Economic Performance of
the Airline Industry
Airline Cost Conference
25th August 2015
Brian Pearce, Chief Economist
www.iata.org/economics
To represent, lead and serve the airline industry
ROIC gains driven by a subset of the industry
Distribution of 2014 airline ROIC
14
Most frequent ROIC = 0%
12
Median ROIC = 3.2%
number of airlines
10
34 airlines ROIC > WACC
8
6
4
2
0
-21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
% return on invested capital
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
2
FCF concentrated in the US
2014 Free Cash Flow by region
4
2
FCF US$ billion
0
-2
Network
LCC
-4
-6
-8
-10
US
LA
ME
EU
AP
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
3
But good ROIC performance in Europe as well
2014 return on capital by region
30%
ROIC as as % invested capital
20%
Average cost of capital
10%
0%
-10%
-20%
-30%
N America
Europe
Asia Pacific
LA
ME
AF
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
4
Median airline balance sheet still deteriorating
Free cash flow and adjusted net debt
30
Adjusted net debt, US$ billion
25
6 airlines could
repay all debt
in next 5 years
20
15
10
5
0
-50%
Median airline
$3 billion net debt
-3% FCF/net debt
-40%
-30%
-20%
-10%
0%
10%
20%
Free cash flow as a % of adjusted net debt
30%
40%
50%
Source: The Airline Analyst, IATA
IATA Economics www.iata.org/economics
5
2015 should see record profits for the industry
Global commercial airline profitability
8.0
6.0
30
EBIT margin
20
10
2.0
0.0
0
Net post-tax profit
-2.0
-10
US$ billion
% revenues
4.0
-4.0
-20
-6.0
-8.0
-30
2000
2002
2004
2006
2008
2010
2012
2014
Source: ICAO, IATA
IATA Economics www.iata.org/economics
6
Though that’s still only $8.27 per passenger
Worldwide airline net post-tax profit per departing passenger, 2015
250
$205.37
Ancillaries
200
$197.10
$8.27
Ancillaries
150
Fare
100
50
Cargo
0
Revenue
Cost
Net profit
Source: IATA
IATA Economics www.iata.org/economics
7
But paying investors ‘normal’ return for 1st time
Return on capital invested in airlines
9.0
8.0
Cost of capital (WACC)
% of invested capital
7.0
6.0
5.0
4.0
3.0
Return on capital
(ROIC)
2.0
1.0
0.0
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
8
Widening gap above breakeven driving returns
Breakeven and achieved weight load factors
69
Achieved
67
% ATKs
65
Breakeven
63
61
59
57
2000
2002
2004
2006
2008
2010
2012
2014
Source: IATA
IATA Economics www.iata.org/economics
9
Consolidation has played an important role
Market share of top-4 airlines/JVs
81%
68%
36%
48%
42%
33%
51%
59%
Source: SRS Analyser
IATA Economics www.iata.org/economics
10
The product structure is changing too
2013 ancillaries and operating profits, % revenues
35%
Allegiant
30%
Ryanair
Ancillaries as % revenues
25%
20%
Flybe
United
15%
Qantas
10%
Korean
Easyjet
Aer Lingus
Spicejet
SAA
Alaska
JetBlue
Frontier
5%
PIA
Air Asia
Delta
Hawaiian
BA
JAL
0%
-20%
-15%
-10%
-5%
0%
5%
Operating profits as % revenues
10%
15%
20%
Source: IdeaWorks, Airline Analyst, IATA
IATA Economics www.iata.org/economics
11
Low fuel prices important but US$ major offset
The Brent crude oil price and the US dollar
160
95
US dollar
90
120
85
100
80
80
75
60
70
US dollar trade weighted index
Oil price, US$ per barrel
140
Brent crude oil price
40
65
20
60
2008
2009
2010
2011
2012
2013
2014
2015
Source: Datastream
IATA Economics www.iata.org/economics
12
Driving further divergence in performance this year
