John P. Heimlich, VP & Chief EconomistPresentation to the CAAFI Biennial General MeetingDecember 5, 2018
Air Service and Airline Economics in 2018Growing, Competing and Reinvesting
Source: A4A and Bureau of Transportation Statistics for U.S. passenger and cargo airlines
2 airlines.org
The ~720,000 Employees* of U.S. Passenger and Cargo Airlines Offer an Extensive Worldwide Network Facilitating the Safe and Rapid Movement of People and Goods
27,000 daily flightsto/from 800+ airports in
nearly 80 countries
55,000 tons of cargo per day
2.3 million passengersper day
* Headcount as of July 2018
U.S. Airlines Are Moving More People and More Goods Over Longer DistancesSignificant Growth of Demand for Air Transportation Services in the Deregulated Era
airlines.org3
Source: U.S. Bureau of Transportation Statistics (T1 systemwide for U.S. airlines)
0
200
400
600
800
1,000
1,200
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
Passenger Traffic Up 4.1xRevenue Passenger Miles (Billions)
0
5
10
15
20
25
30
35
40
45
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
Cargo Traffic Up 5.6xRevenue Ton Miles (Billions)
In 2014-2018, Domestic Airline Capacity Grew at Twice the Rate of the U.S. Economy
airlines.org
Source: Bureau of Economic Analysis and published airline schedules via Diio Mi
1.6 1.1
0.2
1.6
2.3
5.1 4.9
4.0
5.3
2.6
1.6
2.2 1.8
2.5 2.9
1.6
2.2 2.5
0
1
2
3
4
5
6
2010 2011 2012 2013 2014 2015 2016 2017 2018
Domestic Airline Capacity (ASMs) Real US GDP
4
(Airlines 1.3%, Economy 2.0%)
(Airlines 4.8%, Economy 2.3%)
2,274 2,289 2,366 2,454 2,542 2,651 2,618 2,713 310 330 351 368 390 405 401 415 2,584 2,620 2,717 2,823 2,932 3,056 3,019 3,128
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2013 2014 2015 2016 2017 2018 1H18 1H19
Domestic International
Customers Will See All-Time High of 3.07M Daily Seats Departing U.S. AirportsDaily Seats (000) Departing U.S. Airports: Up 4.2% YOY in 2018 and 3.6% in 1H 2019
airlines.org5
Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled passenger service from U.S. airports to all destinations
airlines.org6
Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the FastestDifferent Types of Carriers Market Their Prices and Services Differently
(50)
0
50
100
150
200
250
300
350
400
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
% C
hang
e in
Cap
acity
* S
ince
200
7
Spirit
Sun Ctry
HawaiianAlaska
JetBlue
SouthwestAA/DL/UA
Source: Innovata (via Diio Mi) schedules as of Oct. 5, 2018, for selected marketing airlines including predecessors
Allegiant
Frontier
* Systemwide scheduled available seat miles
From 2000-2017, Global Network Carrier Domestic Share Fell From 73% to Just 53%Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model
airlines.org
Source: DOT Data Bank 1B (each airline shown on a marketing-carrier basis and tracked with its respective merged/acquired predecessors [e.g., UA/CO]
7
73 71 69 68 67 67 65 62 60 59 58 57 57 57 56 55 54 53 53
18 19 20 21 21 21 22 23 24 25 25 25 25 24 24 24 24 24 23
9 10 10 11 12 13 13 15 16 16 17 18 19 19 20 21 22 23 24
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1H18
