U.S. Airline Industry Financial Resultsand Operations: An Early 2013 Review

John HeimlichVP & Chief Economist

February 21, 2013

Dan ElwellSVP-Safety, Security & Operations

U.S. Airlines Incurred More Than $50 Billion in Fuel Costs in 2012Average Spot Price of Jet Fuel Has Risen 260 Percent Since 2000, 42 Percent Since 2010

airlines.org2

2000 2005 2010 2012

$16,787,334,749.0

$33,175,241,878.0

$38,778,687,372.0

$50,413,907,132.0

. . . Incurring Higher CostsBillion U.S. Dollars per Year

Source: BTS for U.S. airlines

2000 2005 2010 2012

$85.00

$171.56$214.90

$305.62

Due to Rising Prices . . .Dollars per Gallon (U.S. Gulf Coast)

Source: Energy Information Administration

Price of Jet Fuel Reached All-Time High in 2012, on the Rise Again in 2013

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$130

$140

WTI Brent Jet

Price per Barrel (Five-Day Moving Average)

Source: A4A and EIA (for WTI and Brent crude oil and U.S. Gulf Coast jet fuel)

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-200

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-200

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-201

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2012

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$102

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$313

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$326

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Price per Gallon (U.S. Gulf Coast)

Product (Unit) 2000 2012 Change (%)College Tuition: Public (Year) $3,508 $8,655 146.7Gasoline (Gallon, Unleaded) $1.51 $3.64 141.3Costs Faced by U.S. Airlines (A4A Index) 100.0 204.9 104.9Eggs (Dozen, Grade A, Large) $0.91 $1.84 102.0MLB Baseball Game (Nonpremium Ticket) $16.22 $26.98 66.3NFL Football Game (Nonpremium Ticket) $49.35 $78.38 58.8Prescription Drugs (BLS Index) 285.4 440.2 54.2Postage Stamp (First-Class) $0.33 $0.45 36.4Whole Milk (BLS Index) 156.9 211.3 34.7U.S. CPI (All Urban Consumers)1 172.2 229.6 33.3Air Travel (R/T Domestic Fare + Ancillary)2 $316.96 $380.05 19.9Air Travel (R/T Domestic Fare Only)2 $314.46 $356.98 13.5Apparel: Clothing/Shoes/Jewelry (BLS Index) 129.6 126.3 (2.6)Television (BLS Index) 49.9 5.4 (89.1)

Relative to Most Goods/Services (and Airlines’ Costs), Air Travel Remains a BargainU.S. Inflation and Airline Costs Have Sharply Outpaced the Price of Domestic Air Travel

1. Bureau of Labor Statistics “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”2. A4A analysis of data collected by BTS for YTD 3Q 2012 – excludes taxes; “ancillary” includes revenue from reservation changes and baggage

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From 2000 to YTD 3Q12, Real (Inflation-Adjusted) Domestic Fares Fell 15 PercentWith Ancillary Revenue Included, Domestic Journey Price Fell 10 Percent

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Sources: DOT O&D Survey (Data Bank 1B) and Bureau of Labor Statistics for the Consumer Price Index (CPI)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3Q12$300

$325

$350

$375

$400

$425

Fares Fares + Ancillary

Average Round-Trip Domestic Airfare in Constant CY2000 Dollars

In 2012, Results of 10 U.S. Passenger Airlines* Results Inferior to 2011Despite 4.5% More Revenues, 4.7% Higher Costs Reduced Profit Margin to 0.1%

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways

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2012 vs. 2011 % Better/(Worse)

Operating Revenues 4.5

Operating Expenses (4.5)

Fuel (36%) (5.9)

Wages and Benefits (24%) (4.7)

Landing Fees & Rents (5%) (1.3)

Maintenance/Materials (6%) (9.0)

Depreciation & Amortization (4%) (2.9)

Other (26%) (2.3)

Other Income/(Expenses) (11.8)

Subtotal Expenses (4.7)

2010 2011 2012

2.2

0.3 0.1

Net Profit MarginEarnings as % of Revenues

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U.S. Airline Profitability: It’s a Matter of Pennies$152 Million in Profit Spread Over 711 Million Passengers Translates to . . .

Airfare94%

2010: 318¢ per Passenger 2011: 77¢ per Passenger 2012P: 21¢ per Passenger*

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways

In 2012, U.S. Airline* Earnings Amounted to 1/10th of a Penny per Dollar of RevenueWeak Profit Margin in Stark Contrast to Other Fortune 500s

airlines.org8

U.S. Airlines* 2012Net Income ($ Millions) 152Net Margin (Percent) 0.1

Apple 2012Net Income ($ Millions) 41,747Net Margin (Percent) 25.35

Ford Motor Co. 2012Net Income ($ Millions) 5,665Net Margin (Percent) 4.22

Starbucks 2012Net Income ($ Millions) 1,434Net Margin (Percent) 10.5

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways

Improved Airline Finances Translated to 21 Consecutive Months of Job GrowthAfter Years of Losses, U.S. Airlines Have Also Been Able to Reinvest in Equipment