Airline net post-tax profit margins
Net post-tax profit as % revenue
8%
N America
6%
4%
Europe
Asia-Pacific
2%
0%
-2%
-4%
-6%
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: ICAO, IATA
IATA Economics www.iata.org/economics
13
Longer-term impact of lower fuel prices not clear
Return on invested capital and unit costs
9.0
70
8.0
Unit costs
65
ROIC, % invested capital
7.0
6.0
60
5.0
55
4.0
3.0
50
2.0
Operating costs/ATK, US cents/ATK
Return on invested capital
45
1.0
0.0
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: IATA, McKinsey
IATA Economics www.iata.org/economics
14
Costs typically passed through to prices
Unit cost and the price of air transport
4.0
7.0
3.5
6.0
3.0
5.0
1973
oil
crisis
2.5
4.0
US deregulation
2.0
3.0
1.5
EU deregulation
Unit cost
(US$/ATK)
1.0
2.0
1.0
0.5
US$ in 2013 prices per tonne kilometer
US$ in 2013 prices to fly a tonne kilometer
Boeing 707
Price
(US$/RTK)
0.0
1950
1960
1970
1980
1990
2000
2010
Source: ICAO, IATA
IATA Economics www.iata.org/economics
15
A strong economy is unambiguously positive
Airline industry ROIC and world GDP growth
6.0
8.0
Airlines ROIC
5.0
4.0
World GDP growth, %
4.0
3.0
2.0
2.0
World GDP
growth
1.0
0.0
0.0
-2.0
-1.0
Airlines ROIC, % invested capital
6.0
-4.0
-2.0
-3.0
-6.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: IATA, McKinsey, IHS Global Insight
IATA Economics www.iata.org/economics
16
Economic cycle positive but not very strong
Indicators of the global economic cycle
70
20%
15%
year-on-year % growth
65
World trade growth
60
Industrial production growth
10%
Business confidence
55
5%
0%
50
-5%
45
-10%
40
-15%
35
-20%
-25%
Net balance of respondents, 50 = no change
25%
30
2008
2009
2010
2011
2012
2013
2014
2015
Source: Datastream
IATA Economics www.iata.org/economics
17
Chinese equity market bubble has burst
IATA Economics www.iata.org/economics
18
But growth in demand for travel and cargo looks OK
Growth of air travel and air freight
25%
20%
Freight (FTK) growth
year-on-year % growth
15%
10%
Travel (RPK) growth
20-year
average
growth rate
5%
0%
-5%
-10%
-15%
-20%
2008
2009
2010
2011
2012
2013
2014
2015
Source: IATA
IATA Economics www.iata.org/economics
19
Though cargo growth should be much stronger
International trade compared to global industrial production
1.2
1.1
Index, 2005=100
1.0
0.9
0.8
0.7
0.6
1992
AFTER: FTKs
growth 3.2% p.a.
BEFORE: FTKs
growth 6.4% p.a
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: Netherlands CPB, IATA
IATA Economics www.iata.org/economics
20
Trade and cargo markets appear to have peaked
7. World trade in goods and air FTKs
Billion FTKs
(seasonally adjusted)
Index of world trade, 2005=100
(seasonally adjusted)
140
15
14
130
13
120
12
110
11
100
10
9
International FTKs
Apr-15
Dec-14
Aug-14
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
90
World Trade Index
Source: Netherlands CPB, IATA
IATA Economics www.iata.org/economics
21
Business confidence has been diminishing
IATA Economics www.iata.org/economics
22
Risk that growth expectations now too high
IATA survey of airline CFOs and heads of cargo
Net balance responses. 50=no change
120
Passenger services growth
expected in the next 12
months
100
80
Cargo services
growth expected in
the next 12 months
60
40
20
0
2006
2008
2010
2012
2014
Source: IATA Business Confidence survey
IATA Economics www.iata.org/economics
23