John P. HeimlichVice President and Chief EconomistAirlines for America

Media BriefingFebruary 28, 2012

The Bottom LineThe Word on the Street

“While earnings declined in 2011, we continue to believe current valuations are well

below what industry improvement and performance would justify. Perhaps the best

illustration of this improvement was the dramatic difference in fundamental

performance between 2008 and 2011… We believe this comparison highlights the

transformation the industry has undergone. We believe the business is better

and more adaptable as a result of this transformation. We believe that current

market conditions provide an attractive entry point for airline equities, especially given

the 2012 outlook we expect to materialize.”

airlines.org3

Gary Chase, Barclays Capital equity research, “U.S. Airlines: 4Q Earnings Should Highlight 2012 Potential,” Jan. 17, 2012

2011 U.S. Airline* Earnings Fell Sharply, Resulting in a 0.3 Percent Net Profit MarginDespite 12.6 Percent Stronger Revenue, Profits Shrank on 15.5 Percent Higher Costs

* A4A analysis of reports by Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, SkyWest, Southwest, Spirit, United and US Airways

2011 Better/(Worse) Than 2010 for Reporting Carriers*

airlines.org4

$ Millions Percent

Operating Revenues 15,717 12.6

Operating Expenses (18,277) (15.5)

Nonoperating Expenses 76 1.8

Income Taxes 144 29.3

Net Income (2,341) (85.7) 2010 2011

2.2

0.3

Net Profit Margin (%)

Airline Energy Costs on the Rise Yet AgainUsing Less but Paying More Translates to Rising Expenses – More than $50B in 2011

19

91

-19

95

19

96

-20

00

20

01

-20

05

20

06

-20

10

20

11

YT

D 2

01

2

$5

3.9

6

$5

8.4

2

$1

02

.09 $

21

6.7

7

$2

99

.85

$3

12

.85

Source: Energy Information Administration

20

05

20

06

20

07

20

08

20

09

20

10

20

11

$3

3,1

75

,24

1,8

78

.0$

38

,77

1,8

88

,44

0.0

$4

1,8

61

,50

2,1

22

.0$

57

,84

9,8

54

,32

1.0

$3

2,2

90

,03

2,4

85

.0$

38

,77

8,6

87

,37

2.0 $

50

,48

9,0

70

,99

7.0

Source: BTS for U.S. airlines

20

05

20

06

20

07

20

08

20

09

20

10

20

11

54

.7

54

.0

54

.5

51

.5

46

.6

47

.4

48

.3

Paying More per GallonJet-Fuel Price (U.S. Gulf Coast)

Using Less FuelMillion Gallons per Day

Spending More AnnuallyBillions of Dollars Spent on Fuel

Source: BTS for U.S. airlines

airlines.org5

With Few Exceptions, U.S. Airline Stocks Plummeted in 2011

(0.003)

32.5

8.3

(95.5)

(35.8)(26.0) (21.3)

(33.9)

35.1

(20.8)

(49.4)

Change (%) in Closing Price from 31-Dec-2010 to 31-Dec-2011

Source: Yahoo Finance

airlines.org6

U.S. Airline Industry Continues to Post ~80 Percent On-Time Arrival PerformanceAlso, 2011 Was Best Year Ever Recorded for Denied Boardings and Mishandled Bags

2007 2008 2009 2010 2011

Flight Cancellations(as % of scheduled domestic departures)

2.16 1.96 1.39 1.76 1.91

On-Time Arrival Rate(% of domestic flights within 00:15)

73.4 76.0 79.5 79.8 79.6

Involuntary Denied Boardings(per 10,000 passengers)

1.12 1.11 1.19 1.09 0.81

Mishandled Bags(per 1,000 domestic passengers)

7.05 5.26 3.91 3.57 3.39

Customer Complaints(per 100,000 systemwide passengers)

1.38 1.13 0.97 1.20 1.18

Sources: Bureau of Transportation Statistics and DOT Air Travel Consumer Report (http://airconsumer.dot.gov/reports/index.htm)

airlines.org8

Conditions for Travel Demand: A Tale of Two Customer Segments (Part 1)Overall U.S. Economic Growth and Corporate Profits Supporting Business Travel

U.S. Corporate ProfitsTrillions of Current Dollars, SAAR

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

$900.0

$1,100.0

$1,300.0

$1,500.0

$1,700.0

$1,900.0

$2,100.0

Source: BEA National Income and Product Accounts, Table 1.12

airlines.org

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

$12.6

$12.7

$12.8

$12.9

$13.0

$13.1

$13.2

$13.3

$13.4

$13.5

U.S. Gross Domestic ProductTrillions of Chained 2005 Dollars, SAAR

Source: BEA (http://www.bea.gov/national/index.htm#gdp)

9

Conditions for Travel Demand: A Tale of Two Customer Segments (Part 2)Declining U.S. Personal Income and Household Worth Crimping Leisure Demand