Global Network (AA, DL, UA) Southwest Other
Los Angeles-Seattle Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 78%)
airlines.org8
2007 O&D Passenger Share 2017 O&D Passenger Share
64%
17%
8%
7%
52%
19%
8%
5%
7%
7%
* Defined as carrying at least 5 percent of O&D passengers between BUR/LAX/LGB and SEASource: DOT Data Bank 1B and Innovata published schedules via Diio Mi
Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which Competition* Increased From 2007-2017 (Real Fares Down 20%, Passengers Up 23%)
* Defined as carrying at least 5 percent of O&D passengers between BOS and CAK/CLESource: DOT Data Bank 1B and Innovata published schedules via Diio Mi
airlines.org9
63%
30%
47%
28%
12%
6%
2007 O&D Passenger Share 2017 O&D Passenger Share
YTD 3Q18 Expenses Rose Faster Than Revenues, Reducing Profitability Yet AgainCarriers Under Cost Pressure in Every Major Category, Driving Margins Lower in 2018
airlines.org10
Change (%) in Operating Revenues and ExpensesFirst Nine Months 2018 vs. First Nine Months 2017
6.5
15.8 12.4
7.0 5.9
33.9
2.7 6.5
3.2 8.6
12.0 15.6 15.5
12.1 8.2
Pax
Rev
(1)
Car
go R
ev
Oth
er R
ev (2
)
Tota
l OpR
ev
Labo
r
Fuel
Mai
nten
ance
Airp
orts
Airc
raft
Oth
er (3
)
Tota
l OpE
xp
2015
2016
2017
2018
Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
1. Traffic (revenue passenger miles) up 4.8 percent; yield (revenue per passenger-mile flown) up 1.6 percent; U.S. CPI up 2.5 percent2. Sale of frequent flyer award miles to airline business partners, transportation of pets, in-sourced aircraft and engine repair, flight simulator rentals, inflight sales, etc.3. Professional fees, food/beverage, insurance, commissions, GDS fees, communications, advertising, utilities, office supplies, crew hotels, nonfuel payments to regionals
Pre-Tax Profit Margin (%)YTD 3Q Four-Year Trend
$10.
8B
$14.
9B
$2.2
0 vs
. $1.
70
$18.
3B
$18.
7B
Airlines Recovered $0.68 in Revenue for Every $1.00 Increase in Operating CostsFuel Alone Accounted for 57 Percent of the Year-Over-Year Increase in Costs
airlines.org11
~ $70M/D
ay
PassengerCargo
Other
Fuel
Labor MaintenanceAirportsAircraftOther
$8,668
$12,767
($4,099)
Op Revenues Op Expenses Op Profits
Source: A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United
Change ($ Millions) in Revenues and Expenses – First Nine Months 2018 vs. First Nine Months 2017
1 ~75% traffic-driven 2 ~90% price-driven
12
Even in Best Years, Profitability of U.S. Airlines Lags U.S. Corporate AveragePre-Tax Profit Margin (%) Gap Widened in 2016 and 2017, Widening Further in 2018
airlines.org
Source: ATA Annual Reports (1970-1976), A4A Passenger Airline Cost Index (1977-present); Bureau of Economic Analysis
8.2
15.2
(25)
(20)
(15)
(10)
(5)
0
5
10
15
2019
70
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
U.S. Recession
U.S. Passenger Airlines
All U.S. Corporations
12
Note: Recessions highlighted in gray
Jet-Fuel Prices Creeping Up AgainA Penny per Gallon per Year Equates to ~$200M in U.S. Airline Industry Fuel Expenses
airlines.org13
0.81
1.66
2.27
3.05 3.15 3.01 2.86
1.86
1.461.70
2.14
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 2018
