consumers 2011 air transport association us airlines
TRANSCRIPT
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The Economic Climb-Out for U.S. Airlines:Global Competitiveness and Long-Term Viability
ATA Office of Economics
January 29, 2011
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www.airlines.org
The Air Transport Association of America, Inc.
2
AirTran Airways
Alaska Airlines
American Airlines
United Airlines*
Delta Air Lines
Hawaiian AirlinesJetBlue Airways
Southwest Airlines
US Airways
ABX Air
ASTAR Air Cargo
Atlas Air Worldwide Holdings
Evergreen Intl Airlines
FedEx Corporation
UPS Airlines
Air Canada
Air Jamaica
Air transport has become an essential economic and social conduit throughout theworld. Beyond the benefits of fast and inexpensive transcontinental travel, airtransport also has become a vital form of shipping for high-valued items that needto come to market quickly
World Bank (www.worldbank.org/airtransport)
* Includes Continental Airlines
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OVERVIEW
3
Safety of commercial travel exceeds other modes and continues to improve
DOT statutory mission explicitly recognizes importance of airline industry
viability and global competitiveness
A viable, competitive U.S. airline industry is good for the country, fueling jobs and growth
Numerous stakeholders benefit from a financially viable, competitive U.S. airline industry
Competition among airlines remains intense
Battlefield is increasingly global, with a relatively mature domestic market
U.S. airlines are financially weaker than many non-U.S. airlines
To reinvest in product/people, airlines needsubstantiallyimproved finances
Competing in theglobal marketplace is essential for airlines and good for USA
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The State of the IndustryFitch: 2011 Outlook: U.S. Airline
Balance Sheet Repair to Continue
4
Fitch [Ratings] expects ratings for most U.S. airlines to improve in 2011, reflecting a
modest strengthening of industry operating fundamentals and steady progress toward
debt reduction and balance sheet deleveraging. As U.S. carriers look to unwind the
lingering effects of historically weak returns, insufficient cash flow generation, and
constrained liquidity, deployment of cash toward debt repayment will be essential if the
ratings momentum witnessed in 2010 is to continue for another year.* Much like the U.S. economy, U.S. airlines are climbing out of a deep hole and have a long
way to go to be financially strong: (1) attain investment-grade credit and generate a
return on invested capital in excess of cost of capital through a full business cycle
U.S. airlines are focused on shoring up balance sheets to reinvest in product, people and
planes, and to weather the next fuel spike or economic downturn without significantreductions in personnel or service; the global aviation marketplace, where traffic growth
is most promising, is increasingly relevant and intensely competitive
* Fitch Ratings, 2011 Outlook: U.S. Airline Balance Sheet Repair to Continue (Dec. 9, 2010)
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U.S. Carriers: Competing in a Global Marketplace
5
Republic/Shuttle America Air France/KLM
US Airways/America West Copa/AeroRepblica
SkyWest/Atlantic Southeast Lufthansa/Swiss
Lufthansa/JetBlue* Air China/Cathay Pacific*
Delta/Northwest Cathay Pacific/Dragonair
Republic/Midwest Lufthansa/Brussels*/BMI/Austrian
Republic/Frontier Avianca/TACA
United/Continental British Airways/Iberia
SkyWest-ASA/ExpressJet LAN/TAM
Southwest/AirTran LAN/Aires*
Selected M&A and/or Cross-Border Investment: 1995-Present
Source: ATA and Deutsche Bank Global Research * Strategic investment but not full ownership or control
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An Analyst/Investor View
Source: Deutsche Bank Global Research (Jan. 13, 2011)
Consolidation, in our review, represents a later stage for a
mature industry that is seeking ways to address its financial
volatility Our view is that consolidation is part of a longer-term
process that should ultimately allow the global airline industry
to efficiently allocate capital and assets such that a positive
return on invested capital can be achieved
On the surface, airlines pursue mergers as a means to improve
profitabilityand their competitive positioning via an expanded
network. Longer-term, consolidation should improve industryviability while mitigating industry volatility and consequently
lower its cost of capital.
