economic performance of the airline industry · economic performance of the airline industry...
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To represent, lead and serve the airline industry
Economic Performance of the Airline Industry Airline Cost Conference 25th August 2015 Brian Pearce, Chief Economist www.iata.org/economics
ROIC gains driven by a subset of the industry
IATA Economics www.iata.org/economics 2
0
2
4
6
8
10
12
14
312927252321191715131197531-1-3-5-7-9-11-13-15-17-19-21
nu
mb
er o
f ai
rlin
es
% return on invested capital
Distribution of 2014 airline ROIC
34 airlines ROIC > WACC
Median ROIC = 3.2%
Most frequent ROIC = 0%
Source: The Airline Analyst, IATA
FCF concentrated in the US
IATA Economics www.iata.org/economics 3
-10
-8
-6
-4
-2
0
2
4
US LA ME EU AP
FCF
US$
bill
ion
2014 Free Cash Flow by region
Network LCC
Source: The Airline Analyst, IATA
But good ROIC performance in Europe as well
IATA Economics www.iata.org/economics 4
-30%
-20%
-10%
0%
10%
20%
30%
RO
IC a
s as
% in
vest
ed c
apit
al
2014 return on capital by region
N America Europe Asia Pacific LA ME AF
Average cost of capital
Source: The Airline Analyst, IATA
Median airline balance sheet still deteriorating
IATA Economics www.iata.org/economics 5
0
5
10
15
20
25
30
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Ad
just
ed n
et d
ebt,
US$
bill
ion
Free cash flow as a % of adjusted net debt
Free cash flow and adjusted net debt
6 airlines could repay all debt in next 5 years
Median airline$3 billion net debt-3% FCF/net debt
Source: The Airline Analyst, IATA
2015 should see record profits for the industry
IATA Economics www.iata.org/economics 6
-30
-20
-10
0
10
20
30
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2000 2002 2004 2006 2008 2010 2012 2014
US$
bill
ion
% r
even
ues
Global commercial airline profitability
Net post-tax profit
EBIT margin
Source: ICAO, IATA
Though that’s still only $8.27 per passenger
IATA Economics www.iata.org/economics 7
0
50
100
150
200
250
Revenue Cost Net profit
Worldwide airline net post-tax profit per departing passenger, 2015
Ancillaries
Fare
Cargo
$205.37 $197.10 $8.27
Ancillaries
Source: IATA
But paying investors ‘normal’ return for 1st time
IATA Economics www.iata.org/economics 8
Source: IATA, McKinsey
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2000 2002 2004 2006 2008 2010 2012 2014
% o
f in
vest
ed c
apit
alReturn on capital invested in airlines
Cost of capital (WACC)
Return on capital (ROIC)
57
59
61
63
65
67
69
2000 2002 2004 2006 2008 2010 2012 2014
% A
TKs
Breakeven and achieved weight load factors
Achieved
Breakeven
Widening gap above breakeven driving returns
IATA Economics www.iata.org/economics 9
Source: IATA
Consolidation has played an important role
Market share of top-4 airlines/JVs
IATA Economics www.iata.org/economics 10
Source: SRS Analyser
81%68%36%
59%
48%
42%
33%51%
The product structure is changing too
IATA Economics www.iata.org/economics 11
Source: IdeaWorks, Airline Analyst, IATA
0%
5%
10%
15%
20%
25%
30%
35%
-20% -15% -10% -5% 0% 5% 10% 15% 20%
An
cilla
ries
as
% r
even
ues
Operating profits as % revenues
2013 ancillaries and operating profits, % revenues
Allegiant
Ryanair
Air Asia
Alaska
EasyjetAer Lingus
United
JetBlue
Delta
Flybe
SpicejetPIA SAA
Qantas
Korean
JALBAHawaiian
Frontier
60
65
70
75
80
85
90
95
20
40
60
80
100
120
140
160
2008 2009 2010 2011 2012 2013 2014 2015
US
do
llar
trad
e w
eigh
ted
ind
ex
Oil
pri
ce, U
S$ p
er b
arre