U.S. Disposable Personal IncomeTrillions of Chained 2005 Dollars, SAAR

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

$9,800.0

$9,900.0

$10,000.0

$10,100.0

$10,200.0

$10,300.0

Source: BEA National Income and Product Accounts, Table 2.1

airlines.org

U.S. Household Net WorthTrillions of Current Dollars, NSA

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

$50,000,000

$52,000,000

$54,000,000

$56,000,000

$58,000,000

$60,000,000

$62,000,000

$64,000,000

Source: Federal Reserve Flow of Funds Account Z.1, B.100

10

Jet Fuel at Highest Level Since May 2011High Crude-Oil Price Plus Refining Crack Spread*

15-D

ec-1

1

25-D

ec-1

1

4-Ja

n-12

14-J

an-1

2

24-J

an-1

2

3-F

eb-1

2

13-F

eb-1

2

23-F

eb-1

2

4-M

ar-1

2

14-M

ar-1

2

24-M

ar-1

2

3-A

pr-1

2

13-A

pr-1

2

23-A

pr-1

2

$90

$95

$100

$105

$110

$115

$120

$125

$130

$135

$140

Pri

ce

pe

r B

arr

el

(5-D

ay

Avg

.)

Jet Fuel

WTI Crude

Brent Crude

Source: A4A and EIA (for WTI and Brent crude oil and U.S. Gulf Coast jet fuel) * Refining margin (difference between jet-fuel and crude-oil price)

airlines.org11

Rising Costs Forcing Airlines to Continue Capacity Reductions in 2012Year-Over-Year Change (%) in Scheduled Domestic Available Seat Miles (ASMs)

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

2.3 2.5

1.1

(1.6)(1.1)

(0.4)

Source: Innovata (via Diio Mi) published schedules as of Feb. 24, 2012

airlines.org12

Only One U.S. Passenger Airline Has Investment-Grade CreditE

xxo

nM

ob

il

Mic

roso

ft

GE

Wa

l-Ma

rt

To

yota BP

eB

ay

Sta

rbu

cks

QA

NT

AS

Lu

ftha

nsa

So

uth

we

st

Ala

ska

Alle

gia

nt

Brit

ish

Air

GO

L

TA

M

De

lta

Un

ited

Air

Ca

na

da

JetB

lue

SA

S

US

Airw

ays

Am

eric

an

AA

A

AA

A

AA

+

AA

AA

-

A A A-

BB

B

BB

B-

BB

B-

BB

-

BB

-

BB

-

BB

-

B+

B B B-

B-

B-

B-

D

< BBB- (speculative grade)

>= BBB- (investment grade)

Source: Standard and Poor’s

airlines.org13

Improved Balance Sheets Allow Airlines to Preserve/Grow Jobs, Acquire New AircraftU.S. Passenger Airlines Beginning to Hire Workers and Purchase Planes

Nov

-00

Nov

-01

Nov

-02

Nov

-03

Nov

-04

Nov

-05

Nov

-06

Nov

-07

Nov

-08

Nov

-09

Nov

-10

Nov

-11

53

2,1

00

47

4,8

00

47

1,3

00

42

9,8

77

43

9,4

86

41

0,9

69

40

4,4

73

41

9,4

69

39

2,0

95

37

9,3

58

37

9,3

35

38

9,3

61

airlines.org14

00

-01

02

03

04

05

06

-09

10

11

12

F

13

F

$1

6,9

20

.0

$9

,74

0.0

$6

,60

0.0

$5

,84

0.0

$4

,82

0.0

$5

,77

0.0

$4

,24

0.0

$3

,40

0.0

$5

,70

0.0 $

9,2

40

.0

Aircraft Capital Spending on the RiseAverage Annual Estimated Aircraft/Engine CapEx (Billions)

Airline Payrolls StabilizingFull-Time Equivalent Employees (Thousands)

Source: BTS for U.S. scheduled passenger airlines Source: Bank of America Merrill Lynch airline equity research (Jan. 5, 2012)

U.S. Passenger Airlines: Economic ReviewThe Bottom Line in Early 2012

• Net profit margin fell from 1.6 percent in 2010 to 0.3 percent (prelim. per 11 carriers) in 2011o Second year of modest profitability after recording an average margin of -6.3 percent in 2001-2009o All but three U.S. airline stocks took a beating in 2011, especially relative to S&P 500o Spot price of U.S. jet fuel hit all-time high in 2011; thus far (through Feb. 22), running 16 percent higher in 2012

• 2011 was a stellar year on many operational frontso Second consecutive year of zero passenger fatalitieso Best year ever recorded for baggage handling and denied boardings; best 4Q ever recorded for on-time arrivalso All-time high for U.S. exports of air-travel services ($36.7B) and for U.S. merchandise exported by air ($424.3B)

• Fuel remains largest and most volatile cost – continuing threat to GDP and earnings

• Airlines reacting to increasing (and volatile) marginal costs and uncertain revenues with conservative volumes, high utilization of existing assets, “variabilization” of cost structure, avoidance of costs incurred without sufficient revenues generated, product diversification

• Major focus on debt reduction, fleet renewal and product enhancement

• Improved financial wherewithal translating to uptick in employment and fleet upgrades

• Increasing governmental/regulatory costs creating potential barrier to entry for start-ups

» Looking Back

» Looking Ahead

airlines.org15

www.airlines.org