Sharon L. Pinkerton, SVP-PolicyCAPA Americas Aviation SummitDenver, COMarch 18, 2019

Unlocking the U.S. Domestic Airline System: Operational vs Commercial Implications

In 2014-2018, Domestic Airline Capacity Grew at Twice the Rate of the U.S. EconomyThroughout the Business Cycle, Capacity Has Fluctuated With the Price of Crude Oil*

airlines.org

Source: Bureau of Economic Analysis and published airline schedules via Diio Mi

1.6 1.1 0.2

1.6 2.3

5.1 4.9

4.0

5.4 5.0

2.6

1.6 2.2

1.8 2.5

2.9

1.6 2.2

2.9 2.4

0

1

2

3

4

5

620

10 ($

80)

2011

($11

1)

2012

($11

2)

2013

($10

9)

2014

($99

)

2015

($52

)

2016

($44

)

2017

($54

)

2018

($72

)

2019

F ($

65)

Domestic Airline Capacity (ASMs) Real US GDP

2

(Airlines 1.3%, Economy 2.0%)

(Airlines 4.8%, Economy 2.3%)

* Brent crude oil in dollars per barrel, shown next to each year

2011-2014 Crude = $108/bbl

2015-2018 Crude = $56/bbl

Post-Recession, Scheduled Service in Small Communities* Rising Again in 2019Small U.S. Airports Seeing Most Flights Since 2011, Most Seats Ever

airlines.org3

Source: Innovata (via Diio Mi) published schedules as of Mar. 1, 2019, for all airlines providing scheduled passenger service from U.S. airports to all destinations* Per https://www.faa.gov/airports/planning_capacity/passenger_allcargo_stats/categories/, U.S. airports with less than 0.25% of annual passenger boardings

Avg.

Dai

ly F

light

s (S

ched

uled

)

300,000

400,000

500,000

600,000

3,000

4,000

5,000

6,000

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Avg. Daily Seats (Scheduled)

Notes: Recession (Dec-2007–Jun-2009); FAA pilot qualification (1,500-hour) rule effective Jul-2013; pilot flight/duty/rest rule effective Jan-2014; 2019 is Jan-Sep

Flights (Left Axis)

Seats (Right Axis)

airlines.org4

Among 11 U.S. Airline Brands, Smaller Carriers Have Been Growing the FastestDifferent Types of Carriers Market Their Prices and Services Differently

(50)

0

50

100

150

200

250

300

350

400

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

% C

hang

e in

Cap

acity

* S

ince

200

7

Spirit

Sun Ctry

HawaiianAlaska

JetBlue

Southwest

AA/DL/UA

Source: Innovata (via Diio Mi) schedules as of Oct. 5, 2018, for selected marketing airlines including predecessors

Allegiant

Frontier

* Systemwide scheduled available seat miles

Company 2019 Guide (%)Spirit 15Allegiant 7-9JetBlue 4.5-6.5Delta 5United 4-6Southwest 5American 3Hawaiian 1.5-4.5Alaska 2

Note: Guides as of 3/6/2019

airlines.org5

Smaller U.S. Carriers Are Serving More and More Domestic MarketsCompetitive Presence of Low-Cost and Ultra Low-Cost Carriers Continues to Expand

74

54 50

15

48

18

99

120

101

22

67

48

Alaska Allegiant Frontier Hawaiian JetBlue Spirit

2007 2019

Source: Innovata (via Diio Mi) schedules as of Feb. 8, 2019, for selected marketing airlines including predecessors * July 15-21 of each year

Number of U.S. Airports Served*

From 2000-2017, Global Network Carrier Domestic Share Fell From 73% to Just 53%Share (%) of U.S. Domestic Origin-and-Destination Passengers by Airline Business Model

airlines.org

Source: DOT Data Bank 1B (each airline shown on a marketing-carrier basis and tracked with its respective merged/acquired predecessors [e.g., UA/CO]

6

73 71 69 68 67 67 65 62 60 59 58 57 57 57 56 55 54 53 53

18 19 20 21 21 21 22 23 24 25 25 25 25 24 24 24 24 24 23

9 10 10 11 12 13 13 15 16 16 17 18 19 19 20 21 22 23 24

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

1H18

Global Network (AA, DL, UA) Southwest Other

Competitive Choices for Domestic Flyers Have Continued to IncreaseContrary to Some Assertions, Traffic Analysis Shows More Competitors on U.S. City Pairs

airlines.org

3.21

3.33

3.41

3.39

3.49

3.54

1995

2000

2005

2010

2015

2017

7

* Carrying at least 5 percent of O&D passengers in the city pair; average number of competitors is passenger-weighted across city pairs

