Trends and Challenges for the Airline Industry

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Trends and Challenges for the Airline Industry Tim-Jasper Schaaf Director Marketing & Sales To represent, lead and serve the airline industry

The value proposition for air travel remains strong It’s safer, it’s greener and it’s still a bargain

Source: Constructed from worldwide data from ICAO and IATA IATA Economics www.iata.org/economics

2

The quality of air service has improved Even in the past 5 years the main facets of airline service have got better

2007

2008

2009

2010

2011

On-time arrival rate* European flights** 77.9% 78.3% 82.1% 75.8% 82.1% US domestic flights*** 73.4% 76.0% 79.5% 79.8% 79.6% Mishandled bags per 1000 passengers Worldwide^ 19 15 11 12 9 Cancelled flights European network airlines^^ 1.40% 1.38% 1.08% 3.43%^* 0.94% US domestic flights^^^ 2.16% 1.96% 1.39% 1.76% 1.91% * % flights arriving within 15 minutes scheduled time ** http://www.eurocontrol.int/articles/coda-publications *** http://airconsumer.ost.dot.gov/reports/; table 1A YTD December figures ^ SITA Baggage Report 2012 ^^ AEA ^^^ http://www.transtats.bts.gov/HomeDrillChart.asp; On time performance - Flight delays at a glance ^* Impacted by airspace closures due to Icelandic volcanic ash cloud

IATA Economics www.iata.org/economics

2012

2013

83.4% 81.9%

83.9% 78.8%

9 1.00% 1.29%

1.23% 1.42%

3

Over $6 trillion of goods annually are now carried by air 35% of world trade is carried by air; a key enabler of globalization

Source: ICAO, IATA, WTO. Value carried by air=world merchandize exports*35% (35% estimated by The Colography Group, 2005) IATA Economics www.iata.org/economics

4

Air connectivity has enabled global supply chains Dell, Apple, Amazon would look very different without rapid air freight

Dell manufacturing plant Austin, Texas

Businesses can set up much more efficient global supply chains

Mexico Keyboards

France Soundcards

Japan RAM Chips CD-ROM Drives

Taiwan Network Cards Monitors Cooling Fans

China Power supplies

Malaysia Floppy Drives

Singapore SCSI Cards Disk Devices

Hong Kong Video Cards Microprocessors

Source: Dell, IATA IATA Economics www.iata.org/economics

5

Aviation plays a major role in most economies Footprint of aviation and tourism measured by the sector’s GVA as % GDP Malta Lebanon Cyprus United Arab Emirates Iceland New Zealand Thailand Singapore Hong Kong Egypt Australia Greece Ireland Canada Jordan Spain United Kingdom United States Turkey Chile Finland Sweden France Kenya Malaysia Luxembourg WORLD AVERAGE Portugal Saudi Arabia South Africa Netherlands Belgium Israel Germany Taiwan Norway Switzerland Philippines Korea Latvia Mexico Peru Austria Ecuador Italy Colombia India Denmark Brazil Hungary Russian Federation China Romania Czech Republic Japan Poland Nigeria

0.0%

5.0% 10.0% 15.0% Aviation and tourism GVA as a % GDP

20.0%

Source: Oxford Economics. http://www.benefitsofaviation.aero/Pages/default.aspx Note: GVA = Gross Value Added which is mainly wages and profits. GDP = Gross Domestic Product IATA Economics www.iata.org/economics

6

Massive expansion ahead for emerging markets Expanding middle classes drive both travel and air cargo flows Serving this demand will require a big expansion of investment Global middle income class in 2009 and prediction for 2030 Europe

North America

Asia Pacific Middle East & North Africa Central & South America

Sub Saharan Africa 100mn 500mn 1bn

2030 2009

Source: OECD, Standard Chartered Bank IATA Economics www.iata.org/economics

7

Periods of profit in the industry are typically short-lived Average 1990-2012 net profit margin for airlines worldwide was 0.0%!

Source: ICAO, IATA IATA Economics www.iata.org/economics

8

Lack of profitability not due to business model or region Airlines generating average EBIT margins of more than 8% during the 2000s Average EBIT margins, 2000-09 L America

INDUSTRY LAN Aegean Southwest Airlines Singapore Airlines Emirates Pinnacle Airlines Aeroflot Turkish Air Arabia GOL Allegiant COPA Republic Airways Ryanair

N America Mid East Asia-Pacific Europe

LCC

Full service long-haul

Regional

0%

5%

10%

15%

20%

25%

EBIT margin %, 2000-2009 Source: IATA Vision2050 report http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf IATA Economics www.iata.org/economics

9

Profitability is very unbalanced across the value chain Airlines sit in the middle of the value chain making the least returns ROIC excluding goodwill of sample, period 2004-2011, % 45 40 35 30 25 20 15 10 5 0