lThe Brent crude oil price and the US dollar
US dollar
Brent crude oil price
Low fuel prices important but US$ major offset
IATA Economics www.iata.org/economics 12
Source: Datastream
Driving further divergence in performance this year
IATA Economics www.iata.org/economics 13
-6%
-4%
-2%
0%
2%
4%
6%
8%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Net
po
st-t
ax p
rofi
t as
% r
even
ue
Airline net post-tax profit margins
Asia-Pacific
N America
Europe
Source: ICAO, IATA
Longer-term impact of lower fuel prices not clear
IATA Economics www.iata.org/economics 14
Source: IATA, McKinsey
40
45
50
55
60
65
70
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Op
erat
ing
cost
s/A
TK, U
S ce
nts
/ATK
RO
IC, %
inve
sted
cap
ital
Return on invested capital and unit costs
Unit costsReturn on invested capital
Costs typically passed through to prices
IATA Economics www.iata.org/economics 15
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1950 1960 1970 1980 1990 2000 2010
US
$ in 2
013 p
rices p
er
tonne k
ilom
ete
r
US
$ in 2
013 p
rices to fly
a t
onne k
ilom
ete
rUnit cost and the price of air transport
Price(US$/RTK)
Unit cost(US$/ATK)
US deregulation
EU deregulation
Boeing 707
1973 oil crisis
Source: ICAO, IATA
A strong economy is unambiguously positive
IATA Economics www.iata.org/economics 16
Source: IATA, McKinsey, IHS Global Insight
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Air
lines
RO
IC, %
inve
sted
cap
ital
Wo
rld
GD
P g
row
th, %
Airline industry ROIC and world GDP growth
Airlines ROIC
World GDP growth
Economic cycle positive but not very strong
IATA Economics www.iata.org/economics 17
Source: Datastream
30
35
40
45
50
55
60
65
70
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015
Net
bal
ance
of
resp
on
den
ts, 5
0 =
no
ch
ange
year
-on
-yea
r %
gro
wth
Indicators of the global economic cycle
World trade growth
Industrial production growth
Business confidence
But growth in demand for travel and cargo looks OK
IATA Economics www.iata.org/economics 18
Source: IATA
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015
year
-on
-yea
r %
gro
wth
Growth of air travel and air freight
Freight (FTK) growth
Travel (RPK) growth
20-year average growth rate
Though cargo growth should be much stronger
IATA Economics www.iata.org/economics 19
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Ind
ex, 2
00
5=1
00
International trade compared to global industrial production
BEFORE: FTKs growth 6.4% p.a
AFTER: FTKs growth 3.2% p.a.
Source: Netherlands CPB, IATA
Trade and cargo markets appear to have peaked
IATA Economics www.iata.org/economics 20
90
100
110
120
130
140
9
10
11
12
13
14
15
Au
g-0
7
De
c-0
7
Ap
r-08
Au
g-0
8
De
c-0
8
Ap
r-0
9
Au
g-0
9
De
c-0
9
Ap
r-1
0
Au
g-1
0
De
c-1
0
Ap
r-1
1
Au
g-1
1
De
c-1
1
Ap
r-1
2
Au
g-1
2
De
c-1
2
Ap
r-1
3
Au
g-1
3
De
c-1
3
Ap
r-1
4
Au
g-1
4
De
c-1
4
Ap
r-1
5
7. World trade in goods and air FTKs
International FTKs World Trade Index
Source: Netherlands CPB, IATA
Billion FTKs (seasonally adjusted)
Index of world trade, 2005=100(seasonally adjusted)
Business confidence has been diminishing
IATA Economics www.iata.org/economics 21
Risk that growth expectations now too high
IATA Economics www.iata.org/economics 22
0
20
40
60
80
100
120
2006 2008 2010 2012 2014
Net
bal
ance
res
po
nse
s. 5
0=n
o c
han
geIATA survey of airline CFOs and heads of cargo
Passenger services growth expected in the next 12 months
Cargo services growth expected in the next 12 months
Source: IATA Business Confidence survey