15
20
25
30
35
40
45
50
55
60
65
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
55
65
75
85
95
105
115
125
135
145
155
165
Crude Oil (WTI)* Jet Fuel Paid (DOT) Jet Fuel Spot (EIA)
*West Texas Intermediate (WTI) at Cushing, Texas
Sources: U.S. Department of Transportation, Energy Information Administration, Air Transport Association, and PIRA Energy Group
Crude Oil $/bbl*
2001 $26
2002 $26
2003 $31
2004F $41
2005F $50
FO
RE
CA
ST
Ave
rag
e P
rice
of
Cru
de
Oil
($/
Bar
rel)
* Jet Fu
el Pric
e excl. Taxes (¢/G
allon
)
ATA Mar-05 -- 8
38.2 38.2
41.5
43.6
45.0
30.0
32.0
34.0
36.0
38.0
40.0
42.0
44.0
46.0
48.0
50.0
2000 2001 2002 2003 2004F
Rev
enu
e P
asse
ng
er M
iles
pe
r G
allo
n
Source: ATA Cost Index for Major and National Passenger Airlines
Aviation Fuel Efficiency Has Risen Steadily Conservation Efforts Accelerated Post-9/11, Paying Off in Better Throughput
ATA Mar-05 -- 9
Mainline Passenger Revenue Running Just Above 1995With Express Flying Included, Passenger Revenue Finally > 2001
$55.0
$60.0
$65.0
$70.0
$75.0
$80.0
$85.0
$90.0D
ec-9
5D
ec-9
6D
ec-9
7D
ec-9
8D
ec-9
9D
ec-0
0
Jun
Dec
-01
Jun
Dec
-02
Jun
Dec
-03
Jun
Dec
-04
12
-Mo
nth
Ro
llin
g S
ys
tem
Ps
gr.
Re
ve
nu
e (
$M
illio
ns
)
Mainline Express*
Source: ATA research
* Express data not available before January 2000.
ATA Mar-05 -- 10
3.0
3.6
4.4
3.0
1.9
0.8
3.7
0.0
1.0
2.0
3.0
4.0
5.0
2000 2001 2002 2003 2004 2005F 2006F
U.S. Economy Remains Relatively Strong But GDP Decelerating Post-2004, Partly on Higher Energy Costs
Source: U.S. Bureau of Economic Analysis
Re
al
GD
P G
row
th v
s.
Pre
ce
din
g Y
ea
r (%
)
ATA Mar-05 -- 11
0.65%
0.70%
0.75%
0.80%
0.85%
0.90%
0.95%
1.00%
1.05%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Sy
ste
m-W
ide
Pa
sse
ng
er
Rev
en
ue
as
% o
f N
om
ina
l GD
P*
Air Travel Demand Disconnecting from Cyclical FactorsHistorically > 0.90% of GDP, Passenger Revenue Now Just 0.70%
Sources: U.S. Bureau of Economic Analysis; U.S. Department of Transportation Form 41 reports
Historical Band
*Four-quarter rolling passenger revenue derived from government filings of major and national passenger airlines
ATA Mar-05 -- 12
Planes, Trains, and Automobiles . . .Domestic Air Travel Volumes Ahead of 2000 but Still Lag Amtrak/Autos
85
90
95
100
105
110
115
Dec-00
Mar Jun Sep Dec-01
Mar Jun Sep Dec-02
Mar Jun Sep Dec-03
Mar Jun Sep Dec-04
Mar
Planes Trains Autos
Sources: Seabury APG (Domestic Onboards-T100); Amtrak (Ridership); Federal Highway Administration (Rural Arterial Vehicle Miles); Travel Industry Association
An
nu
ali
zed
Ps
gr.
Vo
lum
e I
nd
ex
(1
2M
E D
ec
-00
=1
00
)
ATA Mar-05 -- 13
Short-Haul Domestic Travel Down; Long-Haul Up*Hassle/Taxes Take Toll Where Substitutes Abound; LCCs Offer Long-Haul Alternative
One-Way Trip Length (Miles)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
< 250 251-500 501-750 751-1000 1001-1250 1251-1500 1501-1750 1751-2000 > 2000
% C
ha
ng
e in
Do
me
sti
c O
&D
Pa
ss
en
ge
rs v
s. 2
00
0
2001 2002 2003 YE2Q04
Source: U.S. Department of Transportation Data Bank 1A (DB1A) – Origin and Destination (O&D) Survey; Data Base Products
* Because much mainline service has been replaced with commuter service since 2000 and DB1A fails to capture a significant portion of commuter traffic, volume declines for short-haul trips may be overstated.