Average Number of Competitors* on All Reported Domestic U.S. Itineraries

Source: Compass Lexecon analysis of DOT Origin-Destination Survey (Data Bank 1B)

Los Angeles-Seattle Is Among Countless Domestic City Pairs on WhichCompetition* Has Increased Since 2007 (Real Fares Down 20%, Passengers Up 78%)

airlines.org8

64%

17%

8%

7%

* Defined as carrying at least 5 percent of O&D passengers between BUR/LAX/LGB and SEASource: DOT Data Bank 1B and Innovata published schedules via Diio Mi

56%

20%

7%

6%

6%

2007 O&D Passenger Share 1Q-3Q18 O&D Passenger Share

Boston-Akron/Cleveland Is Among Countless Domestic City Pairs on Which

Competition* Has Increased Since 2007 (Real Fares Down 20%, Passengers Up 23%)

* Defined as carrying at least 5 percent of O&D passengers between BOS and CAK/CLESource: DOT Data Bank 1B and Innovata published schedules via Diio Mi

airlines.org9

63%

30%

2007 O&D Passenger Share 1Q-3Q18 O&D Passenger Share

48%

25%

15%

5%

5%

Air Travel Between the U.S. and Foreign Countries* Reached All-Time High in 2018Foreign Flag Airlines Carried 53 Percent of Passengers, Up From 45 Percent in 2011

airlines.org

Source: U.S. Department of Commerce National Travel and Tourism Office

10

*Years preceding 2011 do not include traffic between the United States and Canada

91.3 95.3 98.4 102.1 104.6 107.2 111.9 115.9 75.0 82.2 86.9 95.2 104.5 114.4 121.7 130.1 166.3 177.6 185.4 197.3 209.1 221.6 233.6 246.1

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 2017 2018

U.S. Flag Foreign Flag

International Air Passengers* (Millions) to/from the United States

From 2010-2018, U.S. Airlines* Plowed 75% of Operating Cash Flow Back Into the Product While Retiring $79B in Debt and Returning $48B in Cash to Shareholders

airlines.org11

* SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors

2010-2018 Total Per Psgr. % Ops CF

Retire Debt $78.8B ~$12 49%

Enhance the Product $120.9B ~$18 75%

Reward Shareholders $47.5B ~$7 29%

Substantial U.S. Passenger Airline Capital Investment* Continued in 2018 Despite Waning Profits – Bringing Total for This Business Cycle to $121 Billion

airlines.org12

5.26.6

9.8

12.513.9

17.0 17.519.9

18.6

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: SEC filings of Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and merged/acquired predecessors

U.S. Passenger Airline Capital Expenditures*$ Billions per Year

* Includes payments made for aircraft and other flight equipment, ground and other property and equipment, airport and other facility construction and information technology

» As of YE18, firm orders for 1,717 aircraft valued at $88B

§ Expecting deliveries to average ~ one new aircraft per day in 2019

» Additionally, several billion dollars in commitments for ground equipment, facilities and information technology

Airline-Airport Collaboration Has Paved Way for Widespread Infrastructure InvestmentCapital Investment Has More Than Doubled Since 2015 at the 30 Largest U.S. Airports*

airlines.org13

» Nearly $165B of capital projects completed, underway or approved at the 30 largest U.S. airports since 2008, including, for example:o New/expanded/modernized facilities at Atlanta, Boston, Chicago (ORD),

Dallas (DFW), Denver, Honolulu, Houston (IAH), Las Vegas, Los Angeles, Miami, Newark, New York (JFK and LGA), Orlando, Phoenix, Portland, Salt Lake City, San Diego, San Francisco, Seattle and Washington (DCA)

o 27 airfield capacity projects at 23 major airports, including new runways at Chicago (ORD), Charlotte, Seattle and Washington (IAD)

» Development is also robust at smaller airports, including:o Airfield projects at Anchorage, Columbus, Des Moines, El Paso,

Manchester, Providence and Sioux Falls

o Terminal projects at Bangor, Dallas (DAL), Eugene, Grand Rapids, Greenville-Spartanburg, Kansas City, Nashville, New Orleans, Oakland, Pasco, Reno, San Antonio, San Luis Obispo and Wichita

» Investment is also occurring in cargo facilities and related infrastructure – e.g., Fort Worth, Louisville, Lafayette, Indianapolis, Memphis, Miami, Newark, Ontario, Rockford

$70

$100

$130

$165

2015 2017 2018 2019Approved Completed/Underway

Investment at Largest Airports*($ Billions)

* Capital projects completed, underway or approved at the 30 largest U.S. airports since 2008, per A4A research

.