44

20 7

Cost of 9-11 capital

9

11

9-11

7-9

IATA Economics www.iata.org/economics

6

9

6-8

6-8

15

4

7-10

10-11

8-11

7-8

Source: McKinsey

10

Existing and proposed regulation risk significant cost A selection of regulations/policies illustrating industry and market-level costs Policy risk impact

% average ticket price

9% 8%

Total cost for industry $1.5bn

Delhi

7% 6% 5% German tax

4% 3% 2%

LHR congest -ion pricing

Climate fund levy Europe

LHR 2012-14

Austrian tax

1% EU ETS

ACSA

CDG congest -ion pricing

0% Airport regulation

Budget deficits

Passenger rights

Climate change

Congestion policy

Source: IATA IATA Economics www.iata.org/economics

11

Demand for air travel and cargo diverge Air travel and air freight volumes Seasonally adjusted 19 480

440

17

420

16

400

15 Freight FTKs

380

14 360 13

340 320

12

300 2007

11

Source: IATA

FTKs per month, billion

RPKs per month, billion

18

Passenger RPKs

460

2008

IATA Economics www.iata.org/economics

2009

2010

2011

2012

2013 12

Revenue divergence greater than volumes Passenger and cargo revenues 600

90

550

Passenger revenue

80

500 70

400

60

350

50

US$ billion

US$ billion

450

Cargo revenue

300

40 250 30

200 150

20 1993

1995

1997

1999

2001

2003

2005

2007

2009

2011 2013F

Source: ICAO (history), IATA (forecast) IATA Economics www.iata.org/economics

13

Cargo asset utilization under pressure

(Seasonally adjusted)

Average daily hours flown

10.5 10.0

Freight aircraft utilization

53% 51% 49%

9.5

47%

9.0

45% 8.5

43%

8.0 7.5 7.0

Freight Load Factor

41% 39% 37%

% available freight tonne capacity

Freight load factor and freighter aircraft utilization

Source: IATA, Boeing IATA Economics www.iata.org/economics

14

Asset utilization high in passenger business Passenger aircraft utilization 81% Passenger load factor

Average daily hours flown

11.6

80%

11.4

79%

11.2

78% Twin-aisle aircraft utilization

11.0

77%

10.8

76%

10.6

75%

10.4

74%

10.2 2007

73% 2008

IATA Economics www.iata.org/economics

2009

2010

2011

2012

% of ASKs

11.8

2013 15

Ancillary services increasingly important Revenue per departing passenger

190

Fare

180 170 160 150 140 40

Cargo + other

30 20

Ancillaries

10 0 2000

2002

2004

2006

2008

2010

2012

2014

Source: Ancillaries derived from IdeaWorks 2013 report, IATA forecast IATA Economics www.iata.org/economics

16

25%

70 World trade growth

Year-on-year % change

20%

65

15% Industrial production growth

10% 5% 0%

60 55 50

Business confidence (right scale)

-5% -10%

45 40

-15% -20%

35

-25%

30

2007

2008

2009

2010

2011

2012

Confidence index, 50 equal no change

World economy is finally turning up

2013

Source: Netherlands CPB, Markit IATA Economics www.iata.org/economics

17

Jet fuel price to slide to low end of range Jet kerosene and crude oil price, $/barrel 200 180 160 $140/b 140 Jet kerosene price 120 $110/b

100 Brent crude oil price

80 60 40 20 0 2008

2009

Source: RBS, Platts, IATA

IATA Economics www.iata.org/economics

2010

2011

2012

2013

2014 18

Industry profitability almost as good as 2010 Global commercial airline profitability

25

6.0

3.0

EBIT margin (left scale)

15

0.0 -5 -3.0

Net post-tax profit (right scale)

-15

-6.0

-25

-9.0

-35

US$ billion

% revenues

5

Source: ICAO, IATA IATA Economics www.iata.org/economics

19

Better but divergent regional performance Airline net post-tax profit margins 8% 6% N America

4%

AsiaPacific Europe

2% 0% -2% -4% -6% 2007

2008

2009

2010

2011

2012

2013F 2014F

Source: ICAO, IATA IATA Economics www.iata.org/economics

20

IATA Business Intelligence data shows opportunities  China-ATH has

PDEW of 113. Currently there is no direct flight. People connect through SVO, IST, DXB, AUH,DOH, FRA 1,85%

1,79% DOH

2,68% 9,19%

IST SVO

2,79%

AUH 5,80%

8,38%

DXB FRA CDG

6,66% 8,08%

PEK MUC

IATA Solutions Spectrum

www.iata.org/solutions

IATA Solutions Spectrum

www.iata.org/solutions

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Trends and Challenges for the Airline Industry

Trends and Challenges for the Airline Industry Tim-Jasper Schaaf Director Marketing & Sales To represent, lead and serve the airline industry The va...

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