ATA Mar-05 -- 14
Pricing Power Remains ElusiveDomestic Fares (Excl. Taxes) Down Sharply From 2000; International Recovering
Source: ATA research
“Internet pricing, low-cost carrier growth and higher taxation of airline revenue remain as obstacles to an airline recovery. [I]t may be years before we experience a return to the late 1990's absolute level of revenue….” (William Greene, Morgan Stanley — September 24, 2004)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
Jan-01 Apr Jul Oct Jan-02 Apr Jul Oct Jan-03 Apr Jul Oct Jan-04 Apr Jul Oct Jan-05
Domestic International
“Many industries, still saddled with excess capacity, can’t raise prices. The biggest: carmakers and airlines.”(Rich Miller, ”Pricing Power Is Back—But Inflation Isn’t Likely to Follow,” BusinessWeek — December 27, 2004)
% C
ha
ng
e i
n M
ain
lin
e P
sg
r. Y
ield
(¢
/RP
M)
vs
. 2
00
0
ATA Mar-05 -- 15
Aviation Taxes Have Outpaced Inflation and FaresTaxes the Leader of the Pack, at Expense of Fares
PFC <=$12 per R/T
Segment Feephase-in
Segment Fee + CPISecurity Fee
*Itinerary assumes one-stop domestic round-trip with maximum passenger facility charge (PFC) per airport; $200 total includes taxes and fees.
Source: ATA research
PFC <=$18 per R/T
Ind
ex (
1991
=10
0)
ATA Mar-05 -- 16
Notwithstanding Tax Hikes, Fare Compression UnderwaySince 2000, All Buckets Have Declined Except $100-300 Round-Trips
Distribution of Domestic O&D Passengers by Total R/T Ticket Prices (incl. Taxes)2.
2%
13.2
%
4.1%
1.0%
0.2%
20.1
%
21.1
%
31.2
%
6.8%
0.5%
24.4
%
42.2
%
19.4
%
8.1%
3.6%
1.3%
0.2%
0.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
$0-100 $100-200 $200-300 $300-400 $400-500 $500-600 $600-800 $800-1000 $1,000+
2000 1H04
Source: ATA analysis of DOT Databank 1A
ATA Mar-05 -- 17
Even With Tax Hikes, Total Ticket Prices Down $40 per R/TTwo-Thirds of Domestic Passengers Now Pay Total Price Under $300
Cumulative Distribution of Domestic O&D Psgrs. by Total R/T Ticket Prices*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$0-100 $100-200 $200-300 $300-400 $400-500 $500-600 $600-800 $800-1000 $1,000+
1H04 2000Source: ATA analysis of DOT Databank 1A
*Including taxes
Tickets < $200 -- 25% (up from 23%)
Tickets < $300 -- 67% (up from 55%)
Tickets < $400 -- 87% (up from 75%)
Tickets < $500 -- 95% (up from 88%)
Avg. Ticket Price: $276
Avg. Ticket Price: $316
ATA Mar-05 -- 18
Passenger Unit Revenue Weak at Home; Strong AbroadDomestically, Record Load Factors Insufficient to Offset Sharply Lower Fares
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
10.50
11.00
Dec-00 Mar Jun Sep Dec-01 Mar Jun Sep Dec-02 Mar Jun Sep Dec-03 Mar Jun Sep Dec-04
Domestic Atlantic Latin Pacific
* ATA research of Alaska, American, America West, Continental, Delta, Northwest, United, US Airways
“[T]he industry continues to face a demand curve characterized by very accentuated price elasticity and thus the needed objective to achieve simultaneously capacity and traffic growth as well as improved price realization continues to be a very elusive task.” (Citigroup — October 24, 2004)