ATL

CLT

DCA

DFW

EWR

IAH

JFKLGA

MDW

MIA

ORD

PHL

SEA

MCOTPA

MSP

$1-5B $6-9B $10B+$100M-$1B

PDX

HNL

DEN

LAS

PHX

SLC

SAN

LAX

BWI

Airport Investment Is Booming at Airports Across the United States*

* A4A research (capital projects completed, underway or approved since 2008 at 30 large hub airports) and FAA Form 127 reports (capital expenditures and construction in progress, 2009-2018)

ANCKOA

GSPMYR

RNO IND

ICT

AUS

MEM

LGB

SJC

MSY

MCI

BHMDAL

HOU

RDUBNA

14airlines.org

SMF STL

BZN

SGF

DSM

TULOKC

BOI

GPT

IDA

CID

MLB

LBB

ELPTUS

CRW

JAC

MOT

JAX

COS

HSV

AVL

GRR

FAI

JNU

SNA

MRYFAT

BURXNA

LIT

ECP

BDL

BFIGEG

AEX

ACY

PNS

PBI

RSW

SAV

MLI

SFB

OGG

ITO

PIA

LEX

BTR

RFD

AZA

PWM

LFT

BUF

LNK

GSO

DLH

OMA

ROC SYRMHT

ABQ

BOS

PVD

ABE

CLE

HPN

CAK

FSD

PIT

CHS

DAYCVG

CMH

PHF

SAT

TYS

IAD

SWF

FLL

DTW

SDF

ORF

RIC

BLI

BTV

MKE

PSC

PBG

SBA

SFO

OAK

CRP

SGU

BET

According to FAA, Flight Delays Cost the USA an Estimated $28B in 2018More Than Half of Delay Costs Attributed to Passenger Value of Time

Source: FAA Air Traffic Organization update to “Total Delay Impact Study: A Comprehensive Assessment of the Costs and Impacts of Flight Delay in the United States”

$6.4

$16.1 $2.1$3.6 $28.2

Airlines (1)

Passengers (2)

Lost Demand (3)

Indirect (4)

TOTAL

2018 U.S. Flight Delay Costs($Billions)

airlines.org15

1. Increased expenses for crew, fuel, maintenance, etc.2. Time lost due to schedule buffer, delayed flights, flight cancellations, missed connections3. Estimated welfare loss incurred by passengers who avoid air travel as the result of delays4. Increased cost of doing business for other sectors, making associated business less productive

Airlines Utilize a Wide Array of Tools to Improve Profitability Amid Rising Costs

airlines.org16

Increase fuel efficiency (reduce consumption per unit of flying)o Continue to replace older (often smaller) aircraft with typically larger, next-generation or re-engined aircrafto Deploy state-of-the-art flight planning/navigation software to optimize airborne movement of aircraft

o Utilize taxi-management technologies – and single-engine taxi – to minimize ground-based fuel burno Consistently employ ground power while parked at gate instead of aircraft auxiliary power unit (APU)o Reduce onboard weight (e.g., lighter materials/structures, inflight entertainment systems, excess fuel)

Airlines Utilize a Wide Array of Tools to Improve Profitability (Cont’d)

airlines.org17

Reduce or contain non-fuel costso Deploy customer-preferred technologies

(e.g., airport kiosks for self-tagging of luggage, airline apps for passenger modification of itinerary in lieu of agents)

o Drive more bookings to lower-cost direct distribution channels (e.g., website, app)

o Trim management/nonunion headcount via attrition, buy-outs; freeze open positions

o Retire debt to lower interest expense

o Use virtual medicine (e.g., Doctor on Demand) for health care – cost-efficient and highly popular with workforce

o Achieve single pilot/FA contracts – reduce delays/cancels, enable efficient use of aircraft/crews, avoids over-hiring

o Employ new software/methods to improve hotel procurement and manage employee travel bookings

o Insource engine/ground-handling/other work to be performed better/more efficiently (where practicable)

o Negotiate preferred-pricing maintenance contracts enabled by improved scale/credit, recover warranties on aircraft parts, leverage data streams from new aircraft/engines to increase reliability and lower repair/inspection costs

Airlines Utilize a Wide Array of Tools to Improve Profitability (Cont’d)

airlines.org18

Generate more revenue

o Carry more passenger traffic or better mix of traffic (corporate/premium), optimize fare/fee structure

o Boost availability/desirability of ancillary products (fleet-wide/faster WiFi, live TV int’l, refurbished clubs)

o Increase credit card sales – attracting new accounts due to larger networks and customer-preferred timings

o Intensify cargo sales efforts and leverage increased belly capacity (and temp controls) offered by new aircraft