2007 Jun

Nov Apr

Sep Feb

Jul

Dec

May Oct

Mar

Aug

2012 Jun

Nov

(8)

(6)

(4)

(2)

0

2

4

airlines.org9

2000 2005 2010 2011

$15,320,700,000.0

$6,108,903,000.0 $5,172,192,00

0.0

$6,172,160,000.0

Airline Capital Reinvestment UnderwayAircraft and Non-Aircraft Capital Expenditures (Billions)

Airline Jobs Grow When Times Are GoodYOY Change (%) in Full-Time Equivalent Employees

Source: BTS for U.S. scheduled passenger airlines

Source: A4A and company reports for AirTran, Alaska, Allegiant, America West, American, Continental, Delta, Hawaiian, JetBlue, Northwest, Southwest, Spirit, United and US Airways

Investment Grade1 (>= BBB-)

Source: Standard and Poor’s as of Nov. 19, 2012; “Guide to Credit Rating Essentials: What are credit ratings and how do they work?”

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ExxonMobil, Microsoft AAAGE AA+Wal-Mart AAToyota AA-UPS A+BP, eBay AAmtrak, Starbucks A-FedEx, Marriott, Starwood BBBLufthansa, Qantas, Southwest BBB-

Ford Motor Co. BB+British Airways, TAM BBAlaska, Allegiant BB-Avis, Hertz B+Delta, Gol, United BAir Canada, JetBlue, US Airways B-SAS CCC+American D

Speculative2 Grade (< BBB-)

1 Describes issuers with relatively high levels of creditworthiness and credit quality2 Describes issuers with ability to repay but facing significant uncertainties, such as adverse business or financial circumstances that could affect credit risk

Passenger Airline

The Airline Industry’s Financial Condition Is Improving, But Far From StellarPer S&P, Only One U.S. Passenger Airline Has Investment-Grade Credit

Financial Pressures Have Generally Translated to Cuts in Domestic Air ServiceAs Rising Costs Outpace Revenues, the USA Continues to See a Smaller Airline Industry

Source: Innovata (via Diio Mi) published schedules as of Feb. 16, 2013; an available seat mile (ASM) is one seat flown one mile

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Domestic Flights

Domestic Seats

Domestic ASMs

(13.2)

(9.3)

(5.7)

(0.3)

0.6

1.4

% Change: 2Q13 vs. 2Q12

% Change: 2Q13 vs. 2Q07

“We’ve lost a lot of markets that were served only with the 50-seat (aircraft). We’d like more flights. But you’re not going to have any flights if the airlines don’t make money, so we understand their predicament.” (Larry Cox, president and CEO of the Memphis-Shelby County Airport Authority)

─ “Regional airlines face closings, bankruptcy,” USA Today (Aug. 20, 2012)

Some of the Domestic Capacity Cuts Resulted from Brands Ceasing to OperateSoaring Costs and Volatile Economic Conditions Took Their Toll on Many During the 2000s

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Southwest; 24.9%

Other; 1.0%

Frontier; 2.2%

Spirit; 1.8%Hawaiian; 1.5%

Allegiant; 1.5%

Virgin America; 1.3%

JetBlue; 5.2%Alaska; 4.0%Delta; 19.5%

United; 15.6%

American; 11.4%

US Airways; 10.2%

airlines.org13

Liquidations, M&A, Globalization and Financial Pressures Have Reshaped the IndustryDomestic O&D Share* = 57% Global Network Carriers, 37% Low Cost Carriers, 6% Other

* A4A analysis of BTS Data Bank 1B for marketing airlines (incl. regional partners flying under code-share agreements) for the year ended 3Q 2012

airlines.org14

Industry Restructuring Has Helped Pave the Way for Four Major National Networks

United (including Continental)

American (including US Airways): Proposed

Delta (including Northwest)

Southwest (including AirTran)

airlines.org15

Competing National Networks Mean Enhanced Service Offerings for Travelers

2007 2012

Load Factor(% of seating capacity utilized)

79.9 83.0 (est.)

On-Time Arrival Rate(% of domestic flights within 00:15)

73.4 81.9

Involuntary Denied Boardings(per 10,000 passengers)

1.12 0.99

Mishandled Bags(per 1,000 domestic passengers)

7.05 3.09

Flight Cancellations(% of scheduled domestic departures)

2.16 1.29

Sources: BTS and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

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U.S. Airline Operations Have Improved Substantially Over Past Five YearsImprovements Enabled by Profitability (Reinvestment), Fewer Flights, Better Weather

Coping with Storms: Increasingly Proactive, Collaborative and Tech-Savvy

airlines.org17

Then Now

Weather forecasts Less precise, manual process

High-capacity weather modeling, more real-time tools

Communication tools Fewer, low-techMany, high-tech - social media, 24-hour news, PDA alerts; steady stream to customers

Operations philosophy “Wait and see” Earlier decision-making,quicker recovery

Collaboration Limited Intense - across airlines, airports, FAA, DHS/CBP/TSA

www.airlines.org