12
-Mo
nth
Ro
llin
g P
sg
r. R
ev
en
ue
pe
r A
SM
(¢
)
ATA Mar-05 -- 19
Since 2000, Breakeven Load Factor Well Above Actual Prices, Less Cargo, Higher Costs = More Seats Must be Filled
67.2
69.470.5 70.8 71.1
72.4
70.0
71.8
74.8
73.4
64.3
66.4
69.3
84.1
81.4
64.964.966.0
79.6 80.0
60
65
70
75
80
85
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F
Actual BreakevenSource: ATA research
Pa
ss
en
ge
r L
oa
d F
ac
tor
(%)—
Ma
jors
an
d N
ati
on
als
ATA Mar-05 -- 20
Capital Expenditures Just One-Third of 2000 LevelsATA Member Passenger Airlines
$2.8$5.2
$10.9$13.1
$2.4
$1.5
$2.4
$2.3
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
2003200220012000
Big 6* Other ATA
* American, Continental, Delta, Northwest, United, US Airways
Source: U.S. Securities and Exchange Commission (SEC) filings of selected companies; Air Transport Association
Cap
ital
Exp
end
itu
res
($B
illi
on
s)
ATA Mar-05 -- 21
2,181
1,800
1,850
1,900
1,950
2,000
2,050
2,100
2,150
2,200
2,250
2000 2001 2002 2003 2004F
Av
aila
ble
Se
at
Mile
s p
er
FT
E (
00
0),
4 Q
tr M
AProductivity Improvements Driving Cost Relief
Network Restructuring, Work Rules, Human Capital, Outsourcing, Technology
Source: ATA Airline Cost Index for U.S. major and national passenger airlines
ATA Mar-05 -- 22
Airline Headcount Down ~126,000 (17%) from 9/11Low Fares, High Fuel Prices, Productivity Gains Driving Cuts or Curbing Growth
433
75
165
74
305
81
152
84
0
100
200
300
400
500
"Big 6" PassengerAirlines*
Selected Low-CostCarriers**
Selected CargoAirlines***
Other U.S. Airlines
Aug-01 Dec-04
Sources: U.S. Department of Transportation P1a employment report; carrier reports for full-time and part-time workers
* American, Continental, Delta, Northwest, United, US Airways
** AirTran, Alaska, America West, ATA (formerly American Trans Air), Frontier, JetBlue, Southwest, Spirit
*** Air Transport Int’l, ASTAR/DHL, Express.Net, Evergreen, FedEx, Gemini, Kalitta, Kitty Hawk, Polar, Ryan Int’l, Southern, Tradewinds, UPS, World
Aug-01 Dec-04
747.6 621.5
TOTAL
U.S
. A
irli
ne
Em
plo
ymen
t (0
00s)
ATA Mar-05 -- 23
Consumer/CEO OutlookCEO Confidence Deteriorating; Energy Costs Swinging Consumers
25
30
35
40
45
50
55
60
65
70
75D
ec-9
8
Mar
Jun
Sep
Dec
-99
Mar
Jun
Sep
Dec
-00
Mar
Jun
Sep
Dec
-01
Mar
Jun
Sep
Dec
-02
Mar
Jun
Sep
Dec
-03
Mar
Jun
Sep
Dec
-04
Mar
Jun
Sep
Dec
-05
75
80
85
90
95
100
105
110
115
120
125
CEO Consumer
Sources: Conference Board and University of Michigan
CE
O B
usi
ne
ss C
on
fid
enc
e In
dex
(Q
uar
terl
y)C
on
sum
er Sen
time
nt In
dex (M
on
thly)
ATA Mar-05 -- 24
500
600
700
800
900
1,000
1,100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Fiscal Year
FAA Forecast FY01
FAA Forecast FY04
Volumes Up But Four Years Behind Pre-9/11 ExpectationsFAA Expects Demand to Exceed a Billion Passengers in Fiscal Year 2014
*Scheduled Revenue Passenger Enplanements (Millions), Certificated U.S. Carriers; Source: FAA Aerospace Forecasts, based on DOT Forms 41 and 298-C
Rev
enu
e P
asse
ng
ers
En
pla
ned
(M
illi
on
s)
www.airlines.org