The Economic Climb-Out for U.S. The Economic Climb-Out for U.S. AirlinesAirlinesGlobal Competitiveness and Long-Term Global Competitiveness and Long-Term ViabilityViability

John P. HeimlichJohn P. HeimlichVice President and Chief EconomistVice President and Chief Economist

March 17, 2011March 17, 2011

www.airlines.org

The Air Transport Association of America, Inc.The Air Transport Association of America, Inc.

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Combination Services

AirTran AirwaysAlaska Airlines

American AirlinesUnited Airlines*Delta Air Lines

Hawaiian AirlinesJetBlue Airways

Southwest AirlinesUS Airways

All-Cargo Services

ABX AirASTAR Air Cargo

Atlas Air Worldwide HoldingsEvergreen Int’l Airlines

FedEx CorporationUPS Airlines

Associate Members

Air CanadaAir Jamaica

Air transport has become an essential economic and social conduit throughout the

world. Beyond the benefits of fast and inexpensive transcontinental travel, air

transport also has become a vital form of shipping for high-valued items that need

to come to market quickly…

— World Bank (www.worldbank.org/airtransport)

* Includes Continental Airlines

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Globally, Globally, Airlines Challenged to Cover Cost of CapitalAirlines Challenged to Cover Cost of Capital

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Source: IATA (1993-2004 from McKinsey study) and Deutsche Bank Global Research (for 2010-2012 estimates)

Perc

ent

ROIC Below WACC Translates to Loss of Investor WealthROIC Below WACC Translates to Loss of Investor Wealth

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An Analyst/Investor ViewAn Analyst/Investor ViewSource: Deutsche Bank Global Research (Jan. 13, 2011)Source: Deutsche Bank Global Research (Jan. 13, 2011)

“Consolidation, in our review, represents a later stage for amature industry that is seeking ways to address its financialvolatility… Our view is that consolidation is part of a longer-term process that should ultimately allow the global airlineindustry to efficiently allocate capital and assets such that apositive return on invested capital can be achieved…On the surface, airlines pursue mergers as a means toimprove profitability…and their competitive positioning viaan expanded network. Longer-term, consolidation shouldimprove industry viability while mitigating industry volatilityand consequently lower its cost of capital.”

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Source: “Global Airline Sector – Laying the Foundation for Global M&A,” Deutsche Bank Global Research (Jan. 13, 2011)

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U.S. Carriers: Competing in a Global MarketplaceU.S. Carriers: Competing in a Global Marketplace

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USA Non-USARepublic/Shuttle America Air France/KLMUS Airways/America West Copa/AeroRepúblicaSkyWest/Atlantic Southeast Lufthansa/SwissPinnacle/Colgan Air China/Cathay Pacific*Lufthansa/JetBlue* Cathay Pacific/DragonairDelta/Northwest Lufthansa/Brussels*/BMI/AustrianRepublic/Midwest/Frontier Avianca/TACAUnited/Continental British Airways/IberiaPinnacle/Mesaba LAN/TAM (pending)SkyWest-ASA/ExpressJet LAN/Aires*Southwest/AirTran (pending)

Selected M&A and/or Cross-Border Investment: 2005-PresentSelected M&A and/or Cross-Border Investment: 2005-Present

Source: ATA and Deutsche Bank Global Research * Strategic investment but not full ownership or control

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DOT DOT Statutory Statutory Mission* Mission* Explicitly Explicitly RecognizesRecognizesImportance ofImportance of Industry Viability and CompetitivenessIndustry Viability and Competitiveness

(6) placing maximum reliance on competitive market forces and on actual andpotential competition — (A) to provide the needed air transportation system; and(B) to encourage efficient and well-managed air carriers to earn adequateprofits and attract capital, considering any material differences betweeninterstate air transportation and foreign air transportation.

(14) promoting, encouraging, and developing civil aeronautics and a viable,privately-owned United States air transport industry.