Systemwide Average Paid Price of Jet Fuel per Gallon
Source: A4A and Bureau of Transportation Statistics (all U.S. carriers, scheduled an nonscheduled services)
Jan-
Sep
Crude-Oil Prices Surged Through October, Plunging in NovemberOctober 2018 Averaged 41% More Than October 2017; Remain Highest in Four Years
Spot Price* of Brent Crude Oil ($ per Barrel)
airlines.org14
$0
$20
$40
$60
$80
$100
$120
Jan-
14M
ar-1
4M
ay-1
4Ju
l-14
Sep
-14
Nov
-14
Jan-
15M
ar-1
5M
ay-1
5Ju
l-15
Sep
-15
Nov
-15
Jan-
16M
ar-1
6M
ay-1
6Ju
l-16
Sep
-16
Nov
-16
Jan-
17M
ar-1
7M
ay-1
7Ju
l-17
Sep
-17
Nov
-17
Jan-
18M
ar-1
8M
ay-1
8Ju
l-18
Sep
-18
Nov
-18
Jan-
19M
ar-1
9M
ay-1
9Ju
l-19
Sep
-19
Nov
-19
Jan-
20
Source: A4A and Energy Information Administration (http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm)
Airlines Utilize a Wide Array of Tools to Minimize Fuel Consumption
airlines.org15
o Continue to replace older (often smaller) aircraft with typically larger, next-generation or re-engined aircrafto Deploy state-of-the-art flight planning/navigation software to optimize airborne movement of aircraft
o Utilize taxi-management technologies – and single-engine taxi – to minimize ground-based fuel burno Consistently employ ground power while parked at gate instead of aircraft auxiliary power unit (APU)o Reduce onboard weight (e.g., lighter materials/structures, inflight entertainment systems, excess fuel)
Substantial U.S. Airline Capital Investment* Has Continued in 2018 Despite Waning Profits – Bringing Total for This Business Cycle to $115 Billion
airlines.org16
15.513.8
7.76.6 5.8 5.2
6.6
9.8
12.513.9
17.0 17.519.9
13.0
2000
2001
2002
2003
-08
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors
U.S. Passenger Airline Capital Expenditures* ($ Billions per Year)
Incl
uded
> 4
50 a
ircra
ft
* Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology
Jan-
Sep
Infrastructure Investment Is Robust and Growing at Airports of All SizesU.S. Airport Capital Expenditures ($ Billions) by FAA Hub Size
airlines.org17
5.6 5.7 6.4 6.9 8.7
1.1 1.0 1.0
1.3
1.7
1.0 1.0 1.1
1.0
1.1
1.1 1.1 1.2
1.0
1.1
8.9 8.99.8 10.3
12.7
2013 2014 2015 2016 2017
Large Medium Small Non
Source: FAA Form 5100-127 reports, section 10: “Capital Expenditures and Construction in Progress”
Almost Every Major* U.S. Airport Has Seen Supply of Seats Rise Over Past 5 Years% Change in Scheduled-Service Seats Available: 2018 vs. 2013
airlines.org
70
57
56
51
45
44
43
35
35
35
33
33
32
32
31
30
30
29
26
25
24
24
24
24
22
22
22
21
20
20
19
19
18
17
16
16
15
15
14
14
12
11
10
9 9 9 9 9 8 7 7 5 5 5 3 2 1 1 (2
)(3
)(4
)
(10)
0
10
20
30
40
50
60
70
80
DA
LA
US
SJC FL
LS
EAC
VG
BN
AM
CO
RD
UM
SY
PD
XB
OS
SM
FS
ANO
AKS
FO IND
LAX
EW
RR
SW
OM
AS
LCC
MH
BU
RB
DL
TPA
OG
GJF
KO
RD
PBI
DE
NJA
XO
NT
PIT
HO
ULA
SB
WI
SAT MC
IS
TLA
NC
ATL
SN
AIA
HD
FWD
TW MS
PD
CA
MIA
PH
XC
LT IAD
LGA
HN
LP
HL
MD
WM
KE
CLE
BU
FA
BQ SJU
18
Source: Innovata (via Diio Mi) published schedules as of Nov. 23, 2018, for all airlines providing scheduled service * FAA large and medium hub airports
In Addition to Expanding Schedules, Airlines Are Deploying Larger AircraftReplacement of 50-Seaters With Larger Regional Jets Is Primary Driver
