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To represent, lead and serve the airline industry
Cyclical upturn and the bigger picture
September 2010Brian Pearcewww.iata.org/economics
Markets rebound from Great Recession
Source: IATA
International air freight and passenger volumesseasonally adjusted
160
180
200
220
240
260
2005 2006 2007 2008 2009 2010
RP
K, b
illio
ns
9
10
11
12
13
14
FT
K, b
illio
ns
FTK
RPK
World trade upturn boosts air cargo
World trade in goods and air FTKsSource: Netherlands CPB and IATA
8
9
10
11
12
13
14
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Bill
ion
FT
Ks
90
100
110
120
130
140
150
160
170
inde
x of
wor
ld t
rade
, 20
00=
100
International FTKs(left scale)
World goods trade volumes(right scale)
Source: IATA, Netherlands CPB
Freighter utilization peaking at high level
Freighter utilization and freight load factor
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
2005 2006 2007 2008 2009 2010
Fre
ight
load
fact
or, %
AF
TK
7.5
8
8.5
9
9.5
10
10.5
11
Fre
ight
er u
tiliz
atio
n, d
aily
hou
rs
Freight load factor
Freighter utilization
Source: IATA
Business travel revives premium business
Busines confidence and premium travel growth
55
65
75
85
95
105
115
2006 2007 2008 2009 2010
Co
nfid
en
ce in
de
x
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
% c
han
ge
ove
r ye
ar
Premium travel(right scale)
Business confidence(left scale)
Source: IATA, Haver
Fares turning up but so are fuel prices
Source: IATA and Platts
Average international fares and jet kerosene prices
300
320
340
360
380
400
420
2006 2007 2008 2009 2010
US
$ pe
r on
e-w
ay fa
re
100
150
200
250
300
350
400
450
US
cen
ts p
er g
allo
n
Jet kerosene price(right scale)
Average one-way international fare(left scale)
Asset utilization not as good as it seems
Aircraft utilization and passenger load factor
71%
72%
73%
74%
75%
76%
77%
78%
79%
80%
2005 2006 2007 2008 2009 2010
Pas
seng
er lo
ad fa
ctor
, % A
SK
s
10.2
10.4
10.6
10.8
11
11.2
11.4
11.6
Airc
raft
utili
zatio
n, d
aily
hou
rs
Passenger load factor
Twin aisle utilization
Source: IATA
Capacity starting to outpace demand
International air travel and capacityseasonally adjusted
185
195
205
215
225
235
245
255
265
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
RP
K b
illio
n
250
260
270
280
290
300
310
320
330
AS
K b
illio
n
ASKs(right scale)
RPKs(left scale)
Source: IATA
And there are big geographical differences
Growth in passenger numbers by market
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010
Cha
nge
over
yea
r
Middle-East - Asia
Within Asia
North & Mid Pacific
North Atlantic
Source: IATA
Reflected in mixed operational cash flows
Source: Bloomberg
EBITDA as % revenuesseasonally adjusted
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010
% r
even
ues
US airlines
Asia-Pacific airlines
European airlines
Some regions back in profit, some not
Source: ICAO, IATA
Airline net profits by region
-6
-4
-2
0
2
4
6
Europe Asia-Pacific N America L America Middle east Africa
US
$ bi
llion
2009 2010 2011
Overall industry profits see cyclical upturn
Global commercial airline profitability
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
F
20
11
F
% r
eve
nu
es
-20
-15
-10
-5
0
5
10
15
20
US
$ b
illio
n
Net losses(right scale)
EBIT margin (left scale)
Source: ICAO, IATA
But significant structural gap remains
Source: IATA
Return on invested capital in the airline industry vs the cost of capital
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
F
2011
F
2012
F
2013
F
2014
F
2015
F
% o
f inv
este
d ca
pita
l
Return on capital(ROIC)
Cost of capital(WACC)
Forecast
There are supply chain issues
Source: IATA ‘Value Chain Profitability’
0
5
10
15
20
25
Ave
rage
RO
IC 1
996-
2004
(%
)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Upt
urn
RO
IC d
ivid
ed b
y D
ownt
urn
RO
IC
Average ROIC (LHS)
Volatility in ROIC (RHS)
But majority of capital invested in airlines
7
35
11
10
31
43
11
40
51
54
315
2
4
4
6
8
9
18
26
38
185
380
0 50 100 150 200 250 300 350 400
Fuelling
Travel Agents
Catering
CRS
Groundhandling
Freight Forwarders
Lessors
Maintenance
Manufacturers
Airports
Airlines
US$ Billion
Invested Capital
Revenue
Source: IATA ‘Value Chain Profitability’
Returns inadequate for whole value chain
Annual investor returns (US$bn) in the air transport value chain (1996-2004)
-14
-12
-10
-8
-6
-4
-2
0
2
Inve
stor
Ret
urn
($bi
llion
)
+0.3 +0.2
-1,1 -0.2
-11,7 +0.7 -0.01 +0.4 ~11
Source: IATA ‘Value Chain Profitability’
US-EU 2nd Stage could have opened path for $5bn benefit from liberalized O&C
US-EU Open Skies liberalisation
Open Skies only O&C liberalisation (incremental benefits)
Passengers: +26m +15-40m
Economic benefits: €6-12bn €4bn
Jobs: +70,000 +1,800-10,000
Source: Booz Allen Hamilton study
M&A and JVs taking place but restructuring potential is limited
Source: Bloomberg
Alliances active but share stable at best
ASK share of alliances, 'LCCs' and 'non-aligned' airlines
5%
15%
25%
35%
45%
55%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
% o
f gl
oba
l sch
edu
led
AS
Ks
Alliance airlines
'Non-aligned' airlines
'LCCs'
+6%
-6%
Air China, China Southern, COPA and others
Swiss, SAA, Aeroflot
Source: IATA
Exits exceeded by new entrants even in recession
Airline new entrants and exits
-60
-40
-20
0
20
40
60
80
100
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Num
ber
of a
irlin
es
New entrants
Exits
Recessions
Source: Ascend
Substantial value is created…but captured by customers and wider economy
Economic returns, US$ billion per annum
-100
0
100
200
300
400
500
600
US
$ bi
llion
?
?$11bn investor losses
?
Source: IATA