(15) strengthening the competitive position of air carriers to at least ensureequality with foreign air carriers, including the attainment of the opportunity forair carriers to maintain and increase their profitability in foreign airtransportation.

(16) ensuring that consumers in all regions of the United States, including thosein small communities and rural and remote areas, have access to affordable,regularly scheduled air service.

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* U.S. Code, Title 49, Sec. 40101. Policy, Subsection A: “Economic Regulation”

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A Viable, Competitive U.S. Airline Industry Is Good forA Viable, Competitive U.S. Airline Industry Is Good forthe Country, Fueling Jobs and Economic Growththe Country, Fueling Jobs and Economic Growth

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“Aviation is the glue that keeps the global economy together. Without widely accessible andwell-priced air travel, the global economy will quickly become less global.”

— Dr. Mark Zandi, Chief Economist & Co-Founder, Moody’s Economy.com (August 2008)

! $1.225 trillion/year in economic activity! $371 billion/year in personal earnings! 10.9 million jobs

“The Economic Impact of Civil Aviationon the U.S. Economy” (FAA, Dec. 2009)

Commercial aviation helps drive:

Commercial aviation contributes:! $731.5 billion/year to U.S. GDP! 5.2% of U.S. GDP

“Economic growth and prosperity are determinedin large part by access to the global economy.And, just as islands require bridges to themainland….communities require bridges to theglobal economy. Air transportation is that bridge,providing the necessary access for U.S. cities…toenjoy a ‘Virtuous Circle of Economic Growth.’”

“The Plane Truth About Air Service and Economic Development,”Global Aviation Improvement Network, Booz Allen (March 2001)

“Every day, the airline industry propels the economic takeoff of our nation. It is the greatenabler, knitting together all corners of the country, facilitating the movement of people andgoods that is the backbone of economic growth. It also firmly embeds us in that awesomeprocess of globalization that is defining the 21st century.”

— Daniel Yergin, Author, Commanding Heights: The Battle for the World Economy, in the ATA 2005 Economic Report

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The Lost Decade: Industry Climbing Out of a Deep HoleThe Lost Decade: Industry Climbing Out of a Deep HoleNet Income ($Billions) Net Income ($Billions) and Profit Margin (%) for and Profit Margin (%) for U.S. U.S. AirlinesAirlines**

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* All U.S. passenger airlines and cargo airlines reporting to DOT Form 41 P-12, Accounts 9899 and4999

3.2% 1.9%2.7% 1.6%

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Doing Better and Doing Well Are Doing Better and Doing Well Are NotNot the Same Thing the Same Thing

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Sources: Bureau of Labor Statistics (http://www.bls.gov/cps) and Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp)

U.S. Unemployment Rate (8.9%)Percent

Real U.S. GDPTrillions of Chained 2005 Dollars, SAAR

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$3.00 Jet Fuel Would Raise U.S. Airlines $3.00 Jet Fuel Would Raise U.S. Airlines’’ 2011 Fuel Bill by 2011 Fuel Bill by~$15B*~$15B*

Airline Airline Energy Costs Are High and Poised to RiseEnergy Costs Are High and Poised to Rise

Source: EIA Weekly Petroleum Status Report for U.S. Gulf Coast jet fuel prices per gallon

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Estimated $14.9B/yearimpact*

* Excludes potential hedge impact (gains and/orlosses)

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Exceeding $130/ Exceeding $130/bblbbl on Rising Crude and Widening Crack on Rising Crude and Widening CrackSpread*Spread*

Jet Fuel Highest Since 3Q 2008: Not Just a Crude StoryJet Fuel Highest Since 3Q 2008: Not Just a Crude Story

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Jet Fuel (USGC)

Crude Oil (WTI)

Source: ATA and EIA (for West Texas Intermediate and Brent crude oil and U.S. Gulf Coast jet fuel)* Refining margin (difference between jet fuel and crude oil price)