6
Source: Global Airline Sector Laying the Foundation for Global M&A, Deutsche Bank Global Research (Jan. 13, 2011)
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Air Travel Safer Than Other Forms of Intercity Transport
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Source: National Safety Council Injury Facts 2010 Edition, 1998-2007 averages (most recent available)
1. Passenger cars/taxis; drivers considered passengers; data from the NSC Fatality Analysis Reporting System
2. Does not include school buses; data from the NSC Fatality Analysis Reporting System
3. Data from the Federal Railroad Administration (FRA)
4. Large and commuter airlines, excluding cargo; data from the National Transportation Safety Board (NTSB)
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Each Decade, U.S. Airline Safety Has Improved Markedly
8
Source: ATA analysis of data from the National Transportation Safety Board
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DOT Statutory Mission Explicitly Recognizes Importance of
(and Role in) Industry Viability and Competitiveness
(6) placing maximum reliance on competitive market forces and on actual and
potential competition (A) to provide the needed air transportation system; and (B)
, considering any material differences between interstate air
transportation and foreign air transportation.
(14) , , and developing civil aeronautics and a , privately-
owned United States air transport industry.
(15) of air carriers to at least ensure
, including the attainment of the opportunity for air carriers to
maintain and in foreign air transportation.(16) ensuring that consumers in all regions of the United States, including those in
, have to affordable, regularly
scheduled air service.
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A Viable, Competitive U.S. Airline Industry Is Good for The
Country, Fueling Jobs and Economic Growth
10
Aviation is the glue that keeps the global economy together. Without widely accessible andwell-priced air travel, the global economy will quickly become less global.
Dr. Mark Zandi, Chief Economist & Co-Founder, Moodys Economy.com (August 2008)
$1.225 trillion/year in economic activity
$371 billion/year in personal earnings
10.9 million jobs
$731.5 billion/year to U.S. GDP
5.2% of U.S. GDP
Economic growth and prosperity are determined
in large part by access to the global economy.
And, just as islands require bridges to the
mainland.communities require bridges to theglobal economy. Air transportation is that bridge,
providing the necessary access for U.S. citiesto
enjoy a Virtuous Circle of Economic Growth.
The Plane Truth About Air Service and Economic Development,
Global Aviation Improvement Network, Booz Allen (March 2001)
Every day, the airline industry propels the economic takeoff of our nation. It is the great
enabler, knitting together all corners of the country, facilitating the movement of people and
goods that is the backbone of economic growth. It also firmly embeds us in that awesome
process of globalization that is defining the 21st century.
Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report
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Commercial Aviation Drives Nearly 11 Million U.S. Jobs
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Air Transport3.0
AirportOperations
0.6
AircraftManufacturing
1.1
VisitorExpenditures
5.9
TravelArrangements
0.2
Source: Federal Aviation Administration, The Economic Impact of Civil Aviation on the U.S. Economy, (December 2009)
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Numerous and Varied Stakeholders Benefit From a
Financially Viable, Competitive U.S. Airline Industry
12
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Inter-Airline Competition Remains Intense
13
The purpose of this study is to examine the competitiveness of the U.S.
domestic airline industry following a period of
and considerable change in industry structure.
.
One area of promise for the network airlines is the
.
Although the airlines (and consumers) have benefited from the international
network development enabled by the liberalization created by open skies
agreements, .