airlines.org19
% of Domestic U.S. Departures by Aircraft Size
Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017
Factors include availability of pilots, fuel efficiency, congested airspace/airfields, improving economics of large regional jets, lack of new-generation in-production small aircraft
45 38 27 22
8 1520 22
47 48 53 56
2005 2010 2015 2018
≤ 50 Seats 51-100 Seats > 100 Seats
In 2017, the Average Airline Flight Departing a U.S. Airport Traveled 16 Percent Farther and Carried an 19 Percent Larger Payload Than It Did in 2007
airlines.org20
Source: Innovata (via Diio Mi) published schedules as of Dec. 29, 2017
726
844
29,675
35,354
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
0
100
200
300
400
500
600
700
800
900
1,000
2007 2017
Aver
age
Sta
ge L
engt
h (M
iles) Average P
ayload (Pounds)
Jet-Fuel Demand Growth at U.S. Airports Varied Widely From 2007 to 2017% Change in Gallons Dispensed at 65 U.S. Airports: 2007 to 2017
airlines.org21
Source: A4A Fuel Portal
175
94
62
57
42
40
39
36
35
33
33
26
25
22
21
20
20
17
17
16
12
11
11
10
10
8 8 7 7 7 6 5 4 4 2 1 0 (0
)(3
)(3
)(4
)(5
)(6
)(6
)(6
)(6
)(6
)(8
)(1
0)(1
1)(1
3)(1
4)(1
6)(1
7)(2
0)(2
0)(2
0)(2
3)(2
8)(2
9)(3
0)
DA
LLI
HA
US
MS
YC
LT FLL
KO
AIT
OS
EAB
OS
SFO SJC
CV
GD
CA
OG
GLA
XM
IAJF
KS
AND
FWH
OU
SLC TU
LB
WI
BN
AH
NL
LGA
MC
OD
EN
SAT IAH
RD
UR
SW
EW
RO
NT
DS
MM
EM
IAD
PD
XM
SP
ATL PIT
OR
DD
TW SM
FLA
SP
HX
BU
FM
DW
TPA
PH
LS
NA
OAK
CO
SM
CI
ELP
OR
FR
NO
RO
CM
KE
STL
• Changes in law (DAL–Wright Amendment, DCA-perimeter rule)• Airline change of hubs (AA-PIT/STL, UA-CLE, DL-MEM)• Airline focus city growth (B6-BOS, B6/NK/WN-FLL)• Organic economic/tourism growth (AUS, BNA, DEN, Hawaii)• Growth of international flights (BOS, HOU, JFK, SJC)• Amazon (cargo) effect (CVG)• Fuel-efficiency gains (aircraft, flight mix – IAD, PDX)
Total U.S.-Based Jet Fuel Demand1 Back to 2000 All-Time High
U.S. Product Supplied2 of Kerosene-Type Jet Fuel (Thousand Barrels per Day)84
2 77
1 79
1 78
9 83
1 85
8 87
6 85
1 80
9 80
4 83
9 953
1,00
5 1,
105
1,18
1 1,
236
1,28
4 1,
340
1,29
6 1,
310
1,35
7 1,
480
1,49
7 1,
575
1,59
8 1,
623
1,67
5 1,
725
1,65
6 1,
621
1,57
8 1,
630
1,67
9 1,
633
1,62
2 1,
539
1,39
3 1,
432
1,42
5 1,
398
1,43
4 1,
470
1,54
8 1,
614
1,68
2 1,
720
0
200
400
600
800
1,000
1,200
1,400
1,600
1,80019
73
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
airlines.org22
Source: U.S. Energy Information Administration
1 Jet fuel supplied within the United States to all users (i.e., U.S. and foreign airlines, recreational and business aviation, civilian government, military)2 Per EIA, approximates consumption by measuring the disappearance of these products from primary sources (i.e., refineries, natural gas processing plants, blending plants, pipelines, bulk terminals). Generally computed as follows: field production, plus renewable fuels and oxygenate plant net production, plus refinery and blender netproduction, plus imports, plus net receipts, plus adjustments, minus stock change, minus refinery and blender net inputs, minus exports.