Crude Oil (Brent)

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2011 Margin Significantly Undermines Value of Hedging2011 Margin Significantly Undermines Value of HedgingProgramsPrograms

Jet Fuel Crack Spread* Especially High Relative to WTIJet Fuel Crack Spread* Especially High Relative to WTI

Source: ATA and Energy Information Administration

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* Refining margin (difference between jet fuel and crude oil price)

1991-2000 $3.29 16% $4.77 25%2001-2010 $10.83 19% $12.19 22%YTD Feb-11 $25.79 29% $14.54 15%

Crack vs. Brent

Crack vs.WTI

BrentWest Texas

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Spending on Domestic Air Transport Spending on Domestic Air Transport Has Has NotNot Recovered RecoveredTotal Domestic Operating Revenue (¢) per $100 of U.S. GDP*Total Domestic Operating Revenue (¢) per $100 of U.S. GDP*

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* ATA analysis of BEA and BTS data for U.S. passenger airlines

Shor

tfall

= $1

8.7B

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Capacity Being Re-Balanced With Size of U.S. EconomyCapacity Being Re-Balanced With Size of U.S. EconomyFewest Domestic ASMs* per $1K of Real U.S. GDP** Since 1979Fewest Domestic ASMs* per $1K of Real U.S. GDP** Since 1979

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Sources: BTS (T1 Domestic, All Services) and Bureau of EconomicAnalysis

* An available seat mile (ASM) is one seat flown one mile** Chained 2005 dollars

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2121stst Century Century Capacity Capacity ““GrowthGrowth”” –– A Tale of Two Markets A Tale of Two Markets33rdrd Quarter ASMs Down 5% Domestically, Up 15% to/from USA Quarter ASMs Down 5% Domestically, Up 15% to/from USA

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Billion Domestic ASMs per Week

Source: Innovata (via APG) published schedules as of Mar. 10, 2011

Billion International* ASMs per Week

* Scheduled U.S.- and non-U.S.-airline flights departing U.S. airports for non-U.S. destinations; an ASM is one seat flown one mile

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Healthy Investment Requires Healthy Healthy Investment Requires Healthy EquityEquityEquity Market Capitalization (Billions) as of Equity Market Capitalization (Billions) as of Mar. 14 at 1330 ESTMar. 14 at 1330 EST

* AAI, ALGT, ALK, AMR, DAL, HA, JBLU, LCC, LUV, PNCL, RJET, SKYW, UAL

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Healthy Investment Requires Healthy CreditHealthy Investment Requires Healthy CreditNo Passenger Airline No Passenger Airline Enjoys Enjoys an A-Minus or Better Rating froman A-Minus or Better Rating from

S&PS&P

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< BBB- (speculative or “junk”)

>= BBB- (investment-grade)

AAA

BBB

BBBBB-

BB-

B+B+BBB

B- B- B-AAA

AA+

AA AA-

A A A B-B-B-

Source: Standard and Poor’s

BB-

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WhatWhat’’s Wrong With This Picture?s Wrong With This Picture?

“As you weigh policy objectives for the airlines, you maywant to consider the benefits from having airlines in abetter position to generate a return on invested capital inexcess of their cost of capital through a full businesscycle. The balance between positions which seek to socializeaspects of the airline industry versus those that promote growthin the free market will contribute to how the market pricesairline capital risk and measures the required rate of return tojustify growth. The ability to generate more consistentreturns on equity and increase free cash flow is the path torepairing balance sheets and longer term financialstability. Only then will there be a solid foundation forincreased capital expenditures, rising wages, andincreased service.”

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David R. Strine, before the House Subcommittee on Aviation, “Consolidation In The Aviation Industry, With A Focus On The ProposedMerger Between United Airlines And Continental Airlines – A Perspective From Within The Financial Markets” (June 16, 2010)

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When America Flies, It WorksWhen America Flies, It Works