Former DOT officials Randy Bennett, Patrick Murphy and Jack Schmidt,
A Competitive Analysis of An Industry in Transition (July 2007)
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Economic Forces Continue Toll on Airline Jobs*
14
46
1.9
430.3
446.8
442.0
426.8
433.1
442.4
454
.8 478.1
509.0 5
30.9
499.3
476.4
431.7
440.6
413.6
403.4
417.9
394.2
379.7
378.1
* Full-time equivalent employees in thousands (see http://www.bts.gov/programs/airline_information/number_of_employees/)
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The Lost Decade: Industry Climbing Out of a Deep Hole
Net Income ($Billions) and Profit Margin (%) for U.S. Airlines*
15
$0.6 $1.6$3.6
($1.5)
$16.3
($53.7)
1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2010E
(0.3%) (~4%)
* All U.S. passenger airlines and cargo airlines reporting to DOT Form 41 P-12 Accounts 9899 and 4999
3.2% 1.9%2.7% 1.6%
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A Quarter or Two of Profit Will Not SufficeMeaningful Profitability Needed to Reinvest, Compete Abroad
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
Source: ATA analysis of DOT Form 41 reports
16
* Earnings before interest, taxes, depreciation, amortization and rents; an approximate measure of a companys operating cash flow based on data from the companys income
statement. Rent is included in the measure to evaluate the financial performance of airlines and other companies (e.g., casinos, restaurants) that have significant rental and
lease expenses derived from business operations.
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Doing Better and Doing Well Are Not the Same Thing
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3
4
5
6
7
8
9
10
11
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Sources: Bureau of Labor Statistics (http://www.bls.gov/cps) and Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp)
(9.4%)Percent
$12.5
$12.6
$12.7
$12.8
$12.9
$13.0
$13.1
$13.2
$13.3
$13.4
$13.5
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
Trillions of Chained 2005 Dollars, SAAR
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DOT Airline Customer Service Metrics
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(as % of sched. domestic departures)
(per 10,000 domestic departures)
(% of domestic flights within 00:15)
(per 10,000 passengers)
(per 1,000 domestic passengers)
(per 100,000 systemwide passengers)
* Time elapsed between departure from the origin airport gate and wheels off
Sources: Bureau of Transportation Statistics and DOTAir Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)
** Effective October 2008, BTS monthly reports on tarmac times included, for the first time, data from flights which were subsequently cancelled, diverted,
and/or had multiple gate departures (see http://www.bts.gov/help/about_tarmac.html)
http://www.bts.gov/help/about_tarmac.htmlhttp://www.bts.gov/help/about_tarmac.html -
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Breakeven Load Factor Finally Below 80% Again
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Source: ATA Passenger Airline Cost Index
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Airline Energy Costs Are High and Poised to Rise
Source: Energy Information Administration, including Short-Term Energy Outlook (Jan. 11, 2011) forecast of Jet Fuel Refiner Price to End Users
20
http://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htm -
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Jet Fuel Prices: Not Just a Crude Story
Source: ATA and Energy Information Administration
21
Crack
Spread
Jet Fuel (Gulf Coast)
Crude Oil (WTI)
http://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htmhttp://tonto.eia.doe.gov/dnav/pet/pet_pnp_pct_dc_nus_pct_a.htm -
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For U.S. Passenger and Cargo-Only Airlines, Fuel
Expenditures Trending Up Despite Lower Consumption
22
Sources: ATA, Energy Information Administration, Department of Transportation
Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs; YE = year ended
16.815.0
12.8
15.5
22.7
33.2
38.841.9
57.8
32.337.4
16
17
18
19
20
21
$10
$20
$30
$40
$50
$60
2000($0.82)
2001($0.78)
2002($0.72)
2003($0.85)
2004($1.16)
2005($1.66)
2006($1.97)
2007($2.11)
2008($3.07)
2009($1.90)
YE 9/10($2.19)
Billion Gallons
Billion Dollars
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Tax Bite on a $300 One-Stop Round Trip*
23
Source: ATA analysis of federal tax code
* Sample itinerary assumes one-stop domestic round trip with maximum passenger facility charge (PFC) per airport; $300 total price includes taxes and fees.
2011 Taxes
20% ($61)*
1972 Taxes
7% ($22)*
1992 Taxes
13% ($38)*
TAX
AIRFARE
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Special Aviation Tax Burden* Exceeded $16B in 2010
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$2,787
$1,808 $282$599 $291
$460
$7,261
$2,324$395 $351 $16,558
* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees shown include collections from non-U.S. carriers; PFCs reflect FAA estimate as of Nov. 2010
Sources: Department of Homeland Security, FAA, Office of Management Budget, Transportation Security Administration, ATA
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Demand for Domestic Air Travel Has NotRecovered
25
Source: ATA analysis of BEA and BTS data
Shortfall=
$34B
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The Price of Air Travel Has NotKept Pace With U.S. Inflation
26
Grade-A Large Eggs (Dozen) $0.91 $1.66 82.9
Unleaded Gasoline (Gallon) $1.51 $2.35 55.6
Movie Ticket $5.39 $7.50 39.1
Prescription Drugs (Index) 285.4 391.1 37.0
First-Class Domestic Stamp $0.33 $0.44 33.3New Single-Family Home $169,000 $216,700 28.2
Whole Milk (Index) 156.9 183.2 16.7
New Vehicle $24,923 $28,966 16.2
Television (Index) 49.9 10.6 (78.7)
1. BLS measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
2. BTS average airfare and ancillary fees generated per passenger enplaned, excluding government-imposed charges.
3. BTS National-Level Average Fare Series, the average domestic airfare paid per round-trip itinerary, including government-imposed charges.
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The Price* of Air Travel Has NotKept Pace With U.S. Inflation
27
Sources: BTS National-Level Average Fare Series (http://www.bts.gov/xml/atpi/src/avgfareseries.xml) and BLS (http://www.bls.gov/cpi/tables.htm)
$296.8
0
$275.7
8
$289.4
4
$300.9
7
$32
9.3
4
$339.1
6
$32
8.6
7
$317.93
$314.5
2
$309.4
5
$306.6
8 $
341.5
8
$325
.39
$346.1
0
$301.2
6 $340.7
2
$425.2
1
2Q95
2Q96
2Q97
2Q98
2Q99
2Q00
2Q01
2Q02
2Q03
2Q04
2Q05
2Q06
2Q07
2Q08
2Q09
2Q10
* BTS reports average fares based on domestic itinerary fares (round-trip or one-way for which no return is purchased). [Averages do not include frequent-flyer or zero fares.]
Fares are based on the total ticket value, which consists of the price charged by the airlines plus any additional taxes and fees levied by an outside entity at the time of purchase.
$84.4
9
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2009 Domestic Seating Capacity Fell Most Since 1942
28
Sources: ATA, BTS (T1 Scheduled Service)
(16.2) (6
.9)
(40)
(20)
0
20
40
60
80
100
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
* An available seat mile (ASM) is one seat flown one mile
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Capacity Being Re-Balanced With Size of U.S. Economy
29
Sources: BTS (T1 Domestic, All Services) and Bureau of Economic Analysis * An available seat mile (ASM) is one seat flown one mile
** Chained 2005 dollars
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Capacity Over the Past Decade: A Tale of Two Markets
30
Source: Innovata (via APG) published schedules as of Jan. 21, 2011
13.99 14.39
12.6512.92
13.6
9 14.05
13.62 14.02
14.02
12.56
12.5112.76
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
2.232.41
1.94 2
.052.10
2.42 2.4
92.662.85
2.74
2.64
2.89
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
* U.S. airlines only; an available seat mile (ASM) is one seat flown one mile and is the standard unit of capacity in the passenger airline sector
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Source: Innovata (via APG) published schedules as of Jan. 21, 2011
29,673
29,953
25,947
26,07726,826 28,000
26,359
26,895
26,282
23,991
23
,299
23,452
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1,75
9
1,898
1,541
1,654
1,669
1,811
1,806 1
,864 1
,921
1,816
1,816
1,836
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations
Departures Over the Past Decade: A Tale of Two Markets
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The Future Lies Across the Ponds
Thinking Outside the [Domestic] Box
2.0
4.0 4.2
6.8
DomesticUS
US-Europ
e
Japan-US
China-US
2.5
4.6 4.7 4.9
WithinNorthAm
NorthAtlantic
N
orthAmtoLatAm
Transpacific
Annual Traffic Growth: 2009-2028 Annual Traffic Growth: 2009-2028
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Healthy Investment Requires Healthy Equity
Equity Market Capitalization (Billions) as of Jan. 5 at 1800 EST
$376.7
$306.4
$239.6
$198.4
$193.8
$145.6
$125.8
$89.0
$50.9
$40.9
$37.5
ExxonMobil
Apple
Microsoft
GE
Wal-Mart
Toyota
BP
Goldman Sachs
Deutsche Bank
U.S. airline industry*
eBay
* AAI, ALGT, ALK, AMR, DAL, HA, JBLU, LCC, LUV, PNCL, RJET, SKYW, UAL
33
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Healthy Investment Requires Healthy CreditNo Passenger Airline in the World Enjoys an A-Minus or Better Rating from S&P
34
< BBB- (speculative or junk)
>= BBB- (investment-grade)
ExxonMobil
Microsoft GE
Toyota
Wal-Mart BP
eBay
GoldmanSachs
QANTAS
Southwest
Lufthansa
BritishAir
Alaska
TAM
Delta
United
AirCanada
AirTran
American
JetBlue
SAS
USAirways
AAA
BBB
B
B
BBB-
BB-
B+
B+
BBB
B-
B-
B-
AAA
AA+
AA
AA
A A A B-
B-
B-
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S&P Corporate Credit Ratings (July 12, 2010) for North
American Transportation Companies, Strongest to Weakest
1. Union Tank Car
2. UPS
3. TTX
4. AMTRAK
5. Canadian
National
Railway
6. Kirby Corp.
7. Burlington Northern
8. Enterprise Holdings
9. Norfolk Southern
10. Ryder System
11. Alexander & Baldwin
12. GATX
13. Union Pacific
14. FedEx
15. Hunt (J.B.) Transport
16. Brink's Co.
17. Aviation Capital Group
18. Canadian Pacific Railway
20. CSX
21. Con-way
22. ILFC
23. AWAS Aviation Capital
24. Teekay Corp.
25. AMERCO
26. Kansas City Southern
27. Mobile Mini Inc.
28. Overseas Shipholding Group
29. Kenan Advantage Group
30. RailAmerica
31. Avis Budget Group
32. US Xpress Enterprises
33. Hertz Global Holdings
35. Global Aviation Holdings
36. Marquette Transportation
37. United Maritime Group
39. Ozburn-Hessey Holding Co.
40. American Commercial Lines
41. Horizon Lines
42. General Maritime Corp.
44. Dollar Thrifty Automotive
46. Coach America Holdings
48. AirTran Holdings
49. JHCI Acquisition Inc.
50. Quality Distribution Inc.
51. Trailer Bridge Inc.
52. Western Express Inc.
56. Swift Corp.
57. Evergreen International
58. YRC Worldwide
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Whats Wrong With This Picture?The Investors View
. The balance between positions which seek to socialize
aspects of the airline industry versus those that promote growth in the
free market will contribute to how the market prices airline capital risk
and measures the required rate of return to justify growth.
.
Statement of David R. Strine before the House Subcommittee on Aviation, Consolidation In The Aviation Industry,
With A Focus On The Proposed Merger Between United Airlines And Continental Airlines A Perspective From Within
The Financial Markets (June 16, 2010)
36
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Global Context: Airlines Challenged to Cover Cost of Capital
37
Source: IATA (1993-2004 from McKinsey study) and Deutsche Bank Global Research (for 2010-2012 estimates)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011F
2012F
2013
2014
2015
Return (ROIC)
Cost (WACC)
ROIC Below WACC Translates to Loss of Investor Wealth
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Where Do We Go From Here?
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When America Flies, It Works